[Federal Register Volume 71, Number 187 (Wednesday, September 27, 2006)]
[Proposed Rules]
[Pages 56806-56824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-8282]



[[Page 56805]]

-----------------------------------------------------------------------

Part VI





Department of Labor





-----------------------------------------------------------------------



Employee Benefits Security Administration



-----------------------------------------------------------------------



29 CFR Part 2550



Default Investment Alternatives Under Participant Directed Individual 
Account Plans; Proposed Rule

  Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / 
Proposed Rules  

[[Page 56806]]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB10


Default Investment Alternatives Under Participant Directed 
Individual Account Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Proposed regulation.

-----------------------------------------------------------------------

SUMMARY: This document contains a proposed regulation that, upon 
adoption, would implement recent amendments to title I of the Employee 
Retirement Income Security Act of 1974 (ERISA) enacted as part of the 
Pension Protection Act of 2006, Public Law 109-280, under which a 
participant of a participant directed individual account pension plan 
will be deemed to have exercised control over assets in his or her 
account if, in the absence of investment directions from the 
participant, the plan invests in a qualified default investment 
alternative. A fiduciary of a plan that complies with this proposed 
regulation will not be liable for any loss, or by reason of any breach 
that occurs as a result of such investments. The types of investments 
that qualify as default investment alternatives under section 404(c)(5) 
of ERISA are described in the proposal. Plan fiduciaries remain 
responsible for the prudent selection and monitoring of the qualified 
default investment alternative. The proposed regulation conditions 
relief upon advance notice to participants and beneficiaries describing 
the plan's provisions governing the circumstances under which 
contributions or other assets will be invested on their behalf in a 
qualified default investment alternative, the investment objectives of 
the default investment alternative, and the right of participants and 
beneficiaries to direct investments out of the default investment 
alternative without penalty. The regulation, upon adoption, will affect 
plan sponsors and fiduciaries of participant directed individual 
account plans, the participants and beneficiaries in such plans, and 
the service providers to such plans.

DATES: Written comments on the proposed regulation should be received 
by the Department of Labor on or before November 13, 2006.

ADDRESSES: Comments should be addressed to the Office of Regulations 
and Interpretations, Employee Benefits Security Administration, Room N-
5669, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210, Attn: Default Investment Regulation. Commenters 
are encouraged to submit comments electronically to [email protected] or 
www.regulations.gov (follow instructions for submission). Comments will 
be available to the public at www.dol.gov/ebsa and www.regulations.gov. 
Comments also will be available for public inspection at the Public 
Disclosure Room, N-1513, Employee Benefits Security Administration, 200 
Constitution Avenue, NW., Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Erin M. Sweeney or Lisa M. Alexander, 
Office of Regulations and Interpretations, Employee Benefits Security 
Administration, (202) 693-8500. This is not a toll-free number.

SUPPLEMENTARY INFORMATION: 

A. Background

    It is well established that many of America's workers are not 
adequately saving for retirement. Part of the retirement savings 
problem is attributable to employees who, for a wide variety of 
reasons, do not take advantage of the opportunity to participate in 
their employer's defined contribution pension plan (such as a 401(k) 
plan). The retirement savings problem is also exacerbated by those 
employees who enroll in their employer's plan, but do not assume 
responsibility for investment of their contributions, leaving their 
accounts to be invested in a conservative default investment that over 
the career of the employee is not likely to generate sufficient savings 
for a secure retirement.
    A number of recent studies indicate that significant improvements 
can be made in 401(k) plan participation and in retirement savings 
levels through plan design changes. Specifically, the studies show that 
adoption of automatic enrollment provisions (provisions pursuant to 
which employees are automatically enrolled in the plan and must 
affirmatively opt-out of plan participation) by 401(k) plans can 
dramatically increase plan participation rates.\1\ However, most 
surveys suggest that fewer than 20 percent of the employers sponsoring 
401(k) plans have adopted an automatic enrollment provision.\2\
---------------------------------------------------------------------------

    \1\ Stephen P. Utkus & Jean A. Young, Lessons from Behavioral 
Finance and the Autopilot 401(k) Plan, (Vanguard Center for 
Retirement Res.) April 2004; Sarah Holden & Jack VanDerhei, The 
Influence of Automatic Enrollment, Catch-Up, and IRA Contributions 
on 401(k) Accumulations at Retirement, 283 Employee Benefit Res. 
Inst. Issue Brief (2005). The issue brief indicates that the ``EBRI/
ICI model shows that prior to automatic enrollment, 66 percent of 
eligible workers at year-end 2000 were participants in 401(k) plans, 
while immediately after adding automatic enrollment to the model, 
the participation rate rises to 92 percent of eligible employees.'' 
Id. at 4. See also James J. Choi, David Laibson, & Brigitte C. 
Madrian, Plan Design and 401(k) Savings Outcomes, 57 National Tax J. 
275 (2004); see also James J. Choi, David Laibson, Brigitte Madrian, 
& Andrew Metrick, For Better or For Worse: Default Effects and 
401(k) Savings Behavior (Pension Research Council, Working Paper No. 
2002-2, 2001), available at http://prc.wharton.upenn.edu/prc/PRC/WP/WP2002-2.pdf.
    \2\ The incidence of automatic enrollment appears to be growing, 
by one estimate from 8.4 percent of plans in 2003 to 10.5 percent in 
2004 (48th Annual Survey of Profit Sharing and 401(k) Plans, (Profit 
Sharing/401(k) Council of America, Chicago, Ill.), 2005, at 36), by 
another from 14 percent in 2003 to 19 percent in 2005 (Survey 
Findings: Trends and Experiences in 401(k) Plans 2005, (Hewitt 
Associates LLC), 2005, at 1, 13). Another survey found no growth 
between 2003 and 2004 (2004 Annual 401(k) Benchmarking Survey 
(Deloitte Consulting LLP), 2004, at 6).
---------------------------------------------------------------------------

    Many of the studies also indicate that the accumulation of 
retirement savings in automatic enrollment plans depends heavily on the 
default investment alternative and the default contribution rate 
provided under the plan.\3\ The scope of this proposal is limited to 
default investment alternatives in which individual account plan assets 
are invested on behalf of those participants or beneficiaries who fail 
to give investment instructions. Modification of contribution rates 
implicates issues beyond the jurisdiction of the Department of Labor.
---------------------------------------------------------------------------

    \3\ See studies cited supra note 2. See also Stephen P. Utkus, 
Selecting a Default Fund for a Defined Contribution Plan (Vanguard 
Center for Retirement Res.), July 2004.
---------------------------------------------------------------------------

    Several studies note that the contributions of automatically 
enrolled participants are frequently invested in products that present 
little risk of capital loss, e.g., money market funds, stable value 
funds and similarly performing investment vehicles.\4\ It also appears 
that many plans without automatic enrollment provisions \5\

[[Page 56807]]

utilize similar capital preservation default investment products for 
those employees who enroll in the plan but fail to direct the 
investment of their contributions or their employer's matching 
contributions. As a short-term investment, money market or stable value 
funds may not significantly affect retirement savings. Such investments 
can play a useful role as a component of a diversified portfolio. 
However, when such funds become the exclusive investment of 
participants or beneficiaries, it is unlikely that the rate of return 
generated by those funds over time will be sufficient to generate 
adequate retirement savings for most participants or beneficiaries.\6\
---------------------------------------------------------------------------

    \4\ Of the responding plans with automatic enrollment, the 
default investment option was a stable value fund for 26.9%, a money 
market fund for 23.7%, a balanced fund for 29%, a life cycle fund 
for 8.6%, a professionally managed account for 6.5%, and 5.4% were 
reported as ``other.'' 48th Annual Survey of Profit Sharing/401(k) 
Plans, supra note 2, at 37, Table 64. Other surveys indicate the use 
of money market, stable value and similarly performing investment 
vehicles at 58 percent (2004 Annual 401(k) Benchmarking Survey, 
supra note 2, at 7, Exhibit 20) and 81 percent (Stephen P. Utkus, 
Selecting A Default Fund for a Defined Contribution Plan, (Vanguard 
Center for Retirement Res.), Volume 14, June 2005, at 3).
    \5\ This proposal encompasses situations beyond automatic 
enrollment. Examples include: failure of a participant or 
beneficiary to provide investment instruction following the 
elimination of an investment alternative or a change in service 
provider, failure of a participant or beneficiary to provide 
investment instruction following a rollover from another plan, and 
any other failure of a participant or beneficiary to provide 
investment instruction.
    \6\ Investments in capital preservation vehicles deprive 
investors of the opportunity to benefit from the returns generated 
by equity securities that have historically generated higher returns 
than fixed income investments.
---------------------------------------------------------------------------

    A frequently cited impediment to adoption of automatic enrollment 
provisions in individual account plans is the assumption of fiduciary 
responsibility for the investment decisions that the plan fiduciary 
must make on behalf of the automatically enrolled participants. In the 
case of a participant directed individual account plan designed to 
comply with the requirements of ERISA section 404(c)(1), responsibility 
for the result of specific investment directions rests with the 
directing plan participant or beneficiary, rather than the plan sponsor 
or other fiduciaries.\7\ Before enactment of the Pension Protection 
Act, which became law on August 17, 2006, the Department indicated that 
a participant or beneficiary would not be considered to have exercised 
control when the participant or beneficiary is merely apprised of 
investments that will be made on his or her behalf in the absence of 
instructions to the contrary.\8\ In effect, the Department treated the 
plan fiduciary's investment decision on behalf of a participant or 
beneficiary as if the decision were made in connection with a 
participant directed individual account plan that is not designed, or 
fails, to meet the conditions for a section 404(c) plan. While some 
employers, in adopting automatic enrollment provisions or otherwise 
dealing with the absence of investment direction from plan 
participants, have been willing to assume fiduciary responsibility for 
their investment decisions, many of those employers attempt to minimize 
their fiduciary liability by limiting default investments to funds that 
emphasize preservation of capital and little risk of loss (e.g., money 
market and stable value funds).
---------------------------------------------------------------------------

    \7\ See Final Regulation Regarding Participant Directed 
Individual Account Plans (ERISA Section 404(c) Plans), 57 FR 46,906 
(Oct.13, 1992) (codified at 29 CFR 2550.404c-1).
    \8\ See Rev. Rul. 98-30, 1998-1 C.B. 1273; see also Rev. Rul. 
2000-8, 2000-1 C.B. 617; see also Final Regulation Regarding 
Participant Directed Individual Account Plans (ERISA Section 404(c) 
Plans), 57 FR at 46924; see also Retirement Plans, Cash or Deferred 
Arrangements Under Section 401(k) and Matching Contributions or 
Employee Contributions Under Section 401(m) Regulations, 69 FR 
78144, 78146 n. 2 (Dec. 29, 2004) (codified at 26 CFR pts. 1 & 602).
---------------------------------------------------------------------------

    As part of the Pension Protection Act, section 404(c) of ERISA was 
amended to provide relief accorded by section 404(c)(1) to fiduciaries 
that invest participant assets in certain types of default investment 
alternatives in the absence of participant investment direction. 
Specifically, section 624(a) of the Pension Protection Act added a new 
section 404(c)(5) to ERISA. Section 404(c)(5)(A) of ERISA provides 
that, for purposes of section 404(c)(1) of ERISA, a participant in an 
individual account plan shall be treated as exercising control over the 
assets in the account with respect to the amount of contributions and 
earnings which, in the absence of an investment election by the 
participant, are invested by the plan in accordance with regulations 
prescribed by the Secretary of Labor. Section 624(a) of the Pension 
Protection Act directed that such regulations provide guidance on the 
appropriateness of designating default investments that include a mix 
of asset classes consistent with capital preservation or long-term 
capital appreciation, or a blend of both. In the Department's view, 
this statutory language provides the stated relief to fiduciaries of 
any participant directed individual account plan that complies with its 
terms and with those of the Department's proposed regulation under 
section 404(c)(5) of ERISA. This relief therefore, is not contingent on 
a plan being an ``ERISA 404(c) plan'' or otherwise meeting the 
requirements of the Department's regulations at 2550.404c-1.
    Section 624(a) of the Pension Protection Act also added notice 
requirements in section 404(c)(5)(B)(i) and (ii) of ERISA. Section 
404(c)(5)(B)(i) requires that each participant--(I) receive, within a 
reasonable period of time before each plan year, a notice explaining 
the employee's right under the plan to designate how contributions and 
earnings will be invested and explaining how, in the absence of any 
investment election by the participant, such contributions and earnings 
will be invested, and (II) has a reasonable period of time after 
receipt of such notice and before the beginning of the plan year to 
make such designation. Section 404(c)(5)(B)(ii) requires each notice to 
be sufficiently accurate and comprehensive to appraise the employee of 
such rights and obligations, and to be written in a manner calculated 
to be understood by the average employee eligible to participate.
    The amendments made by section 624 of the Pension Protection Act 
shall apply to plan years beginning after December 31, 2006. Section 
624(b) of the Pension Protection Act directed the Department to issue 
final regulations under section 404(c)(5)(A) of ERISA no later than 6 
months of the date of enactment of the Pension Protection Act.
    In an effort to increase plan participation through the adoption of 
automatic enrollment provisions, and increase retirement savings 
through the utilization of default investments that are more likely to 
increase retirement savings for participants and beneficiaries who do 
not direct their own investments, the Department, exercising its 
authority under section 505 of ERISA and consistent with section 624 of 
the Pension Protection Act, is proposing to provide relief to 
fiduciaries of participant directed individual account plans that 
invest participant assets in certain types of default investment 
alternatives in the absence of participant investment direction. The 
proposed regulation is described below.

B. Overview of Proposal

Scope of the Fiduciary Relief

    The proposal would, upon adoption, implement the fiduciary relief 
afforded by ERISA section 404(c)(5), under which a participant, who 
does not give investment directions, will be treated as exercising 
control over his or her account with respect to assets that the plan 
invests in a qualified default investment alternative. See Sec.  
2550.404c-5(a)(1).
    The relief provided by the proposed regulation is conditioned on 
the use of certain investment alternatives, but the limitations of the 
proposed regulation should not be construed to indicate that the use of 
investment alternatives not identified in the proposed regulation as 
qualified default investment alternatives would be imprudent. For 
example, the Department recognizes that investments in money market 
funds, stable value products and similarly performing investment 
vehicles may be prudent for some participants or beneficiaries.

[[Page 56808]]

    Paragraph (b) of Sec.  2550.404c-5 defines the scope of the 
fiduciary relief provided. Specifically, paragraph (b)(1) provides 
that, subject to certain exceptions, a fiduciary of an individual 
account plan that permits participants and beneficiaries to direct the 
investment of assets in their accounts and that meets the conditions of 
the regulation, as set forth in paragraph (c) of Sec.  2550.404c-5, 
shall not be liable for any loss under part 4 of title I, or by reason 
of any breach, that is the direct and necessary result of investing all 
or part of a participant's or beneficiary's account in a qualified 
default investment alternative, or of investment decisions made by the 
entity described in paragraph (e)(3) in connection with the management 
of a qualified default investment alternative. The scope of this relief 
is the same as that extended to plan fiduciaries under ERISA section 
404(c)(1)(B) in connection with carrying out investment directions of 
plan participants and beneficiaries in an ``ERISA section 404(c) plan'' 
as described in 29 CFR 2550.404c-1(a), although it is not necessary for 
a plan to be an ERISA section 404(c) plan in order for the fiduciary to 
obtain the relief accorded by this proposed regulation. As with section 
404(c)(1) of the Act and the regulation issued thereunder (29 CFR 
2550.404c-1), the proposed regulation would not provide relief from the 
general fiduciary rules applicable to the selection and monitoring of a 
default investment alternative or from any liability that results from 
a failure to satisfy these duties, including liability for any 
resulting losses. See paragraph (b)(2) of Sec.  2550.404c-5. Paragraph 
(b) further makes clear that nothing in the proposed regulation 
relieves an investment manager from its general fiduciary duties or 
from any liability that results from a failure to satisfy these duties, 
including liability for any resulting losses. See paragraph (b)(3) of 
Sec.  2550.404c-5. In addition, the proposed regulation provides no 
relief from the prohibited transaction provisions of section 406 of 
ERISA or from any liability that results from a violation of those 
provisions, including liability for any resulting losses. See paragraph 
(b)(4) of Sec.  2550.404c-5.
    Like other investment alternatives made available under a plan, a 
plan fiduciary would be required to carefully consider investment fees 
and expenses in choosing a qualified default investment alternative for 
purposes of the proposed regulation. To the extent that a plan offers 
more than one investment alternative that could constitute a qualified 
default investment alternative, the Department anticipates that fees 
and expenses would be an important consideration in selecting among the 
alternatives.

Conditions for the Fiduciary Relief

    The conditions for relief are set forth in paragraph (c) of the 
proposal. The proposal has six conditions.
    The first condition requires that assets invested on behalf of 
participants or beneficiaries under the proposed regulation be invested 
in a ``qualified default investment alternative.'' See Sec.  2550.404c-
5(c)(1). ``Qualified default investment alternatives'' are defined in 
paragraph (e) of the proposed regulation and discussed in detail below. 
The second condition provides that the participant or beneficiary on 
whose behalf assets are being invested in a qualified default 
investment alternative had the opportunity to direct the investment of 
assets in his or her account but did not direct the assets. See Sec.  
2550.404c-5(c)(2). In other words, no relief is available when a 
participant or beneficiary has provided affirmative investment 
direction concerning the assets invested on the participant's or 
beneficiary's behalf.
    The third condition requires that the participant or beneficiary on 
whose behalf an investment in a qualified default investment 
alternative may be made is furnished a notice within a reasonable 
period of time of at least 30 days in advance of the first such 
investment, and within a reasonable period of time of at least 30 days 
in advance of each subsequent plan year. As described in the 
regulation, the required notice can be furnished in the plan's summary 
plan description, summary of material modifications, or as a separate 
notification. See Sec.  2550.404c-5(c)(3). The specific content 
requirements for the notice are described in paragraph (d) of the 
proposed regulation and discussed in detail below.
    The Department notes that a similar notice requirement is contained 
in section 401(k)(13)(E) of the Internal Revenue Code (Code), as 
amended by the Pension Protection Act. The Department anticipates that 
the notice requirements of this proposed regulation and the notice 
requirements of section 401(k)(13)(E) of the Code could be satisfied in 
a single notice.
    The Department further notes that the phrase--``in advance of the 
first such investment [in a qualified default investment 
alternative]''--is not intended to foreclose availability of relief to 
fiduciaries that, prior to the adoption of a final regulation, invested 
assets on behalf of participants and beneficiaries in a default 
investment alternative that would constitute a ``qualified default 
investment alternative'' under the regulation. In such cases, the 
phrase ``in advance of the first such investment'' should be read to 
mean the first investment with respect to which relief under the 
proposed regulation is intended to apply after the effective date of 
the regulation. The Department is proposing to make this regulation 
effective 60 days after publication of the final rule in the Federal 
Register.
    The fourth condition of the proposed regulation requires that the 
terms of the plan provide that any material provided to the plan 
relating to a participant's or beneficiary's investment in a qualified 
default investment alternative (e.g., account statements, prospectuses, 
proxy voting material) will be provided to the participant or 
beneficiary. See Sec.  2550.404c-5(c)(4).
    The fifth condition requires that any participant or beneficiary on 
whose behalf assets are invested in a qualified default investment 
alternative be afforded the opportunity, consistent with the terms of 
the plan (but in no event less frequently than once within any three 
month period), to transfer, in whole or in part, such assets to any 
other investment alternative available under the plan without financial 
penalty. See Sec.  2550.404c-5(c)(5). This provision assures that 
participants and beneficiaries on whose behalf assets are invested in a 
qualified default investment alternative have the same opportunity as 
other plan participants and beneficiaries to direct the investment of 
their assets, and that neither the plan nor the qualified default 
investment alternative impose financial penalties that would restrict 
the rights of participants and beneficiaries to direct their assets to 
other investment alternatives available under the plan. This provision 
does not confer greater rights on participants or beneficiaries whose 
accounts the plan invests in qualified default investment alternatives 
than are otherwise available under the plan with respect to the timing 
of investment directions. Thus, if a plan provides participants and 
beneficiaries the right to direct investments on a quarterly basis, 
those participants and beneficiaries with investments in a qualified 
default investment alternative need only be afforded the opportunity to 
direct their investments on a quarterly basis. Similarly, if a plan 
permits daily investment direction, participants and beneficiaries with 
investments in a qualified default investment alternative

[[Page 56809]]

must be permitted to direct their investments on a daily basis.
    The Department notes that this proposal does not address or provide 
relief with respect to the direction of investments out of a qualified 
default investment alternative into another investment alternative 
available under the plan. See generally section 404(c)(1) of ERISA and 
29 CFR 2550.404c-1.
    The last condition requires that the plan offer participants and 
beneficiaries the opportunity to invest in a ``broad range of 
investment alternatives'' within the meaning of 29 CFR 2550.404c-
1(b)(3).\9\ See Sec.  2550.404c-5(c)(6). For purposes of the proposed 
regulation, the Department believes that participants and beneficiaries 
should be afforded a sufficient range of investment alternatives to 
achieve a diversified portfolio with aggregate risk and return 
characteristics at any point within the range normally appropriate for 
the pension plan participant or beneficiary. The Department believes 
that the application of the ``broad range of investment alternatives'' 
standard of the section 404(c) regulation accomplishes this objective. 
Moreover, the Department believes that virtually all individual account 
plans that provide for participant direction, without regard to whether 
such plans meet all the requirements for an ERISA section 404(c) plan, 
likely will meet this standard without having to undertake significant 
changes in available investment alternatives.
---------------------------------------------------------------------------

    \9\ 29 CFR 2550.404c-1(b)(3) provides that ``[a] plan offers a 
broad range of investment alternatives only if the available 
investment alternatives are sufficient to provide the participant or 
beneficiary with a reasonable opportunity to: (A) Materially affect 
the potential return on amounts in his individual account with 
respect to which he is permitted to exercise control and the degree 
of risk to which such amounts are subject; (B) Choose from at least 
three investment alternatives: (1) Each of which is diversified; (2) 
each of which has materially different risk and return 
characteristics; (3) which in the aggregate enable the participant 
or beneficiary by choosing among them to achieve a portfolio with 
aggregate risk and return characteristics at any point within the 
range normally appropriate for the participant or beneficiary; and 
(4) each of which when combined with investments in the other 
alternatives tends to minimize through diversification the overall 
risk of a participant's or beneficiary's portfolio; * * *''
---------------------------------------------------------------------------

Notices

    As discussed above, relief under the proposed regulation is 
conditioned on furnishing participants and beneficiaries advance 
notification concerning the default investment provisions of their 
plan. See Sec.  2550.404c-5(c)(3). The specific information required to 
be contained in the notice is set forth in paragraph (d) of the 
regulation.
    Paragraph (d) of Sec.  2550.404c-5 requires that the notice to 
participants and beneficiaries be written in a manner calculated to be 
understood by the average plan participant and contain the following 
information: (1) A description of the circumstances under which assets 
in the individual account of a participant or beneficiary may be 
invested on behalf of the participant and beneficiary in a qualified 
default investment alternative; (2) a description of the qualified 
default investment alternative, including a description of the 
investment objectives, risk and return characteristics (if applicable), 
and fees and expenses attendant to the investment alternative; (3) a 
description of the right of the participants and beneficiaries on whose 
behalf assets are invested in a qualified default investment 
alternative to direct the investment of those assets to any other 
investment alternative under the plan, without financial penalty; and 
(4) an explanation of where the participants and beneficiaries can 
obtain investment information concerning the other investment 
alternatives available under the plan.
    It is the view of the Department that the notice requirements of 
this proposed regulation are consistent with the notice requirements 
added to section 404(c)(5) of ERISA by section 624 of the Pension 
Protection Act. The Department believes the required information is 
sufficient to put participants and beneficiaries on notice as to the 
consequences of failing to direct investment of the assets in their 
account, and encourages active decisionmaking by participants and 
beneficiaries. The Department invites suggestions as to whether 
additional information should be considered for inclusion in the 
notice.

Qualified Default Investment Alternatives

    Under the proposal, relief from fiduciary liability is provided 
with respect to only those assets invested on behalf of a participant 
or beneficiary in a ``qualified default investment alternative.'' See 
Sec.  2550.404c-5(c)(1). Paragraph (e) of Sec.  2550.404c-5 sets forth 
five requirements for a qualified default investment alternative.
    The first requirement is intended to limit investment in employer 
securities as part of a qualified default investment alternative's 
investment strategy. Subject to two exceptions, the proposal provides 
that a qualified default investment alternative shall not hold or 
permit the acquisition of employer securities. See Sec.  2550.404c-
5(e)(1)(i).
    The first exception to this general prohibition is applicable to 
employer securities held or acquired by an investment company 
registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1, 
et seq., or a similar pooled investment vehicle regulated and subject 
to periodic examination by a State or Federal agency and with respect 
to which investment in such securities is made in accordance with the 
stated investment objectives of the investment vehicle and independent 
of the plan sponsor or an affiliate thereof. While the Department does 
not believe it is appropriate for a qualified default investment 
alternative to encourage investments in employer securities, the 
Department also recognizes that an absolute prohibition against holding 
or investing in employer securities may unnecessarily complicate the 
selection and monitoring of qualified default investment alternatives 
by publicly traded companies, the stock of which may be held or 
acquired pursuant to an investment strategy wholly independent of the 
employer. The Department believes that the foregoing exception is 
sufficiently broad to accommodate publicly traded companies and pooled 
investment vehicles that may invest in such companies.
    The second exception is for employer securities acquired as a 
matching contribution from the employer/plan sponsor or at the 
direction of the participant or beneficiary. This exception is intended 
to make clear that an investment management service will not be 
precluded from serving as a qualified default investment alternative 
under Sec.  2550.404c-5(e)(5)(iii) merely because the account of a 
participant or beneficiary holds employer securities acquired as 
matching contributions from the employer/plan sponsor, or acquired as a 
result of prior direction by the participant or beneficiary, provided 
that the investment management service has the authority to dispose of 
such securities.
    In the case of employer securities acquired as matching 
contributions that are subject to a restriction on transferability, 
relief would not be available until the investment management service 
can exercise discretion over such securities, at the expiration of the 
restriction. Although an investment management service would be 
responsible for determining whether and to what extent the account 
should continue to hold investments in employer securities, the 
investment management service could not, except as part of an 
investment company or similar pooled investment vehicle, exercise its 
discretion to acquire additional employer securities on behalf

[[Page 56810]]

of an individual account without violating Sec.  2550.404c-5(e)(1).
    In the case of prior direction by a participant or beneficiary, if 
the participant or beneficiary provided investment direction with 
respect to employer securities, but failed to provide investment 
direction following an event, such as a change in investment 
alternatives, and the terms of the plan provide that in such 
circumstances the account's assets are invested in a default investment 
alternative, the proposed regulation would permit an investment 
management service to hold and manage those employer securities in the 
absence of participant or beneficiary direction. While the investment 
management service may not acquire additional employer securities using 
participant contributions, the investment management service may reduce 
the amount of employer securities held by the account of the 
participant or beneficiary.
    The second requirement provides that, except as otherwise provided 
in paragraph (c)(5), a qualified default investment alternative may not 
impose financial penalties or otherwise restrict the ability of a 
participant or beneficiary to transfer, in whole or in part, his or her 
investment from the qualified default investment alternative to any 
other investment alternative available under the plan. The Department 
does not believe that limits on the ability of a participant or 
beneficiary to move from a qualified default investment alternative 
should be permitted by the plan or the qualified default investment 
alternative.
    The third requirement is that a qualified default investment 
alternative be either managed by an investment manager, as defined in 
section 3(38) of the Act, or an investment company registered under the 
Investment Company Act of 1940. The Department believes that when plan 
fiduciaries are relieved of liability for underlying investment 
management/asset allocation decisions, those responsible for the 
investment management/asset allocation decisions must be investment 
professionals who acknowledge their fiduciary responsibilities and 
liability under ERISA. For this reason, the proposed regulation 
requires that, except in the case of registered investment companies, 
those responsible for the management of a qualified default investment 
alternative be ``investment managers'' within the meaning of section 
3(38) of ERISA.\10\ Inasmuch as the assets of an investment company 
registered under the Investment Company Act of 1940 do include plan 
assets solely by virtue of a plan's investment in securities issued by 
such investment company \11\ and such investment companies are subject 
to Federal and State regulation and oversight, the proposal permits an 
investment company registered under the Investment Company Act of 1940 
to constitute a ``qualified default investment alternative'' provided 
that the other conditions of the proposed regulation are satisfied.
---------------------------------------------------------------------------

    \10\ Section 3(38) of ERISA defines the term ``investment 
manager'' to mean ``any fiduciary (other than a trustee or named 
fiduciary, as defined in section 402(a)(2) [29 U.S.C. 1102(a)(2)])--
(A) who has the power to manage, acquire, or dispose of any asset of 
a plan; (B) who (i) is registered as an investment adviser under the 
Investment Advisers Act of 1940 [15 U.S.C. 80b-1 et seq.]; (ii) is 
not registered as an investment adviser under such Act by reason of 
paragraph (1) of section 203A(a) of such Act, is registered as an 
investment adviser under the laws of the State (referred to in such 
paragraph (1)) in which it maintains its principal office and place 
of business, and, at the time the fiduciary last filed the 
registration form most recently filed by the fiduciary with such 
State in order to maintain the fiduciary's registration under the 
laws of such State, also filed a copy of such form with the 
Secretary; (iii) is a bank, as defined in that Act [15 U.S.C. 80b-1 
et seq.]; or (iv) is an insurance company qualified to perform 
services described in subparagraph (A) under the laws of more than 
one State; and (C) has acknowledged in writing that he is a 
fiduciary with respect to the plan.''
    \11\ See ERISA section 401(b)(1).
---------------------------------------------------------------------------

    The fourth requirement provides that a qualified default investment 
alternative is diversified so as to minimize the risk of large losses.
    The last requirement for a qualified default investment alternative 
conditions relief on the use of one of three types of investment 
products, portfolios or services. See Sec.  2550.404c-5(e)(5). In 
defining qualified default investment alternatives, the Department 
presumes that, in those instances when a participant or beneficiary 
chooses not to direct the investment of the assets in their account, 
the only objective and readily available information relevant to making 
an investment decision on behalf of the participant is age. For this 
reason, the investment objectives of the qualified default investment 
alternatives are not required to take into account other factors, such 
as risk tolerances, other investment assets, etc.
    The first alternative is an investment fund product or model 
portfolio that is designed to provide varying degrees of long-term 
appreciation and capital preservation through a mix of equity and fixed 
income exposures based on the participant's age, target retirement date 
(such as normal retirement age under the plan) or life expectancy. Such 
products and portfolios change their asset allocation and associated 
risk levels over time with the objective of becoming more conservative 
(i.e., decreasing risk of losses) with increasing age. As noted above, 
asset allocation decisions for eligible products and portfolios are not 
required to take into account risk tolerances, investments or other 
preferences of an individual participant. An example of such a fund or 
portfolio may be a ``life-cycle'' or ``targeted-retirement-date'' fund 
or account. See Sec.  2550.404c-5(e)(5)(i). The reference to ``an 
investment fund product or model portfolio'' is intended to make clear 
that this alternative might be a ``stand alone'' product or a ``fund of 
funds'' comprised of various investment options otherwise available 
under the plan for participant investments. In the context of a fund of 
funds portfolio, it is likely that money market, stable value and 
similarly performing capital preservation vehicles will play a role in 
comprising the mix of equity and fixed-income exposures.
    The second alternative is an investment fund product or model 
portfolio that is designed to provide long-term appreciation and 
capital preservation through a mix of equity and fixed income exposures 
consistent with a target level of risk appropriate for participants of 
the plan as a whole. For purposes of this alternative, asset allocation 
decisions for such products and portfolios are not required to take 
into account the age of an individual participant, but rather focus on 
the demographics of the participant population as a whole. An example 
of such a fund or portfolio may be a ``balanced'' fund. As with the 
preceding alternative, the reference to ``an investment fund product or 
model portfolio'' is intended to make clear that this alternative might 
be a ``stand alone'' product or a ``fund of funds'' comprised of 
various investment options otherwise available under the plan for 
participant investments. In the context of a fund of funds portfolio, 
it is likely that money market, stable value and similarly performing 
capital preservation vehicles will play a role in comprising the mix of 
equity and fixed-income exposures for this alternative.
    Unlike the first alternative, which focuses on the age, target 
retirement date (such as normal retirement age under the plan) or life 
expectancy of an individual participant, the second alternative 
requires a fiduciary to take into account the demographics of the 
plan's participants, similar to the considerations a fiduciary would 
take into account in managing an individual account plan that does not 
provide for participant direction. For this reason, a

[[Page 56811]]

fiduciary may, in connection with the duty to monitor investment 
alternatives available under the plan, conclude that a new or 
additional investment fund product or model portfolio is required to 
take into account significant changes in the demographics (e.g., age) 
of the plan's participant population.
    The third alternative is an investment management service with 
respect to which an investment manager allocates the assets of a 
participant's individual account to achieve varying degrees of long-
term appreciation and capital preservation through a mix of equity and 
fixed income exposures, offered through investment alternatives 
available under the plan, based on the participant's age, target 
retirement date (such as normal retirement age under the plan) or life 
expectancy. Such portfolios change their asset allocation and 
associated risk levels over time with the objective of becoming more 
conservative (i.e., decreasing risk of losses) with increasing age. As 
with the first alternative, the proposed regulation makes clear that, 
as with the other alternatives described in the regulation, asset 
allocation decisions are not required to take into account risk 
tolerances, other investments or other preferences of an individual 
participant. An example of such a service may be a ``managed account.'' 
\12\
---------------------------------------------------------------------------

    \12\ With regard to this alternative, the Department notes that 
in 2003, a working group of the Advisory Council on Employee Welfare 
and Pension Benefit Plans submitted a report on optional 
professional management in defined contribution plans. While the 
Advisory Council report focused on the use of managed account 
services in which participants played an active role in preparing an 
investment profile, the report nonetheless provides support for 
including such services within the definition of a qualified default 
investment alternative. This report may be accessed at http://www.dol.gov/ebsa/publications/AC_1107b03_report.html.
---------------------------------------------------------------------------

    Although investment management services are included within the 
scope of relief, the Department notes that relief similar to that 
provided by this proposed regulation is available to plan fiduciaries 
under the statute. Specifically, section 402(c)(3) of ERISA provides 
that ``a person who is a named fiduciary with respect to control or 
management of the assets of a plan may appoint an investment manager or 
managers to manage (including the power to acquire and dispose of) any 
assets of a plan.'' Section 405(d) of ERISA provides that ``[i]f an 
investment manager or managers have been appointed under section 
402(c)(3), then * * * no trustee shall be liable for the acts or 
omissions of such investment manager or managers, or be under an 
obligation to invest or otherwise manage any asset of the plan which is 
subject to the management of such investment manager.'' The Department 
included investment management services within the scope of fiduciary 
relief in order to avoid any ambiguity concerning the scope of relief 
available to plan fiduciaries in the context of participant directed 
individual account plans.

C. Miscellaneous Issues

Preemption

    Section 902 of the Pension Protection Act added a new section 
514(e)(1) to ERISA providing that notwithstanding any other provision 
of section 514, title I of ERISA shall supersede any State law that 
would directly or indirectly prohibit or restrict the inclusion in any 
plan of an automatic contribution arrangement. Section 902 further 
added section 514(e)(2) to ERISA defining the term ``automatic 
contribution arrangement'' as an arrangement under which a participant: 
may elect to have the plan sponsor make payments as contributions under 
the plan on behalf of the participant, or to the participant directly 
in cash; is treated as having elected to have the plan sponsor make 
such contributions in an amount equal to a uniform percentage of 
compensation provided under the plan until the participant specifically 
elects not to have such contributions made (or specifically elects to 
have such contributions made at a different percentage); and under 
which such contributions are invested in accordance with regulations 
prescribed by the Secretary of Labor under section 404(c)(5) of ERISA. 
The Department specifically requests comments on whether and to what 
extent regulations would be helpful in addressing the preemption 
provisions of section 514(e) of ERISA.

Enforcement

    Section 902 of the Pension Protection Act amended section 502(c)(4) 
of ERISA to provide that the Secretary of Labor may assess a civil 
penalty against any person of up to $1,100 a day for each violation by 
any person of section 302(b)(7)(F)(vi) or section 514(e)(3) of ERISA. 
Implementing regulations will be developed in a separate rulemaking.

D. Request for Comments

    The Department invites comments from interested persons on all 
aspects of the proposed regulation. Comments should be addressed to the 
Office of Regulations and Interpretations, Employee Benefits Security 
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington, DC 20210, Attn: Default Investment Regulation. 
Commenters are encouraged to submit comments electronically to [email protected] or www.regulations.gov. All comments received will be 
available to the public at http://www.dol.gov/ebsa and 
www.regulations.gov. Comments also will be available for public 
inspection at the Public Disclosure Room, N-1513, Employee Benefits 
Security Administration, 200 Constitution Avenue, NW., Washington, DC 
20210.
    Comments on this proposal should be submitted to the Department on 
or before November 13, 2006.

E. Effective Date

    The Department proposes to make this regulation effective 60 days 
after the date of publication of the final rule in the Federal 
Register.

F. Regulatory Impact Analysis

Summary

    This proposed regulation is expected to have two major, positive 
economic consequences. First, default investments will be directed 
toward higher-return portfolios boosting average account performance. 
Second, automatic enrollment provisions will become more common 
boosting participation in retirement savings plans. Both of these 
effects will tend on average and on aggregate to increase retirement 
savings, especially among younger workers with low earnings and 
frequent job changes. A substantial number of individuals will enjoy 
significant increases in retirement income.\13\ The magnitude of these 
effects will be large in absolute terms and proportionately large for 
many directly affected individuals, but will be modest relative to 
overall aggregate retirement savings.
---------------------------------------------------------------------------

    \13\ In rare cases, retirement income may decrease slightly. A 
few individuals may wind up contributing for some period of time at 
a default rate that is lower than the rate they otherwise would have 
elected (this risk will be minimized in plans that automatically 
escalate default contribution rates). A few may realize lower 
returns in a qualified default investment alternative than they 
would otherwise have realized.
---------------------------------------------------------------------------

    The magnitude of the proposed regulation's effects will depend on 
plan sponsor and participant choices. The effects will be cumulative 
and will become fully realized only after workers beginning their 
careers today reach retirement. For these reasons, any estimates of the 
regulation's effects are subject to substantial uncertainty. The 
Department has developed low- and high-impact estimates, to illustrate 
a range of potential long-term effects.

[[Page 56812]]

    In the very long run the proposed regulation is predicted to 
increase aggregate 401(k) plan account balances by between 2 percent 
and 5 percent, or approximately $45 billion and $90 billion if 
represented at 2005 levels. The portion invested in equity will 
increase by between 3 percent and 5 percent, or $27 billion and $48 
billon.
    For individuals born in 1985 and surviving to age 67, holding other 
factors constant, low-impact estimates suggest that the proposed 
regulation will increase pension income by an average of $2,010 per 
year (in 2005 dollars) for 10 percent, but decrease it by $1,120 per 
year on average for 5 percent. Pension income would be unchanged for 
the remaining 85 percent. High-impact estimates suggest that average 
annual pension income will increase by $2,740 for 14 percent, fall by 
$1,460 for 6 percent, and be unchanged for 80 percent.
    The costs and benefits of the proposed regulation are not simple, 
direct functions of the foregoing gross dollar estimates. Increases in 
retirement savings due to automatic enrollment will be offset by either 
decreases in current consumption or reductions in other savings, so net 
benefits will be smaller than the predicted increases in retirement 
savings. The proposed regulation may also have macroeconomic 
consequences, which are likely to be small but positive. An increase in 
retirement saving is likely to promote investment and long-term 
economic productivity and growth. The Department therefore concludes 
that the benefits of this proposed regulation will exceed its costs by 
a wide margin.
    In accordance with OMB Circular A-4(available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), Table 1 below depicts 
an accounting statement showing the annualized benefits and transfers 
associated with the provisions of this proposed rule.
BILLING CODE 4510-29-P

[[Page 56813]]

[GRAPHIC] [TIFF OMITTED] TP27SE06.094

BILLING CODE 4510-29-C

Executive Order 12866

    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) of the Executive 
Order, a ``significant regulatory action'' is 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

[[Page 56814]]

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. OMB has 
determined that this action is significant under section 3(f)(1) 
because it is likely to have an annual effect on the economy of $100 
million or more. Accordingly, the Department has undertaken, as 
described below, an analysis of the costs and benefits of the proposed 
regulation. The Department believes that the proposed regulation's 
benefits justify its costs.

Alternatives Considered by the Department

    Prior to the enactment of the Pension Protection Act, the 
Department considered providing relief under section 404(a) of ERISA, 
rather than section 404(c), in response to concerns that conditioning 
relief on compliance with the Department's regulations under section 
404(c), 29 CFR 2550.404c-1, may deter adoption of automatic enrollment 
provisions. Inasmuch as the relief provided by recently enacted section 
404(c)(5) of ERISA does not condition relief on compliance with the 
Department's regulations under section 404(c), the Department concluded 
that adopting a regulation under section 404(c)(5) effectively provided 
the same relief it considered providing under section 404(a).
    In defining the three types of investment products, portfolios or 
services that may be used as a qualified default investment 
alternative, the Department applied certain criteria. These criteria 
included consistency with market trends and mainstream financial 
planning practices. The Department entertained including as an 
additional type of investment product near risk-free fixed income 
instruments. Such instruments might have been defined so as to include 
money market mutual funds, certain bank deposits, and stable value 
insurance products. Including such instruments might yield some 
benefits. It is possible that at least some plan sponsors strongly 
prefer to use as default investments such instruments rather than any 
of the three types embraced by the proposed rule. It is further 
possible that some such sponsors would adopt automatic enrollment 
programs if and only if the fiduciary relief afforded by the proposed 
regulation was extended to include such instruments. In that case, 
including such instruments in the proposed regulation might boost 
participation and net retirement income for some individuals. The 
Department believes such cases would be rare, however. The proposed 
rule, by providing relief from fiduciary liability, is both intended 
and expected to tilt plan sponsors' default investment preferences away 
from such instruments and toward the three types it embraces. Moreover, 
many plan sponsors currently use such instruments as default 
investments under automatic enrollment programs, and they and others 
might continue to do so after adoption of the proposed rule. The 
proposed rule leaves intact the current legal provisions applicable to 
the use of such instruments as default investments.
    On the other hand, including such instruments might erode benefits. 
Consider plan sponsors that under the proposed rule will adopt 
automatic enrollment programs and use as default investments one of the 
three types defined in the proposed rule. If such near-risk-free 
instruments were included as a fourth type, some of these plan sponsors 
might instead use such instruments as default investments, thereby 
reducing average investment performance and retirement income for some 
individuals. The Department therefore believes that including such 
instruments would be more likely to erode benefits than to increase 
them. Accordingly, the Department omitted such instruments from the 
types defined in the proposed rule.
    The Department also considered whether to include or omit an 
investment fund product or model portfolio that establishes a uniform 
mix of equity and fixed income exposures for all affected participants, 
ultimately deciding to include such a type as the second of the three 
types defined in the proposed rule. Such a product or model portfolio 
has some drawbacks relative to the other two types of investment 
products, portfolios or services that may be used as a qualified 
default investment alternative. Unlike the latter types, its target 
level of risk must be appropriate for participants of the plan as a 
whole but cannot be separately calibrated for each participant or for 
particular classes of participants. Therefore, while its risk level may 
be appropriate for all affected participants it is unlikely to be 
optimal for all. However, such a product or model portfolio may also 
have relative advantages. Compared with the other two types such a 
product or portfolio may be simpler, less expensive and easier to 
explain and understand. These advantages may outweigh the potential 
advantage of more customized risk levels, especially for plans covering 
relatively homogenous populations. And the inclusion of such products 
or model portfolios along with the other two types of investment 
products, portfolios or services might help heighten competition in the 
market and thereby enhance product quality and affordability across all 
three types.

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 are likely to 
have a significant economic impact on a substantial number of small 
entities. Small entities include small businesses, organizations, and 
governmental jurisdictions.
    For purposes of analysis under the RFA, the Department proposes to 
continue 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 to prescribe 
simplified annual reports for pension plans that 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 that cover fewer than 100 
participants and satisfy certain other requirements.
    Further, while some large employers may have small plans, in 
general small employers maintain most small plans. Thus, the Department 
believes that assessing the impact of these proposed rules 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 that 
is based on size standards promulgated by the Small Business 
Administration

[[Page 56815]]

(SBA) (13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 
631 et seq.). The Department therefore requests comments on the 
appropriateness of the size standard used in evaluating the impact of 
these proposed rules on small entities.
    The reasons the Department is proposing this regulation, and the 
objectives of and legal basis for the proposed regulation, are 
discussed earlier in this preamble.
    The Department has concluded that the primary effects of this 
proposed regulation will be to increase retirement savings and pension 
incomes for participants and beneficiaries by directing default 
investments to higher-performing portfolios and by promoting the 
implementation of automatic enrollment programs in participant directed 
individual account pension plans. Applying this assessment under the 
standards of the RFA, the Department believes that the impact of this 
proposed regulation will fall primarily on participants in participant 
directed individual account pension plans, and not on the plans 
themselves or on the employers that sponsor the plans. By promoting 
automatic enrollment programs and thereby increasing aggregate 
participant contributions, the proposed regulation may also increase 
some employers' matching contributions, including matching 
contributions made by small plans. For reasons explained below, 
however, the Department has concluded that this effect is not a 
sufficient basis for concluding that the proposed regulation will have 
a significant impact on a substantial number of small entities.\14\
---------------------------------------------------------------------------

    \14\ The proposed regulation requires affected plans to disclose 
to participants and beneficiaries certain information related to 
default investment provisions and default investments. As discussed 
below in connection with the Paperwork Reduction Act, the burden of 
compliance with the information collection provisions, which will be 
borne by plan sponsors and plans, will be minor, relative to the 
anticipated benefits of the regulation.
---------------------------------------------------------------------------

    Many plan sponsors provide matching contributions. The Department 
estimates that, if the proposed regulation is finalized, approximately 
10 to 20 percent of all small participant directed defined contribution 
plans, or as many as 28,000 to 56,000 small plans, may adopt automatic 
enrollment programs and, consequently, may incur additional matching 
contributions. Such an increase in automatic enrollment programs could 
have the indirect effect of increasing aggregate matching contributions 
in small plans by between $100 million and $300 million annually 
(expressed at 2005 levels). The effect of increased matching 
contributions is expected to be proportionately similar for small and 
large entities. However, adverse consequences are not expected, for 
either large or small plans, because the adoption of automatic 
enrollment programs and the provision of matching contributions are, 
generally, voluntary and at the discretion of the plan sponsor. 
Reliance on the proposed regulation and, therefore, compliance with its 
provisions are also voluntary on the part of the plan sponsor. 
Accordingly, it is highly unlikely that the proposed regulation would 
have a significant impact on a substantial number of small entities. 
Therefore, the head of the Employee Benefits Security Administration 
hereby certifies, as required under section 605(b) of the RFA, that 
this proposed regulation will not, if promulgated, have a significant 
economic impact on a substantial number of small entities.
    The Department is unaware of any duplicative, overlapping or 
conflicting federal rules.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department of Labor conducts a preclearance consultation 
program to provide the general public and Federal agencies with an 
opportunity to comment on proposed and continuing collections of 
information in accordance with the Paperwork Reduction Act of 1995 (PRA 
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public 
understands the Department's collection instructions; respondents can 
provide the requested data in the desired format, the reporting burden 
(time and financial resources) is minimized, and the Department can 
properly assess the impact of collection requirements on respondents.
    Currently, the Department is soliciting comments concerning the 
information collection request (ICR) included in the Proposed 
Regulation on Default Investment Alternatives under Participant 
Directed Individual Account Plans. A copy of the ICR may be obtained by 
contacting the person listed in the PRA Addressee section below.
    The Department has submitted a copy of the proposed regulation to 
OMB in accordance with 44 U.S.C. 3507(d) for review of its information 
collections. The Department and OMB are particularly interested in 
comments that:
     Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., by 
permitting electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. Although comments may be 
submitted through November 13, 2006, OMB requests that comments be 
received within 30 days of publication of the Notice of Proposed 
Rulemaking to ensure their consideration.
    PRA Addressee: Address requests for copies of the ICR to Susan G. 
Lahne, Office of Policy and Research, U.S. Department of Labor, 
Employee Benefits Security Administration, 200 Constitution Avenue, 
NW., Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax: 
(202) 219-5333. These are not toll-free numbers.
    The proposed Regulation on Default Investment Alternatives under 
Participant Directed Individual Account Plans (29 CFR 2550.404c-5) 
would provide certain relief for fiduciaries who make investment 
decisions on behalf of participants and beneficiaries in individual 
account pension plans that provide for participant direction of 
investments when such participants and beneficiaries fail to direct the 
investment of their account assets. The regulation describes conditions 
under which a participant who fails to provide investment direction 
will be treated as having exercised control over assets in his or her 
account under an individual account plan as provided in section 
404(c)(5)(A) of ERISA. The proposed regulation would require that the 
assets of non-directing participants be invested in one of the 
qualified default investment alternatives described in the proposed 
regulation and that certain other specified conditions be met.

[[Page 56816]]

    This ICR pertains to two separate disclosure requirements that are 
conditions to the relief created by the proposed regulation, as 
follows: (1) An annual notice containing specified information that 
must be provided to any individual whose assets may in the future be 
invested in a qualified default investment alternative at least 30 days 
prior to the fiduciary's initial investment, and thereafter at least 30 
days before the beginning of each plan year; and (2) pass-through to 
participants and beneficiaries of any material (such as account 
statements, prospectuses, and proxy voting material) provided to the 
plan relating to the participant's or beneficiary's investment in a 
qualified default investment alternative. The information collection 
provisions of this proposed regulation are intended to ensure that 
participants and beneficiaries who are provided the opportunity to 
direct the investment of their account balances, but who do not do so, 
are adequately informed about the plan's provisions for default 
investment and about investments made on their behalf under the plan's 
default provisions.
    The estimates of respondents and responses are derived primarily 
from the Form 5500 Series filings for the 2003 plan year, which is the 
most recent reliable data available to the Department. The burden for 
the preparation and distribution of the disclosures is treated as an 
hour burden. Additional cost burden derives solely from materials and 
postage. It is assumed that electronic means of communication will be 
used in 38 percent of the responses pertaining to annual notices and 
that such communications will make use of existing systems. 
Accordingly, no cost has been attributed to the electronic distribution 
of information.
    Annual Notice--29 CFR 2550.404c-5(c)(3). The proposed regulation 
requires that a notice be provided at least 30 days before any portion 
of a participant's or beneficiary's account balance is initially 
invested in a qualified default investment alternative and annually 
thereafter. The notice must describe (1) the circumstances under which 
assets in a participant's individual account may be invested in a 
qualified default investment alternative; (2) the qualified default 
investment alternative, including its investment objectives, risk and 
return characteristics (if applicable), and fees and expenses; (3) the 
participants' and beneficiaries' right to direct the investment of the 
assets to any other investment alternative offered under the plan, 
without financial penalty; and (4) where participants and beneficiaries 
can obtain information about the other investment alternatives 
available under the plan. The proposed regulation states that the 
initial notice may be included in the plan's summary plan description 
or a summary of material modifications, or it may be provided as a 
separate notice.
    The Department estimates that 418,000 \15\ participant directed 
individual account pension plans will prepare and distribute annual 
notices to 61,612,000 eligible workers, participants and beneficiaries 
in the first year in which this proposed regulation (if finalized) 
becomes applicable. Preparation of the annual notice in the first year 
is estimated to require one-half hour of legal professional time for 
each plan, for a total aggregate estimate of 209,000 burden hours. For 
the 62 percent of participants and beneficiaries who will receive the 
annual notice by mail (38,200,000 individuals), distribution of the 
annual notice is estimated to require an additional 306,000 hours of 
clerical time, based on an estimate of one-half minute of clerical time 
per notice. No additional burden hours are attributed to the 
distribution of the annual notice to the remaining 38 percent of 
participants and beneficiaries who will receive this notice 
electronically (23,413,000 individuals). The total annual burden hours 
estimated for the annual notice in the first year, therefore, are 
515,000. The equivalent cost for this burden hour estimate is 
$22,548,000 (legal professional time is valued at $83 per hour, and 
clerical time is valued at $17 per hour).\16\
---------------------------------------------------------------------------

    \15\ All numbers used in this paperwork burden estimate have 
been rounded to the nearest thousand.
    \16\ Hourly wage estimates are based on data from the Bureau of 
Labor Statistics 2000 Occupational Employment Survey and data from 
the 2001 Employment Cost Index, and overhead assumptions by EBSA.
---------------------------------------------------------------------------

    In addition to burden hours, the Department has estimated annual 
costs attributable to the annual notice for the first year, based on 
materials and postage, at $18,718,000. This comprises the material cost 
for a two-page annual notice ($.10 per notice) to 38,200,000 
participants and beneficiaries (62 percent of 61,612,000 participants 
and beneficiaries), which equals $3,820,000, plus postage at $0.39 per 
mailing, which equals $14,898,000. Total annual costs for the annual 
notice in the first year are therefore estimated at $18,718,000.
    In years subsequent to the first year of applicability, the 
Department estimates that annual notices will be prepared only by newly 
established participant directed individual account pension plans and 
plans that changed their choice of qualified default investment 
alternative. For purposes of burden analysis, the Department has 
assumed that one-third (\1/3\) of all participant directed individual 
account plans (139,000 plans) will prepare and distribute new or 
updated initial notices to all participants and beneficiaries, 
requiring 24 minutes of legal professional time per notice. The 
preparation of the initial notice in each subsequent year is estimated 
to require 56,000 hours. However, the number of participants receiving 
initial notices stays the same. As in the calculation for the initial 
year, distribution to the 62 percent of participants and beneficiaries 
who will receive the initial notice by mail (38,200,000 individuals) 
will require 306,000 hours and $18,718,000 additional materials and 
postage cost. (As for the first year, the Department has assumed that 
electronic distribution of the initial notice in subsequent years will 
not add any significant additional paperwork burden.)
    Based on those assumptions, the Department estimates that the total 
burden hours for annual notices in each year after the first year of 
applicability will fall to 361,000 hours. The equivalent cost of such 
an hour burden (using the same assumptions as for the first year) is 
$9,823,000. The total cost burden estimated for subsequent years for 
the annual notice will stay at $18,718,000.
    Pass-through Material--29 CFR 2550.404c-5(c)(4). Under the proposed 
regulation, any material received by a plan (such as account 
statements, prospectuses, and proxy voting material) that relates to a 
default investment must be passed through to the participant or 
beneficiary on whose behalf the default investment was made. The 
proposed regulation imposes this requirement only with respect to 
participants and beneficiaries who have an investment in a qualified 
default investment alternative that was made by default. In conformity 
with the assumptions underlying the other economic analyses in this 
preamble, the Department has assumed that, at any given time, 5.3 
percent of participants and beneficiaries in participant directed 
individual account pension plans (2,351,000 individuals) will have 
default investments. For purposes of this burden analysis, the 
Department has also assumed that plans will receive materials that must 
be passed through the participants and beneficiaries on a quarterly 
basis. This assumption takes into account that many, although not all, 
plans will receive quarterly account

[[Page 56817]]

statements and prospectuses, and that plans will also receive other 
pass-through materials on occasion. These two factors result in an 
estimate of 9,405,000 responses (distributions of pass-through 
materials) per year. Duplication and packaging of the pass-through 
material is estimated to require 1.5 minutes of clerical time per 
distribution, for an annual hour burden estimate of 235,000 hours of 
clerical time. The equivalent cost of this hour burden is estimated at 
$3,997,000. Additional cost burden for the pass-through of material is 
estimated to include paper cost (40 pages of material yearly per 
participant or beneficiary) and postage ($.58 per mailing) at 
$10,157,000 annually for 4 distributions per participant or beneficiary 
with a default investment.
    These paperwork burden estimates are summarized as follows:
    Type of Review: New collection.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Default Investment Alternatives under Participant Directed 
Individual Account Plans.
    OMB Number: 1210-NEW.
    Affected Public: Business or other for-profit; not-for-profit 
institutions.
    Respondents: 417,000.
    Responses: 71,017,000.
    Frequency of Response: Annually; occasionally.
    Estimated Total Annual Burden Hours: 750,000 (first year).
    Estimated Total Annual Burden Cost: $28,875,000.

Congressional Review Act

    This notice of proposed rulemaking is subject to the provisions of 
the Congressional Review Act provisions of the Small Business 
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.) and, 
if finalized, will be transmitted to the Congress and the Comptroller 
General for review.

Unfunded Mandates Reform Act

    Pursuant to provisions of the Unfunded Mandates Reform Act of 1995 
(Pub. L. 104-4), this rule does not include any Federal mandate that 
may result in expenditures by State, local, or tribal governments, or 
the private sector, which may impose an annual burden of $100 million 
or more.

Discussion of Economic Impacts

Default Investments
    A majority \17\ of 401(k) plans with automatic enrollment offer as 
default investment vehicles money market or stable value funds or 
similarly-performing vehicles. The proposed regulation is expected to 
reduce this proportion by encouraging plans to offer default investment 
vehicles that include a mix of equity and fixed income instruments.
---------------------------------------------------------------------------

    \17\ Various surveys estimate the proportion at 50 percent (48th 
Annual Survey of Profit Sharing/401(k) Plans, supra note 2, at 37, 
Table 64), 58 percent (2004 Annual 401(k) Benchmarking Survey, supra 
note 2, at 7, Exhibit 20), and 81 percent (Utkus, supra note 4, at 
3).
---------------------------------------------------------------------------

    As a result of this proposed regulation, it is estimated that in 
the long run 401(k) plan equity holdings expressed at 2005 levels will 
increase by between $27 billion and $48 billion. The portion of this 
estimated increase that is attributable directly to the direction of a 
larger share of default investments into equity is between $11 billion 
and $14 billion.\18\ The rest is attributable to increased 
contributions, which are discussed below under the heading 
``Participation and Contribution Behavior.''
---------------------------------------------------------------------------

    \18\ It should be noted that these estimates pertain only to 
default investments made on behalf of default participants under 
automatic enrollment programs. The default investment proposed 
regulation is not so limited. Therefore, these estimates are likely 
to omit some of the direction of a larger share of default 
investments into equity that will occur under the proposed 
regulation. The Department lacks data on the amount of default 
investment activity occurring outside the default participation 
context, or any basis for predicting whether or how much such 
activity might increase as a result of the proposed regulation. The 
Department invites comments on these questions.
---------------------------------------------------------------------------

Account Performance
    Historically, over long time horizons, diversified portfolios that 
include equities have tended to outperform those consisting only of 
very low risk, short term debt instruments, often by large amounts. 
From 1926 to 2004, large company stocks returned 10.4 percent annually 
on average, long-term corporate bonds 5.9 percent, and U.S. Treasury 
bills 3.7 percent.\19\ Stocks are also riskier, however: the standard 
deviations in annual returns for these three securities classes over 
this period were 20.3 percent, 8.6 percent and 3.1 percent.\20\ One-
year large company stock returns ranged from -43 percent to 54 percent, 
long-term corporate bond returns from -8 percent to 43 percent, and 
U.S. Treasury bill returns from 0 percent to 15 percent.\21\ But 20-
year returns on these classes of securities ranged respectively from 3 
percent to 18 percent, 1 percent to 12 percent, and from 0.4 percent to 
8 percent.\22\ Based on this history, it is widely believed to be 
advantageous for long-term savers, such as workers saving for 
retirement, to invest a substantial portion of their assets in 
equity.\23\
---------------------------------------------------------------------------

    \19\ Stocks, Bonds, Bills and Inflation 2005 Yearbook, Ibbotson 
Assocs., at 117, Table 6-7 (2005).
    \20\ Id.
    \21\ Id. at 38-39, Table 2-5.
    \22\ Id. at 50-51, Table 2-11.
    \23\ See, e.g., Utkus, supra note 4.
---------------------------------------------------------------------------

    As noted above, this proposed regulation is expected to result in 
the direction of default investments from very low-risk instruments 
such as money market funds to diversified portfolios that include a 
substantial proportion of equities. If historical patterns hold, this 
in turn is expected to improve investment results for a large majority 
of affected individuals. As a result of this proposed regulation, in 
the long run aggregate 401(k) account balances are estimated to 
increase by between $45 billion and $89 billion, expressed at 2005 
levels. The portion of this estimated increase directly attributable to 
direction of default investments from very low-risk instruments into 
higher-performing portfolios is between $7 billion and $9 billion; the 
remainder is attributable to expected increases in contributions, 
discussed below under the heading ``Participation and Contribution 
Behavior.''
Automatic Enrollment
    Automatic enrollment programs are growing in popularity. These 
programs covered only about 5 percent of workers eligible for 401(k) 
plans in 2002,\24\ but the number may have increased to 18 percent 
today \25\ and could reach 25 percent in the near future. The 
Department expects and intends that this proposed regulation, by 
alleviating some fiduciary concerns that might otherwise discourage 
implementation of automatic enrollment programs, will promote wider 
implementation of such programs. As a result of the proposed 
regulation, in the near future such programs may cover 35 percent to 45 
percent of eligible workers rather than 25 percent.\26\
---------------------------------------------------------------------------

    \24\ Bureau of Labor Statistics, National Compensation Survey: 
Employee Benefits in Private Industry in the United States, 2002-
2003, Bulletin 2573, at 109 (2005).
    \25\ EBSA estimate. The proportion of plans in various size 
classes that provide automatic enrollment was taken from 48th Annual 
Survey of Profit Sharing/401(k) Plans, supra note 2, at 36, Table 
61. EBSA took a weighted average of these proportions, reflecting 
the distribution of 401(k) participants across the plan size 
classes, as estimated by EBSA based on annual reports filed by plans 
with EBSA.
    \26\ The incidence of automatic enrollment appears to be 
growing, by one estimate from 8.4 percent of plans in 2003 to 10.5 
percent in 2004 (Id. at 36), by another from 14 percent in 2003 to 
19 percent in 2005 (Survey Findings: Trends and Experiences in 
401(k) Plans, 2005, supra note 2, at 1, 13). Another survey found no 
growth between 2003 and 2004. 2004 Annual 401(k) Benchmarking 
Survey, supra note 2, at 6. Indicators of future growth are mixed. 
Most point to a potential for large growth, but it is unclear how 
much of this growth will be realized. The same survey that found no 
growth between 2003 and 2004 also found that, in 2004, 14 percent of 
plan sponsors had not yet implemented but were considering 
implementing automatic enrollment. Id. at 6, Exhibit 17. By another 
estimate, in 2005, 28 percent of plan sponsors indicated that they 
were likely to implement automatic enrollment over the next year. 
See Survey Findings: Hot Topics in Retirement 2005, (Hewitt 
Associates LLC) 2005, at 11. But 53 percent indicated they were 
unlikely to implement any automatic plan features, including 28 
percent that cited concern about assuming additional fiduciary 
responsibility. Id. at 12. To estimate the impact of this proposed 
regulation on account balances and pension income, EBSA adopted the 
following assumptions. If current trends and concerns continued, the 
incidence of automatic enrollment would soon reach 25 percent of 
eligible employees, and then remain at that level. The proposed 
regulation, by relieving fiduciary concerns that discourage 
implementation of automatic enrollment, would increase that 
incidence to between 35 percent (low impact estimates) and 45 
percent (high impact estimates). In addition, new provisions for a 
nondiscrimination safe harbor under the Code for ``qualified 
automatic contribution arrangements,'' added by section 902 of the 
Pension Protection Act, are likely to affect the future incidence of 
automatic enrollment. These assumptions are highly uncertain and 
EBSA invites comments on their validity and suggestions as to how to 
develop more reliable estimates of the future incidence of automatic 
enrollment programs.

---------------------------------------------------------------------------

[[Page 56818]]

Participation and Contribution Behavior
    Analyses of automatic enrollment programs demonstrate that such 
programs increase participation. The increase is most pronounced among 
employees whose participation rates otherwise tend to be lowest, namely 
lower-paid, younger and shorter-tenure employees. Automatic enrollment 
programs increase many such employees' contribution rates from zero to 
the default rate, often supplemented by some employer matching 
contribution. These additional contributions tend to come early in the 
employees' careers and therefore can add disproportionately to 
retirement income as investment returns accumulate over a long 
period.\27\
---------------------------------------------------------------------------

    \27\ However, there is also evidence that automatic enrollment 
programs can have the effect of lowering contribution rates for a 
few employees below the level that they would have elected absent 
automatic enrollment. At present, surveys indicate that the default 
contribution rate is usually either 2 percent or 3 percent of 
salary. Some employees who might otherwise have enrolled (either at 
first eligibility or later) and elected a higher contribution rate 
may instead permit themselves to be enrolled at the default rate. 
Once contributing at the default rate they may continue at that rate 
for some time. See, e.g., James J. Choi, David Laibson, Brigitte C. 
Madrian & Andrew Metrick, Saving for Retirement on the Path of Least 
Resistance, (July 19, 2004); see also Choi, Laibson & Madrian, supra 
note 1. The potential for lowering of contribution rates will be 
minimized in plans that provide for automatic escalation of default 
contribution rates, such as will be required under new tax 
nondiscrimination safe harbor provisions for ``qualified automatic 
contribution arrangements,'' added by section 902 of the Pension 
Protection Act.
---------------------------------------------------------------------------

    Plans implementing automatic enrollment programs may increase their 
participation rates on average from approximately 70 percent to perhaps 
90 percent. Consequently, the Department estimates that this proposed 
regulation will increase overall 401(k) participation rates from 72 
percent to between 75 percent and 77 percent. Aggregate annual 
contributions are expected to grow on net by between $1.9 billion and 
$3.8 billion, expressed at 2005 levels. These and related estimates are 
summarized Table 2 below.
[GRAPHIC] [TIFF OMITTED] TP27SE06.095

Retirement Income From 401(k) Plans
    For all individuals born in 1985 and surviving to age 67, holding 
other factors constant, low-impact estimates suggest that the proposed 
regulation may increase pension income by an average of $2,010 per year 
(in 2005 dollars) for 10 percent, but could decrease it by $1,120 per 
year on average for 5 percent. Pension income would be unchanged for 
the remaining 85 percent. High-impact estimates suggest that average 
annual pension income may increase by $2,740 for 14 percent, fall by 
$1,460 for 6 percent, and be unchanged for 80 percent. The number of 
individuals experiencing increases in retirement income is estimated to 
be approximately twice the number experiencing decreases, and the 
average gains are estimated to be approximately twice the size of 
average losses. These estimates are summarized Table 3 below. (The 
incidence and size of gains are likely to be larger than estimated 
here, and those of any losses are likely to be smaller, if plans 
provide for escalating default contribution rates or higher default 
contribution rates than assumed here.)

[[Page 56819]]

[GRAPHIC] [TIFF OMITTED] TP27SE06.096

Cost
    Plan sponsors may incur some administrative cost in order to meet 
the conditions of the proposed regulation. The Department generally 
expects such cost to be low. The annual notice provision can be 
satisfied by adding information to existing notices and disclosures, 
such as the Summary Plan Description, the annual investment election 
form, or by adapting information provided to the plan by the investment 
manager of a qualified default investment alternative. The requirement 
to pass through investment material to participants and beneficiaries 
does not impose extensive costs. These revisions may be no more 
extensive than those associated with other amendments that plans 
implement from time to time. The boundaries of the proposed regulation 
are sufficiently broad to encompass a wide range of readily available 
and competitively priced investment products and services. It is likely 
that a large majority of participant directed plans already offer one 
or more investment options that would fall within the proposed 
regulation. For these reasons, it is likely that the administrative 
cost for a plan sponsor to take advantage of the relief afforded by the 
proposed regulation will be low. The Department invites comments on the 
administrative cost of this proposed regulation, and suggestions as to 
how to minimize that cost.
    The proposed regulation may indirectly prompt some plan sponsors to 
shoulder additional costs in terms of increased retirement benefits 
paid to employees. For example, it is expected that the proposed 
regulation, by promoting the adoption of automatic enrollment programs, 
will have the indirect affect of increasing aggregate employer matching 
contributions by between $700 million and $1.3 billion annually 
(expressed at 2005 levels). Adverse consequences are not expected 
because the adoption of automatic enrollment programs and the provision 
of matching contributions generally are at the discretion of the plan 
sponsor. Use of the proposed regulation and, therefore, compliance with 
its provisions are also voluntary on the part of the plan sponsor.
Additional Potential Consequences
    The Department anticipates that this proposed regulation will have 
two major economic consequences. Default investments will be directed 
toward higher-return instruments boosting average account performance, 
and automatic enrollment provisions will become more common boosting 
participation. However, it is possible that the proposed regulation 
will have additional, indirect consequences, which could affect future 
retirement income levels. The Department invites public comment on the 
likelihood and implications of any such consequences, including 
comments addressing the following questions.
     Will plan sponsors that direct default investments from 
very low-risk instruments into higher-performing portfolios make other 
changes to investment options or undertake new efforts to inform or 
influence participants' investment decisions? Will those plan sponsors 
that implement automatic enrollment programs change other provisions of 
their plans as well? For example, might they change matching 
contribution formulas, eligibility or vesting provisions, loan 
programs, or distribution policies?
     More than one-half of all participant directed individual 
account plans recently reported compliance with ERISA section 404(c)(1) 
and associated regulations. While the fiduciary protections afforded by 
this proposed regulation for default investments are intended to be 
similar to those afforded by the regulation under section 404(c)(1) of 
ERISA for participants' active investment elections, it is possible 
that some fiduciaries who are covered by the proposed regulation in 
connection with

[[Page 56820]]

default investments will not be covered by the regulation under section 
404(c)(1) in connection with participant directed investments out of 
default investments. If so, how might the proposed regulation's 
incentives interact with those associated with the existing ERISA 
section 404(c) regulation, and to what effect?
     Will employees who make additional contributions as a 
result of new automatic enrollment programs reduce their current 
consumption or other types of current saving, or some of each? Will 
they be more or less likely than otherwise similar participants to 
retain or roll over their accounts, preserving them into retirement?
    Changes such as these could either augment or offset the effects of 
this proposed regulation on retirement saving and pension income. For 
example, by one estimate, among employees eligible for a 401(k) plan 
with automatic enrollment and a life cycle fund investment default, 
moving the default contribution up from 3 percent to 6 percent could 
increase the median earnings replacement rate from 401(k) savings in 
each of the four earnings quartiles by between 6 and 10 percentage 
points.\28\
---------------------------------------------------------------------------

    \28\ Holden & VanDerhei, supra note 1, at 15, Figure 10.
---------------------------------------------------------------------------

Cost-Benefit Assessment
    The costs and benefits of the proposed regulation are not simple, 
direct functions of the foregoing gross dollar estimates. For example, 
increases in retirement savings due to automatic enrollment will be 
offset by either decreases in current consumption or reductions in 
other savings. Increases due to higher returns will entail additional 
risk. Therefore, net benefits will be smaller than the predicted 
increases in retirement savings. The Department did not attempt to 
quantify these welfare effects, believing that there is insufficient 
data on the time preference for consumption and level of risk aversion 
in the affected population.\29\
---------------------------------------------------------------------------

    \29\ As noted below, peer reviewers raised questions about 
welfare effects in connection with peer review.
---------------------------------------------------------------------------

    The proposed regulation will have distributional consequences, the 
costs and benefits of which are open to different interpretations. 
Average increases in pension income will be larger for individuals with 
higher career earnings, but they will be proportionately larger for 
those with lower career earnings (see Table 4 below). Moreover, while 
average pension incomes will rise in each of the four career earnings 
quarterlies, a small minority of individuals in each quartile could 
lose some pension income (see Table 3).
    The proposed regulation may also have macroeconomic consequences, 
which are likely to be small but positive. An increase in retirement 
saving is likely to promote investment and long-term economic 
productivity and growth. The increase in retirement saving will be very 
small relative to overall market capitalization, and may be offset in 
part by reductions in other saving. Therefore macroeconomic benefits 
are likely to be small.\30\
---------------------------------------------------------------------------

    \30\ Insofar as the Department expects contributions to 
increase, the Department expects taxes on income to be 
correspondingly deferred. The magnitude of this effect would depend 
on the timing of contributions and withdrawals and the tax rates 
applicable at those times.
---------------------------------------------------------------------------

    Based on the foregoing analysis and estimates, the Department is 
confident that the proposed regulation will increase aggregate 
retirement savings and pension income substantially. The Department 
therefore concludes that the benefits of this proposed regulation will 
exceed its costs by a wide margin, and invites comments on this 
conclusion.
[GRAPHIC] [TIFF OMITTED] TP27SE06.097

Basis of Estimates
    The Department estimated the effect of the proposed regulation on 
401(k) plan participation, contributions, account balances, and 
investment mix, and its effect on pension incomes at age 67, using a 
microsimulation model of lifetime pension accumulations for a birth 
cohort, known as PENSIM.\31\ To produce the low and high impact 
estimates presented here, PENSIM was parameterized and applied as 
follows.
---------------------------------------------------------------------------

    \31\ PENSIM was developed for the Department by the Policy 
Simulation Group as a tool for examining the macroeconomic and 
distributional implications of private pension trends and policies. 
Detailed information on PENSIM is available at http://www.polsim.com/PENSIM.html. Examples of PENSIM applications include 
comparisons of retirement income prospects for different generations 
contained in U.S. Government Accountability Office, Report No. 03-
429, Retirement Income: Intergenerational Comparisons of Wealth and 
Future Income (2003) and comparisons of pension income produced by 
traditional defined benefit pension plans and cash balance pension 
plans contained in U.S. Government Accountability Office, Report No. 
06-42, Private Pensions: Information on Cash Balance Pension Plans 
(2005). As noted below, the choice of PENSIM as the basis for these 
estimates was questioned in the context of peer review.
---------------------------------------------------------------------------

    First, automatic enrollment was assigned randomly to achieve 
incidences of 25 percent (baseline), 35

[[Page 56821]]

percent (low impact) and 45 percent (high impact) of 401(k) plan 
eligible employees. Next, participation and default participation rates 
were adjusted to reflect available research findings on these rates at 
various tenures in the presence and absence of automatic enrollment 
programs.\32\ The default contribution rate was assumed to be 3 
percent, which surveys indicate is the most common rate currently in 
use.\33\ The investment of contributions made by default was directed 
as follows:\34\ in the baseline estimates, to U.S. Treasury bonds;\35\ 
in the low- and high-impact estimates, to a mix resembling a life cycle 
fund, with 100 percent minus the participant's age in equity and the 
remainder in U.S. Treasury bonds. Returns to equity were determined 
stochastically. The distribution was lognormal with a nominal mean of 
9.48 percent \36\ and standard deviation of 16.54 percent.\37\
---------------------------------------------------------------------------

    \32\ These findings were drawn from Choi, Laibson & Madrian, 
supra note 1. The overall participation rate under automatic 
enrollment was adjusted upward to 90 percent.
    \33\ See, e.g., 2004 Annual 401(k) Benchmarking Survey; supra 
note 2, at 6; see also Survey Findings: Trends and Experiences in 
401(k) Plans, supra note 2, at 16;'' see also 48th Annual Survey of 
Profit Sharing/401(k) Plans, supra note 2, at 36.
    \34\ These estimates assume complete correspondence between 
default participation in 401(k) plans and default investing. 
Participants contributing by default are assumed to invest by 
default, while those who actively elect to contribute or who are in 
plans without elective contributions are assumed to actively invest. 
In practice neither of these assumptions will hold all of the time. 
Some participants contributing by default may actively direct their 
investments. Perhaps more important, some active contributors or 
participants in plans without elective contributions may invest by 
default--and this proposed regulation may affect the incidence of 
such default investing. The Department did not attempt to estimate 
the extent or effect of default investing not associated with 
default contributing. The Department was unable to locate data on 
the extent of such default investing, but believes it is likely to 
be small relative to that of default investing of default 
contributions. The Department is likewise uncertain how much the 
proposed regulation might affect the incidence of such default 
investing, but believes that the economic effects of changes in that 
incidence will be modest insofar as the asset allocation of the 
active investments such default investments would replace are likely 
on average and aggregate to not differ much from the asset 
allocation of the defaults. The Department also notes that a large 
majority of the estimated economic effects of the proposed 
regulation derive from increased contributions rather than increased 
equity investment, so the omission from the estimates of some 
default investment effects may have only a modest effect on the 
total. The Department invites comments on its assumptions and 
estimates relating to the incidence of default investments.
    \35\ On the risk return spectrum, Treasury bonds generally fall 
between money market and stable value funds on one side and balanced 
and life cycle funds on the other. They serve here as a proxy for 
the current default investments connected with automatic enrollment 
programs, which are mostly money market and stable value funds but 
include a substantial proportion of balanced and life cycle funds.
    \36\ This is the rate used by the Office of the Actuary, U.S. 
Social Security Administration, to estimate returns to proposed 
personal accounts in the Social Security program.
    \37\ This is parallel to volatility assumed by Vanguard in 
illustrating the effects of alternative default investments. See 
Utkus, supra note 4, at 17.
---------------------------------------------------------------------------

    To estimate the effects of the proposed regulation, the Department 
compared the baseline estimates with the low- and high-impact 
estimates. Because the proposed regulation's effects will be cumulative 
and gradual, estimates were prepared for the 1985 birth cohort, whose 
working lives would almost entirely follow implementation of the 
proposed regulation. To estimate participation rates, contributions, 
account balances and investment mixes, the cohort was sampled at random 
ages from 21 to 65, and results for individuals participating in 401(k) 
plans when sampled were aggregated, with all dollar amounts adjusted to 
2005 levels. This roughly illustrates a point-in-time snapshot of plans 
in the future.\38\ To estimate effects on pension incomes, account 
balances available at retirement \39\ were converted into lifetime 
annuities, and pension incomes of cohort members surviving to age 67 
were measured and compared.
---------------------------------------------------------------------------

    \38\ Because PENSIM is a birth cohort-based model (rather than a 
panel-based model that simulates the experience of an entire 
population from year to year) it does not directly provide point-in-
time aggregate estimates for the overall population. These PENSIM-
derived estimates serve as a proxy for such panel-derived point-in-
time estimates. The PENSIM-based estimates in effect blend the 
experience of younger workers in the nearer future with that of 
older workers in the more distant future, producing a sort of 
longitudinal central tendency. The estimated participation and 
contribution rates serve as proxies for the average across many 
future years (reflecting near-immediate, ongoing effects). The 
estimated account balances serve as proxies for some point in the 
distant future (reflecting cumulative effects). Actual aggregate 
participation rates and contribution amounts will vary over time 
because of changes in certain population variables such as birth 
rates, age-specific labor force participation rates, and 
productivity and compensation levels. Any long-term forecasts of 
such changes are highly uncertain, however. The Department therefore 
did not attempt to adjust its estimates for such changes, believing 
such adjustments would be of questionable analytic value. Because 
the PENSIM-derived contribution estimates blend experience at 
different points in time and do not represent changes in population 
contributions over time or the timing of those changes, they do not 
lend themselves to discounting, conversion to net present values or 
level annuity equivalents. Rather, they can be interpreted as 
proxies for level annuity equivalents, albeit proxies which neglect 
the aforementioned changes in population variables.
    \39\ Taking into account individuals' propensities to cash out 
their accounts prior to retirement.
---------------------------------------------------------------------------

    The estimates are highly uncertain. The long time horizon compounds 
the uncertainty. One of the greatest uncertainties relates to the 
default contribution rate, which is assumed to be fixed at 3 
percent.\40\ Higher initial default contribution rates, or default 
provisions that increase contribution rates as tenure and/or pay 
increases, might enlarge the positive effects on pension income and 
reduce the negative effects. But it is unclear whether plan sponsors 
will adopt such approaches, or if they do, whether they might make 
other changes to their plans or whether more eligible employees might 
decline automatic participation. The Department therefore has no 
reliable basis for estimating the effects of such changes in automatic 
enrollment programs.\41\ The Department invites comments on this and 
other areas of uncertainty in its estimates.
---------------------------------------------------------------------------

    \40\ As noted below, other areas of uncertainty, including rates 
of return, the rate of adoption of automatic enrollment, 
participation rates under automatic enrollment, and other savings 
decisions, were raised in connection with peer review.
    \41\ Nonetheless, to illustrate the potential impact of higher 
default contribution rates, the Department estimated the effect of 
the proposed regulation where the default contribution rate in 
automatic enrollment programs is 5 percent rather than 3 percent. 
The estimate holds constant other plan characteristics and 
participants' default rates and elective behaviors. In this 
scenario, in the very long run the proposed regulation is predicted 
to increase aggregate 401(k) plan account balances by between 3 
percent and 6 percent, or approximately $60 billion and $114 billion 
if represented at 2005 levels. For individuals born in 1985 and 
surviving to age 67, holding other factors constant, low-impact 
estimates suggest that the proposed regulation will increase pension 
income by an average of $2,200 per year (in 2005 dollars) for 11 
percent, and decrease it by $810 per year on average for 4 percent. 
Pension income would be unchanged for the remaining 85 percent. 
High-impact estimates suggest that average annual pension income 
will increase by $2,880 for 15 percent, fall by $1,040 for 5 
percent, and be unchanged for 80 percent.
---------------------------------------------------------------------------

Peer Review

    The ``Final Information Quality Bulletin for Peer Review'' issued 
by the Office of Management and Budget on December 16, 2004 (the 
Bulletin) establishes that important scientific information shall be 
peer reviewed by qualified specialists before it is disseminated by the 
federal government. Collectively, the PENSIM model, the data and 
methods underlying it, the surveys and literature used to parameterize 
it, and the Department's interpretation of these and application of 
them to produce the estimates presented in this regulatory impact 
analysis (RIA) constitute a ``highly influential scientific 
assessment'' under the Bulletin. Therefore, pursuant to the Bulletin, 
the Department arranged for review of this assessment by three highly 
qualified independent reviewers. The Department provided each reviewer 
with instructions for review pursuant to the Bulletin, a draft of the 
Notice of

[[Page 56822]]

Proposed Rulemaking (NPRM) including a draft RIA, technical 
documentation of PENSIM and its application in support of the RIA, and 
detailed tables of related PENSIM estimates. The instructions directed 
the reviewers to focus on the technical and scientific issues in the 
assessment rather than the policy proposed in the NPRM. Each reviewer 
separately reviewed the assessment embodied in these materials and 
submitted to the Department a peer review report. All of the 
aforementioned materials are being published together with the 
Department's written response to the peer reviews on the Department's 
Web site, concurrent with the publication of this NPRM, at http://www.dol.gov/ebsa.
    The reviews offer both praise for and criticism of the assessment. 
They question numerous specific modeling assumptions and identify 
potential indirect effects that were not estimated. They note that 
welfare effects (as distinguished from simple dollar impacts on 
retirement saving), which the Department did not estimate, may be 
negative if consumers are risk averse or prefer current to future 
consumption. One review criticizes PENSIM's reduced form modeling 
approach as lacking the structural, behavioral foundation necessary to 
predict results and evaluate welfare effects, finds the PENSIM 
estimates ``unconvincing,'' and concludes that the Department has 
failed to provide a scientific rationale for the policy initiative 
contained in the NPRM.
    While many of the reviews' criticisms have merit, the Department 
does not believe that they cast serious doubt on the RIA's primary 
conclusions: that the proposed rule on net will increase retirement 
savings and thereby benefit consumers. The Department's written 
response to the reviews qualifies and tempers some of the RIA's 
conclusions. It answers, to the extent possible, major questions raised 
in the reviews, including questions about welfare effects. It defends 
the Department's reliance on PENSIM as a basis for its estimates and 
explains why the Department did not estimate net welfare effects but 
believes such effects to be positive. It also offers a tentative, 
prioritized plan for conducting sensitivity tests and otherwise 
refining its assessment and RIA in connection with a possible final 
rulemaking.
    Federalism Statement. Executive Order 13132 (August 4, 1999) 
outlines fundamental principles of federalism and requires federal 
agencies to adhere to specific criteria 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 the States, or on the distribution of power and responsibilities 
among the various levels of government. The proposed 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 supersede any and all laws of the States as 
they relate to any employee benefit plan covered under ERISA. The 
requirements implemented in the proposed rule do not alter the 
fundamental provisions of the statute with respect to employee benefit 
plans, and as such would have no implications for the States or the 
relationship or distribution of power between the national government 
and the States.

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Exemptions, Fiduciaries, Investments, 
Pensions, Prohibited transactions, Real estate, Securities, Surety 
bonds, Trusts and trustees.
    For the reasons set forth in the preamble, the Department proposes 
to amend Chapter XXV, Subchapter F, Part 2550 of Title 29 of the Code 
of Federal Regulations as follows:
    Subchapter F--Fiduciary Responsibility Under the Employee 
Retirement Income Security Act of 1974

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

    1. The authority citation for part 2550 is revised to read as 
follows:

    Authority: 29 U.S.C. 1135; sec. 657, Pub. L. 107-16, 115 Stat. 
38; and Secretary of Labor's Order No. 1-2003, 68 FR 5374 (Feb. 3, 
2003). Sec. 2550.401b-1 also issued under sec. 102, Reorganization 
Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 Comp. 
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), 3 CFR, 1978 
Comp. 332. Sec. 2550.401c-1 also issued under 29 U.S.C. 1101. 
Sections 2550.404c-1 and 2550.404c-5 also issued under 29 U.S.C. 
1104. Sec. 2550.407c-3 also issued under 29 U.S.C. 1107. Sec. 
2550.408b-1 also issued under 29 U.S.C. 1108(b)(1) and sec. 102, 
Reorganization Plan No. 4 of 1978, 3 CFR, 1978 Comp. p. 332, 
effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 
Comp. 332. Sec. 2550.412-1 also issued under 29 U.S.C. 1112.

    2. Add Sec.  2550.404c-5 to read as follows:


Sec.  2550.404c-5  Fiduciary relief for investments in qualified 
default investment alternatives.

    (a) In general. (1) This section implements the fiduciary relief 
provided under section 404(c)(5) of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA or the Act), 29 U.S.C. 1001 et 
seq., under which a participant or beneficiary in an individual account 
plan will be treated as exercising control over the assets in his or 
her account for purposes of ERISA section 404(c)(1) with respect to the 
amount of contributions and earnings that, in the absence of an 
investment election by the participant, are invested by the plan in 
accordance with this regulation. If a participant or beneficiary is 
treated as exercising control over the assets in his or her account in 
accordance with ERISA section 404(c)(1) no person who is otherwise a 
fiduciary shall be liable under part 4 of title I of ERISA for any loss 
or by reason of any breach which results from such participant's or 
beneficiary's exercise of control. Except as specifically provided in 
paragraph (c)(6) of this section a plan need not meet the requirements 
for an ERISA section 404(c) plan under 29 CFR 2550.404c-1 in order for 
a plan fiduciary to obtain the relief under this section.
    (2) The standards set forth in this section apply solely for 
purposes of determining whether a fiduciary meets the requirements of 
this proposed regulation. Such standards are not intended to be the 
exclusive means by which a fiduciary might satisfy his or her 
responsibilities under the Act with respect to the investment of assets 
in the individual account of a participant or beneficiary.
    (b) Fiduciary relief. (1) Except as provided in paragraphs (b)(2), 
(3), and (4) of this section, a fiduciary of an individual account plan 
that permits participants or beneficiaries to direct the investment of 
assets in their accounts and that meets the conditions of paragraph (c) 
of this section shall not be liable for any loss, or by reason of any 
breach under part 4 of title I of ERISA, that is the direct and 
necessary result of--
    (i) Investing all or part of a participant's or beneficiary's 
account in a qualified default investment alternative, or
    (ii) Investment decisions made by the entity described in paragraph 
(e)(3) of this section in connection with the management of a qualified 
default investment alternative.
    (2) Nothing in this section shall relieve a fiduciary from his or 
her duties

[[Page 56823]]

under part 4 of title I of ERISA to prudently select and monitor any 
qualified default investment alternative under the plan or from any 
liability that results from a failure to satisfy these duties, 
including liability for any resulting losses.
    (3) Nothing in this section shall relieve an investment manager 
described in paragraph (e)(3)(i) from its fiduciary duties under part 4 
of title I of ERISA or from any liability that results from a failure 
to satisfy these duties, including liability for any resulting losses.
    (4) Nothing in this section shall provide relief from the 
prohibited transaction provisions of section 406 of ERISA, or from any 
liability that results from a violation of those provisions, including 
liability for any resulting losses.
    (c) Conditions. With respect to the investment of assets in the 
individual account of a participant or beneficiary, a fiduciary shall 
qualify for the relief described in paragraph (b)(1) of this section 
if:
    (1) Assets are invested in a ``qualified default investment 
alternative'' within the meaning of paragraph (e) of this section;
    (2) The participant or beneficiary on whose behalf the investment 
is made had the opportunity to direct the investment of the assets in 
his or her account but did not direct the investment of the assets;
    (3) The participant or beneficiary on whose behalf an investment in 
a qualified default investment alternative may be made is furnished 
within a reasonable period of time of at least 30 days in advance of 
the first such investment and within a reasonable period of time of at 
least 30 days in advance of each subsequent plan year, a summary plan 
description, summary of material modification, or other notice that 
meets the requirements of paragraph (d) of this section;
    (4) Under the terms of the plan any material provided to the plan 
relating to a participant's or beneficiary's investment in a qualified 
default investment alternative (e.g., account statements, prospectuses, 
proxy voting material) will be provided to the participant or 
beneficiary;
    (5) Any participant or beneficiary on whose behalf assets are 
invested in a qualified default investment alternative may, consistent 
with the terms of the plan (but in no event less frequently than once 
within any three month period), transfer, in whole or in part, such 
assets to any other investment alternative available under the plan 
without financial penalty; and
    (6) The plan offers a ``broad range of investment alternatives'' 
within the meaning of 29 CFR 2550.404c--1(b)(3).
    (d) Notice. The notice required by paragraph (c)(3) of this section 
shall be written in a manner calculated to be understood by the average 
plan participant and contain the following:
    (1) A description of the circumstances under which assets in the 
individual account of a participant or beneficiary may be invested on 
behalf of the participant and beneficiary in a qualified default 
investment alternative;
    (2) A description of the qualified default investment alternative, 
including a description of the investment objectives, risk and return 
characteristics (if applicable), and fees and expenses attendant to the 
investment alternative;
    (3) A description of the right of the participants and 
beneficiaries on whose behalf assets are invested in a qualified 
default investment alternative to direct the investment of those assets 
to any other investment alternative under the plan, without financial 
penalty; and
    (4) An explanation of where the participants and beneficiaries can 
obtain investment information concerning the other investment 
alternatives available under the plan.
    (e) Qualified default investment alternative. For purposes of this 
section, a qualified default investment alternative means an investment 
alternative that:
    (1)(i) Does not hold or permit the acquisition of employer 
securities, except as provided in paragraph (e)(1)(ii) of this section.
    (ii) Paragraph (e)(1)(i) of this section shall not apply to:
    (A) Employer securities held or acquired by an investment company 
registered under the Investment Company Act of 1940 or a similar pooled 
investment vehicle regulated and subject to periodic examination by a 
State or Federal agency and with respect to which investment in such 
securities is made in accordance with the stated investment objectives 
of the investment vehicle and independent of the plan sponsor or an 
affiliate thereof; or
    (B) With respect to a qualified default investment alternative 
described in paragraph (e)(5)(iii) of this section, employer securities 
acquired as a matching contribution from the employer/plan sponsor, or 
employer securities acquired prior to management by the investment 
management service;
    (2) Except as otherwise provided in paragraph (c)(5) of this 
section, does not impose financial penalties or otherwise restrict the 
ability of a participant or beneficiary to transfer, in whole or in 
part, his or her investment from the qualified default investment 
alternative to any other investment alternative available under the 
plan;
    (3) Is:
    (i) Managed by an investment manager, as defined in section 3(38) 
of the Act, or
    (ii) An investment company registered under the Investment Company 
Act of 1940;
    (4) Is diversified so as to minimize the risk of large losses; and
    (5) Constitutes one of the following:
    (i) An investment fund product or model portfolio that is designed 
to provide varying degrees of long-term appreciation and capital 
preservation through a mix of equity and fixed income exposures based 
on the participant's age, target retirement date (such as normal 
retirement age under the plan) or life expectancy. Such products and 
portfolios change their asset allocations and associated risk levels 
over time with the objective of becoming more conservative (i.e., 
decreasing risk of losses) with increasing age. For purposes of this 
paragraph (e)(5)(i), asset allocation decisions for such products and 
portfolios are not required to take into account risk tolerances, 
investments or other preferences of an individual participant. An 
example of such a fund or portfolio may be a ``life-cycle'' or 
``targeted-retirement-date'' fund or account.
    (ii) An investment fund product or model portfolio that is designed 
to provide long-term appreciation and capital preservation through a 
mix of equity and fixed income exposures consistent with a target level 
of risk appropriate for participants of the plan as a whole. For 
purposes of this paragraph (e)(5)(ii), asset allocation decisions for 
such products and portfolios are not required to take into account the 
age, risk tolerances, investments or other preferences of an individual 
participant. An example of such a fund or portfolio may be a 
``balanced'' fund.
    (iii) An investment management service with respect to which an 
investment manager allocates the assets of a participant's individual 
account to achieve varying degrees of long-term appreciation and 
capital preservation through a mix of equity and fixed income 
exposures, offered through investment alternatives available under the 
plan, based on the participant's age, target retirement date (such as 
normal retirement age under the plan) or life expectancy. Such 
portfolios change their asset allocations and associated

[[Page 56824]]

risk levels for an individual account over time with the objective of 
becoming more conservative (i.e., decreasing risk of losses) with 
increasing age. For purposes of this paragraph (e)(5)(iii), asset 
allocation decisions are not required to take into account risk 
tolerances, investments or other preferences of an individual 
participant. An example of such a service may be a ``managed account.''

    Signed at Washington, DC, this 22nd day of September.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 06-8282 Filed 9-26-06; 8:45 am]
BILLING CODE 4510-29-P