[Federal Register Volume 65, Number 203 (Thursday, October 19, 2000)]
[Rules and Regulations]
[Pages 62958-62974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26880]



[[Page 62957]]

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Part IV





Department of Labor





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Pension and Welfare Benefits Administration



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29 CFR Part 2520



Small Pension Plan Security Amendments; Final Rule

  Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / 
Rules and Regulations  

[[Page 62958]]


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DEPARTMENT OF LABOR

Pension and Welfare Benefits Administration

29 CFR Part 2520

RIN 1210-AA73


Small Pension Plan Security Amendments

AGENCY: Pension and Welfare Benefits Administration, Department of 
Labor.

ACTION: Final rule.

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SUMMARY: This document contains a final rule amending the regulations 
governing the circumstances under which small pension plans are exempt 
from the requirements to engage an independent qualified public 
accountant (IQPA) and to include a report of the accountant as part of 
the plan's annual report under Title I of the Employee Retirement 
Income Security Act of 1974, as amended (ERISA). These regulatory 
amendments provide a waiver of the IQPA annual examination and report 
requirements for employee benefit plans with fewer than 100 
participants at the beginning of the plan year. The amendments being 
made by this final rule are designed to increase the security of assets 
in small pension plans by conditioning the waiver on enhanced 
disclosure of information to participants and beneficiaries and, in 
certain instances, improved fidelity bonding requirements. The 
amendments do not affect the waiver for small welfare plans (such as 
group health plans) under 29 CFR 2520.104-46. Conforming amendments are 
also being made to the simplified annual reporting requirements for 
small pension plans specified in 29 CFR 2520.104-41. These amendments 
affect participants and beneficiaries covered by small pension plans, 
sponsors and administrators of small pension plans, and providers of 
investment and administrative services to small pension plans.

DATES: Effective Date: This rule is effective December 18, 2000. 
Applicability Date: The amendments made by this rule are applicable as 
of the first plan year beginning after April 17, 2001.

FOR FURTHER INFORMATION CONTACT: John Keene, Office of Regulations and 
Interpretations, Pension and Welfare Benefits Administration, Room N-
5669, 200 Constitution Avenue, N.W., Washington, DC 20210, (202) 219-
8521. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: On December 1, 1999, the Department 
published in the Federal Register (64 FR 67436) proposed amendments to 
the regulations governing the circumstances under which small pension 
plans are exempt from the requirements to engage an independent 
qualified public accountant and to include an opinion of the accountant 
as part of the plan's annual report under Title I of ERISA. The 
Department invited interested persons to submit written comments on the 
proposed amendments. The Department received 19 written comments from 
the public regarding the proposal. The following discussion summarizes 
the proposed regulation and the major issues raised by the commenters. 
It also explains the Department's reasons for the modifications 
reflected in the final regulation that is being published with this 
notice.

A. Background

    In general, the administrator of an employee benefit plan required 
to file an annual report under Title I of ERISA must engage an IQPA and 
include the IQPA's opinion as part of the plan's annual report. These 
annual reporting requirements can be satisfied by filing the Form 5500 
``Annual Return/Report of Employee Benefit Plan'' in accordance with 
its instructions and related regulations.\1\ The requirements governing 
the content of the opinion and report of the IQPA are set forth in 
section 103(a)(3)(A) of ERISA and 29 CFR 2520.103-1(b). Section 
104(a)(2)(A) of ERISA permits the Department to prescribe, by 
regulation, simplified annual reports for pension plans with fewer than 
100 participants, and section 103(a)(3)(A) permits the Department to 
waive the IQPA requirements for pension plans for which such simplified 
annual reporting has been prescribed. Section 104(a)(3) of ERISA 
permits the Department to prescribe exemptions and simplified reporting 
and disclosure requirements for welfare plans. In accordance with the 
Department's authority under sections 104(a)(2)(A) and 104(a)(3) of 
ERISA, the Department adopted, at 29 CFR 2520.104-41, simplified annual 
reporting requirements for pension and welfare benefit plans with fewer 
than 100 participants. In addition, the Department, at 29 CFR 2520.104-
46, prescribed for such small plans a waiver from the requirements of 
section 103(a)(3)(A) to engage an IQPA and to include the opinion of 
the accountant as part of the plan's annual report.
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    \1\ See sections 101(b) and 103 of ERISA, and 29 CFR 2520.103-1.
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    Since the adoption of Sec. 2520.104-46 in 1976, the amount of 
assets held in small pension plans has risen dramatically and small 
pension plans have become increasingly important retirement savings 
vehicles for a growing number of American workers. Media coverage of a 
particularly egregious case involving misappropriation of a small 
pension plan's assets over several years focused national attention on 
the potential vulnerability of small pension plans to fraud and abuse. 
The Department has had experience with other small pension plan cases 
involving service providers, administrators or other fiduciaries 
attempting to conceal fraud or misappropriations by falsifying 
financial and other information provided to plan sponsors, trustees, 
and participants. Although such cases are rare and legal remedies often 
can be pursued in an effort to recover lost assets, the Department 
concluded, given the increasing extent to which workers are depending 
on their employment-based pension plans as a primary source of 
retirement income, that it is appropriate to take steps to improve the 
security of assets in small pension plans.
    One approach the Department considered to improve the security of 
assets in small pension plans was to require all such plans to comply 
with the audit requirements of section 103(a)(3)(A) of ERISA. While 
subjecting the assets of small pension plans to an annual audit would, 
in the view of the Department, provide a high degree of certainty that 
the assets reported on a plan's annual report are actually available to 
pay benefits, the Department recognizes that the costs attendant to 
such a requirement may be significant for many plans and plan sponsors. 
Consistent with the Department's goal of encouraging pension plan 
establishment and maintenance, particularly in the small business 
community, the Department concluded that engaging an accountant should 
not be the only means by which the security of small plan pension 
assets can be improved. Rather, in developing the proposed regulation, 
the Department attempted to balance the interest in providing secure 
retirement savings for participants and beneficiaries with the interest 
in minimizing costs and burdens on small pension plans and the sponsors 
of those plans.
    In assessing alternatives to a mandatory audit requirement, the 
Department concluded that a three-pronged approach--focusing on (1) who 
holds the plan's assets, (2) enhanced disclosure to participants and 
beneficiaries and, (3) in limited situations, an improved bonding

[[Page 62959]]

requirement--could enhance the level of security and accountability 
while keeping administrative burdens and costs to a minimum by building 
on current recordkeeping, disclosure and bonding requirements and 
practices. In general, the Department believes that statements 
regarding plan assets prepared by certain regulated financial 
institutions (such as banks, insurance companies, mutual funds, and 
registered securities brokers), if made available to participants and 
beneficiaries, provide a reliable means by which participants and 
beneficiaries can independently confirm that the assets reported by the 
plan as being available to pay benefits as of the end of the plan year 
are, in fact, available according to the books and records of the 
regulated financial institution. Such disclosure, in the Department's 
view, reduces the likelihood of losses over long periods due to acts of 
fraud or dishonesty. The Department also believes that supplemental 
bonding requirements will serve to reduce the risk of loss due to acts 
of fraud or dishonestly where a substantial percentage of a plan's 
assets are held by entities that may not be subject to state or federal 
regulatory oversight. This approach was set forth as proposed new 
conditions for obtaining a waiver under Sec. 2520.104-46 of the 
requirements to engage an IQPA and include the IQPA's opinion as part 
of the plan's annual report.

B. Summary of the Proposal

    The first part of the proposal focused on the extent to which a 
plan's assets are held by regulated financial institutions. See 
Proposed Sec. 2520.104-46(b)(1)(i)(A). The proposal used the term 
``qualifying plan assets'' in applying the conditions of the waiver. 
``Qualifying plan assets'' were defined to include any assets held by: 
a bank or similar financial institution as defined in Sec. 2550.408b-
4(c); an insurance company qualified to do business under the laws of a 
state; an organization registered as a broker-dealer under the 
Securities Exchange Act of 1934; or any other organization authorized 
to act as a trustee for individual retirement accounts under section 
408 of the Internal Revenue Code. The term ``qualifying plan assets'' 
also included assets that the Department believes present little risk 
of loss to participants and beneficiaries as a result of acts of fraud 
or dishonesty: participant loans meeting the requirements of section 
408(b)(1) of ERISA and qualifying employer securities as defined in 
section 407(d)(5) of ERISA. See Proposed Sec. 2520.104-46(b)(1)(ii).
    The proposal provided, with respect to each plan year for which the 
waiver is claimed, that at least 95% of the assets of the plan must 
constitute ``qualifying plan assets'' or that any person who handles 
assets that do not constitute ``qualifying plan assets'' is covered by 
a bond meeting the requirements of section 412 of ERISA, except that 
the amount of the bond is not less than the value of such assets.\2\ 
The 95% test was provided in recognition of the fact that some small 
plans may have assets (such as limited partnership or real estate 
interests) held by parties that are not regulated financial 
institutions. Only where more than 5% of a plan's assets do not 
constitute ``qualifying plan assets'' would the bonding component of 
the proposal apply.
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    \2\ Section 412 of ERISA and the regulations issued thereunder, 
29 CFR 2550.412-1, 2580.412-1 et seq., set forth the bonding 
requirements generally applicable to ERISA-covered plans.
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    The proposal required that the percentage of a plan's assets that 
constitute ``qualifying plan assets'' and, as appropriate, the amount 
of supplemental bond coverage necessary to comply with the regulation 
must be determined for each plan year for which the waiver is claimed. 
Accordingly, the administrator of a plan electing the waiver must make 
the required determinations as of the beginning of the plan year. The 
proposal provided that, for purposes of this requirement, the required 
determinations are to be made in a manner consistent with the 
requirements of section 412. Inasmuch as a determination that more than 
5% of a plan's assets do not constitute ``qualifying plan assets'' may 
necessitate an increase in the amount of the plan's section 412 bond, 
the Department concluded that, assuming the administrator does not 
elect to engage an IQPA, the determination of ``qualifying plan 
assets'' should be made on the same basis as the required bond.\3\
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    \3\ In this regard, 29 CFR 2580.412-14 requires that the amount 
of the section 412 bond be determined by reference to the preceding 
reporting year. In the case of new plans, with respect to which 
there is no preceding report year, Sec. 2580.412-15 provides 
procedures for making estimates for the current year.
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    Under the second part of the proposal, the waiver of the IQPA 
requirements was further conditioned on the disclosure of certain 
information to participants and beneficiaries. Specifically, 
Sec. 2520.104-46(b)(1)(i)(B) required that the summary annual report 
(SAR) of a plan electing the waiver include, in addition to the other 
information required by Sec. 2520.104b-10: (1) The name of each 
institution holding ``qualifying plan assets'' and the amount of such 
assets held by each institution as of the end of the plan year; (2) the 
name of the surety company issuing the bond, if the plan has more than 
5% of its assets in non-qualifying plan assets; (3) a notice indicating 
that participants and beneficiaries may, upon request and without 
charge, examine, or receive copies of, evidence of the required bond 
and statements received from each institution holding qualifying assets 
that describe the assets held by the institution as of the end of the 
plan year; and (4) a notice stating that participants and beneficiaries 
should contact the Regional Office of the U.S. Department of Labor's 
Pension and Welfare Benefits Administration if they are unable to 
examine or obtain copies of statements received from each institution 
holding qualifying assets or evidence of the required bond, if 
applicable.
    Nothing in the proposal affected the obligation of a plan that 
would be eligible for the audit waiver to file a Form 5500 ``Annual 
Return/Report of Employee Benefit Plan,'' including any schedules or 
statements required by the instructions to the form. On the other hand, 
the proposal made it clear that a plan electing to file a Form 5500 as 
a small pension plan pursuant to the ``80 to 120 rule'' in 
Sec. 2520.103-1(d) may claim the audit waiver in the same manner and 
under the same conditions as a plan with fewer than 100 
participants.\4\
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    \4\ Under the ``80 to 120 rule,'' if the number of participants 
covered under the plan as of the beginning of the plan year is 
between 80 and 120, and an annual report was filed as a small plan 
filer for the prior year, the plan administrator may elect to 
continue to file as a small plan filer and claim the audit waiver 
even though the plan covered more than 100 participants as of the 
beginning of the plan year. Conversely, a plan with fewer than 100 
participants as of the beginning of the plan year that elects to 
continue to file a Form 5500 as a large plan pursuant to the ``80 to 
120 rule'' is not eligible to claim the waiver afforded by this 
section to small plan filers.
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    Finally, conforming amendments to the simplified annual reporting 
provisions in Sec. 2520.104-41 were included in the proposal to clarify 
that, although other simplified reporting options would continue to be 
available, if an employee benefit plan with fewer than 100 participants 
does not meet the criteria set forth in Sec. 2520.104-46, it would be 
required to engage an IQPA to conduct an examination of the financial 
statements of the plan, to include with the plan's annual report the 
financial statements, notes and schedules prescribed in section 103(b) 
of ERISA and 29 CFR 2520.103-1, and to include within the plan's annual 
report a report of an IQPA as prescribed in section

[[Page 62960]]

103(a)(3)(A) of ERISA and 29 CFR 2520.103-1(b)(5).

C. Summary of Public Comments

    As noted above, the Department received 19 written comments 
regarding the proposal. The commenters generally expressed the view 
that the Department's proposal, for the most part, struck a reasonable 
balance between enhancing the level of security and accountability for 
small pension plan assets and minimizing administrative burdens and 
costs on plans and plan sponsors. The commenters also generally 
concluded that, although the proposal will impose new costs on some 
small employers, the proposal was structured so that costs are 
generally proportionate to the risk and the additional burdens should 
be modest. The following discussion summarizes the major issues raised 
by the commenters and explains the Department's reasons for the 
modifications reflected in the final regulation.

1. Definition of Qualifying Plan Assets

    Several commenters asked the Department to clarify the terms ``held 
by'' and ``hold'' as used in describing the requirements that assets 
must be held by certain regulated financial institutions and that year-
end statements regarding plan assets must be from the financial 
institution holding the plan's assets. See Sec. 2520.104-
46(b)(1)(i)(B)(1), (b)(1)(ii)(C), and (b)(1)(ii)(F). The Department 
intended that the ``held'' term as used in the proposal would generally 
have the same meaning as it has in section 103(a)(2) of ERISA. 
Specifically, section 103(a)(2) provides that certain entities which 
``holds'' some or all of the assets of the plan must transmit and 
certify to the plan administrator information regarding the assets that 
is needed by the administrator to comply with any requirement of Title 
I of ERISA. Although section 103(a)(2) is limited to insurance carriers 
and other organizations that hold plan assets in a separate account and 
to banks and similar institutions that hold plan assets in a common or 
collective trust, a separate trust or a custodial account, the concept 
of what constitutes ``holding'' of a plan's assets under the proposal 
was intended to be the same as under section 103(a)(2).
    In that regard, two commenters requested confirmation that certain 
arrangements involving use of ``omnibus accounts'' by banks and 
registered broker-dealers would satisfy the ``holding'' requirement. 
The commenters stated that many banks and registered broker-dealers 
provide various investment related services to small pension plans, 
often acting as custodian, recordkeeper or investment manager. The 
commenters indicated that the bank or broker-dealer will keep internal 
records tracking the specific assets that belong to each of their small 
pension plan customers. The plans' assets may consist of individual 
securities (including stocks, bonds and mutual fund shares), real 
estate, limited partnerships or other types of assets. In the case of 
securities, according to the commenters, banks and registered broker 
dealers often make trades for the plans in the bank's or broker-
dealer's name through omnibus accounts, with most of these trades being 
made through depositories, such as the Depository Trust Company, or 
through the National Securities Clearing Corporation in the case of 
mutual fund shares. In all these cases, the securities are held in the 
name of the bank or broker-dealer on behalf of the plans and the bank 
or broker-dealer maintains internal records that show what assets 
belong to what plan. The Department agrees that such omnibus account 
structures would constitute the bank or registered broker-dealer 
``holding'' the plan's securities for purposes of satisfying the audit 
waiver requirements.
    Other commenters asked for clarification of whether the Department 
intended to exclude from the definition of ``qualifying plan assets'' 
certain types of traditional plan investments, for example, investments 
in mutual funds and insurance company general account contracts, which 
may not involve a regulated financial institution ``holding'' plan 
assets.\5\ The commenters noted that it is not uncommon for small 
pension plans to have an individual employee of the plan sponsor serve 
as the trustee of the plan. In such cases, plan assets may be invested 
in mutual fund shares or in an insurance company general account 
contract with the individual trustee holding the shares or contract in 
his or her name as trustee of the plan. The commenter stated that the 
plan may be unable to meet the conditions in the proposal for two 
reasons: (1) Plan assets, i.e., the mutual fund shares and the 
insurance contract, will not be ``held'' by a regulated financial 
institution, and (2) year-end statements regarding the assets will not 
be from an institution ``holding'' the plan's assets.
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    \5\ See the Department's regulation at 29 CFR 2550.401c-1 
regarding the definition of plan assets as it relates to insurance 
company general accounts.
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    The Department stated in the preamble to the proposal that ``[i]n 
general, the Department believes that statements of plan assets 
prepared by certain regulated financial institutions (such as banks, 
insurance companies, mutual funds, and securities broker-dealers), if 
made available to participants and beneficiaries, provide a means by 
which participants and beneficiaries can independently confirm that the 
assets reported by the plan to be available to pay benefits as of the 
end of the plan year were, in fact, available according to the books 
and records of the institution holding the assets.'' The Department 
agrees with the commenters that plan investments in mutual fund shares 
for which the registered investment company maintains records of 
shareholder accounts and prepares and mails shareholder account 
statements provides a commensurate level of security and accountability 
to that which would exist if the plan's assets were held by and 
disclosure statements were produced by a bank, insurance company, or 
registered broker-dealer.\6\ The Department believes that the same is 
true for general account contracts of an insurance company qualified to 
do business under the laws of a state where the insurance company 
prepares and mails statements to the plan regarding the value of the 
contract as of the end of the year and transaction activity related to 
the contract during the plan year. Accordingly, the final rule includes 
a change to the definition of qualifying plan assets that is intended 
to include such mutual fund shares and insurance company general 
account contracts as ``qualifying plan assets.'' See Sec. 2520.104-
46(b)(1)(ii)(D) & (E). The final rule also includes corresponding 
changes to the Summary Annual Report (SAR) and related disclosure 
provisions to reflect the inclusion of mutual fund shares issued by a 
registered investment company and general account investment contracts 
issued by

[[Page 62961]]

insurance companies in the definition of ``qualifying plan assets.'' 
See Sec. 2520.104-46(b)(1)(i).
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    \6\ According to the commenter, it is a common practice for a 
mutual fund to employ ``registered transfer agents'' to maintain 
records of shareholder accounts, calculate and disburse dividends, 
and prepare and mail shareholder account statements, federal income 
tax information and other shareholder notices. Some transfer agents 
prepare and mail statements confirming shareholder investment 
transactions and account balances and maintain customer service 
departments to respond to shareholder inquiries. Transfer agents are 
regulated by and subject to periodic examination by the Securities 
and Exchange Commission (SEC) under the Securities Exchange Act of 
1934. Among other requirements, transfer agents must register with 
the SEC using a Form TA-1 and must file annually with the SEC a 
report prepared by an independent accountant concerning the transfer 
agent's system of accounting controls and related procedures for the 
transfer of record ownership and the safeguarding of related 
securities and funds. For purposes of the audit waiver, the 
Department would consider statements from a registered transfer 
agent employed by the mutual fund to be statements from the mutual 
fund.
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    Another commenter suggested that assets of individual account plans 
that are invested at the direction of participants or beneficiaries 
should be included in the definition of ``qualifying plan assets.'' The 
Department did not include such a provision in the proposal because 
information available to the Department regarding those assets 
indicated that they generally would meet the conditions in the 
proposal. The commenters stated, however, that the SAR disclosures and 
the requirement to make financial institution statements available to 
participants and beneficiaries in individual account plans, like 401(k) 
plans, could involve an extensive list of financial institutions in 
cases where the plan provides a broad range of investment options. 
Also, the commenters noted that especially in such individual account 
plans that cover a very small number of employees, the proposed SAR 
disclosures could give all the plan's participants and beneficiaries 
access to confidential financial information regarding the type and 
performance of individual account investments made by other 
participants. The commenters indicated that this result would 
particularly impact small business owners who often have the largest 
accounts in the plan, and, accordingly, could create a tension in the 
small business market that would be inconsistent with the Department's 
goal of encouraging pension plan establishment and maintenance. The 
commenters suggested that the Department address this concern by 
including such participant-directed assets in the definition of 
qualifying plan assets subject to the condition that participants and 
beneficiaries are furnished statements regarding the assets allocated 
to their individual accounts at least annually directly from a 
qualified independent financial institution, such as a bank, insurance 
company, registered broker-dealer, or mutual fund.
    The Department believes that, in the case of an individual account 
plan, the security and accountability objectives of the proposal can be 
met for assets allocated to individual accounts if the participant or 
beneficiary has the opportunity to exercise control with respect to 
those assets and the participant or beneficiary is provided, at least 
annually, a statement from a regulated financial institution describing 
the assets held (or issued) by such institution and the value of such 
assets. In such a case, each participant can effectively monitor the 
assets in their individual accounts, and the regulated financial 
institution statements provide a reliable assurance that the assets 
reported to be in the individual account are in fact there. 
Accordingly, the definition of ``qualifying plan assets'' has been 
modified in the final rule so that plan administrators of individual 
account plans can rely on this alternative approach in determining 
whether participant directed assets allocated to individual accounts 
can be treated as ``qualifying plan assets'' for purposes of applying 
the 95% test.
    Another commenter suggested that the Department exclude qualifying 
employer securities from those assets considered to be qualifying plan 
assets. The commenter stated that qualifying employer securities should 
not be treated as qualifying plan assets because they are ``frequently 
mis-valued'' and are subject to special rules. It was the intention of 
the Department in proposing these amendments to improve the security of 
plan assets against losses due to fraud or dishonesty by providing a 
means under which the existence and amount of the plan's investments 
could be independently verified by participants and beneficiaries. The 
comment regarding valuation practices raise issues that are beyond the 
scope of the proposal, and, accordingly, the Department did not make 
any changes to the proposal in response to this comment.
    One commenter asked the Department to clarify in two respects the 
definition of qualifying plan assets as applied to participant loans. 
The commenter asked whether a loan that is treated as a distribution 
under section 72(p) of the Internal Revenue Code because it exceeds the 
maximum dollar limit set forth in Code 72(p)(2)(A)(1) will fail to be a 
qualifying plan asset. Under the proposal, qualifying plan assets 
included ``any loan meeting the requirements of section 408(b)(1) of 
the Act and the regulations issued thereunder.'' Neither section 
408(b)(1) of ERISA nor the Department's regulations at Sec. 2550.408b-1 
expressly place a specific dollar limit on participant loans; however, 
Sec. 2550.408b-1(a)(1)(iii) requires that loans must be made in 
accordance with specific provisions regarding such loans set forth in 
the plan. Accordingly, to the extent that the plan terms regarding 
participant loans include limits intended to ensure that the plan's 
loan program complies with requirements under Code 72(p)(2), those plan 
terms would have to be complied with for the loan to meet the 
requirements of section 408(b)(1) of ERISA.
    The commenter also asked whether a loan would be seen as continuing 
to satisfy the requirements of section 408(b)(1) of ERISA, and 
therefore continue to constitute a qualifying plan asset, even after a 
participant was in default under terms of the loan agreement. The 
Department included participant loans within the term ``qualifying plan 
assets'' because of the belief that such loans are assets that present 
little risk of loss to participants and beneficiaries as a result of 
acts of fraud or dishonesty. Even where a participant defaults on a 
loan, that fact generally should not put the plan at greater risk of 
loss due to fraud or dishonesty. Accordingly, the Department does not 
believe that the characterization of a participant loan as ``in 
default'' should disqualify the loan from continuing to be treated as a 
``qualifying plan asset.''
    One commenter suggested that the audit waiver be conditioned on all 
the assets of the plan being held by qualifying financial institutions 
that file Form 5500 annual reports with the Department regarding the 
assets they hold. Several other commenters stated that the 95% test was 
reasonable, provided adequate flexibility, and was consistent with the 
investment practices of most small pension plans. It was not, and 
continues not to be, the intent of the Department to directly or 
indirectly influence the type of investments held by small pension 
plans through application of the audit requirements. Rather, the 
Department continues to believe that all plan assets do not need to be 
held by a regulated financial institution to achieve the improved level 
of security and accountability that is the objective of this 
rulemaking. Rather, the definition of ``qualifying plan assets,'' the 
disclosure requirements, and the bonding components of the rule provide 
plans with flexibility in structuring their investment portfolios while 
also ensuring an adequate level of security and accountability. 
Accordingly, the Department did not adopt this suggestion.

2. Fidelity Bonding Requirements

    A number of commenters requested clarification of what constitutes 
``handling'' for purposes of the requirement that persons who handle 
non-qualifying plan assets must be covered by a fidelity bond in an 
amount equal to the value of the assets they handle. The term 
``handling'' is defined in 29 CFR 2580.412-6 for purposes of the 
general fidelity bonding requirement

[[Page 62962]]

under section 412 of ERISA. The proposal expressly required that 
persons handling non-qualifying plan assets would have to be bonded 
``in accordance with the requirements of section 412 of the Act and the 
regulations issued thereunder, except that the amount of the bond shall 
not be less than the value of such assets.'' See Proposed 
Sec. 2520.104-46(b)(1)(i)(A)(2). No change is being made in the final 
rule to this aspect of the proposal. Accordingly, the definition of 
handling in Sec. 2580.412-6 would apply for purposes of meeting the 
fidelity bonding conditions in Sec. 2520.104-46 as amended by the final 
rule.
    The Department received several comments that focused on the amount 
of bonding coverage required under the proposal. One commenter was 
critical of the fidelity bonding provisions in the proposal because 
such bonds do not protect against losses resulting from imprudent 
investments and because the commenter believed that ``no amount of 
increased reporting or bonding will prevent a crook from being a 
crook.'' On the other hand, a comment submitted from the surety 
industry suggested as an alternative to the conditions in the proposal 
that the Department require 100% of the assets of a small pension plan 
be covered by a fidelity bond as the most effective way to increase the 
protection of plans from losses due to fraud or dishonesty. Another 
commenter observed that under the proposal some plans would be able to 
use their general fidelity bond under section 412 of ERISA to satisfy 
the fidelity bonding requirement in the proposal, and suggested that 
the amount of the fidelity bonding coverage be increased to condition 
the audit waiver on the plan having a bond in an amount equal to 10% of 
all plan assets plus 100% of all non-qualifying plan assets.
    Although it may not be feasible to develop a regulation that would 
make it impossible for any plan to suffer any losses due to fraud or 
dishonesty, the Department does not consider that circumstance to be a 
valid reason for not adopting this regulation which will provide 
meaningful enhancements in security and accountability for participants 
and beneficiaries in small pension plans. The Department also is not 
prepared to adopt the suggestion that 100% of all small pension plans' 
assets be required to be covered by a fidelity bond because such a 
requirement would, in the Department's view, impose more costs on plans 
and plan sponsors without providing substantially more security for 
qualifying plan assets. The 100% bonding approach suggested by the 
commenter also would not provide participants and beneficiaries the 
improved disclosures set forth in the proposal. Lastly, the Department 
recognized in the proposal that inasmuch as compliance with section 412 
generally requires a bond in an amount not less than 10% of all the 
plan's funds or other property handled, the bond acquired for section 
412 purposes may in some cases be adequate to cover any non-qualifying 
assets under the proposal. Even in those cases, however, the bond would 
still equal 100% of the value of the non-qualifying plan assets. 
Accordingly, the Department did not adopt any of the suggested changes 
regarding the amount of fidelity bond coverage required to be eligible 
for the audit waiver.
    The Department included fidelity bonding examples in the preamble 
to the proposal in an effort to explain the fidelity bonding 
requirements in the proposal and the interaction between those 
requirements and the general fidelity bonding requirements under 
section 412 of ERISA. To make those examples easily accessible, the 
Department inserted the examples in the final rule as a new 
Sec. 2520.104-46(b)(1)(iii)(B).

3. Disclosure

    As noted above, under the proposal, the waiver of the requirement 
to engage an accountant is further conditioned on the disclosure of 
certain information to participants and beneficiaries. Specifically, 
Sec. 2520.104-46(b)(1)(i)(B) required that the SAR of a plan electing 
the waiver include, in addition to the other information required by 
Sec. 2520.104b-10: (1) The name of the institution holding ``qualifying 
plan assets'' and the amount of such assets held by each institution as 
of the end of the plan year; (2) the name of the surety company issuing 
the bond, if the plan has more than 5% of its assets in non-qualifying 
plan assets; (3) a notice indicating that participants and 
beneficiaries may, upon request and without charge, examine, or receive 
copies of, evidence of the required bond and statements received from 
each institution holding qualifying assets which describe the assets 
held by the institution as of the end of the plan year; and (4) a 
notice stating that participants and beneficiaries should contact the 
Regional Office of the U.S. Department of Labor's Pension and Welfare 
Benefits Administration if they are unable to examine or obtain copies 
of statements received from each institution holding qualifying assets 
or evidence of the required bond, if applicable.
    One commenter noted that in many cases more than one regulated 
financial institution may hold plan assets and asked the Department to 
confirm that multiple statements from separate institutions could be 
used to satisfy the conditions in the proposal. As the Department 
explained when it published the proposal, the rule does not require the 
year-end statements to be in any particular form, but the statements, 
at a minimum, must identify the institution holding the assets and the 
amount of assets held as of the end of the year. The Department did not 
intend, and the language of the proposal does not require, that the 
plan receive a single statement from one financial institution.
    Another commenter suggested that the SAR and other disclosure 
requirements in the proposal should be applied to all large plans 
required to furnish SARs to participants, not just small pension plans. 
The commenter's suggestion called for regulatory changes that would be 
beyond the scope of this rulemaking which did not include any changes 
in the information disclosure or audit requirements applicable to large 
pension and welfare plans. Moreover, the annual reporting and audit 
requirements applicable to large plans generally result in the 
availability of more comprehensive and detailed information about the 
plan's investments than the disclosure requirements in the proposal. 
For example, large plans with investment portfolios are generally 
required to include various financial schedules in their annual report, 
including a detailed listing of the assets of the plan, and, pursuant 
to section 103(a)(3)(A) of ERISA, the IQPA report attached to the Form 
5500 must include the accountant's opinion on whether those schedules 
``present fairly, and in all material respects the information 
contained therein when considered in conjunction with the financial 
statements taken as a whole.'' Participants and beneficiaries in such 
large plans have a right, upon request, to examine and obtain copies of 
the Form 5500 and the IQPA report, and the SAR required to be furnished 
to participants must include a notification of that right.
    Several commenters indicated that the disclosure requirements set 
forth in the proposal would require adjustments to the way SARs are 
currently prepared and asked the Department to adopt less detailed SAR 
disclosures. For example, one commenter suggested that the SAR be 
required to state only the percentage of assets held by regulated 
institutions and the amount of any fidelity bonds if

[[Page 62963]]

plan does not meet the 95% test, along with a statement that 
participants and beneficiaries have a right to examine and get copies, 
on request, of statements from the institutions and evidence of any 
required fidelity bond. Another commenter stated that adding more 
information to that already required to be given in the SAR may be 
confusing to many participants. The commenter suggested that including 
a ``boilerplate'' notice in the SAR regarding the financial institution 
statements and fidelity bond would give participants and beneficiaries 
interested in reviewing the materials knowledge of their availability 
at no cost. As noted above, the Department believes that furnishing 
statements from certain regulated financial institutions regarding the 
plan's assets provides a means by which participants and beneficiaries 
can independently confirm that the assets reported by the plan to be 
available to pay benefits as of the end of the plan year were, in fact, 
available. Such disclosure, in the Department's view, reduces the 
likelihood of losses over long periods due to acts of fraud or 
dishonesty. The Department believes that the security and 
accountability objectives of the proposal are enhanced by the 
disclosure of the names of institutions holding (or issuing in the case 
of mutual fund shares and general account investment contracts with 
insurance companies) qualifying plan assets and the amount of such 
assets. A general disclosure that information is available upon request 
would not, in the view of the Department, provide participants with 
sufficient information to make an informed decision on whether to 
request the underlying financial institution statements or evidence of 
bonds.\7\
---------------------------------------------------------------------------

    \7\ Several commenters asked questions about and/or suggested 
modifications of certain conclusions regarding estimated costs and 
burdens associated with complying with the SAR and related 
disclosure requirements that were contained in the Department's 
regulatory impact analysis published in the Federal Register along 
with the proposal. Those comments are addressed in the regulatory 
impact analysis section of this notice.
---------------------------------------------------------------------------

    The Department is making one change in the SAR disclosure 
requirements to address the inclusion, discussed above, of participant 
directed assets in the definition of qualifying plan assets. As noted 
above, the final rule provides in Sec. 2520.104-46(b)(1)(ii)(F) that, 
in the case of an individual account plan the definition of 
``qualifying plan assets'' would include any assets in the individual 
account of a participant or beneficiary over which the participant or 
beneficiary has the opportunity to exercise control and with respect to 
which the participant or beneficiary is furnished, at least annually, a 
statement from one of the regulated financial institutions referred to 
in Sec. 2520.104-46(b)(1)(ii)(C), (D) or (E) describing the assets held 
(or issued) by the institution and the amount of such assets. A new 
provision was added to the final rule to make it clear that the SAR 
disclosure requirements would not apply to individual account assets 
that meet the definition of qualifying plan assets pursuant to the 
alternative described in paragraph (b)(1)(ii)(F). See Sec. 2520.104-
46(b)(1)(i)(B)(1).\8\
---------------------------------------------------------------------------

    \8\ The final rule also includes qualifying employer securities 
and participant loans in this new provision in paragraph 
(b)(1)(i)(B)(1) to make it clear that the there are no special SAR 
disclosures associated with the treatment of such assets as 
qualifying plan assets.
---------------------------------------------------------------------------

    A commenter suggested that the final regulation state that the 
requirement to provide these individual account statements could be 
satisfied by giving participants and beneficiaries access to individual 
account information via ``800'' numbers, automated voice response 
systems, website access, and other similar technologies. The Department 
does not believe that access to information is comparable to 
affirmatively providing participants and beneficiaries with information 
about their accounts. Accordingly, the final rule requires that, as 
with SARs, the individual account statements must be ``furnished'' to 
participants. See Sec. 2520.10 4-46(b)(1)(ii)(F). In that regard, the 
Department notes that it has a separate regulation project pending 
under Sec. 2520.104b-1 that is focused on the use of electronic 
communication technologies by ERISA covered plans to satisfy certain 
disclosure obligations under Part 1 of Title I, including the 
obligation to furnish SARs to participants. In the Department's view, 
measures and methods acceptable for furnishing SARs under the 
Department's regulation at Sec. 2520.104b-1 would also be acceptable 
for regulated financial institutions to use in furnishing individual 
account statements under this final regulation.

4. Miscellaneous Issues

    One commenter asked the Department to exclude from the audit waiver 
requirements plan assets in individual account plans belonging to 
owner-employees. The commenter posited that owner-employees generally 
would not need the additional disclosures set forth in the proposal. 
Another commenter in a similar vein argued that ``top heavy'' plans 
should be exempt from the audit requirement because ``[b]y definition, 
60% or more of the accrued benefits of a top-heavy plan are those of 
``key employees'' as defined by IRC Sec. 416(i) * * * [and] these are 
the type of participants who are most likely to be able to police or 
monitor the performance of their accrued benefits.'' The Department 
does not believe that such carve outs for owner-employee assets or top 
heavy plans would be appropriate. First, the Department believes that 
inclusion of participant directed assets in individual account plans 
and the related adjustments to the disclosure provisions in the 
proposal adequately address the commenter's concerns regarding owner-
employees. Second, ``top heavy'' status may vary from year to year 
which may result in intermittent and potentially confusing disclosures 
to plan participants. Moreover, the rationale presented by the 
commenter ignores the non-key employee participants in the plan. The 
Department, accordingly, did not adopt the carve-outs suggested by 
these commenters.
    A commenter urged the Department to improve the remedies available 
for aggrieved participants in cases where there have been losses due to 
fraud or dishonesty. The commenter observed that participants often do 
not have the financial resources to retain experienced ERISA counsel 
even in cases of clear fiduciary violations, that fiduciaries in cases 
involving interpretation of plan documents may benefit from courts' 
reviewing their interpretations under a deferential ``arbitrary and 
capricious'' standard, that statutory remedies are limited in fiduciary 
cases and do not include compensatory and punitive damages, and that 
courts may not award full attorney's fee awards even in cases where the 
participant prevails. The commenter concluded that enhancing retirement 
security would be better accomplished by improving the remedies 
available to aggrieved plan participants. Expanding the ERISA remedies 
available to participants and beneficiaries in cases involving plan 
losses due to fraud or dishonesty would, in the Department's view, 
generally require legislation and, accordingly, is beyond the scope of 
this administrative rulemaking.

5. Request for Public Comments on Alternatives

    To aid in its effort to develop a cost-effective final regulation, 
the Department solicited views and comments from the benefit plan 
community on whether there are alternative approaches that would 
provide significant enhancements in the security of small pension plan 
assets and the accountability of persons

[[Page 62964]]

handling those assets and that would be more effective or involve less 
cost and burden than this proposal. In that regard, the Department 
specifically invited comments on requiring, as conditions of being 
eligible for the audit waiver, that small pension plans (1) obtain a 
fidelity bond covering persons who handle plan funds in an amount equal 
to at least 80% of the value of the plan's assets and (2) make 
available to participants and beneficiaries a schedule of the plan's 
assets held for investment purposes as of the end of the plan year 
similar to the schedule currently required as part of the Form 5500 
annual report filed by pension plans with 100 or more participants. No 
commenter supported this alternative approach. The two commenters that 
specifically addressed this alternative concluded that it would be more 
disruptive and more costly for most employers and would be unlikely to 
provide sufficient additional benefits to plan participants and 
beneficiaries to justify the extra administrative costs and burden to 
small plan sponsors.

6. Effective Date

    Finally, several commenters requested a delayed effective date to 
give small pension plans sufficient time to comply with the new summary 
annual report and bonding requirements provided for in this rule. The 
proposal envisioned that the final regulation would be effective 60 
days after publication in the Federal Register. One commenter suggested 
that the new requirements should not be applicable until the later of: 
(1) the first plan year beginning after 180 days after the final 
regulation is published in the Federal Register, or (2) the first plan 
year beginning after the first surety bond policy expiration date that 
is at least 60 days after the regulation is finalized. Another 
commenter asked that the effective date be delayed for all plans until 
the first plan year beginning on or after January 1, 2002.
    The Department believes that it is important to make this final 
rule effective in a timely fashion so that participants and 
beneficiaries get the enhanced security and accountability protections 
of the new audit waiver conditions. The Department is also sensitive to 
the need for plans and plan sponsors to have sufficient time to make 
adjustments to comply with the disclosure and bonding provisions in the 
regulation. In light of the fact that fidelity bonds may be issued for 
multi-year periods, although the amount of the coverage is required to 
be set annually, an effective date based on the surety bond policy 
expiration date could provide for a overly long period before some 
plans would be required to comply with the new audit waiver conditions. 
Similarly, making the amendments effective for the first plan year 
beginning on or after January 1, 2002, could provide a prolonged period 
following publication of the final rule for plans with non-calendar 
fiscal years before they would have to comply with the new SAR 
disclosure requirements (as long as four years for some plans with non-
calendar fiscal years). The Department believes that making the 
amendments applicable as of the first plan year beginning after 180 
days after the final regulation is published in the Federal Register 
provides an adequate period of time for plans and plan sponsors to make 
any necessary adjustments while not unduly delaying the implementation 
of the new audit waiver conditions. Accordingly, the final rule will be 
effective 60 days after publication in the Federal Register but the 
amendments to the audit waiver conditions will be applicable as of the 
first plan year beginning after 180 days after the final regulation is 
published in the Federal Register.

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule: (1) having an annual effect on the economy of $100 million 
or more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    Pursuant to the terms of the Executive Order, it has been 
determined that this action is ``significant'' and subject to OMB 
review under Section 3(f)(4) of the Executive Order. Consistent with 
the Executive Order, the Department has undertaken to assess the costs 
and benefits of this regulatory action. The Department's assessment, 
and the analysis underlying that assessment, is detailed below.

Overview

    This regulation is intended to accomplish two purposes: to limit 
pension plan fraud and to provide participants and beneficiaries of 
small pension plans with the information they need to monitor their 
plan assets and to hold plan fiduciaries accountable. Recent cases 
involving embezzlement or other misappropriations of pension assets 
have focused national attention on the potential vulnerability of small 
pension plans to fraud and abuse. As a result, the Department has 
determined that modifications to the small plan audit waiver 
(Sec. 2520.104-46) will enhance pension plan security. Imposing the 
additional conditions on the audit waiver will help to reduce the risk 
of loss due to acts of fraud or dishonesty with small plan assets. It 
will also provide participants with more information about their 
pension plans, thus better enabling them to help provide the checks and 
balances needed to ensure the integrity of the pension plan.
    The cost to small pension plans of the provisions of this final 
rule will not be large--it is estimated to be less than 1% of total 
annual administrative costs for all small pension plans. Estimates from 
Form 5500 data indicate that most small pension plans meet the 
requirement to obtain a waiver that at least 95% of the plan assets 
must be ``qualifying plan assets.'' For the few plans not meeting this 
requirement, the cost of obtaining a fidelity bond to enable them to 
meet the conditions for a waiver is low relative to the increased 
security provided to participants and beneficiaries. Likewise, the cost 
of meeting disclosure requirements is small because, after an initial 
start up cost to include new language in the SAR and allow for the 
inclusion of additional detail concerning qualifying plan assets, the 
subsequent annual cost consists only of updating the SAR with data 
already provided at least annually by the financial institutions in the 
normal course of business. Other costs include a small cost for the 
preparation and distribution of documents to participants and 
beneficiaries who request copies of statements from financial 
institutions and evidence of fidelity bonding.
    The costs imposed by the additional conditions this regulation 
places on the existing small plan audit waiver are expected to total 
$24.1 million

[[Page 62965]]

annually.\9\ This total includes $714,000 for all 605,115 small pension 
plans to determine whether they satisfy the conditions for the audit 
waiver with respect to the percentage of plan assets held by regulated 
financial institutions, $6.5 million to obtain additional fidelity 
bonding coverage for the 29,414 plans not expected to meet the 
condition that at least 95% of the plan's assets are held by a 
regulated financial institution, $16.3 million to satisfy additional 
disclosure conditions of the audit waiver, and $628,000 to respond to 
requests by participants and beneficiaries for copies of the statements 
of financial institutions and evidence of fidelity bonding. As 
explained further below, the cost estimates of the final rule are 
greater than the $15.6 million estimate presented in the proposal, due 
primarily to the adjustment of certain assumptions used in estimating 
the rule's impact. The revised estimates also take into account the 
substantive modifications made to the proposal in the development of 
the final rule.
---------------------------------------------------------------------------

    \9\ The cost estimates are derived from 1995 data on pension 
plans and 1998 BLS data on occupational wages as adjusted for non-
wage compensation and overhead.
---------------------------------------------------------------------------

    In the Department's view, the benefits (although not quantified) of 
the final rule's requirements for the IQPA waiver outweigh the costs. 
The enhanced accountability and security of small pension plans 
resulting from the additional IQPA waiver conditions will benefit plan 
participants who are counting on these pensions for retirement 
security. With minimum government intervention, participants and other 
parties to the plan will have an improved ability to verify and monitor 
plan assets. Given the more than $300 billion in small pension plan 
assets, any increase in security and accountability is valuable. The 
additional conditions will also strengthen confidence in the pension 
system as a whole. The following items highlight other potential 
benefits of the regulation in a qualitative, and when possible, 
quantitative, way:
     Confidence in the private pension system may be 
strengthened and may result in increased participation among the nearly 
600,000 private wage and salary workers who currently elect not to 
participate in a small plan that is offered;
     In 1998, more than $6 million in pension plan assets were 
recovered as a result of criminal investigations. If new conditions are 
imposed on the small plan audit exemption, fewer assets may be missing 
from plans in the future because of the checks and balances put in 
place by improved information disclosure;
     The investigations and litigation associated with 
recovering assets of small pension plans can be very costly to private 
parties and to the Government. In 1998, nearly 6,000 civil 
investigations were initiated by the Department. If new conditions are 
imposed on the small plan audit exemption, losses will likely decline 
and fewer investigations of small pension plans may be needed. This 
will have the dual effect of lowering investigation-related costs for 
small plans and permitting Federal authorities to enhance the security 
of other participants by directing their efforts elsewhere; and
     When workers discover that their pension plan assets are 
missing or are jeopardized, worker productivity declines. Time at work 
may be spent investigating what happened to plan assets, whether they 
will be restored, and whether retirement will be possible without these 
pension assets. A more secure system for monitoring pension plan assets 
will reduce productivity loss to employers.

Comments on Estimated Economic Impact

    The Department received 19 written comments regarding the proposed 
regulation. Of these, the majority commended the Department for its 
efforts to strike a reasonable balance between improving the security 
of small pension plan assets and allowing small plans and small plan 
sponsors to function efficiently without the imposition of undue 
administrative burdens and costs. The principal concerns of those 
commenters who focused on the economic impact of the proposal related 
to the Department's estimates of the costs to comply with the bonding 
and disclosure provisions, as well as to the Department's methodology 
for estimating the number of plans potentially impacted by the proposed 
amendments to the waiver of the requirement to engage an independent 
qualified public accountant. Specifically, commenters questioned 
whether the cost burden for the bond would be ``nominal'' as the 
Department suggested in the proposal, and whether the cost burden for 
developing and modifying the SAR was greater than the Department had 
estimated. These issues are addressed in more detail below.
    Four commenters addressed the cost of the surety bond. The proposed 
regulation provided that, for each plan year for which the waiver is 
claimed, if at least 95% of the assets of the plan do not constitute 
``qualifying plan assets'' any person who handles assets that do not 
constitute qualifying plan assets must be covered by a bond meeting the 
requirements of section 412 of ERISA, except that the amount of the 
bond must be not less than the amount of such assets. Based on 
Department data and consultation with industry representatives, the 
original estimate for the average additional premium cost of an 
enhanced surety bond was $200 per plan. One commenter questioned the 
Department's conclusion that the cost of additional fidelity coverage 
would be ``nominal,'' and whether, in fact, bonding under this 
regulation would be as broadly available to plans as under section 412. 
The comment was based on the fact that the enhanced bond requirement 
applies to only a small portion of the pension plan population--
specifically, a population which is not audited and which maintains 
less than 95% of its assets in a qualified financial institution. The 
commenter further questioned whether, even if a plan were able to 
obtain a bond, it might be at a higher cost than that estimated by the 
Department because the requirement represented adverse selection 
against the surety. In any case, the eventual premium cost and impact 
on the availability of surety bonds under the proposal was viewed by 
the commenter as having a potentially high level of unpredictability 
because surety bonds meeting these requirements are not currently 
offered. Finally, the commenter proposed that a surety might request an 
audit by an independent accountant, or subject the plan to other more 
stringent underwriting requirements, in order to issue a bond for 
unqualified plan assets, resulting in additional attendant costs to the 
plan or plan sponsor.
    Before concluding that enhanced bonding offered a cost effective 
way of protecting small plan assets, the Department had originally 
considered eliminating the waiver of the audit requirement for all 
small plans that did not meet the 95% requirement (approximately 37,000 
plans). In examining the cost, however, the Department concluded that 
the audit cost, $230 million dollars for the 5% of plans not meeting 
the 95% requirement, was too great in relation to other alternatives. 
The Department therefore explored alternatives available to enhance 
pension plan security and the burdens imposed by these various 
alternatives. The regulation was crafted by assessing the net benefits 
of these alternatives and is intended to

[[Page 62966]]

accomplish the goal of increased security without imposing significant 
costs on pension plans. Alternatives considered included on-site 
inspection, periodic reporting, additional compliance penalties, and 
additional bonding as a stand-alone requirement. However, all of these 
options were either (1) extremely expensive (ranging in cost from $200 
million to $4 billion paid by plans or plan sponsors) and thus 
conflicted with the Department's priority of creating a regulatory 
environment that encourages pension plan formation, (2) not feasible to 
implement, or (3) would not have sufficiently enhanced small pension 
plan security.
    Both before and after the comment period, the Department consulted 
with industry representatives about the premium cost for a bond, 
including the details of their formal comment, and the potential risk 
to the surety associated with accomplishing enhanced security through 
bonding of non-qualified assets. Representatives emphasized that the 
cost for a bond covering plan assets not held or issued by regulated 
financial institutions can only be assessed after some period of time 
in which loss experience can accumulate and the industry is able to 
evaluate the risk and respond through pricing. It was considered 
possible that, initially, due to lack of actual experience, industry 
costs would remain stable but would require an upward or downward 
adjustment at a future date. It is also possible that sureties might 
respond to a perceived additional exposure associated with segmenting 
the risk of assets that inherently represent a greater risk of loss 
(i.e., the assets not held by financial institutions) by applying more 
stringent underwriting and rating this risk accordingly. The Department 
will monitor this situation in the future and, if in the Department's 
view serious problems arise, would consider amending this regulation. 
The Department would welcome concerned parties notifying it of any 
problems they encounter.
    The Department agrees that the estimate of additional premium costs 
and other impacts on the market for fidelity bonds in near term and 
over time bears a degree of uncertainty. However, as discussed with 
industry representatives, the Department does not believe that non-
qualifying assets necessarily represent an inherently greater risk of 
loss. Rather, the manner in which they are held simply does not afford 
a mechanism for an independent confirmation of the existence of the 
asset that is comparable to the confirmation associated with statements 
from regulated financial institutions, or with an examination conducted 
by an IQPA. Industry representatives also agreed that the surety market 
as a whole is very large, and that pricing is generally very 
affordable. It is also worth noting that, for some plans, compliance 
with the bonding requirements under section 412 of ERISA will also 
cover the bonding requirement under this regulation. Section 412 
generally requires any person who handles plan funds or other property 
to be bonded in an amount not less than 10 percent of the amount of 
funds handled. Unless the value of a small plan's non-qualifying plan 
assets exceeds the value of 10 percent of total plan funds or other 
property, there is likely to be no additional risk to the surety or 
increase in bonding cost to plans because of this regulation.
    Commenters and industry representatives called attention to 
potential uncertainty in future costs, but did not suggest that the 
estimate of an average of $200 in additional premium would result in an 
unreasonable cost estimate. Accordingly, the Department has not changed 
its earlier estimate of $200 as an average cost increase per affected 
plan for an enhanced fidelity bond. Our analysis shows, therefore, that 
bonding continues to be the least costly alternative for increasing the 
security of small plan assets, lowering aggregate costs by a factor of 
more than 20 compared to other alternatives while still accomplishing 
the goal of enhancing small pension plan security.
    Four commenters suggested that the Department's cost estimate for 
the SAR disclosure underestimated the costs that would be imposed on 
plans. The regulation requires that, for a plan to be able to take 
advantage of the waiver of an audit by an IQPA, a plan's SAR must 
include certain specific information relating to: the financial 
institutions which hold or issue plan assets; bonding; the right of 
participants and beneficiaries to year-end statements of the financial 
institutions and bonding information; and a notice that participants 
and beneficiaries may contact the Regional Office of the Pension and 
Welfare Benefits Administration, U.S. Department of Labor, if they are 
unable to examine or obtain copies of the statements received by the 
plan from each institution holding or issuing qualifying plan assets, 
or evidence of the bond, if applicable. Two commenters suggested that 
most SARs are generated directly by software packages that produce the 
Form 5500 annual report; therefore, they thought that inserting new 
language might require a programming change and a greater start up 
expense to the plan than computed in the proposal. In addition to the 
initial changes, plans are also required to make annual modifications 
to the SAR which will reflect the current assets of the plan, the 
amount of the assets held or issued, and the bonding at the end of the 
plan year. In its economic analysis of the proposed regulation, the 
Department did not include the cost of annual modification of the SAR, 
because it was believed to be nominal. Commenters questioned this 
assumption as to the time it would take to update the SAR, on an annual 
basis, with the names of each regulated financial institution holding 
or issuing plan assets and the year end amount of those assets. The 
commenters added that preparing an annual disclosure document, with 
multiple custodians, would take more time than that attributed to the 
usual preparation of an SAR and, with the additional reporting of 
specific account totals, the Department should include a cost factor in 
the economic analysis for this obligation. The Department has responded 
to these comments in three ways.
    First, we have increased the cost estimates for the start up 
changes to the SAR. Using the same basis used for burden estimates of 
the Form 5500 annual report, the Department assumes that 90% of SARs 
and 90% of the changes required by the final rule will be accomplished 
by service providers. Because the information required to be added to 
the SAR by this regulation is not currently separately reported by 
small pension plans as part of their Form 5500 annual filing or 
currently used by Form 5500 software packages, it is likely, as 
commenters observed, that system modifications will be required. 
Accordingly, the Department assumes that a systems analyst or financial 
manager will complete the work and has increased the hourly rate of the 
professional performing this activity from $39 to $57 per hour. In 
response to comments indicating that revising an SAR will take more 
time than previously anticipated, the Department has also increased its 
assumption for the time required to modify software and procedures to 
produce an amended SAR disclosure from 15 minutes to 30 minutes. 
However, the Department believes the time required to make these 
changes is moderated by the economies of scale resulting from those 
service providers who have multiple client plans, and whose efforts 
will result in a systematic SAR modification for multiple plans, 
usually as a part of a software package

[[Page 62967]]

integrated with Form 5500 preparation software. Based on changes to 
cost estimates for wage rates and time requirements, the resulting cost 
estimate for this SAR start up modification is $12.1 million, compared 
with the $5.9 million originally estimated. Lastly, individual account 
plans are not included in this cost burden because an alternative SAR 
disclosure for these plans is now described in the final regulation. 
This has the result of lowering the original cost estimate for small 
plans, although the net effect is the $6.2 million increase.
    Second, in response to comments, the Department added new paragraph 
(b)(1)(ii)(F) to Sec. 2520.104.46 which modifies the SAR reporting 
requirements under paragraphs (b)(1)(i)(B) in the case of individual 
account plans holding qualified plan assets. This new paragraph 
provides that, in the case of an individual account plan, the SAR 
disclosure requirement may be satisfied as to any assets in the 
individual account of a participant or beneficiary over which the 
participant or beneficiary has the opportunity to exercise control by 
having a regulated financial institution referred to in paragraphs 
(b)(1)(ii)(C), (D) or (E) of section 2520.104-46 furnish a statement, 
at least annually, to participants or beneficiaries describing the 
assets held (or issued) by such institution and the amount of such 
assets. As described above, the change to the regulation is warranted 
because of the existing protective features of the at least annual 
reporting procedures for individually directed individual accounts. The 
change in the regulation will eliminate the need for annual 
modification of SARs for many individual account plans.
    Third, the Department has included in the final cost $4.2 million 
for annual modification of the SAR to reflect changes in the financial 
institutions holding or issuing qualifying plan assets, the amounts of 
assets, and/or fidelity bonding information. Because the information 
used to modify the SAR is provided by the financial institutions in the 
regular course of business and the time needed to transfer the 
information to the SAR was assumed to be minimal, the Department did 
not originally propose a cost for such annual modification of the SAR. 
However, the Department recognized that most SARs are completed by 
service providers in a systematic fashion, either through the use of 
software packages interrelated with the preparation of the Form 5500 or 
by means of extracting figures from financial statements. The 
Department recognizes that some plans may require time to modify the 
SAR each year, but the Department believes that this time will be 
reduced to the extent that SAR preparation software and processes are 
modified to accept new information over time. The Department also 
believes that some of the concerns of the commenters with respect to 
annual modification costs have been addressed through the alternative 
method to SAR disclosure for individually directed account plans.
    Finally, the regulation requires that plans furnish copies of year 
end statements from financial institutions and bonding information to 
those participants and beneficiaries who request them. For purposes of 
its cost estimates, the Department assumes that 5% of participants and 
beneficiaries who are not in individually directed account plans will 
request this information. The Department further assumes that 
participants and beneficiaries with individual account plans taking 
advantage of the alternative disclosure approach under the regulation, 
i.e., those who receive annual statements from a regulated financial 
institution reporting on the value of their assets, will not request 
this general plan level information. Because the documents required to 
be disclosed by the plan have already been provided by bonding 
companies and financial institutions, the aggregate cost for plans to 
produce the copies of statements and bonding information is estimated 
at $627,700, reflecting labor costs of $15 per hour for assembling and 
photocopying and distribution costs of $.37 per request. The aggregate 
cost represents a reduction from the $995,000 estimated in the proposed 
regulation. The cost savings is a result of excluding individual 
account plans eligible to take advantage of the alternative disclosure 
approach under the regulation.

Cost Analysis

    The requirements contained in this final regulation were developed 
to best conform to the actual investment patterns of small plans, 
rather than to alter these patterns. To understand the investment 
patterns of plans and the typical percentage of plan assets that would 
meet the ``qualifying plan assets'' requirement, we used Form 5500 data 
to examine how pension plans report their allocation of assets among 
various investment categories. Plan asset allocation information on the 
Form 5500 C/R formerly filed by small plans is currently limited to 
very general categories. Because of this lack of detailed financial 
information, the Form 5500 filings of plans with more than 100 
participants but less than $2 million in assets (within two standard 
deviations of the mean asset value of small plans) were used as a 
proxy. We obtained a distribution of these plans based upon the 
proportion of each plan's assets that are ``qualifying plan assets.'' 
We then applied this distribution to the actual 1995 count of small 
plans to approximate the current distribution of small plans based on 
the proportion of assets that are ``qualifying plan assets.'' Form 5500 
does not categorize ``qualifying plan assets,'' nor does it identify 
the holder of assets. For purposes of this analysis, we have considered 
the nature of the asset to be an indicator of the holder of the asset. 
Accordingly, we assumed that assets reported as cash, CD's, U.S. 
Government Securities, corporate debt and equity, loans, employer 
securities, and the value of interests in direct filing entities, 
registered investment companies, and insurance company general accounts 
are typically held or issued by regulated financial institutions, and 
as such constitute ``qualified plan assets.''
    Based on a total of 605,000 small plans, 1995 data, and using the 
assumptions outlined above, we determined that the vast majority of the 
assets of small plans are ``qualifying plan assets.'' Specifically, for 
all but 5% of small pension plans, at least 95% of plan assets 
constitute ``qualifying plan assets.'' The plans that will not meet the 
95% threshold are atypical of the industry standard and are 
sufficiently few in number such that additional conditions for an audit 
waiver to protect participants and plan assets are both warranted and 
cost effective.
    The Department received a comment that expressed the view that the 
proxy group used for assessing the number of small plans that will not 
have 95% of assets held or issued by regulated financial institutions 
resulted in a significantly inaccurate estimate of the number of plans 
impacted, and thus the ultimate cost of the regulation. In the 
commenter's view, the distribution of assets in plans with more than 
100 participants but less than $2 million in assets would be new plans, 
which would be attempting to minimize administrative costs. The 
commenter further suggests that the Department assumed a relationship 
between the holder of qualifying plan assets and the manner in which a 
plan is ``trusteed'' (i.e., uses a corporate trustee such as a bank as 
opposed to an individual person such as a representative of the plan 
sponsor). Moreover, the commenter suggests delaying any action amending 
the audit waiver until an actual study of

[[Page 62968]]

the potentially impacted small plan universe is conducted.
    The Department notes that while the statute clearly envisions the 
Department adopting rules intended to limit the administrative burdens 
imposed on small plans to comply with the annual reporting provisions 
in ERISA, and although the more limited reporting requirements actually 
in place for small plans results in the availability of more limited 
detail concerning the assets of small plans, the annual reports filed 
by small plans do provide accurate data with respect to the features of 
small plans, their total income, expenses, and assets, and the 
breakdown of those assets in broad investment categories. The 
Department's methodology in developing detailed estimates of small plan 
assets by investment type involved distributing the breakdown of assets 
in a slightly larger proxy group across the actual assets of the small 
plans potentially affected by this regulation. This larger group is 
still within two standard deviations of the mean asset value of the 
plans with fewer than 100 participants. The Department continues to 
believe this approach offers a reasonable basis for estimating detail 
needed to accurately assess economic impact, given that this level of 
detail is not available under existing regulatory requirements.
    Furthermore, this methodology results only in an estimate of the 
types of assets held by small plans. The types of assets, such as 
mutual funds, marketable securities, or certificates of deposit, are 
assumed to be an indicator of who holds the assets and, thus, the 
extent to which they will be qualifying plan assets for purposes of 
this regulation. The methodology is not intended to identify the 
trustee of the plan, nor is it necessary to do so to assess the 
economic impact of the regulation. As the Department has indicated, it 
does not intend to alter the investment choices of small plans, or 
their arrangements for designating a trustee, but rather to ensure that 
either a mechanism is in place for regular confirmation of the 
existence of small plan assets by regulated financial institutions 
holding those assets, or that enhanced bonding is in place. The 
Department continues to be of the view that its approach to identifying 
the plans and assets potentially impacted is reasonable in light of the 
data available to conduct this analysis.
    Finally, as noted earlier, several commenters requested 
clarification of the definition of ``qualifying plan assets,'' 
particularly with respect to assets allocated to individual account 
plans in which individuals direct their investments. As discussed in 
the Summary of Public Comments section, the Department agrees with the 
commenters that the security and accountability objectives of the 
proposal can be met, in the case of an individual account plan, for 
assets over which the participant or beneficiary has the opportunity to 
exercise control if the participant or beneficiary is furnished, at 
least annually, a statement from a regulated financial institution 
describing the assets held (or issued) by such institution and the 
amount of such assets. The final rule includes such assets within the 
definition of qualifying plan assets. This has the effect of reducing 
the number of plans otherwise subject to the enhanced bonding 
requirement from 37,000 to 29,400, and reducing the number of plans 
impacted by the new SAR disclosures from 605,115 to 425,709. In 
addition to meeting the Department's objectives with respect to small 
plan asset security, this modification from the proposal also limits 
the potential for imposition of disclosure requirements in this rule 
that duplicate the disclosure requirement of other regulatory 
provisions, such as those set forth in ERISA section 404(c) and related 
regulations, or disclosures made as part of normal business practice.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency certifies that a final rule will not 
have a significant economic impact on a substantial number of small 
entities, section 603 of the RFA requires that the agency present a 
final regulatory flexibility analysis describing the impact of the rule 
on small entities at the time of publication of the notice of final 
rulemaking. Small entities include small businesses, organizations and 
governmental jurisdictions.
    For purposes of analysis under the RFA, the Department continues to 
consider a small entity to be an employee benefit plan with fewer than 
100 participants. The basis of this definition is found in section 
104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe 
simplified annual reports for pension plans which cover fewer than 100 
participants. Under section 104(a)(3) of ERISA, the Secretary may also 
provide for exemptions or simplified annual reporting and disclosure 
for welfare benefit plans. Pursuant to the authority of section 
104(a)(3) of ERISA, the Department has previously issued at 29 CFR 
2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10 
certain simplified reporting provisions and limited exemptions from 
reporting and disclosure requirements for small plans, including 
unfunded or insured welfare plans covering fewer than 100 participants 
and satisfying certain other requirements.
    Further, while some large employers may have small plans, in 
general most small plans are maintained by small employers. Thus, the 
Department believes that assessing the impact of this rule on small 
plans is an appropriate substitute for evaluating the effect on small 
entities. The definition of small entity considered appropriate for 
this purpose differs, however, from a definition of small business 
which is based on size standards promulgated by the Small Business 
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business 
Act (15 U.S.C. 631 et seq.). No comments were received with respect to 
the standard. Therefore, a summary of the final regulatory flexibility 
analysis based on the 100 participant size standard is presented below.
    The amount of assets in small pension plans has grown nearly 
tenfold since 1975, making small pension plans an increasingly 
important retirement savings vehicle for Americans. In light of recent 
cases involving embezzlement or other misappropriations of pension 
assets that have focused national attention on the potential 
vulnerability of small pension plans to fraud and abuse, this 
regulation has been written to enhance the security and accountability 
of small pension plans.
    The rule amends the Department's existing waiver of examination and 
report of IQPA for employee benefit plans under ERISA with fewer than 
100 participants. This rule impacts all classes of small pension plans 
subject to Title I of ERISA with fewer than 100 participants. As shown 
by the regulatory analysis, the regulation accomplishes the objective 
of enhancing pension plan security without imposing significant costs 
via additional reporting, recordkeeping, or other compliance 
requirements.
    Under the regulation, for each year in which a waiver is claimed, 
at least 95 per cent of the assets of the plan must constitute 
``qualifying plan assets'' or any person who handles assets of the plan 
that do not constitute qualifying plan assets must be bonded in

[[Page 62969]]

accordance with the requirements of section 412, except that the amount 
of the bond shall not be less than the amount of such assets. In 1995, 
there were approximately 605,000 employee pension plans with fewer than 
100 participants that met the requirements for the audit waiver. The 
Department estimates that, under the regulation, only 29,400 small 
plans will not meet the 95 per cent limit for qualifying plan assets 
and will be required to either purchase a fidelity bond or undergo an 
audit. We assume that plans will choose the less costly alternative of 
bonding to satisfy the regulation. All 605,000 small pension plans, 
however, will be subject to SAR disclosure requirements, which include 
adding new language to the SAR, providing copies of statements from 
regulated financial institutions and bonding information free of charge 
to participants and beneficiaries who request them and, for those plans 
which are not individual account plans, modifying the SAR on and annual 
basis.
    The Department received 19 comments regarding the proposal. The 
majority commended the Department for striking a reasonable balance 
between providing accountability and protection for small pension plans 
and minimizing administrative costs and recordkeeping. Four commenters 
raised the issue of bonding and its impact on small plans, specifically 
questioning whether the cost of the bond would be nominal as described 
in the proposal. Commenters expressed the view that a surety might 
respond to a perceived additional exposure associated with segregating 
a particular group of plans which have the potential of posing greater 
risk to the surety because of adverse selection by requesting an audit 
by an independent accountant or subjecting the plan to other more 
stringent underwriting requirements. The Department had estimated that 
cost of a fidelity bond to be $200 per plan.
    Before determining that bonding was the best and most cost 
efficient way of protecting small assets, the Department considered 
several alternatives, including imposing an audit on all small plans 
that do not meet the 95% requirement, on-site inspection, periodic 
reporting, and eliminating the existing small plan audit waiver for 
examination and reporting by an IQPA. All of these options, however, 
were either extremely expensive (ranging in cost from $200 million to 
$4 billion), thereby conflicting with the Department's priority of 
creating a regulatory environment that encourages pension plan 
formation, not feasible to implement, or would not have sufficiently 
enhanced small pension plan security. After the comment period, the 
Department consulted with representatives of the surety industry to 
further assess the impact of bonding on small plans. Taking into 
consideration the information received from industry representatives as 
well as other comments received by the public, the Department has 
decided not to change its original estimate of $200 per plan for a 
fidelity bond.
    The actual cost of a bond, according to representatives from the 
surety industry, will best be determined after some period of time in 
which the industry will be able to evaluate the risk involved. The cost 
of a premium may not change initially, but could be adjusted upward or 
downward at some future date. On the other hand, the risk for bonding 
small plans invested in assets which are not held or issued by 
regulated financial institutions will not be any greater under the 
regulation than it is now, and the industry risk factor for ERISA plans 
is low. Industry representatives did not believe that audits would be 
required. Because underwriting judgment is necessarily applied on a 
case-by-case basis, actual industry experience will be the best 
predictor of premium cost. Our analysis of available information shows, 
therefore, that bonding is the least costly alternative, lowering 
aggregate costs by a factor of more than 20 while similarly 
accomplishing the goal of enhancing small pension plan security.
    It is also worth pointing out that, for some small plans, 
compliance with the existing bonding requirements under section 412 of 
ERISA will also cover the bonding requirement under this regulation. 
Section 412 requires that any person who handles funds or other 
property must be bonded in an amount not less than 10 percent of the 
amount of funds handled. Unless the value of a small plan's non-
qualifying plan assets exceeds the value of 10 percent of total plan 
funds or other property handled, there is no additional cost to small 
plans because of this regulation.
    For those plans that do not have 95% qualifying plan assets 
(approximately 29,414 plans), the Department estimates that the cost 
for obtaining a bond will be $574,000 for labor for a professional's 
time at $39 per hour. This represents a reduction in cost from the 
proposed estimate of $713,600. The Department has made this adjustment 
because small pension plans that are individual account plans, which 
are generally invested in mutual funds or insurance company 
investments, have been provided under the final regulation with an 
alternative disclosure approach that should result in a fewer number of 
these plans needing to purchase a bond. The cost to small plans for 
bond premiums is therefore lower by $1,436,000. The aggregate cost for 
labor and for the premiums is $6.5 million, which represents a cost 
savings of $1.5 million from the original proposal. The per plan cost 
for meeting the bonding requirement is $220.
    Commenters also suggested various changes to the proposed SAR 
disclosure requirements. Under the regulation, the SAR must disclose to 
participants and beneficiaries the names of the regulated financial 
institutions which hold or issue qualified plan assets, the amount of 
those assets, the fact that the plan must furnish to participants and 
beneficiaries on request statements from the financial institutions and 
information on bonding, and, finally, that if they do not receive the 
statements and bonding information from the plan, they may contact the 
plan administrator or the Pension and Welfare Benefits Administration, 
U.S. Department of Labor. A number of commenters suggested that, as an 
alternative to listing each financial institution and the amount of 
assets held or issued by the institution, the SAR could include a model 
statement which explained that the statements were available to 
participants and beneficiaries on request. The Department considered 
changing the disclosure requirements to reflect this alternative, but 
determined that the protection offered by furnishing statements and 
bonding information about the plans assets to participants and 
beneficiaries was of primary consideration in guarding pension plan 
assets. A general disclosure about availability of information will not 
offer the level of plan protection from fraud and dishonesty to 
participants and beneficiaries that they will receive from a plan's 
actually furnishing to them on an annual basis statements from 
financial institutions and bonding information.
    Certain commenters expressed the view that SAR disclosure for 
individual account plans should not include statements concerning the 
amount of assets held or issued by financial institutions. Participants 
and beneficiaries in these plans regularly receive statements informing 
them of their asset allocation and the value of the assets in their 
individually directed accounts. The commenters stated that furnishing 
statements from financial institutions which do not hold or issue their 
investments would not be relevant and would not offer additional 
protection from fraud or dishonesty. In addition, commenters were 
concerned about the lack of privacy for individual

[[Page 62970]]

participant investors if very small plans were required to furnish the 
names of the financial institutions and the amount of assets they held 
to all participants. As a result of these comments, the Department has 
revised the regulation for individual account plan disclosure. The 
Department agreed that it was unnecessary to require small plans to 
furnish duplicative information. This has the effect of eliminating 
both start up and annual modification costs for individual account 
plans as well as protecting individual investor privacy, without 
compromising SAR disclosure.
    As part of the disclosure requirement under the regulation, plans 
must add new language to the SAR. Because service providers typically 
use software programs to generate SARs, commenters indicated that 
estimates for revising existing programs which generate SARs would cost 
more than the Department had estimated and would require a 
professional's time. The Department agreed with this assessment and 
increased its estimate for start up costs for the additional time 
needed to rewrite existing software programs. Due to the lack of data 
on the number of service providers and the number of plans they serve, 
the Department can not specifically estimate a cost for a service 
provider to make the required changes. The Department is aware, 
however, that some service providers serve very large numbers of plans 
and believes that some economies of scale will arise from the 
repetition of processes. The Department also increased labor costs for 
a professional to $57 per hour from $39 per hour to more accurately 
reflect the level of expertise required to accomplish the revision. 
Therefore, for the 425,709 non-individually directed small plans, the 
start up cost is $12.1 million, based on a professional's time at $57 
per hour. This represents an increase of $6.5 million in start up 
costs. The start up cost per plan is $29.
    Annual modification of the SAR requires updating the list of 
financial institutions holding qualified plan assets, including the 
amount of those assets as expressed in the institutions' financial 
statements, and bonding information. Because plan administrators should 
receive from qualifying financial institutions statements identifying 
plan assets held or issued by that institution in order to properly 
discharge their annual reporting and other obligations under ERISA, no 
cost is associated with obtaining the statements. Originally, the 
Department did not include an estimate for annual modification because 
there is no burden in obtaining the statements from the financial 
institutions and little time was involved in transferring the 
information to the SAR. However, commenters suggested that modifying 
the SAR to include a list of financial institutions holding or issuing 
qualifying plan assets and reporting the changing amount of those 
assets annually would require a professional's time. The Department has 
considered these comments and believes that the costs should include an 
adjustment for annual modification of the SAR. The cost to plans, which 
are not individual account plans, for annual modification of the SAR is 
$4.2 million base on a professional's time at $39 per hour. As 
explained above, individual account plans eligible for the alternative 
disclosure approach set forth in the final rule are not required to 
annually modify SAR information and are therefore not included in the 
cost estimate. For those plans meeting the 95% test, the aggregate 
annual disclosure cost of $4.2 million translates to $6 per plan.
    Finally, plans are required to furnish participants and 
beneficiaries with copies of the financial institution statements and 
bonding information upon request. Excluding participants and 
beneficiaries in individual account plans, the Department assumes that 
5% of all small plan participants and beneficiaries will request this 
information. The cost to provide the information is $.6 million, which 
includes assembling and photocopying by a clerical worker at $15 per 
hour and mailing costs of $.37 per mailing. Participants and 
beneficiaries of individual account plans are excluded because they are 
generally invested in mutual funds and receive statements, at least 
annually, related to their personal accounts.
    When considering any regulatory action, it is important to consider 
the impact on businesses of various sizes. Given that well over half of 
all small pension plans (54%) have between 1 and 10 participants, it is 
important to focus on these small plans in particular.

      Estimates of the Number and Percentage of Very Small Pension Plans (1-9 Participants) Not Meeting the
                           ``Qualifying Plan Assets'' Test at Various Threshold Levels
----------------------------------------------------------------------------------------------------------------
                                               Alternative threshold levels for qualifying plan assets
                                    ----------------------------------------------------------------------------
                                        100%       95%        90%        85%        80%        75%        75%
----------------------------------------------------------------------------------------------------------------
Number of plans....................    186,142     20,377     10,771      9,402      8,737      8,100         49
Percentage of plans................         54          6          3          3          3          2        .01
----------------------------------------------------------------------------------------------------------------

    As the above table shows,\10\ the percent of plans with 1-9 
participants that would meet the requirement that 95% of assets be 
``qualifying plan assets'' is the same as that for all small plans with 
fewer than 100 participants as indicated below. Therefore, the 95% 
threshold is reasonable for all classes of plans within the category of 
those with fewer than 100 participants.
---------------------------------------------------------------------------

    \10\ The data in the table was estimated in the same way as that 
for pension plans with more than 100 participants (see Executive 
Order 12866 Statement).

 Estimates of the Number and Percentage of Small Pension Plans (1-99 Participants) Not Meeting the ``Qualifying
                                 Plan Assets'' Test at Various Threshold Levels
----------------------------------------------------------------------------------------------------------------
                                               Alternative threshold levels for qualifying plan assets
                                    ----------------------------------------------------------------------------
                                        100%       95%        90%        85%        80%        75%        75%
----------------------------------------------------------------------------------------------------------------
Number of plans....................    339,967     29,414     11,409      9,037      7,855      6,743          0

[[Page 62971]]

 
Percentage of plans................         56          4          2          2          1          1          0
----------------------------------------------------------------------------------------------------------------

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520) (PRA 95), the Department submitted the information 
collection request (ICR) included in the proposed Small Pension Plan 
Security Amendments to OMB for review and clearance at the time the 
Notice of Proposed Rulemaking (NPRM) was published in the Federal 
Register (December 1, 1999, 64 FR 67436). OMB approved the revisions to 
the existing information collection, the ERISA Summary Annual Report, 
under control number 1210-0040 on February 2, 2000. This approval will 
expire on February 28, 2003. Certain additional adjustments have been 
made to the ICR and the estimates of burden in response to public 
comments. The information collection provisions of this final rule, as 
well as the adjustments made to the information collection provisions 
and the burden estimates originally incorporated in the proposal, are 
discussed below.
    The revisions to the small plan audit waiver implemented by this 
final rule will increase the security and accountability of small 
pension plans, while minimizing the additional paperwork burden imposed 
on small plans. No additional paperwork burden is associated with two 
of the three provisions in the regulation--the requirement that 95% of 
plan assets be ``qualifying plan assets'' and the more protective 
bonding requirement for those plans not meeting the 95% test. For those 
plans which are not individual account plans, additional burden does 
arise from three other provisions: including new language in the SAR; 
modifying the SAR annually to identify the institutions holding or 
issuing qualifying plan assets and amounts of the assets reported by 
the institutions as of the end of the plan year, and; furnishing copies 
of financial institution statements and bonding information upon 
request.
    It is assumed that adding the additional language to the SAR form 
will be accomplished by service providers for 90% of plans, and in-
house for the remaining plans. The start up cost is estimated to be 
$10.9 million for the 90% of small plans using service providers for 30 
minutes of a professional's time at $57 per hour. This amounts to about 
$3.6 million when annualized over a three-year period. The hourly 
burden for plans that will be required to add additional information to 
their SAR themselves (assumed to be 10% of small plans) is 21,286 
hours, based on 30 minutes of a professional's time at $57 per hour. 
This estimate has been adjusted from the one outlined in the original 
proposal. The increase of $6.2 million is the result of an adjustment 
in the hourly rate for a professional from $39 per hour to $57 per hour 
to reflect the fact that this work may more likely be done by systems 
analysts and financial managers rather than the auditors and 
accountants previously assumed to perform the task of revising the SAR 
format. We have also adjusted the estimated time required to complete 
this work from 15 minutes per plan to 30 minutes per plan.
    These adjustments are the result of comments received in response 
to the NPRM that indicated that both the hourly rate for a professional 
and the time allotted for drafting new SAR language and modifying 
existing software and information management procedures to produce a 
detailed listing of qualifying assets by financial institution at year 
end were too low. The revised hourly rate is derived from 1998 BLS data 
on occupational wages for financial managers, which is the higher of 
the wage rates for financial managers and systems analysts, the two 
professional categories assumed most likely to complete this work. The 
change in the hourly burden reflects a reevaluation by the Department 
in response to comments of the time it will take to make changes to a 
plan's current SAR, particularly where these changes may involve 
rewriting an existing software package. The Department also recognized 
that most SARs are completed by service providers in a systematic 
fashion, either through the use of existing software packages 
interrelated with the preparation of the Form 5500 (which the SAR 
summarizes), or by means of extracting figures from financial 
statements supporting the Form 5500. In either case, the service 
provider is expected to have ready access to the year end statements 
needed to set up an appropriate format for listing institutions and 
amounts, as well as modifying the institutions and amounts from year to 
year, because the statements must be used in the preparation of the 
annual report.
    Commenters noted, and the Department recognizes, that revising 
software or procedures may in many instances require more than 30 
minutes. However, the Department believes that the time required to 
change the SAR format and procedures used to produce the detail figures 
will be moderated by several factors. First, with the exception of the 
institutions and amounts, and the name of the surety issuing the plan's 
fidelity bond if the plan has more than 5% of its assets in non-
qualifying assets, the Department has supplied in Sec. 2520.104-
46(b)(1)(i)(B)(3) and (4) the general format of the language to be 
added.
    In addition, where service providers serve multiple client plans, 
it is assumed that they will achieve certain efficiencies in modifying 
systems and procedures to generate the revised SAR format, resulting in 
lower per plan costs. The Department can not specifically estimate this 
effect or develop an estimate of burden per service provider due to the 
lack of information, especially with respect to small plans, on the 
number of service providers and number of providers servicing multiple 
plans. However, the Department is aware that some service providers 
prepare annual reports and SARs for very large numbers of plans, and 
believes that economies of scale do arise in those situations, 
generally lowering estimates derived on a per plan basis.
    Finally, the existing systems of service providers to small plans 
may more readily accommodate the required format changes to the extent 
that these service providers also have large plan clients. As part of 
their annual reporting obligations, large pension plans are currently 
required to submit a listing of assets held for investment that is 
similar in certain respects to the listing of the regulated financial 
institutions holding qualifying assets and the amounts held required 
under the final rule. Adjusting

[[Page 62972]]

a system already designed to produce the listing of assets held for 
investment may require a smaller commitment of resources to meet the 
SAR disclosure conditions of the final rule than revising a system that 
does not include this capability. For these reasons, the Department 
considers 30 minutes per plan to be a reasonable estimate of the 
average time required for modification of the SAR format.
    The regulation also provides that a plan administrator must, on an 
annual basis, modify the SAR to include the names of regulated 
financial institutions holding or issuing qualifying plan assets, the 
amount of those assets at the end of the plan year, and certain bonding 
information. Originally, the Department did not include a cost burden 
for the annual modification in the proposal's estimates because there 
is no burden associated with obtaining the statements from the 
financial institutions and the amount of time required to transfer the 
information to the SAR was believed to be nominal. Commenters, however, 
observed that modifying the SAR to include a list of financial 
institutions holding or issuing qualified plan assets and reporting the 
amount of those assets would require a professional's time each year to 
accomplish because assets and amounts will typically change from year 
to year. The Department has taken these comments into consideration, 
and concludes that they support an adjustment of the hour and cost 
burdens originally estimated for annual modification of the SAR. This 
adjustment results in increases of 10,643 hours and $3.7 million from 
prior estimates for the 425,709 plans required to modify the SAR for 
changes in the assets and amounts annually. This estimate is based on 
an average of 15 minutes of a professional's time at $39 per hour each 
year, and the assumption that 90% of plans purchase services to comply 
with SAR requirements. Again, some plans may require more time to 
modify the SAR listing each year, but the Department notes that the 
time required for annual modifications will be reduced to the extent 
that plans and service providers are in a position to invest in the 
modification of systems and SAR formatting to fully automate the annual 
modification process.
    It should be noted that the adjustments to the assumptions 
described above would have resulted in more substantial increases in 
burden estimates in the absence of the modification of the requirements 
of the proposal as they relate to those individual account plans in 
which investments are individually directed. As described in detail 
above in the Summary of Public Comments section of this Notice, the 
Department has modified both the definition of qualifying plan assets 
to include participant directed assets under specific circumstances and 
the disclosure provisions as they relate to participant directed 
assets. These changes have the effect of lowering the number of plans 
impacted by the SAR and system design modification and the annual asset 
listing requirement from 605,115 to 425,709 (179,406 small plans are 
reported on Form 5500 to have individually directed assets) while 
ensuring that the objectives of the regulation are met without the 
imposition of duplicative disclosure obligations. The participants in 
those 179,406 plans represent 3,512,000 of the 9,373,000 participants 
in all small pension plans.
    It is possible that the estimate of individual account plans that 
will be excepted from the requirement to list assets, amounts, and 
institutions in the SAR because the investments are individually 
directed, and account statements for these assets are provided by the 
financial institutions to participants at least annually, will differ 
to some degree from the actual number that will be excepted. Because 
the Form 5500 data element used to estimate this number is an indicator 
that some or all of the assets of an individual account plan filer are 
individually directed, no data is available to support an estimate of 
the number of such plans in which all assets are individually directed. 
However, the Department is aware that the assets not subject to 
individual direction in these plans often include participant loans and 
employer securities, which are also excepted from the detailed SAR 
disclosure requirement. Accordingly, the Department believes that the 
actual degree of variation from the number of plans assumed to be 
excepted will be small.
    In addition to addressing the privacy concerns raised by commenters 
with respect to the disclosure in the SAR of assets and amounts held in 
individually directed accounts, the Department also wished to address 
the coordination of the requirements of this rule with other statutory 
and regulatory requirements,\11\ as well as existing business practices 
relevant to individually directed account plans. While not all plans 
that permit participants or beneficiaries to exercise control over 
assets in their individual accounts for purposes of this final rule 
would intend to meet all of the conditions of section 404(c) and 
related regulations, the Department believes that the majority of these 
plans do customarily make the statements of the financial institutions 
holding the individual account assets available to participants and 
beneficiaries at least annually, either to satisfy the conditions of 
section 404(c) \12\ or as a result of the business practice of advising 
participants of their valued benefits.
---------------------------------------------------------------------------

    \11\ See section 404(c) of ERISA and the regulations issued 
thereunder, 29 CFR Sec. 2550.404c-1 et seq.
    \12\ The burden of the disclosure provisions of the Department's 
regulation under section 404(c) of ERISA is accounted for separately 
under the currently approved OMB control number 1210-0090.
---------------------------------------------------------------------------

    Although the Department considered alternatives in the development 
of the final rule that would retain some individual-level SAR 
disclosure features for individually directed accounts while addressing 
privacy concerns, it ultimately concluded that providing an exception 
from plan level disclosures when statements from the regulated 
financial institutions are in fact provided annually to individually 
directed account holders would adequately protect the assets of these 
small plans while ensuring that the information collection is useful 
and non-duplicative. As a result, the total cost of system modification 
and annual modifications to the SAR is approximately $7 million lower 
than it would have been had this exception not been considered an 
appropriate response in light of both public comment and the principles 
of the Paperwork Reduction Act.
    Finally, plan administrators are required under the regulation to 
make available for examination or furnish copies of the statements from 
the regulated financial institutions and the evidence of bonding when 
less than 95% of the assets of the plan are qualifying plans assets, to 
participants and beneficiaries who request them. The 3,512,000 
participants in the 179,406 small individual account plans in which 
assets are reported on Form 5500 to be individually directed are 
assumed to be receiving annual statements related to their particular 
accounts and are therefore not included in the burden estimates for 
furnishing documents on request. The Department assumes that 5% of the 
remaining 5,681,000 participants in small plans will request this 
information annually. Because the documents already have been provided 
by bonding companies and financial institutions, the cost of compliance 
involves 5 minutes to ready the appropriate documents for mailing and 2 
minutes of photocopying by a clerical worker, at $15 per hour, and 
mailing

[[Page 62973]]

costs of $.37 per mailing. The hour burden for the in house furnishing 
of the documents is estimated at 3,419. The cost burden for the 90% of 
plans assumed to purchase services to comply with the requirement to 
make this additional information available upon request is estimated at 
$576,479. This estimate is lower than the $995,000 estimated in 
connection with the proposal due to the modification of the proposed 
requirements with respect to assets in the individual account of a 
participant or beneficiary over which the participant or beneficiary 
has the opportunity to exercise control, and with respect to which the 
participant is furnished a statement at least annually describing the 
assets held or issued by the financial institution issuing the 
statement.
    In summary, the estimated hour and cost burdens of the information 
collection provisions of this final rule are as follows:
    Agency: Pension and Welfare Benefits Administration, Department of 
Labor.
    Title: ERISA Summary Annual Report Requirement.
    OMB Number: 1210-0040.
    Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
    Frequency of Response: Annually.
    Total Respondents: 817,000.
    Total Responses: 235,000,000.
    Estimated Burden Hours: 1,404,924.
    Estimated Annual Cost (Capital/Startup): $3,639,817.
    Estimated Annual Costs (Operating and Maintenance): $115,687,000.
    Total Annualized Costs: $119,327,000.
    Persons are not required to respond to an information collection 
request unless it displays a currently valid OMB control number.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), as well as Executive Order 12875, this rule does not include 
any Federal mandate that may result in expenditures by State, local or 
tribal governments, and does not impose an annual burden exceeding $100 
million on the private sector.

Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires the adherence to specific 
criteria by federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and States, or 
on the distribution of power and responsibilities among the various 
levels of government. This final rule does not have federalism 
implications because it has no substantial direct effect on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government. Section 514 of ERISA provides, with certain 
exceptions specifically enumerated, that the provisions of Titles I and 
IV of ERISA supercede any and all laws of the States as they relate to 
any employee benefit plan covered under ERISA. Further, this final rule 
amends annual reporting and disclosure regulations that have been in 
effect in similar form for many years pursuant to the Department's 
authority under section 104(a)(2)(A) of ERISA to prescribe, by 
regulation, simplified annual reports for pension plans with fewer than 
100 participants. The amendments incorporated in this final rule do not 
alter the fundamental requirements of the statute with respect to the 
reporting and disclosure requirements for employee benefit plans, and 
as such have no implications for the States or the relationship or 
distribution of power between the national government and the States.

Small Business Regulatory Enforcement Fairness Act

    The final rule being issued here is subject to the provisions of 
the Small Business Regulatory Enforcement Fairness Act of 1996 (5 
U.S.C. 801 et seq.) (SBREFA) and has been transmitted to Congress and 
the Comptroller General for review.

Statutory Authority

    These regulations are issued pursuant to authority contained in 
section 505 of ERISA (Pub. L. 93-406, 88 Stat. 894, 29 U.S.C. 1135) and 
sections 103(a) and 104(a) of ERISA, as amended, (Pub. L. 104-191, 110 
Stat. 1936, 1951, 29 U.S.C. 1023 and 1024) and under Secretary of 
Labor's Order No. 1-87, 52 FR 13139, April 21, 1987.

List of Subjects in 29 CFR Part 2520

    Accountants, Disclosure requirements, Employee benefit plans, 
Employee Retirement Income Security Act, Pension plans, and Reporting 
and recordkeeping requirements.

    For the reasons set out in the preamble, Part 2520 of Chapter XXV 
of Title 29 of the Code of Federal Regulations is amended as follows:

PART 2520--RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE

    1. The authority for Part 2520 continues to read as follows:

    Authority: Secs. 101, 102, 103, 104, 105, 109, 110, 111(b)(2), 
111(c) and 505, Pub. L. 93-406, 88 Stat. 840-52 and 894 (29 U.S.C. 
1021-1025, 1029-31, and 1135); Secretary of Labor's Order No. 27-74, 
13-76, 1-87, and Labor Management Services Administration Order 2-6.

    Sections 2520.102-3, 2520.104b-1 and 2520.104b-3 also are issued 
under sec. 101(a), (c) and (g)(4) of Pub. L. 104-191, 110 Stat. 1936, 
1939, 1951 and 1955, and sec. 603 of Pub. L. 104-204, 110 Stat. 2935 
(29 U.S.C. 1185 and 1191c).

    2. Section 2520.104-41 is amended by revising paragraph (c) as 
follows:


Sec. 2520.104-41  Simplified annual reporting requirements for plans 
with fewer than 100 participants.

* * * * *
    (c) Contents. The administrator of an employee pension or welfare 
benefit plan described in paragraph (b) of this section shall file, in 
the manner prescribed in Sec. 2520.104a-5, a completed Form 5500 
``Annual Return/Report of Employee Benefit Plan,'' including any 
required schedules or statements prescribed by the instructions to the 
form, and, unless waived by Sec. 2520.104-46, a report of an 
independent qualified public accountant meeting the requirements of 
Sec. 2520.103-1(b).
* * * * *

    3. Section 2520.104-46 is amended by revising paragraphs (b)(1) and 
(d) to read as follows:


Sec. 2520.104-46  Waiver of examination and report of an independent 
qualified public accountant for employee benefit plans with fewer than 
100 participants.

* * * * *
    (b) Application. (1)(i) The administrator of an employee pension 
benefit plan for which simplified annual reporting has been prescribed 
in accordance with section 104(a)(2)(A) of the Act and Sec. 2520.104-41 
is not required to comply with the annual reporting requirements 
described in paragraph (c) of this section, provided that with respect 
to each plan year for which the waiver is claimed --
    (A)(1) At least 95 percent of the assets of the plan constitute 
qualifying plan assets within the meaning of paragraph (b)(1)(ii) of 
this section, or
    (2) Any person who handles assets of the plan that do not 
constitute qualifying plan assets is bonded in

[[Page 62974]]

accordance with the requirements of section 412 of the Act and the 
regulations issued thereunder, except that the amount of the bond shall 
not be less than the value of such assets;
    (B) The summary annual report, described in Sec. 2520.104b-10, 
includes, in addition to any other required information:
    (1) Except for qualifying plan assets described in paragraph 
(b)(1)(ii)(A), (B) and (F) of this section, the name of each regulated 
financial institution holding (or issuing) qualifying plan assets and 
the amount of such assets reported by the institution as of the end of 
the plan year;
    (2) The name of the surety company issuing the bond, if the plan 
has more than 5% of its assets in non-qualifying plan assets;
    (3) A notice indicating that participants and beneficiaries may, 
upon request and without charge, examine, or receive copies of, 
evidence of the required bond and statements received from the 
regulated financial institutions describing the qualifying plan assets; 
and
    (4) A notice stating that participants and beneficiaries should 
contact the Regional Office of the U.S. Department of Labor's Pension 
and Welfare Benefits Administration if they are unable to examine or 
obtain copies of the regulated financial institution statements or 
evidence of the required bond, if applicable; and
    (C) in response to a request from any participant or beneficiary, 
the administrator, without charge to the participant or beneficiary, 
makes available for examination, or upon request furnishes copies of, 
each regulated financial institution statement and evidence of any bond 
required by paragraph (b)(1)(i)(A)(2).
    (ii) For purposes of paragraph (b)(1), the term ``qualifying plan 
assets'' means:
    (A) Qualifying employer securities, as defined in section 407(d)(5) 
of the Act and the regulations issued thereunder;
    (B) Any loan meeting the requirements of section 408(b)(1) of the 
Act and the regulations issued thereunder;
    (C) Any assets held by any of the following institutions:
    (1) A bank or similar financial institution as defined in 
Sec. 2550.408b-4(c);
    (2) An insurance company qualified to do business under the laws of 
a state;
    (3) An organization registered as a broker-dealer under the 
Securities Exchange Act of 1934; or
    (4) Any other organization authorized to act as a trustee for 
individual retirement accounts under section 408 of the Internal 
Revenue Code.
    (D) Shares issued by an investment company registered under the 
Investment Company Act of 1940;
    (E) Investment and annuity contracts issued by any insurance 
company qualified to do business under the laws of a state; and,
    (F) In the case of an individual account plan, any assets in the 
individual account of a participant or beneficiary over which the 
participant or beneficiary has the opportunity to exercise control and 
with respect to which the participant or beneficiary is furnished, at 
least annually, a statement from a regulated financial institution 
referred to in paragraphs (b)(1)(ii)(C), (D) or (E) of this section 
describing the assets held (or issued) by such institution and the 
amount of such assets.
    (iii)(A) For purposes of this paragraph (b)(1), the determination 
of the percentage of all plan assets consisting of qualifying plan 
assets with respect to a given plan year shall be made in the same 
manner as the amount of the bond is determined pursuant to 
Secs. 2580.412-11, 2580.412-14, and 2580.412-15.
    (B) Examples. Plan A, which reports on a calendar year basis, has 
total assets of $600,000 as of the end of the 1999 plan year. Plan A's 
assets, as of the end of year, include: investments in various bank, 
insurance company and mutual fund products of $520,000; investments in 
qualifying employer securities of $40,000; participant loans, meeting 
the requirements of ERISA section 408(b)(1), totaling $20,000; and a 
$20,000 investment in a real estate limited partnership. Because the 
only asset of the plan that does not constitute a ``qualifying plan 
asset'' is the $20,000 real estate investment and that investment 
represents less than 5% of the plan's total assets, no bond would be 
required under the proposal as a condition for the waiver for the 2000 
plan year. By contrast, Plan B also has total assets of $600,000 as of 
the end of the 1999 plan year, of which $558,000 constitutes 
``qualifying plan assets'' and $42,000 constitutes non-qualifying plan 
assets. Because 7%--more than 5%--of Plan B's assets do not constitute 
``qualifying plan assets,'' Plan B, as a condition to electing the 
waiver for the 2000 plan year, must ensure that it has a fidelity bond 
in an amount equal to at least $42,000 covering persons handling non-
qualifying plan assets. Inasmuch as compliance with section 412 
requires the amount of bonds to be not less than 10% of the amount of 
all the plan's funds or other property handled, the bond acquired for 
section 412 purposes may be adequate to cover the non-qualifying plan 
assets without an increase (i.e., if the amount of the bond determined 
to be needed for the relevant persons for section 412 purposes is at 
least $42,000). As demonstrated by the foregoing example, where a plan 
has more than 5% of its assets in non-qualifying plan assets, the bond 
required by the proposal is for the total amount of the non-qualifying 
plan assets, not just the amount in excess of 5%.
* * * * *
    (d) Limitations. (1) The waiver described in this section does not 
affect the obligation of a plan described in paragraph (b) (1) or (2) 
of this section to file a Form 5500 ``Annual Return/Report of Employee 
Benefit Plan,'' including any required schedules or statements 
prescribed by the instructions to the form. See Sec. 2520.104-41.
    (2) For purposes of this section, an employee pension benefit plan 
for which simplified annual reporting has been prescribed includes an 
employee pension benefit plan which elects to file a Form 5500 as a 
small plan pursuant to Sec. 2520.103-1(d) with respect to the plan year 
for which the waiver is claimed. See Sec. 2520.104-41.
    (3) For purposes of this section, an employee welfare benefit plan 
that covers fewer than 100 participants at the beginning of the plan 
year includes an employee welfare benefit plan which elects to file a 
Form 5500 as a small plan pursuant to Sec. 2520.103-1(d) with respect 
to the plan year for which the waiver is claimed. See Sec. 2520.104-41.
    (4) A plan that elects to file a Form 5500 as a large plan pursuant 
to Sec. 2520.103-1(d) may not claim a waiver under this section.

    Signed at Washington, D.C., this 16th day of October, 2000.
Leslie B. Kramerich,
Acting Assistant Secretary, Pension and Welfare Benefits 
Administration, U.S. Department of Labor.
[FR Doc. 00-26880 Filed 10-18-00; 8:45 am]
BILLING CODE 4510-29-P