[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
H.R. 1984, 401(k) FAIR DISCLOSURE FOR RETIREMENT SECURITY ACT OF 2009
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HEALTH,
EMPLOYMENT, LABOR AND PENSIONS
COMMITTEE ON
EDUCATION AND LABOR
U.S. House of Representatives
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, APRIL 22, 2009
__________
Serial No. 111-14
__________
Printed for the use of the Committee on Education and Labor
Available on the Internet:
http://www.gpoaccess.gov/congress/house/education/index.html
----------
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COMMITTEE ON EDUCATION AND LABOR
GEORGE MILLER, California, Chairman
Dale E. Kildee, Michigan, Vice Howard P. ``Buck'' McKeon,
Chairman California,
Donald M. Payne, New Jersey Senior Republican Member
Robert E. Andrews, New Jersey Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia Peter Hoekstra, Michigan
Lynn C. Woolsey, California Michael N. Castle, Delaware
Ruben Hinojosa, Texas Mark E. Souder, Indiana
Carolyn McCarthy, New York Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts Judy Biggert, Illinois
Dennis J. Kucinich, Ohio Todd Russell Platts, Pennsylvania
David Wu, Oregon Joe Wilson, South Carolina
Rush D. Holt, New Jersey John Kline, Minnesota
Susan A. Davis, California Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona Tom Price, Georgia
Timothy H. Bishop, New York Rob Bishop, Utah
Joe Sestak, Pennsylvania Brett Guthrie, Kentucky
David Loebsack, Iowa Bill Cassidy, Louisiana
Mazie Hirono, Hawaii Tom McClintock, California
Jason Altmire, Pennsylvania Duncan Hunter, California
Phil Hare, Illinois David P. Roe, Tennessee
Yvette D. Clarke, New York Glenn Thompson, Pennsylvania
Joe Courtney, Connecticut
Carol Shea-Porter, New Hampshire
Marcia L. Fudge, Ohio
Jared Polis, Colorado
Paul Tonko, New York
Pedro R. Pierluisi, Puerto Rico
Gregorio Sablan, Northern Mariana
Islands
Dina Titus, Nevada
[Vacant]
Mark Zuckerman, Staff Director
Sally Stroup, Republican Staff Director
SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS
ROBERT E. ANDREWS, New Jersey, Chairman
David Wu, Oregon John Kline, Minnesota,
Phil Hare, Illinois Ranking Minority Member
John F. Tierney, Massachusetts Joe Wilson, South Carolina
Dennis J. Kucinich, Ohio Cathy McMorris Rodgers, Washington
Marcia L. Fudge, Ohio Tom Price, Georgia
Dale E. Kildee, Michigan Brett Guthrie, Kentucky
Carolyn McCarthy, New York Tom McClintock, California
Rush D. Holt, New Jersey Duncan Hunter, California
Joe Sestak, Pennsylvania David P. Roe, Tennessee
David Loebsack, Iowa
Yvette D. Clarke, New York
Joe Courtney, Connecticut
C O N T E N T S
----------
Page
Hearing held on April 22, 2009................................... 1
Statement of Members:
Andrews, Hon. Robert E., Chairman, Subcommittee on Health,
Employment, Labor and Pensions............................. 1
Prepared statement of.................................... 3
Additional submissions:
Letter, dated April 22, 2009, from Hon. Hilda L.
Solis, Secretary, U.S. Department of Labor......... 8
Letter, dated April 22, 2009, from AARP.............. 70
Kline, Hon. John, Senior Republican Member, Subcommittee on
Health, Employment, Labor and Pensions..................... 4
Prepared statement of.................................... 5
McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member,
Committee on Education and Labor........................... 8
Prepared statement of.................................... 10
Questions for the record................................. 77
Miller, Hon. George, Chairman, Committee on Education and
Labor...................................................... 6
Submissions for the record:
Letter, dated April 24, 2009, from the American
Society of Pension Professionals & Actuaries
(ASPPA)............................................ 72
Prepared statement of the Investment Company
Institute (ICI).................................... 73
Statement of Witnesses:
Borland, Alison, retirement strategy leader, Hewitt
Associates, LLC............................................ 21
Prepared statement of.................................... 23
Bullard, Mercer E., founder, Fund Democracy and assistant
professor of law, University of Mississippi................ 12
Prepared statement of.................................... 15
Chambers, Robert G., on behalf of the American Benefits
Council.................................................... 38
Prepared statement of.................................... 40
Goldbrum, Larry H., Esq., general counsel, the SPARK
Institute.................................................. 42
Prepared statement of.................................... 44
Additional submissions:
``The Case for Employer Sponsored Retirement Plans:
Benefits and Accomplishments,'' Internet address to 47
``The Case for Employer Sponsored Retirement Plans:
Coverage, Participation and Retirement Security,''
Internet address to................................ 47
``The Case for Employer Sponsored Retirement Plans:
Fees and Expenses,'' Internet address to........... 48
Memo, dated May 18, 2009, ``Suggested Alternative
Approaches and Concepts for 401(k) Plans Fee
Transparency''..................................... 48
Mitchem, Kristi, managing director, head of U.S. Defined
Contribution, Barclays Global Investors, N.A............... 15
Prepared statement of.................................... 17
Onorato, Julian, CEO, ExpertPlan, Inc., on behalf of CIKR,
ASPPA and NAIRPA........................................... 28
Prepared statement of.................................... 30
H.R. 1984, 401(k) FAIR DISCLOSURE FOR RETIREMENT SECURITY ACT OF 2009
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Wednesday, April 22, 2009
U.S. House of Representatives
Subcommittee on Health, Employment, Labor and Pensions
Committee on Education and Labor
Washington, DC
----------
The subcommittee met, pursuant to call, at 10:30 a.m., in
room 2175, Rayburn House Office Building, Hon. Robert Andrews
[chairman of the subcommittee] presiding.
Present: Representatives Andrews, Hare, Tierney, Kucinich,
Fudge, Holt, Kline, Guthrie, and Roe.
Also present: Representatives Miller and McKeon.
Staff present: Aaron Albright, Press Secretary; Tylease
Alli, Hearing Clerk; Jody Calemine, General Counsel; Fran-
Victoria Cox, Staff Attorney; David Hartzler, Systems
Administrator; Ryan Holden, Senior Investigator, Oversight;
Therese Leung, Labor Policy Advisor; Alex Nock, Deputy Staff
Director; Joe Novotny, Chief Clerk; Megan O'Reilly, Labor
Counsel; Rachel Racusen, Communications Director; Meredith
Regine, Junior Legislative Associate, Labor; Michele Varnhagen,
Labor Policy Director; Mark Zuckerman, Staff Director; Robert
Borden, Minority General Counsel; Cameron Coursen, Minority
Assistant Communications Director; Ed Gilroy, Minority Director
of Workforce Policy; Rob Gregg, Minority Senior Legislative
Assistant; Alexa Marrero, Minority Communications Director; Jim
Paretti, Minority Workforce Policy Counsel; and Linda Stevens,
Minority Chief Clerk/Assistant to the General Counsel.
Chairman Andrews [presiding]. Good morning ladies and
gentlemen. The subcommittee will come to order. We would like
to thank you for your participation here today. We are honored
to have our chairman, George Miller, with us; our senior
Republican member, Buck McKeon, with us. And you will be
hearing from each of those two leaders in a moment.
In the news report which discussed the chairman's efforts
to provide more disclosure to American investors and
pensioners, an industry representative said that the 401(k)
system is about ``freedom and choice and personal
responsibility.''
We agree completely, which is why the legislation that the
chairman has introduced, and that I support, provides people
with the basis to make an intelligent choice about a decision
so important to their future.
It is common to the American experience, that when you buy
something, the person who sells it to you tells you what gets
built into the price; tells you what components make up the
money that you are paying.
It is kind of sadly ironic that, with an asset as important
as someone's retirement account--and for many Americans, their
defined-contribution account is their only retirement account--
that the law does not presently require that investors and
workers be given the right to know what they are being charged
for.
I think most people would be astonished to hear this--that
if they went to the people who are managing their retirement
savings and said, ``I notice that you took $500 out of my
$50,000 balance last year,''--or ``$750 out of my $50,000
balance last year''--``What did I get for it?''--that, under
the present law, they don't have the right to know that.
The bill that the chairman has introduced changes that. And
I believe it changes it in an effective and useful way for
employers, and for employees. The consequences of not being
able to make an intelligent choice about one's self-directed
account are rather extreme. Research done by the General
Accountability Office concluded that a 100-basis-point
difference--that is to say the difference between a 1.5 percent
fee and a 0.5 percent fee--over the course of someone's
lifetime, could make a 20 percent difference in how much is in
their retirement account.
Let me say that again. The person who pays a fee of 0.5
percent, versus a person who pays a fee of 1.5 percent--when
she retires, may have 20 percent more--the person paying the
0.5 percent may have 20 percent more than the person who paid
1.5 percent.
Now, in some cases, you should pay the point and a half,
because it is the right thing for you. But the purpose of this
bill, and a related discussion that the subcommittee has been
having about qualified independent investment advice--a subject
that we will be revisiting--the purpose of this bill is to be
sure that the important material facts, the critical facts,
that are necessary for someone to make an intelligent choice
are in front of that person.
The legislation accomplishes three tasks. It requires
important material disclosure to both employers and employees
about what the fees are, and what they are going for. It
requires the disclosure of any conflicts of interest that may
exist between the person collecting the fee, and any of the
firms that are managing the money to which the accounts are
given. And, finally, it requires that all Americans who are in
defined-contribution plans be given the opportunity--
practically requires this--but be given the opportunity to
choose a low-cost index-fund type option, as opposed to an
actively managed option.
No one has to do it. No one is required to do anything. But
it says that people who wait on tables or teach school or drive
buses or build houses for a living ought to have the same range
of choices that wealthier people do, when it comes to how their
money is managed.
I think this is eminently reasonable, eminently workable
and eminently fair. And so when those who believe in this
system--and I do--say that the 401(k) system is about freedom
and choice and personal responsibility, we agree completely.
People should have the freedom to choose what is best for them.
They should have qualified independent investment advice so
they can evaluate what is best for them.
They ought to know the material facts about what is being
taken out of their account, and why, and by whom, so they can
make the best choice among the options in front of them. And
then, yes, they will take personal responsibility for the
consequences of their choice.
So the bill that is before the subcommittee, and will--
hopefully before the full committee shortly--I think furthers
that agenda. We look forward to hearing from the witnesses this
morning, and from our colleagues on the committee, as we
explore these issues.
By agreement, would the ranking member of the
subcommittee--we are going to have statements from the full-
committee chairperson and ranking member as well. At this
point, I would like to yield to whichever of my friends on the
Republican side would like to speak first.
Would that be you, John?
[The statement of Mr. Andrews follows:]
Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on
Health, Employment, Labor and Pensions
Good morning and welcome to the Health, Employment, Labor and
Pensions Subcommittee hearing on the 401(k) Fair Disclosure for
Retirement Security Act of 2009 (HR 1984), which is authored by my good
friend and Chairman of the Full Committee, Congressman George Miller.
Thanks to his leadership, American workers across the country will
become more aware and better informed about what they should be getting
out of their 401(k). I am honored to be an original co-sponsor of the
bill as well as to working closely with the Chairman to craft what he
and I strongly believe to be one of the most important measures before
us today that will help restore worker trust and confidence in our
retirement system.
American workers across the nation have suffered tremendously due
to last year's economic downturn; particularly, Americans who were laid
off lost a significant amount of their retirement savings or both. At
the end of 2008, a total of 2.8 million American jobs were lost and
retirement accounts were reduced by $2 trillion dollars overall,
shattering the financial goals of many hard-working Americans.
Those most devastated by the market downturn were those workers
nearing retirement who lost close to 30 or more percent of their 401(k)
account. Disturbed over the market's unexpected effect over their
retirement savings, workers who were impacted the most, as well as many
others are further troubled by the lack of transparency of their 401(k)
system. When a worker spends most of their lifetime investing their
hard-earned dollars into an account for their retirement and later
learn that they were being charged fees that contributed to a
significant loss of their nest egg, they understandably lose trust and
confidence the system. The lack of transparency in the 401(k) system is
unacceptable and must end now.
The Members of the HELP Subcommittee have before them today a bill
that improves the 401(k) system and protects the worker by requiring
transparency and disclosure of fees to the employers and employees.
Under our current 401(k) system, there are a numerous instances where
employers are not informed, prior to entering into an agreement with
financial service provider, about the true cost of certain fees and
services included in their ``bundled service arrangement'' plan.
Equally important, HR 1984 requires disclosure of fees to workers that
is both clear and understandable.
When Jack Bogle, founder of Vanguard, testified before the full
committee in February of this year, he made a compelling argument in
favor of providing every worker with the option to invest his or her
retirement savings in an index fund. Under HR 1984, we provide a strong
incentive to employers to ensure an index fund option is offered to
their employers.
Chairman Miller and I strongly believe the 401(k) Fair Disclosure
for Retirement Security Act of 2009 moves us in the right direction to
improve the 401(k) system. You will hear from several of the witnesses
on our panel today, who work on a day-to-day basis in the 401(k) world,
echo our position.
Another important solution, which I will address further during the
hearing, is restoring the conflicted investment advice prohibition
under ERISA, while allowing workers to receive investment advise that
is independent and in the interest of their retirement goals.
I look forward to hearing all the witness testimony and welcome you
to the HELP subcommittee.
______
Mr. Kline. Thank you, Mr. Chairman.
Good morning to you all.
I want to welcome the panel of distinguished witnesses this
morning. Some of you have been with us before, and some of you
are new. We are glad to have you all.
Today, as the chairman indicated, we return to a debate
that we started in the last Congress, specifically regarding
the nature and transparency of fees charged to 401(k) plan
participants, and how best to address that issue.
The bill that we are discussing today was introduced
yesterday. So we have not had much chance to look at it. But we
have been assured on this side that it is the same as the bill
was last year. Is that correct? Okay.
That is the assumption that we are working on as we go----
Chairman Andrews. If the gentleman would yield--my
understanding is there are some very, very technical changes,
like the captions. But, substantively, yes, the bill is
identical to last year's.
Mr. Kline. Okay. We will take that at face value, and go
forward.
I hope that as we go forward in the discussion today, and
we listen to the testimony of our witnesses, and we engage in
the discussion ourselves, that we are, in fact, guided by
facts, and not by rhetoric. Clearly, the economy is in great
trouble. We are in a recession. The value of people's savings,
whether it is retirement or education, or anything that they
have put away, has fallen dramatically.
But I hope that we recognize that the tumbling economy is
behind this loss in value, and not 0.5 percent or 1 percent or
1.5 percent fee, which works out to, for most 401(k) holders, a
medium amount of just over $300 a year. And we have had people
who have lost thousands and tens of thousands of dollars. And,
frankly, it is not because of fees.
American workers are rightly concerned. And we have
important work to do in this Congress, and in the government to
address their concerns on how to strengthen their savings and
give them more options. We have, for example, on our side of
the aisle--we are introducing, today, legislation that will
address some of those concerns, allowing people with 401(k)s to
not be forced to withdraw their savings at 70\1/2\, and
extending that for another couple of years--so we are not
forcing people to withdraw savings when the market is
perilously low.
I think we have real issues out here. This is an important
debate. I am look forward to hearing from the witnesses. I
would just ask all of us to focus on the facts. We have got
real experts here.
And, Mr. Chairman, I ask unanimous consent that my
statement be entered in its entirety.
Chairman Andrews. Without objection.
[The statement of Mr. Kline follows:]
Prepared Statement of Hon. John Kline, Senior Republican Member,
Subcommittee on Health, Employment, Labor, and Pensions
Good morning, and welcome to our distinguished panel of witnesses.
Some of you are making a return appearance before the Committee, and we
appreciate your efforts to continue to provide us with your expertise
on issues of such national importance. Others are joining us for the
first time, and we look forward to your new perspectives.
We return today to a debate we started in the last Congress,
specifically regarding the nature and transparency of fees charged to
401(k) plan participants, and how best to address that issue. We have
before us this morning a bill that was introduced yesterday--providing
insufficient time for staff on our side--not to mention the witnesses
before us this morning--to review in any sort of detail. Republican
staff has been advised that the bill we are discussing is substantively
identical to the fee disclosure legislation we voted to report out of
this Committee in April of last year--an amended version of the bill
originally introduced by Chairman Miller. On that point, Mr. Chairman,
I take you and your staff at face value, and accept as a matter of
faith that we are discussing materially the same bill that received a
vote in Committee last year.
As we take up this debate, let me say first that we must be guided
this morning by facts--not rhetoric. In previous hearings, we've been
painted a sinister picture of greedy financiers ``raiding'' employees'
401(k) plans and robbing them blind through exorbitant pension fees.
Mr. Chairman, I submit we stick to the data. When you run the
numbers, an individual with an average 401(k) account balance would
have paid a median total of pension fees of roughly $346 per year.
Those with lower-than-average balances--such as lower-income workers--
would, obviously, pay even less. I welcome a fair debate about the
appropriateness and transparency of pension fees--and I hope we can
proceed today without hyperbole or fear-mongering--in either our
language or our action.
In the same vein, I would encourage my colleagues to avoid
grandstanding and posturing here this morning. Specifically, I would
hope none of us yields to the temptation to characterize the dramatic
decline in many workers' 401(k) plans as simply an issue of ``fee
disclosure.''
American workers and retirees are justly upset and frightened by
the dramatic effect the market downturn has had on retirement savings.
But we do no one a service--indeed, we do a great disservice--to
suggest the cataclysmic failure in our markets are no more than a
function of so-called ``hidden'' fees or corporate raiders. The
dramatic loss in retirement savings was not caused, nor would it have
been avoided, by the difference of a fraction of a percent in an
investment fee.
Mr. Chairman, you may recall that debate on this bill last year
generated substantial concerns from committee members on both sides of
the aisle. I hope that as we start the process fresh this year we are
both willing and able to work together to forge common ground on how we
might improve pension fee disclosure under ERISA. As I said during our
markup last year, I stand ready and willing to join you in this effort.
Indeed, as we address our retirement system more broadly, I hope we
explore genuine efforts to help Americans rebuild their 401(k) nest
eggs, as packages brought forward by our Republican Leadership--
including the Savings Recovery Act, which is being introduced today--
are prepared to do. Among its provisions, our bill would enable seniors
to keep more of their retirement savings by further suspending the
mandatory withdrawal that requires a certain portion of retirement
savings to be withdrawn after an individual turns 70\1/2\ or retires.
This provision protects the investments of seniors and retirees at a
time when the value of their accounts is low--and is just one of the
many factors worthy of discussion as we consider how to help Americans
rebuild their savings.
That said, we have an excellent panel of witnesses here before us
this morning, and we should hear from them directly. I thank the
gentleman, and yield back my time.
______
Chairman Andrews. I thank the gentleman from Minnesota.
In 2006, long before the market had melted down, long
before loss of retirement savings was an issue on the top of a
lot of people's list, the chairman of the full committee--at
that time, the ranking member of the full committee--had the
foresight to ask the General Accountability Office to look at
the issue surrounding fees in defined-contribution accounts.
That request by Mr. Miller led to a series of reports,
which, in turn, led to extensive hearings by our full committee
and subcommittee, which, in turn, has led to the legislation in
front of us today.
So we are very honored that the chairman of our full
committee, George Miller, is with us. And I would yield to him
at this time.
Mr. Miller. Thank you, Mr. Chairman, and thank you to the
subcommittee, for holding this hearing. This is a continuation
of an effort that, as you know, was started a couple of years
ago, to make sure that we could keep the 401(k) safe and secure
and sustainable, by strengthening the various aspects of the
401(k), so that more people would participate, but they would
participate with greater knowledge.
As we have come through the various congressional hearings
of this committee, we have found that the current law does not
require disclosure of all fees levied by financial-service
firms against the participants' accounts. And I think we will
hear again from this panel not only a reaffirmation of that
fact, but also some very, very good suggestions--as I read the
testimony yesterday and today--some suggestions how even this
bill--it is hard for me to believe it can be improved--but how
even this bill can be improved on that--on that item--so that
we will have a better-informed--it is one thing just to talk
openly about choice. The choice itself is the value. But choice
itself can be confusing if it is not accompanied with good
information.
And in this case, that information is very, very important
to the retirement security of our citizens. As you pointed out,
small differences, over a long period of time, can make a huge
difference in terms of the resources that an individual or a
family will have available to them for their retirement.
You mentioned that we could see a 20 percent difference
over the working life of that individual or that family. A
couple of weeks ago, the founder of Vanguard, Jack Bogle,
testified that the hidden turnover costs in many mutual funds
could wipe out 75 percent of an individual's investments gains
over a lifetime.
The 401(k) account holder is the last person in the Wall
Street food chain to get paid. As he said, ``If we can't get
the croupiers out of this business, the participants are
destined to lose.''
And it is especially difficult time in this country that
this hearing, and the previous hearings--is at a time when
millions of Americans are out of work, struggling to make ends
meet. The best-laid plans of families--we have all heard it
from individuals in our districts--have gone up in smoke
because of the financial scandals and meltdown that have taken
place.
And as they have seen a dramatic reduction in their
retirement resources--we all have the anecdotal stories of
people telling us they are going to work longer, they are going
to go back to work, their spouse is not going to be able to
retire, or, simply, that they now believe they will not have
enough money for retirement. And the previous options of going
back to work are not available to them.
I think this is an important subject because, as we learn
more and more about financial services in this country--there
is more and more concern among the public.
All of us have just returned from 2 weeks of being home in
our districts. And the anger, the fear, is palatable for our
constituents. I think when we understand that we see the
manipulation of credit card interest rates without the
knowledge or the understanding of people who are holding those
cards--when we understand that almost half of the subprime
loans made in California could have been prime loans, but there
were incentives to getting higher interest rates for the
securitization of those loans, so the subprime loans were
issued instead.
And we now see, again, in predatory lending, where bonuses
are paid for higher interest rates put on the same people who
could have had it at a lower interest rate, given their credit
rating, and the rest of that.
And that is to suggest that what we now need is
transparency in the financial-services industry. And the
401(k)s are deeply involved, because that is where they turn to
try to build the security and the safety for their retirement.
I believe that this legislation will provide workers with
clear and complete information about the fees that they are
paying. It simply requires financial-service firms to tell
their account holders how much they charge for their services.
The bill will also require service providers to inform
employers of the cost that the employees will bear, and the
potential conflicts of interest. Employers should, likewise, be
armed with accurate data so that they can shop around.
Next, the bill will require that in order for employers to
receive limited liability against participant losses, that one
low-cost index fund would be included in the menu of investment
options. We have heard over and over again that nothing beats
the performance fees or simplicity of the index fund. This bill
will also strengthen the Department of Labor's oversight of
401(k)s.
I would hope that this bill would not be controversial. I
think that, as we struggle in the Congress, on almost a daily
basis, with financial services in this country, that we would
now come to understand that transparency is the watchword. It
is in every reform proposal, whether it is here or in Europe,
or anywhere else in the world.
And so that transparency, accompanied with proper
oversight, I think, will give a better selection of choices and
greater security and information to workers, as they join the
401(k) savings proposal to try to provide for their retirement.
Thank you, again, for holding this hearing.
I look forward to the testimony of all of the witnesses.
And I thank you for your time and your expertise that you are
lending to the committee today.
Chairman Andrews. Thank you, Mr. Chairman.
Without objection, I would like to enter into the record
a--a letter from the Secretary of Labor, Hilda Solis, with
respect to this issue--without objection.
[The information follows:]
The Secretary of Labor,
Washington, DC, April 22, 2009.
Hon. Robert E. Andrews, Chairman,
Health, Employment, Labor and Pensions Subcommittee, Committee on
Education and Labor, U.S. House of Representatives, Washington,
DC.
Dear Chairman Andrews: Thank you for your leadership in protecting
American workers' savings in section 401(k) plans. I commend you for
focusing attention on this important issue by scheduling a hearing on
the ``401(k) Fair Disclosure for Retirement Security Act of 2009'' and
I very much look forward to
working with you to formulate the best approach to protecting the
hard earned retirement savings of America's workers.
I share your belief that it is essential to provide workers with
the information they need to make nformed investment choices and to
provide plan fiduciaries with critical information necessary for them
to determine that the fees that are charged in connection with their
401(k) plans are reasonable. We want to work with you to provide
practical solutions for workers and fiduciaries.
While determining the optimal course will be difficult, our shared
commitment to protecting the retirement security of all of America's
workers will guide us. Your hearing is an important first step in
gathering the information we will need to accomplish our common goal.
At the same time, as you know, we are currently reexamining the
proposed regulations affecting 401(k) plans developed during the prior
Administration to be sure they strike the appropriate balance between
protecting workers and requiring greater transparency and
accountability from the service providers to 401(k) plans. We look
forward to becoming better educated about the issues as this process
proceeds and working with you to create a more effective and useful
structure for disclosure of 401(k) plan fees.
Again, I appreciate your decision to hold this hearing, and look
forward to working with you and the members of the Committee on
Education and Labor on issues critical to America's workers.
The Office of Management and Budget has advised that there is no
objection to the transmission of this letter from the standpoint of the
Administration's program.
Sincerely,
Hilda L. Solis, Secretary,
U.S. Department of Labor.
______
Chairman Andrews. We are equally honored to have with us
the senior Republican member of the full committee, Mr. McKeon,
who guided this committee with such grace and skill during his
tenure.
Welcome, Mr. McKeon.
Mr. McKeon. That long, long tenure.
Chairman Andrews. All things must come to an end, huh?
Mr. McKeon. Thank you, Mr. Chairman.
That is what we are hoping.
I thank the gentleman for yielding.
We are here this morning to discuss Chairman Miller's
legislation to change the way 401(k) retirement savings plans
operate. Much of the focus has been on the bill's requirements
for increased reporting and disclosure. So let me start there.
Let me be perfectly clear: Republicans support sensible
disclosure to make 401(k) plans more transparent and
understandable to workers. We are approaching this issue--with
a spirit of openness, and a hope that we can work with the
majority to craft a proposal, or with their proposal, as
crafted.
Unfortunately, it seems that the drafting process ended
before it even began. Instead, we are starting the process with
a bill that largely mirrors the proposal that stalled last
year, because of legitimate concerns from both sides of the
aisle.
I, for one, was not able to support last year's proposal
because I saw the potential for harmful, unintended
consequences that would limit options for workers. I hope, at
the end of the day, with this process, to fix a 0.5 percent, or
a 1 percent, or a 1.5 percent fee--we don't end up costing the
workers a lot more.
For instance, the bill's requirement that all plans offer
an index fund is tantamount to a government seal of approval on
a particular investment option. This could inadvertently steer
savers in a direction that isn't best for them. The bill also
requires the unbundling of services for the purposes of
voluminous new reporting; this, despite the fact that experts
have told us that unbundling could actually drive up costs for
workers--the exact opposite outcome that we are trying to
receive.
I hope we can address these issues as the process moves
forward. But I think a more open process would have allowed
this debate before the legislation was introduced.
I would also like to take a minute to clarify two separate
and very serious issues facing America's workers. The fees the
workers pay on their 401(k) accounts can significantly impact
their long-term savings. Transparency in these fees is a real
concern, and one that Republicans share.
But to blame 401(k) fees for the substantial losses workers
are seeing in their retirement accounts is to ignore the real
culprit, a stock market that has plummeted in the face of a
continuing recession.
Again, this is a serious issue, and one that is deeply
impacting Americans from all walks of life, whether they are
new parents establishing a college fund, or workers preparing
for retirement.
Let me say it plainly: The downturn in the stock market
should not--it must not--be used as an excuse to enact
controversial policies on 401(k) reporting and disclosure. To
do so would not only be disingenuous, but it threatens to do a
disservice to the very people that we are seeking to help.
401(k) transparency is an important topic in its own right,
and one that deserves an honest and realistic debate.
When it comes to the market downturn, unfortunately,
solutions will be much harder to come by. But that isn't going
to stop us from trying. That is why I am joining other
Republicans today to introduce the Savings Recovery Act, a bill
that takes important first steps to help Americans begin to
rebuild the savings that they have lost.
Our bill gives Americans flexibility and freedom to save,
while eliminating penalties that would make it harder to
rebuild what has been lost. We will raise the contribution
limits on retirement accounts, and we will stabilize pensions
with a glide path for recognizing losses, and additional time
to boost funding.
We will make it easier for families to save for college,
and we will get capital flowing again by temporarily suspending
the capital-gains tax on newly acquired assets. And we will
allow more Americans to increase their income by doubling the
Social Security earnings limit.
The Savings Recovery Act is the product of a Republican
solutions group that came together to address the very real
concerns of Americans, who have seen their nest eggs evaporate.
We know that savings can't be rebuilt overnight. But that
is no excuse to ignore the challenges that families are facing.
As for the bill before us today, the focus is much
narrower. Rather than responding to the broader losses in
American savings plans, this bill offers a specific
prescription for 401(k) reporting requirements and investment
options. And, so, recognizing the parameters of the bill, I
look forward to a thorough examination of these issues.
Members on both sides of the aisle recognize that Americans
need to be able to save for retirement. I hope we can find
similar agreement on what steps should be considered to enhance
current savings opportunities, rather than stifling them.
Again, thank you for the opportunity to provide a
statement. And I yield back.
[The statement of Mr. McKeon follows:]
Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior Republican
Member, Committee on Education and Labor
We're here this morning to discuss Chairman Miller's legislation to
change the way 401(k) retirement savings plans operate.
Much of the focus has been on the bill's requirements for increased
reporting and disclosure, so let me start there, and let me be
perfectly clear: Republicans support sensible disclosure to make
401(k)s more transparent and understandable to workers.
We're approaching this issue with a spirit of openness and a hope
that we can work with the majority as a proposal is crafted.
Unfortunately, it seems the drafting process has ended before it
ever began. Instead, we're starting the process with a bill that
largely mirrors the proposal that stalled last year because of
legitimate concerns from Members on both sides of the aisle.
I, for one, was not able to support last year's proposal because I
saw the potential for harmful unintended consequences that would limit
options for workers.
For instance, the bill's requirement that all plans offer an index
fund is tantamount to a government seal of approval on a particular
investment option. This could inadvertently steer savers in a direction
that isn't best for them.
The bill also requires the ``unbundling'' of services for the
purposes of voluminous new reporting. This, despite the fact that
experts have told us ``unbundling'' could actually drive up costs for
workers--the exact opposite outcome we're trying to achieve.
I hope we can address these issues as the process moves forward.
But I think a more open process would have allowed this debate before
the legislation was introduced.
I'd also like to take a minute to clarify two separate and very
serious issues facing American workers.
The fees that workers pay on their 401(k) accounts can
significantly impact their long-term savings. Transparency in these
fees is a real concern, and one that Republicans share.
But to blame 401(k) fees for the substantial losses workers are
seeing in their retirement accounts is to ignore the real culprit--a
stock market that has plummeted in the face of a continuing recession.
Again, this is a serious issue, and one that is deeply impacting
Americans from all walks of life, whether they are new parents
establishing a college fund or workers preparing for retirement.
Let me say it plainly: The downturn in the stock market should
not--it must not--be used as an excuse to enact controversial policies
on 401(k) reporting and disclosure. To do so would not only be
disingenuous, but it threatens to do a disservice to the very people we
are seeking to help.
401(k) transparency is an important topic in its own right, and one
that deserves an honest and realistic debate.
When it comes to the market downturn, unfortunately, solutions will
be much harder to come by. But that isn't going to stop us from trying.
That's why I'm joining other Republicans today to introduce the
Savings Recovery Act, a bill that takes important first steps to help
Americans begin to rebuild the savings they have lost.
Our bill gives Americans flexibility and freedom to save, while
eliminating penalties that would make it harder to rebuild what has
been lost.
We'll raise contribution limits on retirement accounts, and we'll
stabilize pensions with a glide path for recognizing losses and
additional time to boost funding.
We'll make it easier for families to save for college, and we'll
get capital flowing again by temporarily suspending the capital gains
tax on newly acquired assets. And we'll allow more Americans to
increase their income by doubling the Social Security earnings limit.
The Savings Recovery Act is the product of a Republican Solutions
Group that came together to address the very real concerns of Americans
who have seen their nest eggs evaporate. We know that savings can't be
rebuilt overnight, but that's no excuse to ignore the challenges that
families are facing.
As for the bill before us today, the focus is much narrower. Rather
than responding to the broader losses in Americans' savings plans, this
bill offers a specific prescription for 401(k) reporting requirements
and investment options. And so, recognizing the parameters of the bill,
I look forward to a thorough examination of these issues.
Members on both sides of the aisle recognize that Americans need to
be able to save for retirement. I hope we can find similar agreement on
what steps should be considered to enhance current savings
opportunities, rather than stifling them.
Again, thank you for the opportunity to provide a statement. I
yield back.
______
Chairman Andrews. Thank you, Mr. McKeon. And we want to
proceed with that open-and-honest debate on the 401(k) Fair
Disclosure for Retirement Security Act of 2009.
And we have assembled, I think, an excellent group of
ladies and gentlemen, to help us do that.
I am going to read the biographies of the witnesses. And
then the written testimony of each of you will be accepted,
without objection, into the record. And we would ask if each of
you would, then, give us a 5-minute oral synopsis of your
testimony.
At that time, we will turn to questions from the members of
the committee, and try to learn more about what you think.
Mercer Bullard is an associate professor of law at the
University of Mississippi School of Law, and founder and
president of Fund Democracy, and non-profit advocacy group for
mutual-fund shareholders, including 401(k) participants.
Mr. Bullard is returning to the committee. He has a J.D.
from the University of Virginia Law School, an M.A. from
Georgetown University, and a B.A. from Yale College.
Welcome back, Professor Bullard.
Kristi Mitchem is a managing director, and head of U.S.
Defined Contribution Plans for Barclays Global Investors, BGI.
Prior to joining BGI, Ms. Mitchem ran the West Coast
Derivatives Group, and U.S. transition services for Goldman
Sachs.
Ms. Mitchem received her MBA from the Stanford Graduate
School of Business, and her B.A. in political science from
Davidson College.
Ms. Mitchem, welcome to the committee.
Alison Borland is the strategy leader for Hewitt
Consultants Retirement Consulting Business, which administers
retirement benefits for more than 11 million participants. She
is responsible for studying and developing solutions that
improve retirement security for plan participants.
Ms. Borland graduated summa cum laude from Vanderbilt
University, with a bachelor's degree in mathematics, and a
minor in French. Good combination.
And welcome to the committee.
Julian Onorato is the chairman, CEO and president of
ExpertPlan, Inc., which provides retirement-plan solutions and
services to employers. Mr. Onorato has 25 years of experience
within the financial-services industry, including more than 20
years in retirement-plan services.
Mr. Onorato earned a B.S. in electrical engineering from
Drexel University, and has completed an executive program at
the Wharton School of the University of Pennsylvania, focused
on reengineering the client-service process.
Mr. Onorato, welcome. And you are one of my constituents,
and my employer, so it is great to have you with us here today.
Robert Chambers, welcome back.
Mr. Chambers is the former chairman of the Board of the
American Benefits Council, an employee-benefits lobbying firm,
whose members either employ or administer employee plans. Mr.
Chambers also serves as a partner in the McGuire Woods law
firm, where he counsels employers in connection with tax-
qualified retirement plans.
Mr. Chambers received his B.A. from Princeton University,
and his J.D. from the Villanova University School of Law.
Welcome back, Mr. Chambers--good to have you with us.
And, finally, Larry Goldbrum--did I pronounce your name
correctly?
Okay. Well, what would it be correctly?
Goldbrum, excuse me--is the executive vice president and
general counsel of the Spark Institute, a trade association
that represents retirement-plan service providers, including
mutual-fund companies, banks, insurance companies, third-party
administrators, and benefits consultants.
He received his law degree from the Vanderbilt University
School of Law, and a bachelor of business administration degree
from the George Washington University.
I know Mr. Kline will be pleased that we have a majority of
lawyers on the panel this morning, so we are ready to go.
Mr. Bullard, we would ask you to go first. You have been
here before, but I will reiterate for our newcomers, when the
yellow light appears, you have a minute or so to wrap up. And
when the red light appears, we would ask you to summarize and
stop, so we can get on to the questions. Welcome back.
STATEMENT OF MERCER E. BULLARD, FOUNDER, FUND DEMOCRACY AND
ASSISTANT PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI
Mr. Bullard. Thank you very much. Thank you Chairman
Andrews, Ranking Member Kline, Chairman Miller, and members of
the subcommittee, for the opportunity to appear before you
today to discuss the 401(k) Fair Disclosure for Retirement
Security Act of 2009.
It is an honor and a privilege to appear before you today.
I am testifying, today, on behalf of Fund Democracy, an
advocacy group for mutual-fund shareholders that I formed about
9 years ago. But I would be remiss not to mention Barbara
Roper, the director of investor protection at the Consumer
Federation of America, with whom I have developed the positions
that you see in my written testimony, over past testimony and
comment letters.
The 401(k) Fee Disclosure Act is--reforms are long overdue.
Under current law, figuring out your 401(k) fees is like trying
to find a needle in a haystack, except the needle has been
broken into three parts, and they have been put into three
different haystacks.
The investment-management fees appear in prospectuses. The
plan fees appear in something called a Form 5500. And any other
account fees that specific to the participant appear in yet
another document, their quarterly statement.
The prospectus fees are provided as a percentage of assets.
The Form 5500 fees, if any participant could actually find
those, are provided as a dollar amount, and not even on a per-
account basis. So even if you were able to find all of these
fees, you would still have to convert either the prospectus
fees, of which there may be 15 or so different options, into
dollars, or the 5500 fees, into a percentage based on the
entire size of the plan, and then figure out what it would be
on a per-participant basis. And then you would have to figure
out what appears on your quarterly statement, and figure out
that as a percentage of fees.
And then, finally, you would have, for at least one period
of time, some idea of what you are paying in 401(k) fees.
If you have any doubt about the absurd patchwork of
disclosure requirements under current law, I suggest you visit
the Department of Labor's Web site, and review their own
brochure, ``A Look at 401(k) Fees.''
The section that explains how to find out what you are
paying in fees would bring tears to the eyes of anyone who has
any kind of commitment to fee transparency.
The 401(k) Fee Disclosure Act solves this problem by
requiring that all fees be disclosed in one place, in one
format. The act is a breath of fresh air in a regulatory
environment that continues to be unfriendly to investors.
The SEC recently announced the suspension of reform of 12b-
1 fees, and appears to be preparing to lower fiduciary
standards for investment advisors. The Department of Labor has
proposed rules that effectively protect conflicted investment
advice provided to plan participants.
The act's requirement that fee disclosure also appear in
participants' statement, which they are actually likely to
review, is also a major step forward. It also requires that
fees be provided in dollars, in the same place that they will
see the value of their accounts in dollars.
For the first time in retail financial-services history,
the act will require that fees are provided in a comparative
format so that investors can place their fees in context.
Standing alone, fees mean nothing to the fee-insensitive
investor. Also, for the first time, the act recognizes the
importance of giving participants freedom of choice in deciding
whether to invest in a passively managed fund, or an actively
managed fund, that also will, inevitably, impose higher fees.
Actively managed options, as a group, will, by definition,
necessarily under-perform the market by the amount of their
fees. This means that in the aggregate, active-management fees
are a dead weight dragging down overall investment returns for
401(k) plans.
Participants who are required to invest in actively managed
funds may significantly outperform the market, but they may
also significantly under-perform the market, as many have.
It is unclear how employers can, consistent with their
fiduciary duty, force their employees to pay higher fees and
assume active-management risk.
The answer may be that financial-services industry has
every incentive to steer participants into actively managed
funds, which are more profitable than passively managed funds.
This is the only way to explain the industry's Orwellian
position that offering a passively managed investment option
somehow limits choice.
The industry argues that we should be focused on the
employer's freedom of choice, not the employees'. But it is the
employees' choice and financial security that should be our
focus.
The financial-services industry would leave the decision to
the employer, and have us ignore the warning issued by the
intellectual father of capitalism, Adam Smith, that ``Managers
of other people's money rarely watch over it with the same
anxious vigilance with which they watch over their own. They
very easily give themselves a dispensation.''
Jack Bogle reminded me of that piece of wisdom, in the
``Opinion'' section of yesterday's Wall Street Journal.
The employer stock option in 401(k) plans is another
example of the incentives of managers of other people's money.
Employers have every incentive to create and encourage a
captive class of shareholders, as illustrated by the image of
Enron executives exhorting their employees to buy more Enron
stock.
We offer tax deferral to workers in order to help them pay
for retirement. Yet, we then permit the workers to use that tax
benefit to gamble 100 percent of their retirement security, not
just on the stock of a single company, but on the stock of the
company on which they also depend for their income.
I strongly encourage Congress to consider limiting
employee's investment in employers' stock to 20 percent of
their account balances.
But even without such a provision, the 401(k) Fee
Disclosure Act promises to enhance transparency, and promote
competition in a way that I am confident will lead to lower
fees for America's tens of millions of 401(k) participants.
I am pleased to express my support for the act, and would
be happy to answer questions that you might have.
Thank you.
[The statement of Mr. Bullard may be accessed at the
following Internet address:]
http://edlabor.house.gov/documents/111/pdf/testimony/
20090422MercerBullardTestimony.pdf
______
Chairman Andrews. Mr. Bullard, thank you very much for your
testimony.
Ms. Mitchem, welcome to the committee.
You need to turn your--there you go.
STATEMENT OF KRISTI MITCHEM, MANAGING DIRECTOR, U.S. DEFINED
CONTRIBUTION PLANS, BARCLAYS GLOBAL INVESTORS
Ms. Mitchem. On behalf of Barclays Global Investors, I
appreciate the opportunity to testify today, regarding the
401(k) Fair Disclosure for Retirement Security Act of 2009.
Headquartered in San Francisco, BGI is one of the world's
largest asset managers. We have approximately $1.5 trillion in
assets under management, including hundreds of billions of
ERISA plan assets.
BGI services to its clients are focused on investment
management. We do not provide other services, such as record-
keeping.
Clearly, the events of 2008 were painful for all those
investing in retirements. These events have some questioning
whether defined-contribution plans can achieve their objective
of providing security in retirement for the workers who
contribute to them.
Yet, for all the talk of the failures of the system, a
closer look at the evolution of 401(k) plans over the past
several years revealed significant progress. First, the Pension
Protection Act of 2006 included a number of provisions to
increase employee participation. And we have seen an increasing
number of plan sponsors using these tools.
Second, recent surveys show that despite the equity and
market events of the past year, the vast majority of defined-
contribution plan participants are sticking with their plans,
leaving their money in, and continuing to contribute--evidence
that participants understand and value the benefit provided by
their defined-contribution plans.
However, the impact of the market turmoil on participant
balances has added urgency to the debate on, ``What is the
optimal design for defined-contribution plans, and how should
they be structured to allow these vehicles to achieve their
long-term objectives: Retirement Security for millions of
Americans.''
Providing plan fiduciaries and plan participants with
additional, targeted information about fees and expenses will
promote better investment decisions, and help 401(k) plans to
better deliver retirement security to the American workforce.
The legislation under discussion today addresses two of the
largest issues for D.C. plans: First, for plan sponsors to have
sufficient information about the fees and expenses to
appropriately discharge their fiduciary responsibility in the
selection of providers; and, second, the need for plan
participants to have ready access to appropriate, easily
understood information about the critical decisions that they
need to make regarding investments.
We believe that the appropriate elements of a disclosure
regime for plan sponsors must rest on the unique fiduciary
considerations that a plan sponsor encounters in choosing
investment funds for the platform.
Through the important and significant costs of providing
plan-participant level administration and record-keeping, a
plan sponsor must determine how to best provide and pay for
these services. In addition, it is most often the case that the
workers pay for all of the major costs of the plan:
Administration, record-keeping and investment management.
Plan sponsors are, thus, in the position of agreeing to the
fees and expenses that workers will fund through deductions
from their investment balances in the plan. As such, we believe
it is important that plan sponsors receive sufficient
information, in sufficient detail, to appropriately discharge
their responsibility.
Today, the information that a plan sponsor needs is
sometimes difficult to obtain or difficult to compare. There
are two reasons for this. First, the myriad of investment
alternatives utilized on 401(k) plans, mutual funds, insurance
products, bank collective trusts, separately managed accounts--
all of these structures have differing compensation mechanisms
and differing terminology for what may be the same service.
Second, it can be very difficult to evaluate fees and
expenses, when fees for investment management are bundled with
fees for administration, record-keeping and related services.
I think we all agree that a worthwhile disclosure regime
permits a comparison of like with like. BGI supports
legislative efforts to require service providers to provide
specific disclosures by fee category, so as to make plan
sponsors' decision-making less burdensome.
As to plan participants, the most fundamental decisions
that they need to make are whether, and at what level, to
participate in the plan; which of the plan investment options
to choose; and whether and when to change their investment
allocations. These decisions are critical to the future value
of their account.
BGI believes that plan participants need information
communicated in a way that is easy to understand, and that
facilitates a comparison across the full range of designated
investment alternatives.
While transparency as to fees and expenses is important for
plan participants, any disclosure document needs to present
this information in context, as too much focus on fees and
expenses could promote a tendency among participants to opt for
the lowest-cost option, or to opt out of the plan, to the
detriment of their retirement income.
It is worth noting, in conclusion, that in our experience,
in the defined-benefit market, asset-management services and
administrative services, such as trustee services, are
generally disclosed separately. This transparency has
contributed to the salutary effect of bringing both investment-
management fees and administrative costs down over the last
decade.
Increased transparency can, therefore, be an important
catalyst for reducing the cost in D.C. plans, and improving the
future income of all retirees. Thank you.
[The statement of Ms. Mitchem follows:]
Prepared Statement of Kristi Mitchem, Managing Director, Head of U.S.
Defined Contribution, Barclays Global Investors, N.A.
On behalf of Barclays Global Investors (BGI), I appreciate the
opportunity to testify today regarding the ``401(k) Fair Disclosure for
Retirement Security Act of 2009''.
Clearly the events of 2008 were painful for all those investing for
retirement: global equities fell over 40 percent, and the average
401(k) investor lost approximately 28% of their accumulated balances.
These events have some questioning whether defined contribution (DC)
plans can achieve their objective of providing security in retirement
for the workers who contribute to them. Yet, for all the talk of the
failures of the system, a closer look at the evolution of 401(k) and
similar plans reveals significant progress over the last several years.
First, the Pension Protection Act of 2006 included a number of
provisions to increase employee participation, and we have seen an
increasing number of employers.using these tools. Second, recent
surveys show that despite the equity market events of the past year,
the vast majority of DC plan participants are sticking with their
plans, leaving their money in and continuing to contribute-evidence
that participants understand and value the benefit provided by their DC
plan.
However, the impact of the market turmoil on participant balances
has added urgency to the debate on what is the optimal design for
defined contribution plans, and how should they be structured to allow
these vehicles to achieve their long-term objective of retirement
security for millions of Americans. Providing plan fiduciaries and
individual plan participants with additional targeted information about
fees and expenses, which the bill under discussion today will do, will
promote better investment decisions and help 401(k) plans to better
deliver retirement security for American workers.
Background on BGI
BGI \1\ was founded in 1971 as part of Wells Fargo Bank in San
Francisco, California. Today, we are owned by Barclays PLC, one of the
world's leading diversified financial services companies. We are
headquartered in San Francisco with approximately 1600 employees in
California and elsewhere in the U.S. and another 1400 worldwide serving
the needs of our global clients. BGI is one of the world's largest
institutional asset managers, and is the largest provider of structured
investment strategies, such as index, tactical asset allocation and
quantitative active strategies. BGI pioneered the first institutional
index fund strategy in 1971, and has continued a tradition of financial
innovation ever since-including the development of target date
retirement (lifecycle) funds in the early 1990's.
---------------------------------------------------------------------------
\1\ BGI includes Barclays Global Investors, N.A. and its worldwide
asset management affiliates.
---------------------------------------------------------------------------
Overview
BGI is pleased to see the focus of this Committee, the Department
of Labor and others on the ways in which services are provided to
employee benefit plans and in the way service providers are
compensated. Increased complexity has made it more difficult for plan
sponsors and other plan fiduciaries to understand what the plan
actually pays for specific services and where the potential exists for
conflicts. This is particularly so for DC plans, where over the last
decade the costs associated with managing and maintaining the plan have
increasingly been shifted to plan participants--often through bundled
fee arrangements where administration and investment management are
offered by the same provider.
Managers of defined benefit (DB) pension plans have well-
established tools that allow for savings and investment today in order
to deliver retirement benefits for workers far in the future. Using a
fully funded DB plan for comparison, we identify four dimensions of
comparability for DC plans-contributions, investment quality,
portability and lifetime income. Most of our testimony will focus on
the second of these-investment quality--which necessarily includes the
one of the largest determinating factor in long-term performance--which
is fees and expenses.
First, let me briefly address the other dimensions. In a DB plan,
contributions are mandated as function of funded status. In a DC plan,
it is the participant who must decide if they want to participate, and
how much they want to contribute. The Pension Protection Act of 2006-
part of the progress in DC plans referenced above-provided plan
sponsors with fiduciary protections in establishing auto-enrollment and
auto-default savings rates. Data shows plans are adopting auto-
enrollment, with the number almost doubling from 2005. And, of the top
1000 plans in the United States, over 53 percent now offer auto-
enrollment for new employees.\2\
---------------------------------------------------------------------------
\2\ Hewitt Associates ``Trends and Experience in 401(k) Plans
2007''.
---------------------------------------------------------------------------
Studies have also shown that people tend to accept the terms of
auto-enrollment as given. They are unlikely to opt out, and they are
also likely to stay with the default savings rates-now generally set at
3 percent.\3\ So inertia is working but it could work even better.
Early results from researchers in the behavioral finance field indicate
that even if you take the default savings rate up to 6, 7, 8 or 9
percent, you won't see a meaningful number of participants opting out.
So, although we don't have the level of funding that's required to
support retirement adequacy today, we can get there by encouraging more
and more plan sponsors to automatically enroll participants and by
creating further incentives for employers to increase the default
saving rate to 6 percent and higher. Another dimension of pension
investing is portability, arguably the one area where DC plans outpace
DB plans. Unlike the traditional DB plan where unvested balances are
typically lost when an employee leaves, the DC plan system explicitedly
recognizes the more transient nature of today's worker, where
contributions actually follow an employee. The DC portability feature
is not without its flaws. Moving balances from one employer to the next
is difficult and requires a participant to take action. And we know
that if exiting employees take a cash distribution, a significant
amount of those funds leak out of the retirement system.
---------------------------------------------------------------------------
\3\ The Importance of Default Options for Retirement Saving
Outcomes: Evidence from the United States. Beshears, Choi, Laibson,
Madrian (2007).
---------------------------------------------------------------------------
Another comparable to DB plans is lifetime income. Every DB plan
offers the opportunity for participants to choose income for life. But
this critical component has yet to have been addressed in a meaningful
way in the 401(k) system today. Important as it is to accumulate
sufficient assets during a participants working years, it is also as
important to have a strategy to fund consumption in retirement. Many
financial services providers, including BGI, are engaged in designing
products for the DC market to manage the twin risks of inflation and
longevity. These products take two principal forms: guaranteed minimum
payments for set periods and annuities. The market turmoil in 2008 has
increased the interest of both plan sponsors and plan participants in
these products.
Now, moving closer to the subject of today's hearing, is the
dimension of investment quality. DB plans tend to be well diversified,
use institutional-quality managers and rebalance on a regular basis
back to a strategic asset allocation. To mimic this in a 401(k) world,
ideally the majority of plan participants would be invested in
autorebalancing strategies that are constructed with institutional
quality funds. Clearly these allocations would need to be age
appropriate, provide acceptable outcomes across a range of different
market environments, and be priced at levels that reflect the bulk
buying power of 401(k) plan sponsors.
More DC plans today offer pre-mixed portfolios that are well
diversified and auto-rebalancing than ever before.\4\ And again, the
PPA has moved things in the right direction, by providing a level of
fiduciary relief for plan sponsors to default participants into just
these types of investments. Congress should also consider changes that
would allow employers to diversify participants out of heavy
concentrations of company stock as they near retirement. The
legislation under discussion today addresses two of the largest issues
for DC plans: first, for plan sponsors to have sufficient information
about fees and expenses to discharge their fiduciary responsibilities
in the selection of service providers. And second, the need for plan
participants to have ready access to appropriate, easily understood
information about critical issues that affect their investment
decisions.
---------------------------------------------------------------------------
\4\ Cerruli, Retirement Markets 2007; Hewitt Associates ``Trends
and Experience in 401(k) Plans 2007.
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Elements of a Disclosure Regime for Plan Sponsors
We believe the appropriate elements of a disclosure regime for plan
sponsors must rest on the unique fiduciary considerations that a plan
sponsor encounters in establishing designated investment alternatives
under a DC plan and in choosing investment funds for the plans. Due to
the importance and significant cost of providing plan participant level
administration and recordkeeping, a plan sponsor must determine how
best to provide and pay for these services. Recordkeeping expense is
often-but need not be-funded on a ``bundled'' basis through the
expenses charged against assets held by the investment funds in which
the plan invests and/or through fees received by the investment
manager. In addition, it is more often the case that plan participants
fund all the major costs of the plan (administration, recordkeeping and
investment management). Plan sponsors are thus often in the position of
agreeing to the fees and expenses that participants will fund through
direct or indirect deductions from their investment balances in the
plan. As such, we believe it is important that plan sponsors receive
sufficient information, in sufficient detail, to appropriately
discharge this responsibility. Today, the information the plan sponsor
needs is sometimes difficult to obtain or difficult to compare. There
are two reasons for this. First, the myriad investment alternatives
(mutual funds, insurance products, bank collective trusts, separately
managed accounts) have differing compensation mechanisms and differing
terminology for what may be the same service. Second, it can be more
difficult to evaluate fees and expenses when fees for investment
management are bundled with fees for administrative, recordkeeping and
related services.
It is not enough for plan sponsors and other plan fiduciaries to
understand what fees and expenses are explicitly deducted from a
participant's account or paid directly from plan assets or by the plan
sponsor from its own funds. To fully evaluate potential investment
options and service providers, and their appropriateness for its plan,
plan sponsors must understand fully how each service provider is
compensated, both directly and indirectly.\5\ BGI supports legislative
efforts to require service providers to provide specific disclosures,
by fee category, so as to make plan sponsors' decision-making less
burdensome.
---------------------------------------------------------------------------
\5\ The Department of Labor proposed service provider exemption
under Section 408(b) (2) [citation] also seeks to provide plan sponsors
with information necessary for the sponsor to determine that a contract
or arrangement is reasonable. (See, Reasonable Contract or Arrangement
Under Section 408 (b)(2)-Fee Disclosure 72 FR 70988). However, as
proposed, service providers offering a bundle of services generally are
not required to break down the aggregate compensation or fees among the
individual services comprising the bundle, with two exceptions--if
separate fees are charged against a plan's investment and reflected in
the net asset value, and if compensation or fees are set on a
transaction basis (even if paid from mutual fund management or similar
fees). Further, we note that the mutual fund industry has questioned
whether the Department's proposed regulation can require investment
advisors to mutual funds to make disclosures to plan fiduciaries as
contemplated under the proposal-even though these investment managers
receive the major portion of plan fees if the plan sponsor chooses
mutual funds as the designated investment alternative. See, Testimony
of Paul Schott Stevens, President and CEO, Investment Company
Institute, Department of Labor Hearing on 408 (b)(2) Proposal (April 1,
2008). The legislation under discussion today addresses these
deficiencies.
---------------------------------------------------------------------------
A worthwhile disclosure regime permits a comparison of ``like with
like''. The challenges faced by plan fiduciaries in making decisions
among service providers for the same services is compounded by the
inability to make comparisons. For example, a plan sponsor who is
evaluating a proposal from (a) a bundled provider who offers a full
range of affiliated investment options, (b) a proposal from an
independent recordkeeper whose platform can accommodate most any
investment option available in the DC market, and (c) a proposal from a
bundled provider who permits the plan fiduciary to add unaffiliated
investment options but is generally priced for a plan using affiliated
investment options, will find it difficult to make effective comparison
of relative costs. In the first proposal, the sponsor cannot determine
the fee for plan level administration/recordkeeping, in the second the
cost of administration and investment are separate and thus
transparent, and in the third, the mix of investment options drives the
overall cost to the plan and its participants but without knowledge of
the underlying fees in administration/recordkeeping, the plan fiduciary
may be unable to determine if any particular affiliated investment
option is appropriately priced.
Bundled service arrangements may be appropriate for some plans,
particularly smaller ones.\6\ This is only appropriate if the fee
components of both recordkeeping and asset management are separately
and clearly disclosed. Clear, comparable and fully disclosed
information about compensation will allow the plan sponsor to more
easily and adequately meet its fiduciary responsibility under ERISA to
determine that the fees and expenses are reasonable.
---------------------------------------------------------------------------
\6\ Bundled services may provide the lowest cost alternative for
small plans. It is not the bundling of services together that is of
concern, but rather the plan fiduciary's need to be able to compare the
costs of certain services as between potential service providers and in
myriad configurations.
---------------------------------------------------------------------------
It is worth noting that in our experience in the defined benefit
market, asset management services and administrative services, such as
trustee services, are generally disclosed separately. This transparency
has contributed to the salutary effect of bringing both the investment
management fees and administration costs down over the last decade.
Elements of a Disclosure Regime for Plan Participants
The appropriate elements for a disclosure regime for plan
participants must be grounded in an understanding of the two levels of
investment decision being made in DC plans. The first, made by plan
fiduciaries, is to decide what investment choices to make available to
plan participants from the enormous array of potential investments and
the second, the decision by plan participants regarding how to direct
their funds among the options selected by the plan sponsor. The
information necessary for a plan fiduciary to determine what investment
options to offer (and which service providers to retain) differs from
the information which plan participants need when choosing an
appropriate investment from amongst those investment options.
The most fundamental decisions that plan participants need to make
are whether, and at what level, to participate in the plan; which
investment options to choose; and whether and when to change their
investment allocations. These decisions are critical to the future
value of the account. Participants' decision making is influenced by
many considerations including basic behavioral finance factors.
BGI believes that participants need information communicated in a
way that is easy to understand and facilitates comparison across the
full range of designated investment alternatives, including automated
asset allocation funds (i.e., target date funds and managed accounts).
Funds should be organized around risk level, rather than by asset
class, as participants do not necessarily understand asset class
designations, but do understand risk levels such as ``conservative'',
``moderate'', ``moderate aggressive'' and ``aggressive''. There should
be a separate section called ``premixed asset allocation products'' for
multi-asset class investments and indicate the the risk level is either
static or a function of the investment horizon. This approach provides
two benefits: it provides basic risk information without the necessity
for a plan participant to review another document and eliminates the
category of ``other'' which otherwise would include all designated
investment alternatives that are not stock or bond funds.\7\ A fund
description should be provided that communicates the investment
objective succinctly and in `plain English'. We don't believe the mere
identification of the management style of the fund as being `passive'
or `active' provides useful information to most participants, who would
not be familiar with this terminology. We note that unless asset based
fees for administration/recordkeeping are disaggregated from management
fees, the distinction between passive and active is not very
meaningful-participants need to understand how much excess return
(`alpha') they should be expecting vis-a-vis the fee to be paid. If
certain investment options carry more administrative/recordkeeping fees
than others (which is not uncommon), plan participants need to
understand that higher fees are not necessarily due to high excess
return expectations.
---------------------------------------------------------------------------
\7\ Company stock, an investment option in a number of DC plans,
will need to be addressed separately due to the particular nature of
this investment option as compared to other investment strategies.
---------------------------------------------------------------------------
Behavioral finance research shows that when confronted with too
much information, or information that is not organized to be customer
friendly, participants fail to participate or engage in decisions about
their investment allocation. While transparency as to fees and expenses
is important for plan participants, any disclosure document also needs
to present this information in context, as too much focus on fees and
expenses could promote a tendency among participants to opt for the
lowest cost option, (most likely to be a money market fund or company
stock) to the detriment of their retirement income. Failure to
adequately diversify investments is one of the more common errors made
by plan participants.
A number of plans provide multiple investment options within the
same general strategy (for example, several large cap domestic equity
funds). When a plan does so, behavioral finance research suggests that
plan participants would also benefit if the alternatives within the
same strategy were either ranked by cost or the least cost alternative
were highlighted in someway.
Other
The bill also proposes that all DC plans provide an investment
option that is an unmanaged or passively managed fund meeting certain
criteria as to its securities portfolio and investment objectives
(including the likelihood of meeting retirement income needs if funded
at adequate levels. We believe one of the advantages of ERISA is that
it permits plan sponsors and plan fiduciaries to make their own prudent
decisions about what investments are appropriate for their plan
participants and beneficiaries. However, the Committee may wish to
consider the approach taken by the Federal Employee Retirement Security
Act of 1986 (FERSA) which established the Federal Thrift Savings Plan.
As amended, FERSA includes six categories of investment options, with a
focus on index strategies across the investment spectrum (equity and
fixed income) as well as lifecycle funds. While many plan sponsors do
provide passive investment options in their plans, this Committee
should consider how to further encourage this trend.
Conclusion
Achieving financial security in retirement is a significant
challenge for most Americans. Currently, many DC plans have challenges
with three of the four major dimensions of retirement security: the
contribution, or savings, component; the investment quality component;
and the retirement distribution component. By promoting more effective
disclosure of fees and expenses to plan sponsors and plan participants,
the 401(k) Fair Disclosure for Retirement Security Act of 2009 would
improve the second component. Increased transparency can be an
important catalyst for making DC plans performs more like DB plans in
the balance of costs and investment performance and thereby improving
the future income of all retirees.
Additional Background on BGI
At December 31, 2008, BGI managed over $1.5 trillion, of which
approximately $200 billion represents defined contribution plan assets.
For both its defined contribution and defined benefit plan clients, BGI
acts solely as an investment manager. Neither BGI nor any of its
affiliates currently act as master trustee or provide recordkeeping
services. It does act as a collective fund trustee and as a named
custodian with custody operations, fund accounting and related services
provided by third parties. Since its founding, BGI has remained true to
a single global investment philosophy, which we call Total Performance
Management. BGI manages performance through the core disciplines of
risk, return, and cost management. The success of our indexing
methodology results from our focus on delivering superior investment
returns over time while minimizing trading and other implementation
costs and rigorously controlling investment and operational risks. It
has been the foundation for the way we've managed money for over 30
years and we believed it has served our clients very well. BGI's
clients are ``institutional'', by which we mean defined benefit and
defined contribution pension plans sponsored by corporations or public
agencies, and endowments, foundations and other similar pools of
capital. BGI's services to its clients are completely focused on
investment management; we do not provide other services, such as
recordkeeping. Among those institutions we have been honored to serve
is the Federal Thrift Savings Plan (TSP). BGI was first appointed a
manager for the TSP in 1988, and we have successfully retained and
grown this relationship in regular, highly competitive bidding
processes since that time.
______
Chairman Andrews. Thank you very much, Ms. Mitchem.
Ms. Borland, welcome. We look forward to your testimony.
STATEMENT OF ALISON T. BORLAND, RETIREMENT STRATEGY LEADER,
HEWITT ASSOCIATES, LLC
Ms. Borland. Thank you.
Chairman Andrews, Chairman Miller, Ranking Member Kline,
and members of the subcommittee, I am honored to be here today,
representing Hewitt Associates, to discus our support of the
401(k) Fair Disclosure for Retirement Security Act of 2009.
We have a unique perspective, as the largest independent
provider of retirement-plan administration services, serving
more than 11 million retirement-plan participants. We are not
affiliated with any investment-management firm.
Now, more than ever, employees need to accumulate the
greatest retirement savings possible for every dollar saved.
Our experience shows that increased fee transparency leads to
lower fees. Because the vast majority of these fees are paid by
participants, lower fees lead to higher retirement benefits for
participants.
Plan fiduciaries cannot fulfill their obligations without
clear fee disclosures from service providers that break out fee
details for various services--most importantly, investment-
management and administration fees, which, together comprise
more than 90 percent of total fees in 401(k) plans.
This breakout of these fees, for these services, on a
consistent basis, enables ready comparisons of various service
providers and their structures, so that fiduciaries can make
the best decisions, based on complete information.
In addition to evaluating the fees and their
reasonableness, at the time of the initial contract,
fiduciaries need to evaluate them on an ongoing basis. Only by
understanding administrative fees separately from asset-based
fees, do plan fiduciaries have the information needed to
effectively understand how these fees could fluctuate over
time, and deem those changes reasonable.
The best way to illustrate the importance of transparency
is through an example. Hewitt recently worked with a client
that wanted to evaluate combining the services for two separate
large 401(k) plans. Administration fees had not been broken out
for one of the plans in the past. The impact of this was clear:
One plan was charged $50 per participant for administration,
while the second plan was charged more than $100 for
administration, even though the second plan was significantly
larger.
Unbundling the administrative fees from the investment-
management fees provided the company with the ability to look
closely at the investment choices offered in their plan, based
on their own merit, and also evaluate the administration
services in greater depth. This resulted in a selection of
lower-priced, non-mutual-fund vehicles, as well as a
significant reduction in the administrative fees.
The combined fee structure across both plans decreased by
nearly half. Administrative fees were reduced to just over $40
per participant. Total fees decreased by about $7 million, all
of it directly accruing to plan-participant accounts. This is
just one example of a scenario we see on a regular basis.
The end result may or may not result in the actual
unbundling of services. But the unbundled transparency almost
always leads to lower prices and, therefore, increased benefits
to plan participants.
Second, I would like to say a few words about the need for
disclosure of additional revenue sources and conflicts of
interest. Service providers often generate revenue streams by
providing services to 401(k) plan participants that are
unrelated to the 401(k) plan, like offering retail IRA
rollovers, or other financial products.
It is critical that all sources of revenue generated as a
result of the 401(k) relationship are disclosed, so that the
plan sponsor can identify and manage conflicts of interest that
may affect plan participants.
The third issue I would like to address is participant fee
disclosure. We believe that comprehensive information should be
readily and easily accessible to participants. Mandatory
disclosures should help participants understand fees on their
account balances, as well as provide other important
information to facilitate investment decisions, such as risk
level and the importance of diversification.
We have to acknowledge that many participants lack the
basic financial acumen to understand these issues. But unbiased
investment advice, education and certain plan-design features
can make a difference there.
In summary, we support Chairman Miller's bill because it
is, quite simply--its provisions enhance the retirement
security of Americans through much-needed clarification on the
level of disclosure required. The bill does not allow service-
provider exemptions that get in the way of full transparency.
Knowledge is power. And by arming plan sponsors with
complete, consistent and comparable information, they will be
better equipped to negotiate and provide high-quality plans for
their participants at reasonable costs. Hewitt would be pleased
to offer our data analysis, our experience, and our consulting
and administration expertise to help the subcommittee complete
its work on this issue. Thank you.
[The statement of Ms. Borland follows:]
Statement of Alison Borland, Retirement Strategy Leader, Hewitt
Associates, LLC
Mr. Chairman and Members of the Subcommittee: Thank you for the
opportunity to testify at this important hearing on 401(k) Fair
Disclosure for Retirement Security Act of 2009. My name is Alison
Borland, and I am the Retirement Strategy Leader for Hewitt Associates.
As requested, I will focus my remarks today on the experience of mid-
to large-sized employers in their role as 401(k) plan fiduciaries.
Hewitt Associates is a global human resources outsourcing and
consulting company providing services to major employers in more than
30 countries. We employ 23,000 associates worldwide. Headquartered in
Lincolnshire, Illinois, we serve more than 2,000 U.S. employers from
offices in 30 states, including many of the states represented by the
members of this distinguished Subcommittee.
As one of the world's premier human resources services companies,
Hewitt Associates has extensive experience in both designing and
administering 401(k) plans for mid- to large-sized employers, including
helping employers to communicate with their participants about this
increasingly important benefit. We are the largest independent provider
of administration services for retirement plans, serving more than 11
million plan participants. We do not manage funds and have no
affiliations with any investment management firms.
The focus of our testimony today is to make a case for much greater
transparency in the disclosure of fees by service providers to plan
fiduciaries, a position that we believe Chairman Miller's bill
addresses well. Now more than ever, employees need to accumulate the
greatest retirement savings possible for every dollar saved. Our
experience shows that increased fee transparency increases fiduciaries'
understanding and their negotiating power, ultimately leading to lower
fees and higher retirement benefits for participants. We will provide
several real-world examples that illustrate how full transparency can
benefit both fiduciaries and participants. We will also discuss the
need for full disclosure of potential conflicts of interest by service
providers, the advantages of providing mandatory fee disclosure to plan
participants and the need for unbiased investment advice and financial
education to help participants adequately prepare for retirement.
Plan Fiduciaries Must Understand All Fees
As the Subcommittee is well aware, 401(k) plans play a vital role
in retirement income security for the majority of Americans. In a
recent Hewitt survey, 65 percent of the 302 employers surveyed
indicated that 401(k) plans were the primary retirement vehicle for
their workforce.\1\ This dependence, coupled with the negative impact
of the economic downturn on 401(k) account balances, gives even greater
urgency to taking the necessary steps to prepare employees to be
financially secure when it comes time to retire.
Since most plan fees are paid by participants out of their
accounts, these fees can significantly affect the overall income that
plan participants earn and, consequently, affect their overall
retirement security. To protect the interests of their participants and
beneficiaries, plan fiduciaries must increasingly act as experts in
plan fee arrangements.
Plan fiduciaries need a complete understanding of all fees under a
contract to ensure that the charges constitute reasonable compensation.
This is necessary before any contract can be covered by the prohibited
transaction exemption under section 408(b)(2) of ERISA. Equally as
important, understanding plan costs is necessary for fiduciaries to act
prudently and solely in the interest of plan participants and
beneficiaries when selecting a service provider, as required by section
404(a) of ERISA.
Plan fiduciaries cannot fulfill their obligations without clear and
concise fee disclosures from service providers. Further, these fees
must be disclosed in a manner that allows for ready and consistent
comparisons. Without a uniform basis of disclosure, plan fiduciaries
cannot make the best decisions. The disclosures required under current
law are both unclear and insufficient, and the 2008 Department of
Labor's proposed regulations on 408(b)(2) also fall short.
Service Providers Must Fully Disclose Fee Details
To fully meet their obligations, fiduciaries must understand the
most significant fee components of their plans and the services covered
by these costs. A recent study highlighted that there is significant
variation in how fees are charged for defined contribution plan
services.\2\ Uniform disclosure rules that permit meaningful fee
comparisons will help fiduciaries better evaluate the costs of services
among competing service providers, even when different packaging and
pricing methods are used. It is especially important that plan sponsors
understand the embedded cost of services that a service provider may
wrap into a single price and represent as ``free.'' In addition to
evaluating fees at the time of contract signing, fiduciaries need to
consider the impact of fees on an ongoing basis to understand how they
may change over time. Full disclosure by service providers is essential
if plan fiduciaries are to act in the best interest of plan
participants.
Breaking Out Fees Increases Knowledge and Negotiating Power
Typical plans have investment management, administrative, trustee,
and other miscellaneous fees.
Investment management and administrative fees generally account for
more than 90 percent of individual account plan costs. Investment
management fees are based on the value of the assets. Administrative
fees include costs for recordkeeping, communication, compliance, and
education, which are generally based on the number of participants
served by the plan. Rather than charge a separate fee based on the
number of participants in the plan, many providers who manage funds in
addition to providing administration services will embed the
administrative fees within the asset based fees that also cover
investment management. By obtaining a breakout of these administrative
fees from the asset-based fees, fiduciaries gain improved negotiating
power by having the information needed to more effectively model how
these fees may fluctuate over time with changing asset values and
participant size. More details about the two primary sources of fees in
401(k) plans and the importance of separating them are described below.
Investment Management Costs
Investment management expenses are the largest plan cost, making up
approximately three-quarters of total plan fees. These fees are
reflected in the expense ratios of the funds represented in the plan.
Research has proven that fees are a critical--if not the most
important--factor when selecting funds. In fact, studies have shown
that lower-cost funds consistently and substantially outpace higher-
cost funds over time.\3\ Understanding a fund's investment costs helps
plan fiduciaries select investment alternatives with strong relative
historical returns and the lowest possible fees. For instance, 401(k)
plans for mid- to large-sized employers with substantial assets might
secure a tiered fee schedule that guarantees a decrease in expense
ratios as the assets grow. This is accomplished by using fund vehicles
available only to institutional investors, such as separate accounts
and collective trusts. These fund vehicles have been common in defined
benefit plans and are gaining popularity in 401(k) plans because of the
clear cost advantages.
Administrative Costs
Administrative costs are the second largest source of fees in
401(k) plans. On average, administrative fees represent an additional
20 percent of total plan fees. These fees are often embedded within the
expense ratio of the mutual funds within the plan. If a plan sponsor
does not understand that it is paying administrative fees through the
investment management fees, it may believe administration services are
``free.'' This might lead the plan sponsor to inadvertently choose
investment options or administrative services that do not maximize
participant savings.
According to Hewitt survey data, 75 percent of plans require plan
participants to pay some or all fees associated with administrative
services.\4\ Unlike investment management costs, which logically vary
based on the amount of assets in the plan, the actual cost of
administrative services is more dependent on the number of participants
served. Because many service providers charge administrative fees as a
percentage of assets embedded within the investment management fee,
administrative fees fluctuate as plan asset values change over time.
Under normal market conditions, this means that the administrative fees
will often increase over time, even if participant counts remain the
same. This practice is most common with bundled providers that combine
investment management services and administrative services in one
bundled price.
There is no reasonable explanation why administrative costs should
fluctuate based on asset size. If administrative fees are broken out
separately from investment management fees and understood in dollars
per participant (even if charged in basis points), responsible
fiduciaries will have the ability to accurately compare all plan fees
and make the optimal investment and administrative choices. Scrutiny of
the initial contract is a necessity, but periodic review over the life
of the contract is also very important to ensure fees remain
reasonable.
Real-World Examples of the Benefits of Uniform and Detailed Fee
Comparisons
In our work with large employers, Hewitt finds that detailed and
uniform fee comparisons across different types of service providers
often results in lower negotiated fees. Armed with disclosure of fee
components, the plan fiduciary can consider alternate providers,
evaluate lower-cost fund options, and/or negotiate lower fees with the
current provider. Lower fees directly benefit plan participants by
increasing their account balances and compounding this savings
throughout their working years. Several real-life examples illustrate
the point.
Company X Company X wanted to evaluate the benefits of combining
the two separate 401(k) plans it sponsored through two different
service providers. The combined plans had nearly $5 billion in assets
and served 45,000 participants. Total fees for the plans were 0.30
percent, with embedded administrative fees of just over $50 per
participant for one plan to more than $100 per participant for the
second plan, with an average of $85 per participant. Administrative
fees had not been broken out for the more expensive plan in the past,
explaining the wide differential in per participant fees.
Consolidating the two plans, including investment options and
administration services, created significant savings on investment
management and administrative costs. Further, unbundling the
administrative fees from the investment management fees provided the
company with the ability to look more closely at the investment choices
and evaluate the administration services in greater depth. This
resulted in the selection of institutional funds (non-mutual fund
vehicles) and a significant reduction in administrative costs through
the negotiation of per participant fees. The combined fee structure
across both plans dropped by nearly one-half to only 0.16 percent,
including administrative fees of just over $40 per participant.
The approximately $2 million of annual savings in administrative
fees accrued directly and entirely to participants. Total fees
decreased nearly $7 million per year.
Company Y Company Y sponsored a plan using a bundled fee structure
with total fees of 0.63 percent of plan assets, which included an
estimated $242 per participant in embedded administrative charges. The
firm had 3,000 participants and $250 million in assets. Although
satisfied with the services, as a responsible fiduciary, Company Y
hired a consultant to help them better understand their fees and fee
structure. Following the analysis, Company Y was able to negotiate with
their same service provider for a drop in total fees from 0.63 percent
to 0.46 percent, with a reduction of administrative fees from $242 per
participant to $155 per participant. Further, Company Y negotiated
additional services for participants as part of the same administrative
fee structure. All $290,000 of annual savings accrued entirely to
participants.
Company Z Company Z used a bundled provider for a plan that was
predominantly invested in mutual funds. The firm had over 50,000
participants and in excess of $4 billion in assets. Total fees were
just over 0.50 percent, with embedded administrative fees estimated at
nearly $100 per participant. After disclosing and evaluating the fee
structure, the current service provider offered to substantially reduce
fees and offered alternative institutional (non-mutual fund) products.
With this new opportunity, fees could decline to approximately 0.30
percent, with estimated administrative fees reduced to just under $50
per participant. Plan participants would realize the annual savings on
administrative fees of nearly $4 million per year. In addition, under
the new fee structure, as assets grow over time, participants' savings
will grow.
BEFORE AND AFTER PRICING SUMMARY FOR REAL-WORLD EXAMPLES
--------------------------------------------------------------------------------------------------------------------------------------------------------
Admin/
Example Assets Participant Total fees Total fees trustee fees Admin/trustee fees after
count before after before
--------------------------------------------------------------------------------------------------------------------------------------------------------
Company X...................................... $5B 45,000 0.30% 0.16% $85/ppt Just over $50 per participant
15% to 60% reduction
Over $2 million in annual savings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Company Y...................................... $250M 3,000 0.63% 0.46% $242/ppt $155 per participant
36% reduction
$290,000 in annual savings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Company Z...................................... >$4B >50,000 0.50% 0.30% $100/ppt Less than $50 per participant
More than a 50% reduction
Nearly $4 million in annual savings
--------------------------------------------------------------------------------------------------------------------------------------------------------
The resulting savings in these examples were possible once plan
sponsors understood that a significant portion of plan costs was not
dependent on asset size but rather on number of participants. This
allowed them to quantify the fees on that basis. When all costs are
bundled into an aggregate asset-based fee, fiduciaries must be able to
model how fees will change over time and how reasonable they are when
considering changes in asset size and participant counts.
Plan Sponsors Need Unbiased Information About Revenue Sources
Service providers often generate revenue streams by providing
services to 401(k) plan participants that are unrelated to the 401(k)
plan. It is critical that all potential sources of revenue generated
from servicing the plan are disclosed so that the plan sponsor can
identify and control conflicts of interest that may affect plan
participants.
A useful example is when a 401(k) service provider offers
participants the ability to roll over their 401(k) account balances
into the provider's own retail individual retirement accounts (IRAs)
upon termination of employment. Many administrative providers actively
market their IRA solution, because encouraging these rollovers can lead
to very lucrative add-on revenue. So in essence, some providers may do
the administration work on a 401(k) plan with the ultimate goal of
obtaining a high percentage of participant rollovers at termination or
retirement, given that high dollar balances, along with the often
higher investment fees in an IRA environment, are generally more
profitable than providing the 401(k) services.
These cross-selling practices may be detrimental to participant
retirement security. Hewitt's research shows that it is usually better
from a cost perspective to either leave the accounts in the existing
mid- to large-sized 401(k) plan, or to move those funds into another
mid- to large-sized employer sponsored 401(k) plan if available through
a new employer. The marketing of rollover products often does not
adequately explain the trade-offs and potential benefits between
alternatives. In addition, the provider servicing the 401(k) plan may
not have the best IRA solution or pricing. Participants may be
encouraged to use a sub-optimal product when it is promoted in
conjunction with plan services, believing the employer has selected the
provider through the fiduciary process.
Consider an example of a participant with access to a 401(k) plan
with institutionally priced investment options. Using conservative
assumptions and typical account balances, our modeling shows that a 35-
year-old who is an average saver and moves her $33,000 balance from her
company plan to a retail IRA could lose $37,681, or 9 percent (or
more), compared to what she would have if she remains invested in the
401(k) plan until she receives required distributions at age 70\1/2\.
If she is an active saver who contributes 8 percent per year over the
course of her career and then moves her $101,808 balance to an IRA at
age 35, she could lose $116,250 or more. If we consider the greater fee
savings she typically would experience in a large 401(k) plan, the IRA
loss increases to $244,078, representing a loss of 18 percent of the
total accumulated balance.\5\ Plan sponsors must understand the
incentives that may exist for service providers to encourage
participant behaviors that may not be in their best interest because
they do not contribute to greater retirement security. Service
providers may directly market products like retail IRAs, other retail
investment products, or life insurance products to this captive
audience. Plan fiduciaries need to understand how these potential
revenue streams may affect services received and administrative fees
paid. They also need to carefully consider the potential consequences
for participants. Identifying these potential conflicts of interest
requires more detailed disclosure than is available today.
Participants Need Better Fee Disclosure
Plan participants will also benefit from improved disclosure of
fees. While Hewitt believes that comprehensive fee information should
be readily accessible when requested, mandatory disclosures should be
concise and provide information that is truly meaningful for the vast
majority of participants. Fee disclosures to participants must be
understandable without overloading the average participant with so much
technical detail that the information is likely to be ignored or
discarded. The worst-case scenario is that the disclosure actually
discourages savings.
Plan participants' needs for expense disclosure are very different
from their employers' (or other plan fiduciaries) requirements. Before
participants choose to contribute to the plan, the plan fiduciary has
already selected service providers and investment funds for the plan.
This means that most plan costs are determined before the participant
is ever involved; thus the importance of full fee transparency for plan
fiduciaries. It is also the plan fiduciary, and not the participant,
that must regularly monitor and evaluate service providers, including
investment managers and administrators. Service provider fee disclosure
is of primary importance to enable plan fiduciaries to keep plan costs
low and maximize retirement income for participants.
Hewitt believes that participants should be informed if and how
administrative fees are paid by the plan, regardless of how fees are
charged, whether bundled or unbundled. As with disclosures to plan
fiduciaries, fee disclosures from all service providers to plan
participants should be available on a uniform basis to allow for
meaningful comparisons.
Mandatory disclosure to plan participants should aid them in
understanding fees on their account balances, but not confuse their
decision making or overwhelm them with information they cannot control.
For example, if participants simply move their portfolios toward the
lowest-cost funds solely based on the fee information provided, this
may decrease their retirement readiness. Many participants do not have
the basic financial acumen to understand the importance of diversifying
their portfolio and changing that asset allocation over time based on
their changing personal circumstances. Greater disclosure will not
solve these critical awareness issues. This is when investment advice,
education, and certain plan design features can make a real
difference.\6\ Objective advice can aid participants in maximizing
their investment returns and achieving a level of risk that is
acceptable to the individual participants, given their unique
circumstances. However, the regulatory oversight provided in the DOL
investment advice regulations currently under review is not sufficient.
Unlike fee disclosure to plan fiduciaries, greater disclosure under the
investment advice rules without greater regulatory scrutiny may not do
enough to protect plan participants. Hewitt believes that all but the
most sophisticated plan participants could benefit from more investment
advice and that unbiased investment advice should be readily available.
The 401(k) Fair Disclosure for Retirement Security Act of 2009 Can Help
Hewitt supports Chairman Miller's bill because its provisions
enhance the retirement security of Americans. The bill addresses the
key disclosure gaps from both a plan sponsor and a plan participant
perspective and does not allow service provider exemptions that get in
the way of full transparency.
Full Fee Disclosure
The 401(k) Disclosure for Retirement Security Act of 2009 would
require service providers to break out total costs into the main fee
categories: investment management, administrative/recordkeeping,
transactional, and other. The bill would also require disclosure of all
fees paid to affiliates and subcontractors in a bundled fee
arrangement. This will allow plan sponsors to readily compare the
services of different types of providers in a uniform manner leading to
better control and management of fees. By comparison, the Department of
Labor's 2008 proposed service provider fee regulations permit bundled
providers to report all fee types in the aggregate. Under the proposed
regulations, fiduciaries would not be able to uniformly evaluate
services offered by different providers, severely impairing their
ability to negotiate lower fees for plan participants.
Potential Conflicts of Interest
The 401(k) Disclosure for Retirement Security Act of 2009 would
also requires disclosure of any material personal, business, or
financial relationship with the plan sponsor, plan, or other service
provider (or affiliate) that benefits the service provider. The service
provider must also disclose the extent to which it uses its own
proprietary investment products. These provisions would go far to arm
plan sponsors with the information they need to identify any potential
conflicts of interest that could disadvantage their plan participants
over time.
Meaningful Participant Disclosures
The 401(k) Disclosure for Retirement Security Act of 2009 would
provide for uniform and transparent disclosure of fees to participants,
regardless of how plan services are provided (e.g., bundled or
unbundled). This is a good starting point, although we believe that the
mechanics of participant fee disclosure merit further review and
discussion. On the other hand, the proposed DOL regulations on
participant fee disclosure appear to treat disclosure very differently,
depending on how plan services are packaged. Under these rules, it is
quite likely that plan participants in a plan with bundled services may
never realize that they are paying for plan administration or how much.
In contrast, plans with independent plan recordkeepers would be
required to provide a special quarterly disclosure of administrative
fees. Such different disclosure standards are inconsistent, misleading,
and lack the transparency that participants deserve and increasingly
demand.
Conclusion
In closing, Mr. Chairman and Members of the Subcommittee, Hewitt
believes that complete fee transparency is a key factor in maintaining
a strong defined contribution retirement plan system.
Knowledge is power, and by arming plan sponsors with complete and
comparable information, they will be better equipped to negotiate and
provide high-quality plans for their participants at reasonable costs.
The current economic and financial environment makes it even more
important to provide uniform fee transparency in 2009. Hewitt would be
pleased to offer our data analysis, our experience, and our consulting
and administration expertise in helping the Committee complete its work
on this issue.
Thank you.
endnotes
\1\ Hewitt Associates, Trends and Experience in 401(k) Plans (2007)
\2\ Deloitte, Defined Contribution 401(k) Fee Study (Spring 2009),
conducted for the Investment Company Institute
\3\ For example, Christine Benz, director of personal finance at
Morningstar Inc., stated that ``In almost every study we've run,
expenses show up as a very significant predictor of future
performance.'' In other words, lower costs are an indicator of high
performance. http://online.wsj.com/article/
SB122099798601116727.html?mod=googlenews--wsj; See also, Haslam, John,
Baker, H. Kent, and Smith, David M., Performance and Characteristics of
Actively Managed Retail Mutual Funds with Diverse Expense Ratios,
Financial Services Review, Vol. 17, No. 1, 2008 http://papers.ssrn.com/
sol3/papers.cfm?abstract--id=1155776
\4\ Hewitt Associates, Trends and Experience in 401(k) Plans (2007)
\5\ Hewitt's Statement for the Record to the U.S. Senate Special
Committee on Aging Hearing on ``Saving Smartly for Retirement: Are
Americans Being Encouraged to Break Open the Piggy Bank,'' July 16,
2008
\6\ Hewitt Associates, Building the Ideal 401(k) Plan: Providing
Optimal Accumulation and Effective Distribution (October 2008)
______
Chairman Andrews. Ms. Borland, thank you for your
contribution to this debate, and to our committee's
consideration.
Mr. Onorato, welcome. It is nice to have you with us.
STATEMENT OF JULIAN ONORATO, CEO AND CHAIRMAN OF THE BOARD,
EXPERTPLAN, INC.
Mr. Onorato. Thank you.
Good morning. My name is Julian Onorato. I am the chief
executive of ExpertPlan, based in East Windsor, New Jersey. My
firm is a national leader in the small-business 401(k)-plan
market, providing retirement-plan services for thousands of
businesses and their employees throughout the country.
I am here today on behalf of the Council of the Independent
401(k) Recordkeepers, which is an organization of the
Independent Retirement Plan Service Providers. CIKR is a sister
organization of the American Society of Pension Professionals
and Actuaries, which has thousands of members nationwide. I am
also speaking on behalf of the National Association of
Independent Retirement Plan Advisors, a national organization
of firms that provide independent investment advice to
retirement plans and participants.
In order to make informed decisions, we believe that plans
and plan participants should be provided with all the
information that they need about fees and expenses in their
401(k) plans, in a form that is clear, uniform and useful.
Therefore, we strongly support the 401(k) Fair Disclosure for
Retirement Security Act of 2009.
And we thank you, Mr. Chairman, and members of the
committee, for your leadership on this important issue. The
bill will go a long way toward addressing some legitimate
concerns about the system, and make 401(k) plans work better
for American workers who depend on them.
The 401(k)-plan industry delivers investments and services
to plan sponsors and their participants, using two primary
business models, commonly known as ``bundled'' and
``unbundled.''
Bundled providers are large financial-services companies
whose primary business is manufacturing and selling
investments. They bundle their proprietary investment products,
with plan services, into a package that is sold to plan
sponsors.
By contrast, unbundled, or independent, providers are
primarily in the business of offering retirement-plan services.
They will couple such services with a universe of unaffiliated
investment alternatives, whether a firm is a bundled investment
firm, or an unbundled independent, this full scope of services
offered to plans and their participants is the same.
In other words, the only real difference to the plan
sponsor is whether the services are provided by just one firm,
or more than one firm. Under ERISA, the business owner, as a
plan fiduciary, must follow prudent practices, when choosing
retirement-plan service providers. This prudent evaluation
should include an apples-to-apples comparison of services
provided, and the costs associated with those services.
The only way to determine whether a fee for a service is
reasonable, is to compare it to a competitor's fee for that
service.
In addition, if the breakdown of fees is not disclosed,
plan sponsors will not be able to evaluate the reasonableness
of fees as account balances grow. Take a $1 million plan
serviced by a bundled provider that is only required to
disclose a total fee of 125 basis points, or $12,500.
If that plan grows to $2 million, the fee doubles to
$25,000, although the level of plan services and the costs of
providing such services have remained the same.
The bundled providers want to be exempt from uniform
disclosure rules. Simply put, they want to be able to tell
business owners that they can offer retirement-plan services
for free. Of course, there is no free lunch. And there is no
such thing as a free 401(k) plan.
In reality, the cost of these free plan services are being
shifted to participants through the investment-management fees,
charged on the proprietary investments; in many cases, without
their knowledge.
As provided in the bill, by breaking down plan fees into
only three simple categories--investment management, record-
keeping and administration, and selling costs--we believe
business owners will have he information they need to satisfy
their ERISA duties.
The retirement security of employees is completely
dependent upon the business owner's choice of retirement-plan
service providers. If the fees are unnecessarily high, the
workers' retirement income will be severely impacted. It is
imperative that the business owner have the best information to
make the best choice.
We commend Chairman Miller and Andrews for the uniform
application of new disclosure rules to all 401(k)-plan service
providers, in their bill. The last topic I want to touch on is
independent investment advice, which this committee examined at
a hearing last month.
With the growth of 401(k) plans, the importance of
investment advice to participants of retirement plans, has
become increasingly clear. The majority of Americans are not
experts on how to appropriately invest their retirement
savings.
We believe that working Americans are best served by
independent investment advice, provided by qualified advisors;
not conflicted investment advice, where the advisor has a
financial interest in what investment choices to recommend.
In my over two decades of experience in this industry, I
can absolutely testify that participant rates of return are
better when served by independent advisors.
We commend Chairman Andrews for his recent legislation,
promoting independent advice for retirement plans and
participants.
Thank you again, and I welcome your questions.
[The statement of Mr. Onorato follows:]
Prepared Statement of Julian Onorato, CEO, ExpertPlan, Inc., on Behalf
of CIKR, ASPPA and NAIRPA
Thank you, Mr. Chairman and members of the subcommittee. My name is
Julian Onorato and I am the CEO of ExpertPlan, Inc. based in East
Windsor, New Jersey. ExpertPlan was founded as a technology innovator
in the administration of retirement programs. With continued investment
in operating efficiencies and client service, ExpertPlan is a leader in
the defined contribution market, providing retirement services for
thousands of companies and organizations with billions of dollars in
retirement assets.
I am here today on behalf of the Council of Independent 401(k)
Recordkeepers (CIKR), the American Society of Pension Professionals &
Actuaries (ASPPA), and the National Association of Independent
Retirement Plan Advisors (NAIRPA) to testify on important issues
relating to 401(k) plan fee disclosure addressed in Chairmen Miller and
Andrews' legislation, the 401(k) Fair Disclosure for Retirement
Security Act of 2009. CIKR, ASPPA and NAIRPA strongly support the
premise that plans and plan participants should be provided with all
the information they need about fees and expenses in their 401(k)
plans-in a form that is clear, uniform and useful-to make informed
decisions about how to invest their retirement savings plan
contributions. This information is critical to millions of Americans'
ability to invest in a way that will maximize their retirement savings
so that they can achieve adequate retirement income. Accordingly, CIKR,
ASPPA and NAIRPA strongly support the 401(k) Fair Disclosure for
Retirement Security Act of 2009.
CIKR, ASPPA and NAIRPA also believe that working Americans should
not have their retirement assets exposed to conflicted investment
advice where the adviser has a financial interest in what investment
choices to recommend to the plan and participants. Instead, American
workers should have access to independent investment advice provided by
qualified advisers. This issue was addressed by this Committee at a
hearing on March 24. CIKR, ASPPA and NAIRPA strongly support
legislation recently introduced by Chairman Andrews that would promote
the provision of independent advice to plans and participants.
CIKR is a national organization of 401(k) plan service providers.
CIKR members are unique in that they are primarily in the business of
providing retirement plan services as compared to larger financial
services companies that primarily are in the business of selling
investments and investment products. As a consequence, the independent
members of CIKR, many of whom are small businesses, make available to
plan sponsors and participants a wide variety of investment
alternatives from various financial services companies without bias or
inherent conflicts of interest. By focusing their businesses on
efficient retirement plan operations and innovative plan sponsor and
participant services, CIKR members are a significant and important
segment of the retirement plan service provider marketplace.
Collectively, the members of CIKR provide services to approximately
70,000 plans covering three million participants holding in excess of
$130 billion in assets. ASPPA is a national organization of more than
6,500 members who provide consulting and administrative services for
qualified retirement plans covering millions of American workers. ASPPA
members are retirement professionals of all disciplines, including
consultants, investment professionals, administrators, actuaries,
accountants and attorneys. Our large and broad-based membership gives
ASPPA a unique insight into current practical applications of ERISA and
qualified retirement plans, with a particular focus on the issues faced
by small- to medium-sized employers. ASPPA's membership is diverse but
united by a common dedication to the employer-sponsored retirement plan
system. NAIRPA is a national organization of firms, not affiliated with
financial services companies, which provide independent investment
advice to retirement plans and participants. NAIRPA's members are
registered investment advisors whose fees for investment advisory
services do not vary with the investment options selected by the plan
or participants. In addition, NAIRPA members commit to disclosing
expected fees in advance of an engagement, reporting fees annually
thereafter and agreeing to serve as a plan fiduciary with respect to
all plans for which it serves as a retirement plan advisor. Background
on 4011(k) Plan Fee Disclosure Legislation CIKR, ASPPA and NAIRPA
strongly support the House Education and Labor Committee's interest in
examining issues relating to 401(k) fee disclosure and the impact of
fees on a plan participant's ability to save adequately for retirement.
We are particularly pleased with the reintroduction of the 401(k) Fair
Disclosure for Retirement Security Act of 2009. This bill will shine
much needed light on 401(k) fees.
We also are encouraged by the introduction of two other pieces of
legislation by Congress on the fee disclosure issue. On February 9,
2009, Senators Tom Harkin (D-IA) and Herb Kohl (D-WI) reintroduced
their 401(k) plan fees legislation, S. 401, the ``Defined Contribution
Fee Disclosure Act of 2009.'' In addition, H.R. 3765, the ``Defined
Contribution of Plan Fee Transparency Act,'' was introduced on October
4, 2007 and sponsored by House Ways and Means Committee Subcommittee on
Select Revenue Measures Chairman Richard Neal (D-MA) and co-sponsored
by Rep. John Larson (D-CT).
We support all three bills' even-handed application of new
disclosure rules to all 401(k) plan service providers. Further, we also
encourage you to strike the right balance between disclosure
information appropriate for plan sponsors versus plan participants. To
demonstrate how both of these goals can be accomplished, we have
attached to these comments two sample fee disclosure forms for your
consideration--one for plan fiduciaries and another for plan
participants. Each is tailored to provide plan fiduciaries and plan
participants with the different sets of information on fees that are
needed to make informed decisions.
Department of Labor Regulations
The Department of Labor (DOL) has finalized one 401(k) fee
disclosure project, a revised Form 5500, including a revised Schedule
C, which was effective beginning on January 1, 2009. In December 2007,
DOL issued proposed regulations under ERISA Sec. 408(b)(2) which would
have provided sweeping changes on what constitutes a reasonable
contract or arrangement between service providers and plan fiduciaries.
The proposed rules would have required enhanced disclosures for service
providers to 401(k) plan fiduciaries. However, the proposed regulations
would have required only an aggregate disclosure of compensation and
fees from bundled service providers, with narrow exceptions, and would
not have required a separate, uniform disclosure of the fees
attributable to each part of the bundled service arrangement.
In July 2008, DOL also issued proposed regulations under ERISA
Sec. 404(a) setting forth a set of new participant fee disclosure
requirements. The proposed rules would have required the disclosure to
plan participants and beneficiaries of identifying information,
performance data, benchmarks and fee and expense information of plan
investment options in a comparative chart format, plus additional
information upon request. However, no information on investment fees
actually incurred with respect to a participant's account would have to
be disclosed. Further, administration charges embedded in investment-
related fees would not have to be separately disclosed. On January 20,
Rahm Emanuel, assistant to President Obama and White House Chief of
Staff, signed an order requiring the withdraw from the Office of the
Federal Register (OFR) of all proposed or final regulations that had
not been published in the Federal Register so that they could be
reviewed and approved by a department or agency head. The proposed
ERISA Sec. 408 (b)(2) and participant fee disclosure regulations were
sent to the Office of Management and Budget (OMB) in final rule form
for review and approval. However, the regulations had not yet been
released by OMB or sent to the OFR as of January 20. Therefore, the
regulations have been stopped by the Emanuel order. ASPPA and CIKR
submitted comprehensive comment letters to the DOL on both the
408(b)(2) and participant fee disclosure proposed regulations.\1\ In
both of these comment letters, we made a number of significant
recommendations to improve each of the disclosure regimes in order to
ensure that understandable and meaningful disclosure is provided, and
stressed the need for uniform disclosure requirements--among all types
of service providers.
---------------------------------------------------------------------------
\1\ We note that House Education and Labor Committee Chairman
Miller, House Education and Labor Subcommittee Chairman Andrews, Senate
HELP Committee Chairman Kennedy (D-MA), Special Aging Committee
Chairman Herb Kohl (D-WI) and Senate HELP Committee Member Tom Harkin
(D-IA) also submitted joint comment letters to the DOL on both the
408(b)(2) regulation and participant fee disclosure regulation. These
comments expressed concerns about the DOL's approach to these
disclosure initiatives and requested additional actions be taken to
protect plan participant and beneficiaries.
---------------------------------------------------------------------------
The 401(k) plan industry delivers investments and services to plan
sponsors and their participants using two primary business models-
commonly known as ``bundled'' and ``unbundled.'' Generally, bundled
providers are large financial services companies whose primary business
is selling investments. They ``bundle'' their proprietary investment
products with affiliate-provided plan services into a package that is
sold to plan sponsors. By contrast, ``unbundled,'' or independent,
providers are primarily in the business of offering retirement plan
services. They will couple such services with a ``universe'' of
unaffiliated, non-proprietary, investment alternatives. Generally, the
costs of the bundled and unbundled arrangements are comparable or even
slightly less in the unbundled arrangement. Under current business
practices, bundled providers disclose the cost of the investments to
the plan sponsor but do not break out the. cost of the administrative
services. Unbundled providers, however, disclose both, since the costs
are paid to different providers (i.e., administrative costs paid to the
independent provider and investment management costs paid to the
managers of the unaffiliated investment alternatives).
Bundled and unbundled providers have different business models, but
for any plan sponsor choosing a plan, the selection process is exactly
the same. The plan sponsor deals with just one vendor, and one model is
just as simple as the other. Plan sponsors must follow prudent
practices and procedures when they are evaluating service providers and
investment options. This prudent evaluation should include an ``apples
to apples'' comparison of services provided and the costs associated
with those services. The only way to determine whether a fee for a
service is reasonable is to compare it to a competitor's fee for that
service.
The retirement security of employees is completely dependent upon
the business owner's choice of retirement plan service providers. If
the fees are unnecessarily high, the workers' retirement income will be
severely impacted. It is imperative that the business owner have the
best information to make the best choice.
While the DOL's proposed ERISA Sec. 408(b)(2) rules (relating to
whether a contract or arrangement is reasonable between a service
provider and plan fiduciary) would have required enhanced disclosures
for service providers to 401(k) plan fiduciaries, the proposed
regulation would have required only an aggregate disclosure of
compensation and fees from bundled service providers, with narrow
exceptions, and would not have required a separate, uniform disclosure
of the fees attributable to each part of the bundled service
arrangement. Although we appreciated the DOL's interest in addressing
fee disclosure, we do not believe that any requirement that benefits a
specific business model is in the best interests of plan sponsors and
participants.
Without uniform disclosure, plan sponsors will have to choose
between a single price business model and a fully disclosed business
model that will not permit them to appropriately evaluate competing
provider's services and fees. Knowing only the total cost will not
allow plan sponsors to evaluate whether certain plan services are
sensible and reasonably priced and whether certain service providers
are being overpaid for the services they are rendering.
In addition, if the breakdown of fees is not disclosed, plan
sponsors will not be able to evaluate the reasonableness of fees as
participant account balances grow. Take a $1 million plan serviced by a
bundled provider that is only required to disclose a total fee of 125
basis points, or $12,500. If that plan grows to $2 million, the fee
doubles to $25,000, although the level of plan services and the costs
of providing such services have generally remained the same.
The bundled providers want to be exempt from adhering to uniform
disclosure rules and regulations. Simply put, they want to be able to
tell plan sponsors that they can offer retirement plan services for
free while independents are required to disclose the fees for the same
services. Of course there is no ``free lunch,'' and there is no such
thing as a free 401(k) plan. In reality, the costs of these ``free''
plan services are being shifted to participants through the investment
management fees charged on the proprietary investment alternatives, in
many cases without their knowledge. The uniform disclosure of fees is
the only way that plan sponsors can effectively evaluate the retirement
plan they will offer to their workers. To show it can be done, attached
is a sample of how a uniform, plan sponsor disclosure would look. By
breaking down plan fees into only three simple categories--investment
management, recordkeeping and administration, and selling costs and
advisory fees--we believe plan sponsors will have the information they
need to satisfy their ERISA duties. We commend Chairmen Miller and
Andrews for the even-handed application of new disclosure rules to all
401(k) plan service providers in the 401(k) Fair Disclosure for
Retirement Security Act of 2009. Uniform disclosure of fees, as
provided by the Miller-Andrews legislation, will allow plan sponsors to
make informed decisions and satisfy their ERISA duties. The breakdown
of fees required in the legislation also will allow plan sponsors to
assess the reasonableness of fees by making ``apples to apples''
comparison of other providers and will allow fiduciaries to determine
whether certain services are needed, leading to potentially even lower
fees.
The level of detail in the information needed by 401(k) plan
participants differs considerably from that needed by plan fiduciaries.
Plan participants need clear and complete information on the investment
choices available to them through their 401(k) plan, and other factors
that will affect their account balance. In particular, participants who
self-direct their 401(k) investments must be able to view and
understand the investment performance and fee information charged
directly to their 401(k) accounts in order to evaluate the investments
offered by the plan and decide whether they want to engage in certain
plan transactions. The disclosure of investment fee information is
particularly important because of the significant impact these fees
have on the adequacy of the participant's retirement savings. In this
regard, studies have shown that costs related to the investments
account for between roughly 87 percent and 99 percent of the total
costs borne by participant accounts, depending on the number of
participants and amount of assets in a plan.\2\
---------------------------------------------------------------------------
\2\ 2007 edition of the 401(k) Averages Book, published by HR
Investment Consultants.
---------------------------------------------------------------------------
CIKR, ASPPA and NAIRPA urge that any new disclosure requirements to
plan participants also be uniform, regardless of whether the service
provider is bundled or unbundled. In July 2008, the DOL issued proposed
regulations on participant fee disclosure that required the annual
disclosure to plan participants and beneficiaries of identifying
information, performance data, benchmarks and fee and expense
information in a comparative chart format, plus additional information
upon request. The proposed regulation further required an initial and
annual explanation of fees and expenses for plan administrative
services to plan participants and beneficiaries (disclosed on a
percentage basis) except to the extent included in investment-related
expenses. The effect of this exception would have been to highlight
administrative costs for one business model (unbundled) over another
(bundled), which would result in a disparity of treatment and
confusion. In most plans, the administrative costs of recordkeeping,
reporting, disclosure and compliance are borne, at least to some
extent, by the investments. For bundled providers, the entire
administrative cost is generally covered by investment-related fees
charged on proprietary investments. For an unbundled provider, however,
those costs are often paid through revenue sharing received from
unrelated investments, which, in many instances, is not sufficient to
offset the entire cost. Accordingly, for unbundled providers, there
would be a direct administrative charge assessed against participants'
accounts. In effect, the DOL's proposed requirement to disclose
administrative expenses except to the extent included in investment-
related expenses would have imposed an additional and burdensome
disclosure requirement on unbundled service providers, whereas there
would be no such disclosure in the case of a bundled service provider.
This would be misleading to most plan participants. In only the
unbundled case would participants see separate administrative costs
charged against his or her account, while with bundled providers,
participants would be given the impression there were no administrative
costs at all as the administrative costs would be imbedded in the
investment costs.
Accordingly, CIKR, ASPPA and NAIRPA recommend that the disclosure
of administrative and investment information be provided on a uniform
basis in any legislation considered by Congress. We believe that
administrative fee information provided on the same annualized basis as
investment costs would provide participants a more complete picture of
the total costs of the plan at a single time, regardless of the
business model of a service provider.
It also is important to recognize that there is a cost to any
disclosure, and that cost is most often borne by the plan participants
themselves. To incur costs of disclosure of information that will not
be relevant to most participants will unnecessarily depress the
participants' ability to accumulate retirement savings within their
401(k) plans. Thus, appropriate disclosure must be cost-effective, too.
The result of mandatory disclosure should be the provision of all the
information the plan participant needs, and no more. To require
otherwise would unjustifiably, through increased costs, reduce
participants' retirement savings. Those participants who want to delve
further into the mechanics and mathematics of the fees associated with
their investment choices and other potential account fees should have
the absolute right to request additional information-it should be
readily available on a Web site, or upon participant request. This will
take care of those participants who feel they need more detailed
information. For the Committee's consideration, ASPPA, CIKR and NAIRPA
have attached a sample fee menu to the testimony that we believe would
contain, in a clear and simple format, all the information a plan
participant would need to make informed decisions about his or her
plan.'
The 401(k) Fair Disclosure for Retirement Security Act of 2009
requires two participant disclosure requirements: a ``before-the-fact''
notice of investment options and a revised quarterly statement
requirement. The notice of investment options requires specific
information be provided with respect to each available investment
option, such as the investment option's risk level. The notice also
must include a plan fee comparison chart that includes a comparison of
actual service and investment charges that will or could be assessed
against the participant's account. The chart must set fees into four
categories: (1) fees depending on a specific investment option selected
by the participant (including expense ratio and investment-specific
asset based fees); (2) fees assessed as a percentage of total assets;
(3) administrative and transaction based fees; and (4) any other
charges deducted not described in the first three categories. The
legislation also would amend the existing quarterly benefit statement
requirement to mandate inclusion of specific information attributable
to each participant's account, including starting balances and
investment earnings or losses.
We are very pleased that the disclosure requirements for plan
participants in the 401(k) Fair Disclosure for Retirement Security Act
of 2009 are uniform, regardless of whether the service provider is
bundled or unbundled. This will provide participants with a complete
picture of total costs and avoid confusion. We also commend Chairmen
Miller and Andrews for the legislation's plan fee comparison chart
requirement. This chart is similar to the sample participant fee menu
that is attached to this testimony. It will provide participants with
an easy to understand summary of fees which will allow them to make
informed decisions about how to invest their retirement saving plan
contributions. However, we ask the Committee to reconsider the level of
detail required for participants. It is important that participant
disclosures be concise, meaningful and readily understandable--
especially, since any new disclosure requirements will carry costs for
participant disclosures. We also ask that the Committee consider
defining ``small plan'', for purposes of permitting annual statements,
as ``fewer than 100'' participants and beneficiaries, as in H.R. 3185
passed by the Committee in the last Congress. Many small employers with
more than 25 participants are struggling in the current economy, and
the additional cost of more frequent reporting may discourage them from
maintaining the company's 401(k) program.
ERISA and the Internal Revenue Code generally prohibit plan
fiduciaries from rendering any investment advice to plan participants
and beneficiaries that would result in the payment of additional fees
to the fiduciaries or their affiliates. The Pension Protection Act of
2006 (PPA) Sec. 601 provided a statutory prohibited transaction
exemption to the rule [codified at ERISA Sec. Sec. 408 (b)(14) and
408(g) and IRC Sec. Sec. 4975(d)(17) and 4975(f)(8)] for certain
transactions that may occur in connection with the provision of
``eligible investment advice'' by a ``fiduciary adviser,'' subject to
specific requirements. In particular, the final PPA investment advice
provision allowed two specific permissible investment advice
exceptions: (1) certain ``fee-leveling'' arrangements; or (2) certified
computer model arrangements.
On August 22, 2008, the Department of Labor (DOL) issued proposed
investment advice regulations interpreting PPA Sec. 601. On the same
date, the DOL issued a separate prohibited transaction class exemption
(Class Exemption) that provided relief for certain transactions that
went beyond the scope of relief contemplated in the statutory language.
DOL issued final investment advice regulations (Final Regulation) on
January 21, 2009, that incorporated the separate Class Exemption. into
the Final Regulation. However, the status of these regulations is
unclear at this point. In response to Rahm Emanuel's memorandum
directing Agency Heads to consider extending for 60 days the effective
date of regulations that had been published in the Federal Register but
not yet taken effect, on February 4, 2009 the DOL proposed extending
the effective date for the investment advice rules from March 23 until
May 22, 2009 to allow the public to comment on whether the rules raise
significant policy and legal issues. ASPPA and CIKR submitted comments
in support of the extended effective date due to the uncertainty
surrounding the final disposition of the regulations. On March 19, the
DOL issued a final rule delaying the effective date to May 22. The
Final Regulation's interpretation of the statutory exemption in PPA
will make it more likely that participants and beneficiaries may obtain
assistance in diversifying investments and appropriately reflecting
their own risk tolerances and investment horizons in asset allocations.
However, the portion of the Final Regulation which implements the non-
statutory Class Exemption (i.e., the portion that does not relate to
the statutory exemption from the prohibited transaction rule enacted in
PPA) may expose participants and beneficiaries to conflicted investment
advice without sufficient protection from the effects of an adviser's
conflicts of interest. Furthermore, this exemption is contrary to
Congressional intent.
Accordingly, ASPPA, CIKR and NAIRPA recommend that the DOL withdraw
the Class Exemption portion of the Final Regulation. The enactment of
ERISA Sec. Sec. 408(b)(14) and 408(g) reflect Congressional desire to
provide very limited relief for providing conflicted investment advice.
The Final Regulation expands this relief in a manner that does not
provide adequate protection to participants and beneficiaries.
With the growth of participant-directed individual account plans,
the importance of investment advice to participants and beneficiaries
of retirement plans has become increasingly clear. The majority of
Americans are not experts on how to appropriately invest their
retirement savings. However, due to the shift from defined benefit to
defined contribution plans, many Americans are required to do just
that.
CIKR, ASPPA and NAIRPA believe that working Americans are best
served by independent investment advice provided by qualified advisers,
not conflicted investment advice where the adviser has a financial
interest in what investment choices to recommend. We believe that
participants' rates of return are better when served by an independent
adviser. We commend Chairmen Andrews for his recent legislation
promoting independent advice for retirement plans and participants.
Summary
The retirement system in our country is the best in the world, and
competition has fostered innovations in investments and service
delivery. However, important changes are still needed to ensure that
the retirement system in America remains robust and effective into the
future. By supporting plan sponsors through uniform disclosure of fees
and services and by encouraging plan sponsors to provide independent
investment advice to participants, American workers will have a better
chance at building retirement assets and living the American dream.
CIKR, ASPPA and NAIRPA applaud the House Education and Labor
Committee's leadership in exploring issues related to 401(k) plan fee
disclosure and independent investment advice and in introducing the
401(k) Fair Disclosure for Retirement Security Act of 2009. The
Committee's consistent focus on retirement issues over the years has
advanced improvements in the employersponsored pension system and led
to an increased concern about the retirement security of our nation's
workers. CIKR, ASPPA and NAIRPA look forward to working with Congress
and the Administration on these important issues.
attachments: sample fee disclosure form (plan sponsors)
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
Chairman Andrews. Thank you very much, Mr. Onorato, for
your contribution.
Mr. Chambers, welcome back. We always appreciate your
valued and constructive input in anything we do. Good to have
you with us.
STATEMENT OF ROBERT G. CHAMBERS, FORMER CHAIRMAN OF THE BOARD,
AMERICAN BENEFITS COUNCIL AND PARTNER, MCGUIRE WOODS
Mr. Chambers. Thank you. It has been a pleasure so far--
remains to be seen.
And thank you to all of the members of the subcommittee,
and the interlopers from the full committee, for the
invitation.
My name is Robert Chambers, and I am a partner in the
international law firm of McGuire Woods.
I hate to admit it, but I have advised clients with respect
to 401(k) plan issues, since section 401(k) was added to the
Internal Revenue code in 1978. I am also, as you noted, the
past chair of the board of directors of the American Benefits
Council, a trade association, on whose behalf I am testifying
today.
In a nutshell, the council's goal for 401(k) plans is an
effective system that functions in a transparent manner, and
provides meaningful benefits at a fair price. To accomplish
this, we support further improvement of the rules relating to
plan-fee disclosure.
We very much appreciate the open and constructive approach
that the committee used in amending H.R. 3185, prior to its
adoption--or approval, rather--by the committee, last year. And
we especially appreciate the openness to our ideas on the part
of Chairman Miller and Mr. McKeon, Mr. Andrews, and Mr. Kline.
We are equally enthusiastic about the current bill, in that
it includes a number of improvements to the proposed
legislation, many of which are listed in our written testimony.
While our members continue to develop measures to ensure
that fee levels are fair and reasonable for participants, there
is room for improvement.
First, I am going to address liability issues, then suggest
a few--Mr. Miller, I was going to use the word, ``tweaks''--
perhaps, ``adjustments''--to the bill--and, finally, make a
request regarding the minimum-investment option.
The principal concern of many plan sponsors in this area
relates to proliferating litigation, and the potential
liability of plan sponsors and fiduciaries.
Over the past few years, we have seen significant growth in
plan-fee litigation involving defined-contribution plans. Plan
sponsors cannot afford to take legal compliance lightly. All
litigation--even litigation where there has been no
wrongdoing--is extremely costly.
Plan sponsors are especially frustrated by so-called
``strike suits.'' These are suits in which litigation is filed
ostensibly for the purpose of surviving a motion to dismiss,
causing the sponsor to consider a large settlement, in lieu of,
perhaps, paying even larger litigation expenses in defending
the action to its conclusion.
The effect of this litigation on plan sponsors has been
very dramatic. It is a drain on resources and time. It
interferes with sound business planning. And, frankly, it
undermines retirement security by reducing sponsors' commitment
to providing retirement programs.
And, equally important, we want to correct the
misimpression of those who view litigation as a positive means
to vindicate employee rights, and to transfer value to
employees.
Fee litigation largely transfers value to the legal system,
and results in the transfer of remarkably little value to
employees. It leads to lower employer contributions, higher
fees, reduced account balances, and less-comprehensive services
for all participants.
So here are four of our members' specific liability
concerns, in areas covered by the bill.
First, there should be no liability where an employee
discloses to participants fee information that has been
provided by a service provider, and that turns out to be
incorrect.
Second, handling unbundled information can be confusing.
The bill would require a bundled service provider to disclose
separate fees for administrative and investment services, even
though the bundled service provider does not actually offer
those services separately.
Since the only commercially reasonable action for plan
sponsors is to compare the total cost of bundled and unbundled
services, plan sponsors need clarification that their taking
this action will satisfy their fiduciary duties. And, of
course, further, the bill needs to provide similar protection
when sponsors pass this unbundled information on to
participants.
Third, the bill needs to make clear that if the fiduciary
obtains and discloses the information as required by ERISA, it
will have satisfied those fiduciary duties. And, finally, minor
inadvertent errors--for example, in disclosing the fees
associated with an investment option--should not provide
participants with a cause of action.
Therefore, we ask that you add these protections to the fee
legislation, as you consider it.
I will now turn to fee-disclosure issues within the bill.
While participants need a clear, simple short disclosures that
will, effectively, communicate key points on whether to
participate and how to invest, fiduciaries need more detailed
information, since it is their duty to understand fully the
options available, and to make prudent choices on behalf of all
participants.
Despite the many improvements to the current bill, the
council does believe that additional changes would be helpful.
And here are three of them that are described at greater length
in our written testimony.
First, the rules should be flexible enough to accommodate
the full range of possible investment options, including self-
directed brokerage accounts. Second, payments from one service
provider to its affiliated service provider are not really
revenue sharing, and should not be required to be disclosed
without the fiduciary protection that I described earlier. And,
finally, plan sponsors that pay fees should not be subject to
any of the disclosure rules.
One last point with regard to the minimum-investment
option: We note that it is considerably different than the
option described in H.R. 3185, and we have developed several
questions regarding the revised concept in the very brief
period that we have had to review the draft language.
Therefore, we request another opportunity to meet with members
of the subcommittee, in order to obtain a better understanding
of what the option entails and, of course, to discuss our
questions.
So that is all. We thank you for this opportunity to share
our views on the bill. And we look forward to continuing our
very constructive dialogue on plan-fee disclosure, with both
this subcommittee and the full committee. Thank you.
[The statement of Mr. Chambers follows:]
Prepared Statement of Robert G. Chambers, on Behalf of the American
Benefits Council
My name is Robert G. Chambers, and I am a partner in the
international law firm of McGuireWoods LLP. I have advised clients with
respect to 401(k) plan issues since 401(k) was added to the Internal
Revenue Code in 1978. In that regard, my clients have included both
large and small employers that sponsor 401(k) plans as well as many
financial institutions that provide services to 401(k) plans. I am also
a past chair of the Board of Directors of the American Benefits Council
(``Council''), on whose behalf I am testifying today. The Council is a
public policy organization representing plan sponsors, principally
Fortune 500 companies, and other organizations that assist employers of
all sizes in providing benefits to employees. Collectively, the
Council's members either sponsor directly or provide services to
retirement and health plans that cover more than 100 million Americans.
The Council appreciates the opportunity to present testimony with
respect to 401(k) plan fees. 401(k) plans have become a primary
retirement plan for millions of Americans. Accordingly, it is more
important than ever for all of us to take appropriate steps to ensure
that 401(k) plans provide those Americans with retirement security. We
recognize that the common goal is an effective 401(k) system that
functions in a transparent manner and provides meaningful benefits at a
fair price in terms of fees. We want to be as helpful to that process
as possible. The Council Supports Enhanced Disclosure Requirements
The Council supports improvement to the rules regarding plan fee
disclosure. Effective plan fee disclosure to participants can enable
them to understand their options and to choose those investments that
are best suited to their personal circumstances. Disclosure to plan
fiduciaries enables them to evaluate the reasonableness of the fees
that are charged by their current provider(s) and to shop for and
negotiate services and fees from other providers.
While plan fiduciaries are receiving extensive information
regarding various plan services and related fees and are using that
information to negotiate effectively for lower fees, we believe more
can and should be done to make that process even more effective. And
while service providers are providing fiduciaries with tools that
enable them to analyze fee levels and to provide meaningful information
to participants, we believe more can be done to improve that exchange
as well. Chairman Miller previously introduced H.R. 3185, a bill that
addressed two key disclosure points:
The disclosure of plan fees by a service provider to a
plan administrator, and
The disclosure of plan fees by a plan administrator to
participants. We very much appreciate the open and constructive
approach that the Committee used in amending H.R. 3185 prior to its
approval by the Committee last year. We especially appreciate the
openness to our ideas on the part of Chairman Miller, Ranking Member
McKeon, Subcommittee Chairman Andrews, and Subcommittee Ranking Member
Kline. The revised bill included many significant improvements to the
proposed legislation, including:
Facilitating the use of electronic communication.
Reducing the extent of unbundling and number of categories
required.
Permitting the use of estimated dollar amounts.
The recognition that investment options with a guaranteed
rate of return need separate treatment.
A helpful delay in the effective date.
Outside the context of investment options, eliminating the
need to disclose all subcontractors and payments to subcontractors.
Recognition of the liability issue with respect to service
providers (reasonable reliance by service providers on information from
unaffiliated service providers).
These important improvements to H.R. 3185, considered in the
previous Congress, are integral to making the disclosure of fees more
effective. There are some specific proposals that we believe could be
helpful in further improving the version of the 401(k) Fair Disclosure
for Retirement Security Act of 2009 that will be considered in the
current Congress.
Protecting the Voluntary System
Before discussing the proposals in the bill that we believe would
benefit from further discussion and improvement, we would like to
discuss what has become a top concern for many plan sponsors: plan
sponsor and fiduciary liability. Over the past few years, we have seen
significant growth in litigation involving defined contribution plans,
much of which is directly related to plan fees. So, as this
Subcommittee and the full Committee consider fee legislation, we urge
you to also consider the nature of the fee-related litigation that has
been filed and pay special attention to areas that could inadvertently
increase litigation.
Plan sponsors cannot afford, either financially or from a
participant-relations standpoint, to take legal compliance lightly. All
litigation, even litigation when there has been no wrongdoing, is very
costly. Plan sponsors are especially frustrated by socalled ``strike
suits''--litigation filed only for the purpose of surviving a motion to
dismiss, causing the sponsor to consider a large settlement in lieu of
incurring the even greater litigation expenses that defending the
action would require.
The effect of the fee and other defined contribution plan-related
litigation on plan sponsors has been very significant.
Litigation is a drain on resources, time, and money.
It interferes with sound business planning.
It undermines retirement security by reducing the
sponsor's commitment to providing retirement programs.
Equally important, we want to correct the misimpression of those
who view substantial increases in litigation as a positive means to
vindicate employee rights and to transfer value to employees.
Realistically, litigation results in remarkably little transfer of
value to employees.
The increased risk of litigation becomes factored into the
cost of benefit plans through lower employer contributions and higher
fees, resulting in reduced account balances.
The sponsor's value is reduced, adversely affecting the
accounts of participants in other plans whose accounts are directly or
indirectly invested in the sponsor.
Services become less comprehensive.
More litigation leads to increasingly reduced benefits for all
participants.
Here are a few of our members' concerns regarding the 401(k) Fair
Disclosure for Retirement Security Act of 2009, along with suggested
solutions:
What happens if an employer discloses to participants fee
information that has been provided by a service provider and that turns
out to be incorrect? To have a workable system, a plan sponsor that
reasonably relies on service provider information should not have any
liability.
What is a plan sponsor required to do with ``unbundled''
information? The bill would require a bundled service provider to
disclose separate fees for administrative and investment services.
However, the bundled service provider does not offer such services
separately. It is unclear how plan sponsors should use the information
to compare services. They cannot compare it directly to actual
unbundled fee structures, since the plan sponsors cannot purchase the
services separately from the bundled service provider for the disclosed
fee. The commercially reasonable action would be to compare the total
cost of the bundled and unbundled services. Plan sponsors need
clarification that this action will satisfy their fiduciary duties in
this regard.
The bill should make clear that, by obtaining and
disclosing the information required by ERISA, plan fiduciaries will
have satisfied their fiduciary duties in this regard.
Minor, inadvertent errors, for example, in disclosing the
fees associated with an investment option, should not provide
participants with a cause of action.
Disclosure by Plan Fiduciaries to Plan Participants
I will now turn to fee disclosure issues in the bill. It is
critical to emphasize that the disclosure rules should take into
account the sharply different circumstances of participants and plan
fiduciaries. Participants value clear, simple, short disclosures that
effectively communicate the key points that they need to know to decide
whether to participate and, if so, how to invest. Plan fiduciaries need
more detailed information since it is their duty to understand fully
the options available and to make prudent choices on behalf of all of
plan participants. Despite the many improvements to the current bill,
the Council does believe that some additional changes could be made.
These include:
The rules must be flexible enough to accommodate the full
range of possible investment options, including brokerage windows.
Disclosure of revenue sharing between two or more
unrelated service providers should be required. Payments from one
service provider to its affiliated service provider are not viewed as
revenue sharing and should not be required to be disclosed.
Fees paid by plan sponsors should not be subject to any of
the disclosure rules. Where plan assets are not involved, ERISA's rules
are not implicated.
Fees charged to service providers by their own service
providers have no relevance to plans and should not be required to be
disclosed.
Unbundling for disclosure purposes requires the production
of data that is not commercially useable raising questions about its
value.
Minimum Investment Option
The decision to include a minimum investment option in the bill
raises policies and questions that are distinct from those relating to
fee disclosure. The minimum investment option in the bill is
considerably different than the option described in H.R. 3185, and we
have developed a number of questions regarding the new concept in the
brief period that we have had to review the draft language.
We look forward to meeting with members of the Subcommittee to
obtain a better understanding of what the option entails and to discuss
our concerns.
Coordination of the Legislative and Regulatory Process
In the effort to improve the fee disclosure rules, we believe that
it is very important that the legislative and regulatory processes be
coordinated to avoid unnecessary costs and confusion resulting from
having to change systems multiple times.
For example, it would be very harmful for the retirement system if
one set of rules is created to be in effect for a year or two, only to
be supplanted by a different set of rules. It is simply too confusing
and too costly and not the best use of resources. Accordingly, we urge
both Congress and the Department of Labor to consider how best to
coordinate their efforts to avoid any adverse consequences.
Effective Date
Any revisions to the fee disclosure rules will require:
Interpretation and implementation by the Department of
Labor,
Extensive systems changes, and
Development of effective communication methods.
Accordingly, it is critical that legislation not be effective prior
to plan years beginning at least 12 months after the publication of
final regulations interpreting the legislation and that the Department
of Labor be given a reasonable period of time to develop them.
We welcome this opportunity to share our views on the bill. We look
forward to continuing our very constructive dialogue on plan fee
disclosure--the bill and any new amendments that will be considered--
with this Subcommittee and the full Committee.
______
Chairman Andrews. Thank you, Mr. Chambers. Your testimony
was characteristically constructive and helpful. We appreciate
it very, very much.
Mr. Chambers. Thank you.
Chairman Andrews. Mr. Goldbrum, welcome to the committee.
STATEMENT OF LARRY H. GOLDBRUM, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, THE SPARK INSTITUTE
Mr. Goldbrum. Thank you.
Chairman Andrews, Ranking Member Kline, honorable members
of the committee, my name is Larry Goldbrum, and I am general
counsel of the Spark Institute, an association that represents
a broad cross-section of the retirement-plan industry.
Our members collectively service more than 62 million plan
participants. I am here to tell you that every one of my
members believes that fee transparency will benefit plan
participants, plan sponsors and, ultimately, the entire
industry. We commend the committee for its efforts.
Our goal today, and, hopefully, in future collaborative
efforts, is to ensure that the approach taken in any
legislation has a meaningful impact on plan participants, and
sponsors' ability to understand 401(k) fees, and does not
unintentionally increase them.
We believe that the 401(k) plan system is a fundamentally
sound, competitive and innovative system that provides the best
way for Americans to save and invest for retirement, and
provides good value for the fees that are charged.
We believe that the best approach to fee disclosure will be
one that is flexible, concept-based, and allows disclosure
materials to be tailored with comparable information for all of
the investment options that are available.
Many misperceptions have emerged in the discussions about
plan fees, which are addressed in a series of white papers we
just released. Some of the misconceptions are that 401(k) plan
fees are not a good value for American workers; plan fees do
little more than erode retirement savings; service providers
make too much money by raiding 401(k) plans; and fees are not
understood because information is not disclosed.
Although time will not allow me to go into detail, I would
like to note that, prior to 2008, the industry's average pre-
tax profit margin was approximately 21 percent. It is expected
to be 10 percent for 2008, and in negative territory for 2009.
In the last 5 years, approximately 80 vendors have exited the
business. Additionally, the vast majority of service providers
provide substantial, detailed and understandable information
about fees, above and beyond what current law requires, because
doing so makes good business sense.
Service providers are already regulated by multiple
agencies, including the IRS, DOL, SEC, OCC, FINRA and state
insurance and securities regulators. Multiple disclosure
standards make compliance expensive. We support a coordinated
approach to fee disclosure.
The proposal requires service providers to make detailed
disclosure about fees in predetermined categories. We urge the
committee to reconsider whether requiring disclosure to a one-
size-fits-all solution is appropriate. Not all fees fit into
categories. And no single form can adequately address the
diversity of products and service structures, without favoring
one segment of the industry over others.
A statutory framework must be flexible for the vast array
of investment products and service structures, and be able to
accommodate the ever-changing retirement and investment
industries.
Much has been made about the debate over bundled versus
unbundled fee disclosure. Unbundled providers argue that their
services may seem more expensive, when compared to services
offered by bundled providers. Bundled providers argue that they
may not offer component services on an unbundled basis, do not
have unbundled pricing information available, and unbundled
pricing information can be arbitrary and potentially
misleading.
We view this debate as a distraction from the real issue:
The need for useful fee disclosure to plan sponsors, so they
can make sound fiduciary decisions. Plan sponsors will have
preferences towards bundled or unbundled providers, and can ask
for unbundled pricing information.
Similarly, providers should be able to structure and price
their products on an unbundled or on a bundled basis, as they
choose. When a bundled provider is asked for unbundled pricing
information, it may choose to comply in order to retain
existing, or win new business. Market forces, industry best
practices and the threat of litigation and regulatory
enforcement should drive behavior.
Ultimately, the bundled-versus-unbundled debate is more
about providers with different product and pricing structures
arguing about business competition, rather than an alleged
defect in fee disclosure. New laws should not attempt to
resolve this business debate.
Plan service providers are ready to assist plan sponsors to
provide plan-fee information to participants. We support a
flexible concept-based legislative framework. However, the
proposal mandates an omnibus notice and chart that many
participants may find will not provide more useful or
understandable information.
Categorizing fees by the way they are charged, which may
have nothing to do with what they are for, may not increase
participants' understanding. Participants should be provided
with total investment-fee information such as expense ratios.
Many participants may not find the additional underlying
details to be useful in making better decisions.
We are concerned that the proposal requires participants'
statements to include dollar-basis disclosures of fees that are
embedded in investment products, such as most investment-
management fees. While rate disclosure is possible, the
information that would be needed for dollar disclosures on
statements is simply not available on the plan record-keeping
systems.
We are concerned that the index-fund requirement as the
condition for 404(c) fiduciary protection is effectively a
mandate, which is unprecedented under ERISA. We are also
concerned about the subjective nature of the requirement,
because reasonable investment experts are likely to disagree on
what funds will satisfy the requirement. And we have all been
painfully reminded: Past performance is no guarantee of future
results.
We are concerned that this subjective requirement will
expose plan sponsors to increase litigation risk, and that
mandating the use of index fund as a way to reduce plan costs
relies on a misconception that it will change the economics of
plan-administration fees.
I thank you for the opportunity to express my----
[The statement of Mr. Goldbrum follows:]
Prepared Statement of Larry H. Goldbrum, Esq., General Counsel, the
SPARK Institute
Chairman Andrews, Ranking Member Kline, honorable members of the
Committee, my name is Larry Goldbrum and I am General Counsel of The
SPARK Institute, an industry association that represents the interests
of a broad based cross section of retirement plan service providers,
including record keepers and investment managers who will be affected
by the proposed 401(k) Fair Disclosure for Retirement Security Act of
2009 (the ``Bill''). Our members include most of the largest service
providers in the retirement plan industry and collectively they service
more than 62 million defined contribution plan participants. It is an
honor for me to share our organization's views on the proposed
legislation. I welcome the opportunity to respond to your questions
after my opening statement.
Introduction
The SPARK Institute supports and encourages fee transparency that
helps plan sponsors and participants understand the fees and expenses
that they pay for plan and investment services, and make decisions on a
fully informed basis. We commend the Committee for its efforts in this
area. Our goal today and hopefully in future collaborative efforts is
to ensure that the approach taken in any legislation has a meaningful
impact on plan participants and sponsors ability to understand 401(k)
fees and does not unintentionally drive those fees up.
The SPARK Institute believes that America's employer-sponsored
retirement plan system is a fundamentally proven, sound, competitive
and innovative system that:
Provides the best way for American workers to save and
invest to reach their retirement goals, and
Provides valuable services and good value for the cost.
Fee disclosure should be a part of an overall assessment made by
plan sponsors and participants about the value they receive for the
cost. In addition to fees, plan sponsors and participants must evaluate
investment performance and the quality and utility of the services
provided. Ultimately, the best approach to fee disclosure will be one
that is flexible, concept-based and allows service providers and plan
sponsors to tailor disclosures with comparable information for each
plan investment option. This measured approach will avoid overwhelming
participants with extensive detail and will help them understand the
fees they are paying and the services they are receiving in return. If
we are not careful, however, requirements intended to help participants
could instead increase costs and create potential fertile ground for
lawsuits against plan sponsors without helping participants make
informed choices.
Many misperceptions and misunderstandings have emerged in the
discussions about plan fees and their disclosure. I would like to try
to correct some of those misperceptions today. In addition, while we
have not had sufficient time in advance of this hearing to review the
specifics of the proposed legislation, we would like to address certain
provisions that we anticipated may be included.
Misperceptions About the Retirement Plan Industry
The SPARK Institute recently completed a series of white papers
entitled ``The Case for EmployerSponsored Retirement Plans'' analyzing
certain aspects of the retirement plan industry including ``Fees and
Expenses'', ``Benefits and Accomplishments'' and ``Coverage,
Participation and Retirement Security.'' These reports identify some
important facts and dispel many myths about employersponsored
retirement plans, particularly 401(k) plans.
Some common misconceptions are that 401(k) plans are not a ``good
value'' for workers trying to save for retirement, and that the fees
for plan and investment services do little more than erode workers'
retirement savings. These criticism do not take into account all of the
services that are provided to the plan sponsor and participants,
including investment management. In fact, the data shows that plan
participants receive more services and support and have more
flexibility when investing through their 401(k) plans than they would
if saving through retail IRAs. In addition, 401(k) plan participants
may also benefit from sponsor-paid services, matching and profit-
sharing contributions, and group pricing. And finally, recent studies
show that on average, expenses for 401(k) participants are lower than
the expenses paid by retail mutual fund investors.
There is also a misperception that service providers make too much
money at the expense of American workers. Providing 401(k) plan
services is capital and labor intensive and involves substantial start-
up and maintenance expenses, especially in light of the ever-changing
employee benefit legislative and regulatory environment. In fact, cost
pressures are significant because competition is fierce. The industry
has been consolidating over the past ten years as many providers were
unable to maintain profitability. SPARK Institute data indicates that
more than 60 companies have sold their businesses in the past five
years, and more than 20 additional firms exited the record keeping side
of the business during that period by outsourcing that function to
third party service providers. The industry's pre-tax profit margin
averaged 21% from 2005 through 2007, a period when the Dow Jones
Industrial average was between approximately 10,800 and 13,400.
However, the 2008 average pre-tax profit margin is estimated to be
approximately 10%, and in negative territory for 2009, because of the
market collapse. Another myth is that plan sponsors and workers do not
understand the fees and expenses associated with their retirement plans
because the information is not being adequately disclosed, or is not
available. The vast majority of retirement plan and investment
providers provide substantial, detailed and understandable information
about plan fees and expenses to plan sponsors and participants above
and beyond what is already required by law because they recognize that
it makes good business sense to do so. It also helps them avoid
potential misunderstandings and claims from plan sponsors, plan
participants and regulators. In fact, a strong case can be made that it
is a combination of simple human nature and the ``do it for me''
preferences of a significant number of American workers when it comes
to retirement saving and investing--rather than the lack of
information--that is at the root of any lack of understanding. As these
issues are considered, it is crucial that we all understand that plan
sponsors and participants already receive and have access to a lot of
information about plan fees, and that additional disclosures must be
more useful, not just more information.
Discussion of Specific Proposals
Before I begin my comments about the specifics of the proposed
Bill, I want to note that retirement plan and investment providers are
already regulated by various agencies including the IRS, DOL, SEC, OCC,
FINRA, and state insurance and securities regulators. Having multiple
disclosure standards makes compliance very expensive and adds to the
fees paid by plans and participants. The SPARK Institute supports a
coordinated approach to regulating fee disclosure for retirement plans.
The proposed Bill requires that all service providers make detailed
disclosures about plan fees and expenses in four categories. The SPARK
Institute strongly urges the Committee to reconsider whether requiring
disclosure to be made through a ``one size fits all'' solution using
pre-determined categories is appropriate. Not all fees fit neatly into
categories and no single form or methodology can adequately address the
diversity of products and service structures without favoring one
segment of the industry over others. Any statutory framework must be
flexible and adaptable to the broad array of investment products and
service structures, and must be able to accommodate the competitive and
ever changing nature of the retirement plan and investment industries.
A. Disclosure to Plan Sponsors
With regard to disclosures to plan sponsors, service providers
should not be required to calculate the actual dollar amount of fees
and expenses, particularly those that are embedded in the expense
ratios of plan investment options. Providing expense ratio or rate
information, instead of dollar estimates, will provide enough
information. Service providers can, upon request, provide simple
estimates of the aggregate amounts of such fees and expenses based on
certain assumptions and average account data. Much has been made of the
debate over disclosure of fees in ``bundled'' vs. ``unbundled'' service
structures. Unbundled providers argue that their products and services
may appear to be more expensive to plan sponsors when compared to the
same or comparable services that are offered through a bundled service
provider. Bundled service providers argue that they may not offer
component services on an unbundled basis, and do not have unbundled
pricing or cost information available. Bundled providers add that any
such unbundled pricing information is inherently arbitrary,
hypothetical, unreliable, and potentially misleading. The SPARK
Institute views this debate as a distraction from the real issue--the
need to provide useful and relevant disclosures to enable plan sponsors
to make sound fiduciary decisions. Plan sponsors will have their own
preferences toward either bundled or unbundled product offerings, and
have the ability and right to request information that they deem
necessary in order to evaluate service providers. Similarly, service
providers should have the ability to structure their products and
services on an unbundled or bundled basis and price their products and
services as they choose. Plan sponsors have the ability to request
information from service providers and service providers have the
option to comply with such requests in the hopes of winning new or
retaining existing business. Market forces, industry best practices,
the threat of litigation, and the threat of regulatory enforcement
actions should drive industry behavior instead of legislative mandates.
The SPARK Institute believes that ultimately the bundled versus
unbundled disclosure debate is more about companies with different
product structures, service models, product and service capabilities,
and pricing structures debating about market forces and competition
than alleged defects in disclosure of employer-sponsored retirement
plan fees. The SPARK Institute does not believe that new laws and
regulations should attempt to resolve this business debate.
B. Disclosure to Plan Participants
SPARK Institute members stand ready to assist plan sponsors in
providing fee information to plan participants. As with service
provider disclosure to plan sponsors, The SPARK Institute urges the
Committee to seek a flexible and concept based framework, as workers
will ultimately bear the costs of additional disclosures.
Instead of creating such a framework, the Bill anticipates an
omnibus notice and fee chart addressing all the plan's investment
options. The Bill's requirement that the fee chart categorize charges
relating to plan investment options has the unintended effect of
increasing burdens and costs without providing new or more useful data
to participants. Categorizing fees by the way they are charged, which
may have nothing to do with what they are for, will not help
participants better understand them. With respect to a plan's
investment options, participants should instead be provided with
information regarding the total investment fees (e.g., the expense
ratio) and the transaction related fees (e.g., redemption fees).
Providing participants with extra detail about how fees are broken down
will likely confuse or overwhelm them instead of enlightening them.
The Bill also obligates the plan sponsor to provide dollar basis
disclosures or estimates of indirect charges, such as fees that are
embedded in investment products, for each participant on quarterly
benefits statements. These charges, by definition, are embedded in the
funds and the information needed for the calculations and estimates
does not exist on the record keeping systems that produce the
statements. Moreover, since the fund and account information is
reported net of the embedded fees, adding this information to the
statements will result in information that does not add up or make
sense.
C. Other Requirements
It is our understanding that the proposal also includes a
requirement that conditions ERISA 404(c) fiduciary liability protection
on the inclusion of an index fund that meets certain subjective
requirements. In our opinion, this precondition is effectively the same
as a mandate, which is unprecedented under ERISA. The Bill's
objective--increased transparency--does not warrant a specific fund
requirement. We are also very concerned about the subjective nature of
the fund description which requires the use of ``an appropriate broad-
based securities market index fund and which offers a combination of
historical returns, risk and fees that is likely to meet the retirement
income needs at adequate levels of contribution.'' Reasonable
investment experts are likely to disagree on which funds satisfy such
requirements. Additionally, as we have all been painfully reminded in
recent months, past performance is no guarantee of future results. The
subjective nature of the requirement makes it untenable and exposes
plan sponsors to unnecessarily increased litigation risk. And finally,
mandating the use of index funds as a potential ``low cost'' investment
option as a way of reducing plan costs relies on the misconception that
doing so will change the economics of servicing a plan. Regardless of
which funds are used in a plan, plan service providers must have a
source of revenue for the total package of services they provide.
Conclusion
On behalf of The SPARK Institute, I thank the panel for the
opportunity to share our views on these important issues, and I welcome
your questions.
______
[Additional submissions of Mr. Goldbrum follow:]
[``The Case for Employer Sponsored Retirement Plans:
Benefits and Accomplishments,'' may be accessed at the
following Internet address:]
http://www.sparkinstitute.org/content-files/File/
Benefits%20and%20Accomplishments%20FINAL%20April-09%281%29.pdf
______
[``The Case for Employer Sponsored Retirement Plans:
Coverage, Participation and Retirement Security,'' may be
accessed at the following Internet address:]
http://www.sparkinstitute.org/content-files/File/
Coverage%20Participation%20and%20Security%20FINAL%205-4-09.pdf
______
[``The Case for Employer Sponsored Retirement Plans: Fees
and Expenses,'' may be accessed at the following Internet
address:]
http://www.sparkinstitute.org/content-files/File/
Fees%20and%20Expenses%20May%202009%20FINAL.pdf
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
------
Chairman Andrews. Well, thank you, Mr. Goldbrum. We are
happy to have you with us.
And I would like to thank each of the witnesses for
excellent contributions to the committee's understanding of the
issues.
We are going to begin with questioning--with Chairman
Miller--for 5 minutes.
Mr. Miller. Thank you very much.
And thank you for your testimony.
This hearing and, I believe, this subject matter, is
absolutely critical. And I think your testimony validates that
point of view.
The financial-services industry likes to remind us that
American households own a piece of the market; that more people
own stock today than at any other time. The vast majority of
them own less than $10,000 worth of stock, and they own it
primarily through their 401(k) plans or a related plan.
That nexus to the stock market is a great deal with the
stock market is going up. Nobody on this committee is
suggesting that, somehow, this money was lost because, solely,
of these fees. But what it pointed out is that, in a volatile
market, with unprecedented events taking place--that you need
to be able to hold on to every dollar possible.
And when we see how fees can erode the savings of
individuals, I think it is very important that we see that we
can secure for them every dollar possible, since they are
working very hard, after paying all of their bills, to set
aside money to save for their retirement.
And if you talk to individuals, you will see--in one market
drop that was engineered by financial scandals, we see that
people could lose their health savings account, their kids'
education, and their retirement--all in one drop from the
market.
And so the question of, ``What are they left with?'' and
``What is the net that is provided to them after they make
these investments?'' is very, very important.
I know we can all talk about how complicated it is, and,
``They won't need it,'' and, ``They won't like it,'' and,
``They won't understand it.'' But the fact of the matter is the
effort hasn't been made to give it to them today, so we don't
know that.
And if I go to Mr. Bullard--if I understand what you are
saying on pages 14, 15, and, I believe, 16, in your opening
statement--is this information is available. It is just not in
a place where it is very useable to the individual, or maybe
even the plan sponsor, in this case, because of the manner in
which it is scattered about in the various reports that are
required today, under the law?
Mr. Bullard. Right. That is correct. And it is a very
important point.
Most of the table has been focusing on the bundled-
unbundled issue. But there is a--a prior issue of just being
able to give participants a number so they can know what their
total, all-in costs are, and, I would hope, also provide that
as a dollar amount so, as the ranking member pointed out, they
can evaluate that $300 for themselves, and decide whether that
is something worth paying.
Mr. Miller. And you believe that that is information that
they can absorb, and make a decision based upon?
Mr. Bullard. Ideally, what you would do is you would have
an all-in expense ratio. And, then, to amend the bill's
comparative-fee components--to provide that, next to that,
there be a representative fee for that size 401(k) plan. By
putting the fee in context, then you are really allowing basic
capitalist principles of competition to work in this
marketplace, and let them evaluate whether it is worth paying
more, if that is the case, than the average fee.
The ICI just released a study which shows that it seems to
be comfortable with there being representative fee amounts out
there that it characterizes as ``average'' for different size
plans. I see no reason why that shouldn't be placed alongside
that very simple one expense ratio that are provided to
participants.
Mr. Miller. Thank you very much.
Ms. Mitchem, you raised a point that has been raised
somewhat in this committee, but a little bit more on the Senate
side. And on page seven, when you discuss organizing funds
around risk levels, as opposed to sort of consumer names, with
the life cycle, safe and secure--what is the other one they
were looking--had another one in the Senate that they had a
problem with--target funds? What we find out is, when they
looked at these funds that are advertised under the same
consumer heading, they are, in fact, very different in terms of
risk.
And there is very--apparently--somewhat difficulty in
consumers determining how that risk is managed. Do you want to
speak to that?
Your mic, please?
Ms. Mitchem, if you could turn your microphone on--thank
you.
Ms. Mitchem. I think it is important to recognize the
challenges that participants face in really becoming their own
chief investment officers. Most of them don't have a background
in finance, and have an extraordinarily difficult time deciding
how to allocate their funds in the most appropriate manner.
So I think what we have to do is to make it easy for them;
to make investing in their 401(k) plan not a difficult
challenge. And one of the ways that we can do that is by
demystifying the vocabulary.
So, instead of talking, you know, about small-cap equity
and large-cap equity and high-yield bonds, we could actually
put these funds on a risk spectrum between ``conservative,''
``moderate,'' and ``aggressive.'' And those are words that the
average participant can----
Mr. Miller. But you have to admit, you started out by
saying that the whole marketing ploy here is that, somehow, you
can beat the Street. So if you don't use the language of the
Street, how could you possibly beat the Street?
So if you don't understand large-caps, small-caps and all
the rest of that--I mean, it is a fallacy of the plan. 85
percent of the trained traders on the Street can't beat the
Street. So--but we are convincing Americans that they can.
But I think you--I have a limited time--you--I am about out
of my time. I am out of my time. But I am chairman of the
committee, so I am going to take another minute.
I think this is a very important point that you are
raising, about how these--again, this is marketed to
individuals.
But I want to, quickly, go to Ms. Borland.
One of the concerns I also have is what happens when people
exit these plans--a lot of discussion here about getting them
in and automatic enrollment, and all the rest of that. What
happens when they exit?
We went through a huge scandal here with lenders in the
student-loan program, who used that program to develop a market
for people for private--``private''--student loans. They were
just simply credit cards.
And the arrangements that they--you know, people started
putting their trust in those individuals, and then they got
marketed off into very high-interest loans.
You are suggesting here that there is a financial advantage
in some of the affinity arrangements between these funds and
their other products.
You want to take 30 seconds? And I will get back to you
``off the air,'' as they say.
Ms. Borland. Okay. Yes, it is something that is very
important.
When individual investors within a 401(k) plan have the
purchasing power of 1,000 or 10,000 or 20,000 investors, they
can expect lower fees. When they roll over into that retail
environment, they have the purchasing power of one individual.
We are not suggesting that rollovers are a bad thing. And,
in many cases, they may be a very smart decision; certainly,
significantly better than cashing out.
However, there could be a significant fee differential. And
there is no requirement that those be effectively disclosed. So
when a service provider for a 401(k) plan has incentives to
encourage rollovers into retail products, we think the plan
sponsor needs to be adequately aware of that potential conflict
of interest, and be aware of the marketing that may be taking
place by the service provider, directly to plan participants,
and ensure the appropriate disclosure is in place.
Mr. Miller. Thank you.
Thank you, Mr. Chairman.
Chairman Andrews. Thank you, Mr. Chairman.
The gentleman from Minnesota, Mr. Kline, is recognized.
Mr. Kline. Thank you, Mr. Chairman.
We have had a number of off-line, sidebar discussions,
here, about the importance of lawyers and the legal profession.
We differ, often, on the importance of that. But I think it
is important that, when we are looking at legislation--that the
principal purpose not be just to grow the legal profession; to
make things complicated; to write legislation in such a way
that you are bringing about more causes of action, more
lawsuits. And I suppose, as I mentioned before, in some
districts, we can expand law schools. But that shouldn't be
what our principal purpose is.
So, Mr. Chambers, I want to turn to you. You, in your
testimony, had a great deal to say about fiduciary-liability
issues. And, as you know, when we took this bill up in the last
Congress, I offered an amendment that, in effect, said, ``If a
plan sponsor did what the bill says it was supposed to do, it
would be shielded from a lawsuit.''
It turns out I withdrew the amendment on the understanding
that, as the legislation went forward, we would continue to
discuss that. The legislation didn't go forward. And so we
didn't proceed with that.
Can you just take some of my time here, or--now, I am
making it your time to tell us what sort of protection needs to
be included in this bill? And how can we go about making sure
that that is taken care of?
Mr. Chambers. Thank you.
Mr. Kline. And I understand I am asking lawyers, so there
is some risk here. But----
Mr. Chambers. Well, I was going to point out that lawyers
have 401(k) plans, too. So there has to be something to go into
that.
I am sorry?
Chairman Andrews. We have nothing in them.
Mr. Chambers. Absolutely.
As I said, the American Benefits Council and, I think, most
employer organizations, are fully in favor of increasing the
transparency of plan fees, and of the operation of plans. There
is no question about that.
The concern here is that as additional responsibilities are
being placed on employers to collect information, and then
disseminate information, we are concerned that that itself is
going to increase their potential for liability.
So one of the things that we have suggested, as I
mentioned, both in the written testimony, and in my oral
testimony, is that in several different situations, we think
that it is appropriate to provide those employers who act in
good faith and--whether there are small mistakes in terms of,
you know, 27 basis points being charged, as opposed to 32, or
whether they are given information that, ultimately, is
incorrect, by a service provider--that the legislation should
provide those employers with coverage--in other words, with
limited or no liability.
Mr. Kline. And that would--excuse me, if I can. You have
seen the legislation, at least as it was last time. And you are
suggesting that we do need to put language into it--we do need
to amend Mr. Miller's bill to make sure that there is that
protection.
Mr. Chambers. That is correct.
Mr. Kline. Okay.
You also talked about strike suits. Tell us a little bit
more about what those are--defining the term. What is their
purpose, and how do we need to address that in the legislation?
Mr. Chambers. Well, I don't know that the term ``strike
suit'' is something that you are going to find in Webster's
Dictionary, but----
Mr. Kline. We will take your definition.
Mr. Chambers. Oh, thank you.
Actually, it is the definition of some of the litigators at
our firm, because I asked them if there is a more appropriate
term, and they said, ``No.''
A strike suit is a suit which is difficult to describe in
saying, ``Well, this was clearly a strike suit, as opposed to
that one,'' because it is a matter of intention.
A strike suit is----
Mr. Kline. What is the purpose of a strike suit?
Mr. Chambers. Well, the purpose is, essentially, to try to
get a settlement in connection with a cause of action. And the
way that a lot of class actions and other suits that are
brought in connection with employee benefit plans are operated
is that, you know, a complaint is filed, and then there is a
motion to dismiss by the defendants.
And a lot of defendants--typically, employers and service
providers--recognize that if a class gets passed in motion to
dismiss part of the program, then, in fact, there is going to
be a lot of additional expense.
And so these are cases in which the theory is, if we can
get past--if the plaintiffs can get past the motion to dismiss,
at that point in time, there is a very good opportunity for
settlement, without actually having to take the case to its
regular conclusion, through the court system.
And, of course, those are cases, as I mentioned in my oral
testimony, which lead to, again, feathering not only
plaintiff's lawyers--I mean, you know the----
Mr. Kline. Both sides get paid.
Mr. Chambers. Both sides are represented.
And----
Mr. Kline. Twice as many law schools.
Mr. Chambers. And an awful lot of the money goes into
lawyers' pockets, and that is unfortunate, because--and it has
an adverse impact on the amount of contributions made to the
plan, services, et cetera.
Mr. Kline. All right. Thank you. I see my time has expired.
I yield back.
Chairman Andrews. I thank my friend.
I thank the witnesses for very edifying testimony. And I
want to kind of walk through some of the concerns that we have
heard about the underlying bill.
One objection, or issue, raised by the minority side, was
that maybe this isn't that big of a deal. Well, small amounts
of money, compounded over time are a very big deal. And if
someone is overpaying for fees over a 30-, 40-, 50-year period
in their life, it metastasizes. It becomes a lot of money.
The second concern--Mr. Chambers, I think we have the same
goal. The purpose of this bill and the investment-advice bill
is not to expand employer liability. It is to expand protection
for consumers and investors and retirees. So we are interested
in hearing from you on a continued basis, of how the bill might
be improved, in conjunction with the minority, on these issues.
I think you have raised some significant questions this
morning.
Mr. Chambers. Thank you.
Chairman Andrews. I heard some concerns--and I am
paraphrasing--but that bundling is too much of a problem for
providers.
Ms. Mitchem, Barclays is a pretty large provider, isn't it?
Ms. Mitchem. Yes.
Chairman Andrews. Do you have any difficulty unbundling any
fees that you would charge to a client?
Ms. Mitchem. Well, I think, importantly, we are not a
record-keeper. So we are an asset manager only. So we don't
provide what would be called the tradition bundle, where we
bundle administrative fees with investment-management fees.
Chairman Andrews. Right.
Ms. Mitchem. But I would say that if you look across the
401(k) industry, there are very few providers that offer only a
completely bundled package. So what you will find is that in
the ``bundled'' category, the majority of those players are
what you might consider ``partially bundled.'' So they offer a
couple of outside options, but the majority of it is a
proprietary----
Chairman Andrews. Would you agree or disagree with the
statement that the unbundling requirements in the bill are
punitive or too burdensome for a provider?
Ms. Mitchem. You know, I don't think they are punitive,
because I think, when you ask a question, and you dig deep, I
think plan sponsors do get the answer. And I think that,
obviously, the work of Hewitt would support that. So we find
that when plan sponsors go out for bid, when they actually
press the provider to get that information, they both get that
information and end up, in many cases, lowering the overall
fees of the plan.
Chairman Andrews. The Adam Smith idea, as Mr. Bullard
talked about--more competition--it tends to work.
Ms. Mitchem. Also, just making it easier for plan sponsors
to get that information. I mean, they shouldn't have to perform
a forensic exam to get the information that they need to make
the most appropriate fiduciary decision.
Chairman Andrews. Mr. Onorato, another criticism that we
have heard is that the information that would be presented
under this bill is too complicated for either employers, or
employees, or both to understand. Do you agree with that
concern?
Mr. Onorato. Mr. Chairman, absolutely not.
The independent providers have been disclosing plan fees
and participant fees for the last 20 years. It may not be in
the template recommended by the bill, but we exist because we
can provide cheaper service, and better availability of
investment direction, and we disclose our fees.
It is absolutely not true to suggest that a small 15-
employee company would have the leverage to go into a bundled
investment firm and ask for full disclosure of record-keeping
fees.
The testimony given was, ``This is provided when client
retention is an issue.''
The plumbing contractor at Ford Trucks cannot go in to a
big, bundled provider and say, ``I would like to know what I am
paying for the call center or the ad men and the plan setup.''
Chairman Andrews. Right.
Mr. Onorato. Not going to happen.
Chairman Andrews. Mr. Goldbrum, and I will just conclude
with you, because my time is about to expire. You graciously
put the light on several minutes after I began, but I am not
going to--I will play by the rules everyone else does.
No, that is right. Well, my dear friends would not let that
happen.
Mr. Goldbrum, if a employee--if that plumbing contractor--
Joe the Plumber, let us call him--goes to his or her financial-
services firm that has set up the 401(k) and says, ``Why are
you guys taking a point and a half a year out of people's
accounts, and what is it for?''--do you think he has the right
to know the answer to that question?
Mr. Goldbrum. Yes, I do think that----
Chairman Andrews. Do you think that we have to provide it
by statute, or do you think the market is providing him with an
answer now?
Mr. Goldbrum. Well, I think that the vast majority of
service providers are already providing a significant amount of
information to employers to help them evaluate the fees that
are being paid for their plans, and to help them satisfy their
fiduciary requirements.
So where you have a provider that is providing a full suite
of services, and the fees are being paid, for example, through
the investment fund, the simple answer is that the fees are the
total expense ratios of the fund. What are the total costs of
the funds?
Chairman Andrews. You are aware, though, of the market
research of--both among small employers and employees that say
most people have no idea what these fees are being paid for.
Why is that?
Mr. Goldbrum. Well, I think that it is important to
separate what employers, as plan fiduciaries, need to know, and
the decision process that they go through in picking the funds
and setting up the plan--versus what the participants need to
know in making their investment decisions.
Chairman Andrews. Shouldn't participants have the right to
know whatever they want to know, because it is their money?
Mr. Goldbrum. Again, the vast majority of service providers
are providing substantial information----
Chairman Andrews. But, no; that wasn't my question. If Joe
is an employee of the fund, as well as the owner, shouldn't he
have the right to know where every dollar of his pension money
is going?
Mr. Goldbrum. Absolutely.
Chairman Andrews. Okay.
Mr. Goldbrum. We are not against fee disclosure. Our issues
are really in the manner and the approach----
Chairman Andrews. Okay.
Mr. Goldbrum [continuing]. And the specific details of
how--approached.
Chairman Andrews. I appreciate that. Thank you very much.
Mr. McKeon is not here, so it would be Dr. Roe?
Dr. Roe. Thanks, Chairman Andrews.
First of all, obviously, Vanderbilt is very well
represented here today. And I am pleased to say, 2 weeks from
Friday, my son gets his MBA from Vanderbilt. So I am--
halleluiah. That is the last one, I think.
Ms. Borland. Congratulations.
Chairman Andrews. Yes, but how is their football team?
Dr. Roe. Well, not bad. Not bad.
Chairman Andrews. He didn't go to law school?
Dr. Roe. No. No, he did not go to law school.
Chairman Andrews. Okay. All right.
Dr. Roe. I appreciate you all being here, and trying to
work through this. In the medical group I practiced in, we had
70 providers and about 350 employees. And I had the fortune, in
good years, to be on the pension committee, and, this last
year, the misfortune of being on the pension committee when
prices--I mean, the assets were going down.
And I think fee transparency is extremely important. It is
very hard, sometimes, even in my position on the pension
committee, to figure out how much money we will pay in to have
the plan administered.
However, in my own personal account, I will use a bundled
approach many times. I do, currently, because I think you have
aligned incentives. I could look at my account and say, ``I
made or lost this much.'' I can certainly compare that to the
market, and make a decision.
I know exactly how much I am paying each year. And I
think--I forgot who gave the example--if it goes from $1
million to $2 million--okay--that you paid more money. That is
correct. But if that beats the market average, I have no
problem with paying for that advice.
And if it is good advice, and my return, net of fees, is
higher than the market average, I am happy with that. I don't
mind paying for that at all.
And I will stop, and then get your comment on that. I had
forgotten you had made that statement.
Mr. Onorato. Thank you. That is a very good point,
Congressman.
It comes down to freedom of choice. You choose not to be
interested in more than the all-in fee. That is what you have
said. If you are a firm that wrote software for call centers,
or provided call-center services, or you were a CPA firm, you
would be fully qualified to produce your own 5500 and file it.
Or you may elect to choose to support the call centers of your
participants.
Those firms need the choice. They need to sit down with the
bundled provider and say, ``I want to know, out of that 125
bits, how much that administrative unit charge is, because I
might be able to do it cheaper.''
We exist because, over time, we have proven we can do it
cheaper by disclosing fees. Fees generate innovation. It
generates better service for the ultimate participant. It comes
down to freedom of choice.
Dr. Roe. Okay. Thank you.
I know that we spend a lot of time and money on, certainly,
complying with ERISA. And I would just like a comment from any
of the panel--do you think this will add any costs by doing
this? Will this make this harder to comply with, or less hard
to comply with?
Mr. Onorato. Are you asking me again?
Dr. Roe. Just anyone on the panel.
Mr. Goldbrum. Yes, I would like to make a comment about
that. I think that you run the risk that if you don't take a
measured approach, and you simply provide a lot of additional
information and more detail, simply for the sake of providing
that information, it will, ultimately, increase the cost. And
those costs will, ultimately, be passed on to the participants.
So I think you need to do a cost-benefit analysis here, in
terms of what information is truly targeted and truly
beneficial, and will help participants make more informed
decisions, and what will it cost to provide that information,
and weigh that.
And that is, ultimately, where we have concerns with the
proposal, not in making fees transparent. We do support that;
but more specifically, the approach that it is taken in how
those fees are mandated to be disclosed.
Dr. Roe. Well, then go ahead and--with Chairman Andrews--
just to have his question a minute ago--certainly, at the end
of a year, when you look at your report, or a quarterly report,
it would be simple for the people in my office, for instance,
to just look and say, ``I paid $400 this year to have my plan
administered, and I made such and such percentage of gain.'' I
think that is what his point was.
And that is really easy to look at. It is difficult to look
at--I mean, I have got through organic chemistry. And figuring
some of these fees out is difficult to do. And so I think just
having it transparent is important. Any comments from that?
Mr. Goldbrum. Yes, again, we agree that transparency is
important. Again, it is the manner in which you go about doing
it. So part of what we say is that participants should be given
the right information. They should be able to have the total
cost of what it is to use a particular investment option, so
that they can make those comparisons.
And, absolutely, that information is available, and can be
provided. And the vast majority of service providers and plan
sponsors already provide that information through fund fact
sheets, through the Internet, through call centers. The
participants can get that information.
And granted, a fund summary would be better. And the vast
majority of service providers, as I said, recognize that, and
do provide that.
Dr. Roe. Thank you, Mr. Chairman.
Mr. Bullard. Could I add something to that?
Chairman Andrews. Sure. I just want to make one point, and
then we will let that happen.
I appreciate the doctor's line of questions. I would invite
you, Mr. Goldbrum, if you would--the committee would like to
see your organization's proposal as to what would work for fee
disclosure. We would welcome you to submit that, so we could
consider it.
Mr. Goldbrum. I thank you for that opportunity.
Chairman Andrews. Thank you.
Mr. Bullard, did you want to----
Mr. Bullard. I would just like to add just two points. One
is that the purpose of disclosure should be to drive
competition and force down fees that way. And I think it
would--the more that you get that at the level of the
participant, the more you will have that effect, because that
is where you have got the market, and that is where you have
got the competition going on.
But I would also like the committee to keep in mind just
the inevitable cost of 401(k)s, no matter what kind of
legislation you adopt. And I was at a meeting of my child's
very small school in Oxford, on Monday, where we were presented
with the costs for a startup plan. And even at very, very low
costs, that was going to run about 2.3 percent for those
teachers, who are not making much money in the first place.
And if they expect to get a return of maybe 7 percent or 8
percent over their lifetime, essentially what they are coughing
up to fees is a quarter of that. As an alternative, they could
simply do a payroll deduction, go into a low-cost index fund at
0.18 percent, for example, and pay about less than one-tenth of
the fees, and get, generally the same tax-deferred benefits you
can get in the 401(k) plan.
So we have a much broader question here, which is----
Chairman Andrews. Thank you.
Mr. Bullard [continuing]. Extremely costly 401(k)
structure.
Chairman Andrews. Thank you very much for the questions,
and also the answers.
Mr. Hare is recognized for 5 minutes.
Mr. Hare. Thank you, Mr. Chairman.
Mr. Bullard, just a couple of questions for you. How do we
reestablish, in your opinion, the integrity of our retirement
structure? Can disclosures and the elimination of hidden fees
do it alone, or--or--or what else do we need to do here?
Mr. Bullard. I could interpret that pretty broadly. And
when you ask a professor a pretty broad question, you are
certainly taking a risk.
It kind of goes to the point I just made at one level,
which is that we currently have a Social Security system that
is not actuarially going to survive. And we have a private
defined-contribution plan that continues to grow and,
essentially, squeeze out Social Security as being anything
other than, ultimately, a welfare program.
So, in that light, if you look at that leg being in the
private defined-contribution model, what we should be moving to
is to eliminate the requirement that you have to do that
through an employer altogether, and have one account where
persons put their tax-deferred savings on their own, through
payroll deduction.
If you want to exercise control over what they do that,
because of the tax benefit they are getting, you do it through
that one standardized account. A huge amount of the costs that
are associated with our defined-contribution system, be it
401(k), 403(B), or other, is that we have these tax filings.
We have got the Form 5500. And it is all because it is done
through an employer who is, really, a completely unnecessary
intermediary. So the first step would be to have, let us say,
lifetime savings accounts that not only are covering all of the
tax-deferred options for which you can invest and not pay
immediate taxes, but also see them as a vehicle through which,
with payroll deduction, you could slash 401(k) fees to a tenth
of what they currently are--not something the financial-
services industry would like to hear, especially 401(k)
providers. But that is, ultimately, where you would want to go
if you wanted to save some real money.
Within the 401(k) context, what I discussed before is
really, I think, the major step that we need to take. Whether
our fees are unbundled or not, we should be able to give market
participants a number, and then a context within which to place
it, so if they don't like it, they can demand to get it
reduced.
Mr. Hare. Well, what options do plan participants have when
they find out that they have been hit with these hidden fees?
Mr. Bullard. Well, one option is to go outside the 401(k)
plan. And there are lots of 401(k) plans that, even with the
tax deferral, they would be much better off not investing. Now,
that is putting aside the match.
Whenever there is an employer match, you are virtually
always better off. But if you ignore the match, because of the
current cost structure of a lot of these plans, you are better
off not even investing in one, and going with either a tax-
managed or a passively managed fund outside in an IRA or a Roth
IRA.
Mr. Hare. Thank you.
This is for Ms. Borland and Mr. Onorato.
We heard last year, when we were taking up this bill, that
several employers' financial services argued that participants
would--you know, I know Mr. Miller talked about this. The
chairman talked about--``too much information to plan
participants.'' And it could even stop participations.
Based upon what you hear from the clients--you know, I know
this may be repetitious, but I wanted to make sure I got this
straight--is this really a concern? Or do you believe that the
sponsors and the participants, A, want the information; and, B,
how do you determine how much information the participants can
absorb for the disclosure to be useful for them?
Mr. Onorato. Ms. Borland, be my guest.
Ms. Borland. Okay.
Based on conversations with clients, clients would
appreciate guidance with respect to what works and what is
effective. I think they sense that their employees do want more
information. And they are looking for help, and the best ways
to provide that information in a way that is understandable,
and a way that works.
It may have been you, Mr. Andrews, who said this earlier--
we haven't actually done this before in a consistent way. So,
today, we don't know exactly what is going to work, but we need
to try something.
We are in the process of doing some research to get some
more ideas and guidance about what is most effective to
employees. Once we have that, we would be absolutely pleased to
share it.
But more information is clearly needed. I think our clients
are open to providing more information, but they are looking
for help and clarity with respect to what that information
needs to be.
Mr. Onorato. Congressman, I would add that I believe what
has been proposed in this bill is just three buckets, is all we
need to do.
There has been a lot of commenting about, as the size of a
plan goes down, the expense goes up. But it is always a
mathematical formula associated with the assets in the plan. 70
percent of the 2,000 plans a year that I acquire as a business
manager are startup plans. They have 15 employees--20,000
people a year did not have a company-sponsored pension, may
have no pension of any type.
The charge for that startup plan--a Safe Harbor plan--in my
company is $600 plan fee, and $36 per participant. We disclose
it to the sponsor, and we disclose it to the participants.
If we divide that by zero assets, it is a pretty high
basis-point calculation. They contribute an average of $4,000 a
year. One hundred thousand people with no pension plans started
pension plans with my company in the last 5 years--$600, and
$36 a participant. It is not expensive.
Mr. Hare. Thank you, Mr. Chairman.
Chairman Andrews. Thank you, Mr. Hare.
The gentleman from Connecticut, Mr. Courtney is recognized.
Mr. Courtney. I thank Mr. Chairman. And thank you for
holding this hearing, which, I think Ms. Mitchem's comment, and
her testimony that people still are sticking with defined-
contribution plans--that demonstrates why we have to get this
right.
Because, for better or worse--and it has been worse lately,
obviously--but, you know, we have got to have a system that
people have confidence in, which, you now, some people have
made allusions to the fact that we certainly can't blame fees
for the downturn in plan value. But on the other hand, if we
are going to recover confidence in the system, which I think
everyone understands is really, fundamentally, what we have to
do with this economy, then we have to have a system that is
credible, and that people believe in.
Get to the question of cost, which Mr. Goldbrum raised--
sort of a, you know, possible concern that what we are doing is
actually going to raise costs.
Ms. Borland, your testimony, which you had to summarize,
actually did a nice job of showing specific examples of company
X, Y and Z--of how better disclosure actually drives down
costs. And, again, for the benefit of those who don't have your
testimony, you showed how companies could save millions,
actually, because of the benefit of disclosure.
And I guess what I want to be clear about is, in your
opinion, does this bill sort of enable companies to really have
tools to negotiate better prices?
Ms. Borland. Absolutely. This bill enables the apples-to-
apples consistent comparison across different types of
arrangements, in order to make better decisions.
Mr. Courtney. And, again, the companies that you cited as
examples--to get to the point where they could negotiate
intelligently with their providers--I mean they actually had to
hire consultants, in some instances.
Ms. Borland. They did. And that is one of the challenges.
Right now, it is so hard to get there, you--large companies
have the sort of buying power to push and force providers to
provide that information. Absent that buying power, companies
don't have the ability to do that.
And in addition, even the most sophisticated companies
generally need outside help to figure out all of the
information, to pull it together.
It is not always the provider is giving it welcomingly.
There is implied fees that have to be discovered within those
structures to be--the bill would provide the consistency and
the clarity needed, with respect to the information that should
be disclosed.
Mr. Courtney. So, for the small business that has got four
or five employees, like my old law firm, a couple years ago,
you know, rather than having to go out and incur the expense of
a consultant--actually having it by operation of law, that
these fees would be disclosed--then you would be able to decide
whether or not, ``Hey, you know, I am not getting a good deal,
here. It is time to shop around.''
Ms. Borland. Exactly. It would facilitate better
comparison.
Mr. Courtney. There is another issue, which has been raised
with prior questions--is the issue of exposure to litigation.
And I am sure everyone believes that no one should be the
target of frivolous litigation.
I guess the question I have, though--because I was sort of
flipping through the bill again, just to sort of see whether or
not this legislation somehow adds to exposure to employers.
Mr. Bullard, I don't know if you have any comment in terms
of whether or not--again, just this statute, or this proposed
legislation, by itself--somehow aggravates that problem or--
because it seems like the obligations it is creating is on
investment plans, not on employers.
Am I reading it right or wrong?
Mr. Bullard. Yes, ultimately, it will go, to some extent,
to the selection of the options. And any informational
requirements will go to their responsibility to select options
prudently.
In litigation contexts, as was discussed, that is a
question of whether you can get past a motion to dismiss. And
the issue of the motion to dismiss is whether the Safe Harbor,
under ERISA, is going to be available to the employer, with
respect to the decision they made.
About 6 months ago, it was fairly clear--at least I think--
that the decision made by the employer would include these
kinds of factors. The law is now in flux because a couple of
appeals courts have suggested that once the employer has
picked, essentially, reasonably allocated options--that there
is no more fiduciary duty.
I think that will eventually be reversed by the majority of
courts.
But that is going to be the issue.
So, essentially, the legislation, as currently written,
fits into the Safe Harbor structure. Where there is a liability
issue is going to be the clarity with which the Department of
Labor explains exactly what employers have to do within that
Safe Harbor. And that is what causes the strike suits.
It is the lack of clarity in the law. And it allows
frivolous litigation to find its way in with justifiable
litigation, because of the lack of clarity in the guidance.
But, ultimately, you have to leave that to a more detail-
oriented body. I think that, as the legislation is written, you
have got your Safe Harbor.
I, really, have no objection to Mr. Chambers' lists of
requests. I think none of those really raise any significant
issues from a participant's point of view. But, ultimately, on
your question, it is going to be the Department of Labor's
guidance under that Safe Harbor that is going to drive how much
frivolous litigation there is.
Mr. Courtney. All right. Thank you, Mr. Chairman.
Chairman Andrews. Thank you.
I think, Mr. Chambers, you wanted to weigh in on that.
Would you maybe like to do that?
Mr. Chambers. Well, I wanted to weigh in until Mr. Bullard
was so complimentary of all the things that I had suggested.
Chairman Andrews. So you can just say, ``As a matter of
law, he was right.''
Mr. Chambers. But, if I could--I think, Mr. Courtney, the--
he went beyond, in his response, the real answer to your
question, which is, you know, ``What does this bill mean to
employers?''
And I must say, you know, employers are largely above the
fray in connection with the bundled versus the unbundled.
Chairman Andrews. Right.
Mr. Chambers. Yes, they have responsibilities that are a
result of that, but, by and large, as Mr. Goldbrum suggested, I
think that is a business decision.
And as Mr. Onorato suggested, the one thing--well,
actually, one thing he didn't suggest is that if, in fact, a
bundled provider makes available an opportunity to say, ``Yes,
this is how we whack up the fee that we charge you,'' the next
question is, ``Well, if we can get the 5500 for a cheaper price
elsewhere, how much does that reduce our bundled fee?''
And the question, often, is, ``It doesn't.'' All right? It
is a bundled fee. We provide this set of this package, these
services. Here is the list of services. I don't know that,
necessarily, you are going to wind up being able to use that
information to do the apples-to-apples analysis that we were
talking about before.
But I do think that the employer needs to be protected.
This is where we were going. What this bill needs to do is that
as it adds additional responsibilities to employers to assemble
information, distribute that information both to the government
and to participants, and to analyze its own fiduciary
responsibilities, it needs protection in connection with a
good-faith effort to fulfill those responsibilities.
Chairman Andrews. Thank you, Mr. Chambers.
Thank you, Mr. Courtney. We appreciate that.
We are going to turn to Mr. Kline, for any concluding
remarks he may have.
Mr. Kline. Thank you, Mr. Chairman. And I will be brief.
I just want to say thank you. This is a terrific panel of
experts. Even though many of you are lawyers, it is, really, a
terrific--it is a terrific panel. And we thank you very much
for your testimony and for the answers to the questions.
And I thank you, Mr. Chairman. I yield back.
Chairman Andrews. I thank my friend from Minnesota.
I would like to thank both the majority and minority staff
for their work in assembling this panel. I concur with my
friend's evaluation of the quality of your input this morning.
The subcommittee will be considering your testimony in
conjunction with the full committee, and moving forward with
our discussion both of fee disclosure and qualified independent
investment advice.
And just to reiterate a couple of cleanup items--without
objection, I would ask that the letter from the American
Association of Retired Persons, dated April 22, 2009, be
entered into the record.
[The information follows:]
April 22, 2009.
Hon. Robert E. Andrews, Chairman,
Subcommittee on Health, Employment, Labor, and Pensions, Committee on
Education and Labor, U.S. House of Representatives, Washington,
DC.
Re: 401(k) Fair Disclosure for Retirement Security Act of 2009
Dear Chairman Andrews: AARP commends you and the other members of
the Subcommittee on Health, Employment, Labor and Pensions for holding
this important hearing on the need for comprehensive, informative and
timely disclosure of fee and expense information to 401(k) plan
participants. Thank you for providing us with this opportunity to
submit this statement and the attached reports for the record of this
hearing. AARP supports the enactment of the 401(k) Fair Disclosure for
Retirement Security Act of 2009 (401(k) Fair Disclosure Act) and urges
the Subcommittee to approve this measure.
With 40 million members, AARP is the largest organization
representing the interests of Americans age 50 and older and their
families. About half of AARP members are working either full-time or
part-time. All workers need access to a retirement plan that builds on
Social Security's solid foundation. For those who participate in a
401(k) plan, better and easier to understand information is essential
to help them make prudent investment decisions.
There were approximately 50 million active participants in 401(k)
plans in 2007, and overall, 401(k) plans held more than $3.0 trillion
dollars in assets. These plans have become the dominant employer-based
pension vehicle. The participants in these plans have a need and a
right to receive timely, accurate, and informative disclosures from
their 401(k) plans to help them prepare for a financially secure
retirement.
The fee information participants currently receive about their plan
and investment options is often scattered among several sources,
difficult to access, or nonexistent. Even if fee information is
accessible, plan investment and fee information is not always presented
in a way that is meaningful to participants.
This must change because fees reduce the level of assets available
for retirement. Never has this issue been more important than in these
difficult economic times, when retirement savings have been greatly
diminished, and every dollar counts.
The Government Accountability Office (GAO) estimated that $20,000
left in a 401(k) account that had a 1 percentage point higher fee for
20 years would result in an over 17 percent reduction--over $10,000--in
the account balance. We estimate that over a 30-year period, the
account would be about 25 percent less.
Even a difference of only half a percentage point--50 basis
points--would reduce the value of the account by 13 percent over 30
years. In short, fees and expenses can have a huge impact on retirement
income security levels.
AARP commissioned a report in 2007 to determine the extent to which
401(k) plan participants were aware of fees associated with their
accounts and whether they knew how much they actually were paying in
fees. The report revealed participants' lack of knowledge about fees as
well as their desire for a better understanding of fees. In response to
these findings, the report suggested that information about plan fees
be distributed regularly and in plain English, including a chart or
graph that depicts the effect that the total annual fees and expenses
can have on a participant's account balance. I have attached a copy of
this report entitled, ``401(k) Participants' Awareness and
Understanding of Fees'', July 2007, for the consideration of the
members of the Subcommittee.
AARP commissioned a second study in 2008 to gather information and
evaluate a model fee disclosure form developed by the Department of
Labor and an alternative disclosure form developed by AARP. I have
attached a copy of this report entitled, ``Comparison of 401(k)
Participants Understanding of Model Fee Disclosure Forms Developed by
the Department of Labor and AARP.'' The report suggested that a
disclosure form that contains participant-specific information and
actual dollar figures may improve participants' comprehension of the
information. The report also suggested other modifications in the DOL
form that would make it more helpful to 401(k) plan participants. AARP
provided a copy of this report to the Department of Labor as part of
our comments on the Department's proposed rule on fee disclosure for
participant-directed individual account plans.
AARP's Public Policy Institute also published the attached paper
entitled, ``Determining Whether 401(k) Plan Fees are Reasonable: Are
Disclosure Requirements Adequate?'' The paper explains how excessive
fees on 401(k) plans can drastically reduce the size of a retirement
nest egg and documents the unsatisfactory state of fee disclosure and
the lack of knowledge about fees among plan participants. The paper
discusses the need for reform of the current regulatory framework to
provide participants with the clear and basic information.
AARP supports the enactment of the 401(k) Fair Disclosure Act. The
bill would establish a solid framework for providing timely information
about fees and expenses to plan participants in a format that is easy
for them to understand.
The bill would require plan sponsors to provide a complete picture
of investment options to participants--including risk, fees, and
historic returns, as well as certain basic information to help
investors better understand their investment options and whether those
investments will provide long term retirement security on their own or
if greater diversification is needed. The comprehensive annual benefit
statement required by the 401(k) Fair Disclosure Act would provide a
more complete picture of a participant's 401(k) status than available
under current law. All of the information that a participant needs
would be available in a single disclosure form, rather than requiring a
participant to piece together information from several different
documents.
AARP commends you and the Subcommittee for your commitment to
preserve and enhance retirement security. We look forward to working
with you and the other members of your Subcommittee to enact
legislation as soon as possible that would require defined contribution
plans to disclose comprehensive, informative and timely information
about fees and expenses to plan participants.
If you have any questions or need additional information, please
feel free to call me, or please have your staff contact Cristina Martin
Firvida of our Government Relations staff at 202-434-6194.
Sincerely,
David P. Sloane, Senior Vice President,
Government Relations and Advocacy.
______
Chairman Andrews. And I would ask them to stop sending
these monthly reminders to me that I am 50 now, if they would.
I will put it in despite the annoying reminders that they are
sending me.
Just to reiterate a couple of other pieces of business, Mr.
Goldbrum, we invite you to submit your ideas as to how we could
solve this problem.
Mr. Chambers and Mr. Bullard, in particular, I think we
would like to engage both of you in a discussion about this
employer-liability issue, along with the minority, obviously.
Thank you. You really have helped us get this discussion
moving along, and identifying answers and questions, which is
what we are here to do. We appreciate your contribution, and we
appreciate the participation of the members.
The subcommittee will be meeting tomorrow at 10:30 for the
issue of how to control health-care costs in the United States.
We try to take the small questions each day. We will be meeting
tomorrow to do that.
As previously ordered, members will have 14 days to submit
additional materials for the hearing record. Any member who
wishes to submit follow-up questions in writing to the
witnesses should coordinate with majority staff within 14 days.
Without objection, the hearing is adjourned.
[Additional submissions of Mr. Miller follow:]
April 24, 2009.
Hon. George Miller, Chairman,
House Education and Labor Committee, U.S. House of Representatives,
Washington, DC.
Dear Chairman Miller: On behalf of the American Society of Pension
Professionals & Actuaries (ASPPA), the Council of Independent 401(k)
Recordkeepers (CIKR), and the National Association of Independent
Retirement Plan Advisors (NAIRPA), we hereby express our support for
401(k) fee disclosure legislation (H.R. 1984) which was recently
reintroduced in the 111th Congress.
ASPPA is a national organization of more than 6,500 retirement plan
professionals who provide consulting and administrative services for
qualified retirement plans covering millions of American workers. ASPPA
members are retirement professionals of all disciplines including
consultants, administrators, actuaries, accountants, and attorneys. The
large and broad-based ASPPA membership gives it unusual insight into
current practical problems with the Employee Retirement Income Security
Act and qualified retirement plans with a particular focus on the
issues faced by small- to medium-sized employers. ASPPA membership is
diverse and united by a common dedication to the private retirement
plan system.
CIKR is a national organization of 401(k) plan service providers.
CIKR members are unique in that they are primarily in the business of
providing retirement plan services as compared to financial services
companies who primarily are in the business of selling investments. The
independent members of CIKR offer plan sponsors and participants a wide
variety of investment options from various financial services companies
without an inherent conflict of interest. By focusing their businesses
on efficient retirement plan operations and innovative plan sponsor and
participant services, CIKR members are a significant and important
segment of the retirement plan service provider marketplace.
Collectively, the members of CIKR provide services to approximately
68,000 plans covering 2.8 million participants and holding in excess of
$120 billion in assets.
NAIRPA is a national organization of firms which provide
independent investment advice to retirement plans and participants.
NAIRPA's members are registered investment advisors whose fees for
investment advisory services do not vary with the investment options
selected by the plan or participants. In addition, NAIRPA members
commit to disclosing expected fees in advance of an engagement,
reporting fees annually thereafter and agreeing to serve as a plan
fiduciary with respect to all plans for which it serves as a retirement
plan advisor.
ASPPA, CIRK and NAIRPA applaud the bill's uniform application of
its disclosure rules to all services providers, regardless of their
business structure. Rather than mandating a particular business model,
the amended legislation treats all business models equally and fairly.
ASPPA, CIKR and NAIRPA particularly support the bill's requirement
that all 401(k) service providers issue a fee disclosure statement to
the plan administrator in advance of entering into a contract for
services. Specifically, the bill would require that all plan fees be
allocated into four uniform categories: (1) plan administrative and
recordkeeping charges; (2) transaction-based charges; (3) investment
management charges; and (4) other charges as may be specified by the
Secretary of Labor. These categories will permit plan fiduciaries to
assess the reasonableness of fees by allowing an ``apples-to-apples''
comparison to other providers, and will allow plan fiduciaries to
determine whether or not certain services are needed, leading to
potentially even lower fees.
ASPPA, CIKR and NAIRPA commend Chairman Miller for his leadership
in enhancing the disclosure of fees to retirement plan fiduciaries and
participants, which is critical to securing a dignified retirement for
American workers. The Committee's consistent focus on retirement issues
over the years has effectively increased attention on the retirement
security of our nation's workers.
Again, ASPPA, CIKR and NAIRPA applaud your proposal,
enthusiastically support it, and stand ready to assist you in your
effort to enact it.
Sincerely,
Brian H. Graff, Esq., APM,
ASPPA Executive Director/CEO.
______
Prepared Statement of the Investment Company Institute (ICI)
The Investment Company Institute\1\ appreciates the opportunity to
file this statement for the record in connection with the
Subcommittee's hearing on April 22, 2009, on the ``401(k) Fair
Disclosure for Retirement Security Act'' (H.R. 1984). The Institute
appreciates the willingness of the Subcommittee and the full Committee
to listen to our views as it considers H.R. 1984. We agree with the
approach taken by the bill to ensure that participants receive key
information on all investment products. Disclosure that is focused and
useful to participants serves an important role in helping workers be
better savers and better investors. However, the Institute believes
H.R. 1984 is flawed in several respects, and we cannot support it in
its current form. Below we reiterate our support for an effective
disclosure regime that provides useful information to employers and
plan participants. Then we address our concerns with H.R. 1984.
---------------------------------------------------------------------------
\1\ The Investment Company Institute is the national association of
U.S. investment companies, including mutual funds, closed-end funds,
exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI
seeks to encourage adherence to high ethical standards, promote public
understanding, and otherwise advance the interests of funds, their
shareholders, directors, and advisers. Members of ICI manage total
assets of $9.71 trillion and serve over 93 million shareholders.
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Improving Disclosure
The Institute has consistently supported meaningful and effective
disclosure to 401(k) participants and employers. In 1976--at the very
dawn of the ERISA era--the Institute advocated ``complete, up-to-date
information about plan investment options'' for all participants in
self-directed plans.\2\ We also have consistently supported disclosure
by service providers to employers about service and fee
arrangements.\3\ Disclosure reform should address gaps in the current
401(k) disclosure rules. The Department of Labor's current participant
disclosure rules cover only those plans relying on an ERISA safe harbor
(section 404(c)); no rule requires that participants in other self-
directed plans receive investment-related information. In plans
operating under the safe harbor, the information participants receive
depends on the investment product, resulting in uneven and difficult to
compare disclosure. Disclosure reform also should clarify the
information that service providers must disclose to an employer on
services and fees to allow the employer to determine the arrangement is
reasonable and provides reasonable compensation. Where the service
provider's services include access to a menu of investment options,
employers should receive from that provider information about the
plan's investments, including information about fees.
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\2\ Letter from Matthew P. Fink, Associate Counsel, Investment
Company Institute, to Morton Klevan, Acting Counsel, Plan Benefit
Security Division, Department of Labor (June 21, 1976).
\3\ See Statement of Investment Company Institute on Disclosure to
Plan Sponsors and Participants Before the ERISA Advisory Council
Working Group on Disclosure, September 21, 2004, available at http://
www.ici.org/statements/tmny/04--dol--krentzman--tmny.html.
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Initiatives to strengthen the 401(k) disclosure regime should focus
on the decisions that plan sponsors and participants must make and the
information they need to make those decisions. The purposes behind fee
disclosure to plan sponsors and participants differ.
Participants have only two decisions to make: whether to contribute
to the plan (and at what level) and how to allocate their account among
the investment options the plan sponsor has selected. Disclosure should
help participants make those decisions. Participant disclosure should
focus on key information about each investment option--including its
objectives, risks, fees, and performance--and information about any
other plan-level fees assessed against the participant's account.
Voluminous and detailed information about the components of plan
investment fees could overwhelm the average participant and could
result in some employees deciding not to participate in the plan or
focusing on fees disproportionately to other important information,
such as investment objective, historical performance, and risks.
On the other hand, plan sponsors, as fiduciaries, must consider
additional factors in hiring and supervising plan service providers and
selecting plan investment options. Information to plan sponsors should
be designed to meet their needs effectively.
Plan sponsors should obtain information from service providers on
the services that will be delivered, the fees that will be charged, and
whether and to what extent the service provider receives compensation
from other parties in connection with providing services to the plan.
These payments from other parties, commonly called ``revenue
sharing''--but which are really cost sharing--often are used in a
variety of service arrangements to defray the expenses of plan
administration. Requiring a service provider to disclose to plan
sponsors information about compensation it receives from other parties
in connection with providing services to the plan will allow the plan
sponsor to understand the total compensation a service provider
receives under the arrangement. It also will bring to light any
potential conflicts of interest associated with payments from other
parties in connection with the plan's services or investments, for
example, where a plan consultant receives compensation from a plan
recordkeeper.
Concerns with H.R. 1984
H.R. 1984 is intended to close the gaps in current law by setting
out the rules for disclosure of service provider compensation and
ensuring that participants in all participant-directed defined
contribution plans have information on the investments available to
them, regardless of type. However, many of the details of the bill need
improvement, and in some cases the bill includes unprecedented and
unnecessary provisions that are not related to improving disclosure.
It is difficult for affected parties to read the bill and know what
information about investment products must be disclosed and who must
disclose it. The bill uses imprecise language and undefined terms that
service providers will have to interpret broadly in order to avoid the
bill's penalties, resulting in disclosure that is confusing to plan
fiduciaries and participants and unnecessarily costly to prepare. Lack
of certainty on the disclosure requirements also could lead to less
standardized disclosure, which makes comparisons more difficult.
Many of our concerns with the bill arise because the bill confuses
a 401(k) plan's services with its investments. Plan sponsors and
participants need disclosure about both. But without some important
clarifications, the bill will force investment disclosure into a
service provider box, which will add unnecessary costs that will be
borne by participants.
A disclosure regime needs to recognize the central role that
recordkeepers play in providing investment information on plan
investments. When a plan contracts with a recordkeeper to receive
administrative services and access to investment products, the plan
fiduciary needs to know the services to be provided, the direct and
indirect compensation the recordkeeper receives and the fees and other
key information about the investment products used by the plan. As is
routine best practice now, plan recordkeepers consolidate information
on plan investments into a single and useful form, as they have a
direct relationship and contract with the plan. Recordkeepers, through
their contracts with mutual fund firms, insurance companies, and other
investment providers, ensure they have the information they need to
provide disclosure on plan investments. Recordkeepers rely on the
information provided to them, since for many products it typically
comes from disclosure that investment products make under other laws (a
point the bill recognizes).
Unfortunately H.R. 1984 does not recognize this central role played
by recordkeepers. It defines a contract that requires individualized
disclosure 10 days in advance to include ``the offering of any
investment option.'' In addition, it defines ``service'' to include ``a
service provided directly or indirectly in connection with a financial
product in which plan assets are to be invested.''
The Institute also is concerned that the bill contains an
unprecedented mandate that 401(k) plans offer an index fund of a
specific type and requires full service recordkeepers to disclose
separate charges for recordkeeping even when there are no separate
charges.
Below we detail the Institute's primary concerns with the bill. The
bill has other technical and substantive problems about which we will
provide comments separately to Committee staff.
A. Index fund mandate
As a condition of section 404(c) liability relief for the
investment decisions of plan participants, the bill imposes a new
condition that the plan sponsor select an index fund. (p. 27, line 13).
The requirement is inappropriate and sets a dangerous precedent for the
government to pick the investment options for private 401(k) plans.
It is not clear what fund would satisfy the requirement to
match the performance of the entire United States equity or bond market
and in addition is ``likely to meet retirement income needs at adequate
levels of contribution'' for any participant. This requirement includes
both an objective and a subjective standard. An S&P 500 index fund,
which is the most common index used in equity index funds, would not
appear to meet the objective standard. In addition, it is not clear
what fund would meet the subjective standard, because no one index fund
is a single investment solution for all retirement savers in all
markets. Accordingly, although 70 percent of plans currently offer a
domestic equity indexed investment,\4\ it appears that very few plans
could satisfy this provision now. In addition, the subjective standard
exposes plan fiduciaries to significant new liability in selecting
index funds for plans.
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\4\ Profit Sharing/401k Council of America, 51st Annual Survey of
Profit Sharing and 401(k) Plans (2008).
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B. Service provider disclosure
Section 111(a)(1)--General requirements
The bill apparently would make a mutual fund that offers
an investment option to a plan a service provider, because anyone
offering an investment is treated as offering a contract for services.
(p. 2, line 21-22). The apparent result is that a plan must receive a
separate and individualized disclosure from each investment product,
rather than (as we expect was intended) the plan receive a single
disclosure that lists the fees of all of the plan investments. An
investment product like a mutual fund would not have the data necessary
to estimate how much of the plan's assets will be invested in that
fund. In any event, mutual funds are prohibited by federal law from
negotiating with individual shareholders over the fees to be paid for a
particular share class of the fund.
The bill also appears to make a person that provides
services to a mutual fund a service provider for purposes of the new
disclosure requirements. This is done through the expansive new
definitions of ``service'' and ``service provider'' under section
111(e)(2) and (4)--which confuse the important distinction between the
investments a plan makes with the service providers it engages. (p. 19,
lines 13 and 23). These provisions indicate that anyone providing
services to an investment option in which a plan invests is treated as
providing services that are subject to the new disclosure requirements
and is an ERISA plan service provider. For example, mutual funds have
virtually no employees so, along with the fund's investment adviser,
funds engage numerous accountants, lawyers, printers, brokers, and
others to provide services to the mutual fund. The definition of
service and service provider in the bill would indicate that ERISA plan
fiduciaries must receive a disclosure concerning all of the services
and ``charges'' paid by a mutual fund to any mutual fund service
providers and to fund directors. Relevant information about all the
payments a mutual fund makes to its service providers is disclosed in
SEC required documents. H.R. 1984 would go beyond that without
justification. This provision cannot be reconciled with the provisions
in ERISA that exclude service providers to mutual funds from being
treated as ERISA plan service providers. See ERISA Sec. 3(21). This
provision is unworkable since a mutual fund may have hundreds of
service providers, including scores of brokers. Of course, ICI believes
that revenue sharing and other payments received by recordkeepers from
mutual funds, investment advisers or other entities should be disclosed
by the recordkeeper and that plan fiduciaries should receive basic
information on the expenses associated with investing in the fund.
Section 111(a)(2)--Unbundling and transaction fees
Requiring unbundling of recordkeeping charges even when
there are no separate charges for the services will result in
inaccurate and misleading numbers that favor one business model over
another. (p. 3, line 16). Since the estimates required under the bill
will not be based on market transactions, service providers face
significant liability risk even for reasonable attempts to comply with
the requirement.
There is no definition of ``transaction-based charges.''
(p. 3, line 24). We expect this is intended to cover items like the
sales charge (load) on investments, and the costs for accessing
individual plan services like plan loans. (A similar provision in the
participant disclosure portion of the bill is clearer on this point.)
Because of the expansive definition of ``service,'' however, this could
be read to require disclosure of internal commissions and transaction
costs within a pooled investment product. These are not operating
expenses or fees but part of the capital cost of acquiring and selling
securities. Mutual funds are required to disclose the fund's portfolio
turnover rate, the best measure of the cost of portfolio trading (and
which allows comparisons among funds). In addition, funds make
available in the Statement of Additional Information a host of
information about commissions, including aggregate brokerage
commissions paid during the last three years and information about the
fund's trading policies.
Section 111(a)(3)--Total dollar amounts
Requiring disclosure of total dollar amounts when a
particular fee is charged on another basis (like percentages or basis
points, or as a charge per usage) requires a service provider to make a
number of assumptions. (p. 4, line 6). For example, the service
provider will need to predict to which investments participants will
direct their accounts, and how often participants will use a particular
plan feature like loans. The estimate is only as good as the underlying
assumptions. This is why a service provider often provides dollar
estimates when it believes that it can make reasonably accurate
assumptions (long-standing plan which has a consistent history of
participant behavior) and may not provide a dollar estimate when it
cannot (brand new plan starting with zero plan assets). For example,
assume a plan without a loan feature adds one that will require a $20
loan fee for each new loan. How is the service provider to estimate how
many loans will be taken out?
Section 111(a)(6)--Financial relationships
The disclosure of financial relationships is potentially
very broad and vague. It is unclear what it means to disclose ``the
amount representing the value of any services.'' (p. 5, line 16). It is
also unclear whether this requires a service provider to disclose the
services and value of the services (even without actual payments) that
are made between the service provider and its affiliates. Plan
fiduciaries need to know total compensation paid under an arrangement
and actual payments. Requiring disclosure of the value of services
provided by affiliates does not apprise the fiduciary of any conflicts
that are not otherwise apparent and could require disclosure of amounts
that are not actually paid between affiliates.
In fact, we believe that the disclosure of direct and
indirect compensation as well as compensation earned by an affiliate in
connection with plan services--already required by the bill--will be
more effective than requiring a service provider who is not a fiduciary
to determine that it may have a material financial relationship
triggering disclosure. ERISA's prohibited transaction rules already
prohibit transactions between the plan and parties-in-interest and
prohibit fiduciaries from self-dealing.
If this provision is applied within a mutual fund, it will
require extensive information of little value. For example, it could
require a disclosure that various entities within an integrated fund
complex purchase joint insurance and other common practices involving
mutual fund affiliated transactions, all of which occur only in
compliance with stringent safeguards under the Investment Company Act
of 1940 and SEC regulations.
The requirement to disclose any personal, business or
financial relationship with the plan sponsor, the plan and any plan
service provider or affiliate thereof will be nearly impossible to
satisfy. (p. 6, line 9). For example, this provision would be triggered
if the plan's accounting firm happens to switch its 401(k) recordkeeper
to the same recordkeeper that services the employer's plan. It will be
impossible for one service provider to monitor constantly whether it is
doing business with another plan service provider or its affiliate.
C. Participant disclosure
Section 111(b)(3)
The bill requires that fees be disclosed to participants
in the actual dollar amount rather than on a percentage basis. (p. 15,
line 5). Service providers currently do not collect or provide fee
information on this basis and it will be extremely expensive to create
the systems to report the actual dollar amount of fees associated with
each participant account. While it would be possible to provide a fee
estimate based on a snapshot of a participant's account (e.g. based on
the asset allocation and balances in a participant's account on a
particular date), this disclosure will undermine a participant's
ability to compare costs of different investment options. For example,
if a participant has 90% of his or her account invested in a fund with
a 0.40% (40 basis point) expense ratio and 10% invested in a fund with
a 1.00% (100 basis point) expense ratio, the participant might think
the first fund is relatively expensive and the second is cheaper.
Comparability is best measured through use of percentages or basis
points or through a representative example (such as the dollar amount
of fees for each investment for each $1,000 invested). This is why the
SEC, which has looked at this repeatedly over the years, requires
mutual funds to disclose the expense ratio up front and a
representative example in the front of the prospectus and in
shareholder reports.
Section 111(c)--Electronic disclosure
The bill does not sufficiently promote electronic
disclosure. Electronic disclosure should be the presumed method of
disclosure to plan fiduciaries and participants and paper copies should
be available on request.
Section 111(d)--Application to insurance and bank products
The bill needs to be modified to ensure that there is a
sufficient level of fee disclosure for traditional fixed interest
insurance and bank products. The bill simply requires that the
Secretary of Labor issue rules to identify products that provide a
guaranteed rate of return. The bill should direct the Secretary to
require disclosure that alerts participants to the risks and economics
of these products, for example that the cost of the fixed return
product is built into the stated rate of return because the insurance
company or bank covers its expenses and profit margin by any returns it
generates on the participant's investment in excess of the stated rate
of return.
D. Effective date
Allowing only one year for service providers and plan
administrators to come into compliance with the provisions is
unrealistic. DOL will not have issued final rules implementing the
statutory provisions with enough time for service providers to adjust
during that period.
The mutual fund industry is committed to meaningful 401(k)
disclosure, which is critical to providing secure retirements for the
millions of Americans that use defined contribution plans. We thank the
Committee for the opportunity to submit this statement and look forward
to continued dialogue with the Committee and its staff.
______
[Questions for the record requested from Mr. McKeon
follow:]
[Via Facsimile],
U.S. Congress,
Washington, DC, May 6, 2009.
Mr. Julian Oronato, CEO,
ExpertPlan, Inc., Building 400, Suite 300, East Windsor, NJ
Dear Mr. Oronato: Thank you for testifying at the Wednesday, April
22, 2009, Subcommittee on Health, Education, Labor, and Pensions
hearing on ``H.R.1984, the 401(k) Fair Disclosure for Retirement
Security Act of 2009.''
The Senior Republican Member on the Committee, Congressman Howard
P. ``Buck'' McKeon had additional questions for which he would like
written responses from you for the hearing record.
Senior Republican Member McKeon asks the following questions:
During your oral testimony before the Committee, you stated that
your firm provides startup 401(k) plans for an annual charge of $600,
plus $36 per participant annually, and that these firms typically had
15 employees. To assist the Committee in our research on fee
disclosure, please answer the following questions and provide a copy of
a standard contract and a fee schedule or other fee disclosure
material. Unless otherwise indicated, the questions below are with
reference to the hypothetical startup plan and costs noted above.
1. Do you have a different fee schedule when dealing with a third
party administrator (TPA) and a single employer? If so, why, and what
are the differences in these schedules?
2. Does the above-quoted cost include all the services required to
administer a plan and meet regulatory compliance requirements? If not,
which additional services would a plan sponsor need to secure? What
cost do you charge for these additional services?
3. Does your firm charge any one-time (or recurring) set-up or
conversion fee to plan sponsors?
4. Are plans offered at the above-referenced charge restricted in
the investments that its sponsor may select? If yes, what are the
criteria for any such restriction?
5. Which funds are on your platform? Is revenue sharing a criterion
for the platform? Do you assess an additional charge for non-platform
investments?
6. Do you receive any other sources of revenue, such as 12b-1 or
sub-transfer agency fees? If so, are these revenues disclosed to the
plan sponsor?
7. Does the above-referenced fee include nondiscrimination testing
for all types of plans?
8. Does your firm assess additional fees for restating prototype
plans? If so, how much?
9. Does your fee include a quarterly benefit statement?
10. Does the above-referenced fee include the processing of loans,
distributions, and rollovers? If it does not, what fees are associated
with these services?
Please send your written response to the Committee on Education and
Labor staff by COB on Wednesday, May 20, 2009--the date on which the
hearing record will close. If you have any questions, please contact
the Committee. Once again, we greatly appreciate your testimony at this
hearing.
Sincerely,
Robert E. Andrews, Chairman,
Subcommittee on Health, Education, Labor, and Pensions.
______
[Whereupon, at 12:11 p.m., the subcommittee was adjourned.]