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38–002 PDF 2008

H.R. 3185, THE 401(K) FAIR DISCLOSURE FOR

RETIREMENT SECURITY ACT OF 2007

HEARING

BEFORE THE

COMMITTEE ON 

EDUCATION AND LABOR

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, OCTOBER 4, 2007

Serial No. 110–67

Printed for the use of the Committee on Education and Labor

(

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/education/index.html 

(II)

COMMITTEE ON EDUCATION AND LABOR 

GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice Chairman 

Donald M. Payne, New Jersey 

Robert E. Andrews, New Jersey 

Robert C. ‘‘Bobby’’ Scott, Virginia 

Lynn C. Woolsey, California 

Rube ́n Hinojosa, Texas 

Carolyn McCarthy, New York 

John F. Tierney, Massachusetts 

Dennis J. Kucinich, Ohio 

David Wu, Oregon 

Rush D. Holt, New Jersey 

Susan A. Davis, California 

Danny K. Davis, Illinois 

Rau ́l M. Grijalva, Arizona 

Timothy H. Bishop, New York 

Linda T. Sa ́nchez, California 

John P. Sarbanes, Maryland 

Joe Sestak, Pennsylvania 

David Loebsack, Iowa 

Mazie Hirono, Hawaii 

Jason Altmire, Pennsylvania 

John A. Yarmuth, Kentucky 

Phil Hare, Illinois 

Yvette D. Clarke, New York 

Joe Courtney, Connecticut 

Carol Shea-Porter, New Hampshire 

Howard P. ‘‘Buck’’ McKeon, California, 

Senior Republican Member 

Thomas E. Petri, Wisconsin 

Peter Hoekstra, Michigan 

Michael N. Castle, Delaware 

Mark E. Souder, Indiana 

Vernon J. Ehlers, Michigan 

Judy Biggert, Illinois 

Todd Russell Platts, Pennsylvania 

Ric Keller, Florida 

Joe Wilson, South Carolina 

John Kline, Minnesota 

Cathy McMorris Rodgers, Washington 

Kenny Marchant, Texas 

Tom Price, Georgia 

Luis G. Fortun ̃ o, Puerto Rico 

Charles W. Boustany, Jr., Louisiana 

Virginia Foxx, North Carolina 

John R. ‘‘Randy’’ Kuhl, Jr., New York 

Rob Bishop, Utah 

David Davis, Tennessee 

Timothy Walberg, Michigan 

Dean Heller, Nevada

Mark Zuckerman, Staff Director 

Vic Klatt, Minority Staff Director 

(III)

C O N T E N T S 

Page

Hearing held on October 4, 2007 ............................................................................ 1

Statement of Members: 

Altmire, Hon. Jason, a Representative in Congress from the State of 

Pennsylvania, prepared statement of .......................................................... 56

McKeon, Hon. Howard P. ‘‘Buck,’’ Senior Republican Member, Committee 

on Education and Labor ............................................................................... 4

Prepared statement of ............................................................................... 5

Additional submissions: 

American Benefits Council and American Council of Life Insurers and Investment Company Institute (ICI) ............................... 56

‘‘A Primer on Plan Fees and an Analysis of H.R. 3185, the 

401(k) Fair Disclosure for Retirement Security Act of 2007’’ ..... 70

Fee disclosure request for information (RFI) from various organizations ............................................................................................. 60

Goldbrum, Larry H., Esq., general counsel, the SPARK Institute, 

statement of .................................................................................... 64

ICI, statement of ................................................................................ 74

ICI Policy Statement—Retirement Plan Disclosure, January 30, 

2007 ................................................................................................. 78

ICI ERISA advisory council, statement of ....................................... 81

Internet address to ICI fee disclosure RFI to U.S. Department 

of Labor, dated July 20, 2007 ........................................................ 78

Miller, Hon. George, Chairman, Committee on Education and Labor ......... 1

Prepared statement of ............................................................................... 3

Statement of Witnesses: 

Campbell, Bradford P., Assistant Secretary of Labor ................................... 7

Prepared statement of ............................................................................... 9

Certner, David, legislative counsel and legislative policy director, AARP .. 14

Prepared statement of ............................................................................... 16

Chambers, Jon C., principal with Schultz Collins Lawson Chambers, 

Inc. ................................................................................................................. 45

Prepared statement of ............................................................................... 47

Minsky, Lew, senior attorney, Florida Power and Light Co. ........................ 38

Prepared statement of ............................................................................... 40

Scanlon, Matthew H., managing director, Barclays Global Investors ......... 19

Prepared statement of ............................................................................... 22

Thomasson, Tommy, president/CEO of DailyAccess Corp., on behalf of 

ASPPA and CIKR ......................................................................................... 29

Prepared statement of ............................................................................... 31

(1)

H.R. 3185, THE 401(k) FAIR DISCLOSURE FOR 

RETIREMENT SECURITY ACT OF 2007

Thursday, October 4, 2007

U.S. House of Representatives 

Committee on Education and Labor 

Washington, DC

The committee met, pursuant to call, at 10:35 a.m., in room 

2175, Rayburn House Office Building, Hon. George Miller [chairman of the committee] presiding. 

Present: Representatives Miller, Andrews, McCarthy, Kuchinich, 

Holt, Grijalva, Bishop of New York, Sestak, Loebsack, Hare, 

Clarke, Courtney, Shea-Porter, McKeon, Petri, Castle, Ehlers, 

Platts, Kline, Marchant, Boustany, Foxx, and Davis of Tennessee. 

Staff present: Aaron Albright, Press Secretary; Tylease Alli, 

Hearing Clerk; Chris Brown, Labor Policy Advisor; Lynn Dondis, 

Policy Advisor for Subcommittee on Workforce Protections; Carlos 

Fenwick, Policy Advisor for Subcommittee on Health, Employment, 

Labor and Pensions; Michael Gaffin, Staff Assistant, Labor; Jeffrey 

Hancuff, Staff Assistant, Labor; Danielle Lee, Press/Outreach Assistant; Rachel Racusen, Deputy Communications Director; Michele 

Varnhagen, Labor Policy Director; Robert Borden, Minority General Counsel; Cameron Coursen, Minority Assistant Communications Director; Rob Gregg, Minority Legislative Assistant; Victor 

Klatt, Minority Staff Director; Alexa Marrero, Minority Communications Director; Jim Paretti, Minority Workforce Policy Counsel; 

Molly McLaughlin Salmi, Minority Deputy Director of Workforce 

Policy; Ken Serafin, Minority Professional Staff Member; and Linda 

Stevens, Minority Chief Clerk/Assistant to the General Counsel. 

Chairman MILLER [presiding]. The Committee on Education and 

Labor will come to order to receive testimony on H.R. 3185, the 

401(K) Fair Disclosure for Retirement Security Act. 

Over the last 3 decades, the number of Americans with 401(k)-

style retirement savings plans has skyrocketed, while the number 

of Americans with traditional plans has plummeted. Today, 50 million workers have 401(k)-style plans. These plans were originally 

intended to help supplement workers’ retirement income, not to become the main source of their retirement income. Yet nearly twothirds of private sector workers who have pensions have a 401(k) 

plans, and only a 401(k) plan. 

The median 401(k) account balance is now $19,000. For many retirees, that is not enough to finance a single year of retirement. It 

2

is no surprise that many Americans worry about how they will ever 

have enough savings to last them throughout retirement. 

Given the increasingly prominent role of 401(k) plans, it is critical that the plans provide the best possible deals for their participants. Unfortunately, far too many 401(k) plan participants are not 

getting the best deals possible. Many 401(k)-style plans charge hidden fees that can cut deeply into workers’ retirement savings. And 

many plan participants do not have access to low-cost investment 

options, such as an index fund, that can help them boost their retirement savings. 

At a committee hearing earlier this year, the General Accountability Office testified about the problems posed by hidden 401(k) 

fees. Under current law, weak disclosure requirements mean that 

workers lack critical information about fees they are paying. According to the GAO’s testimony, 80 percent of workers did not 

know that fees were being taken out of their accounts. Without this 

information, workers simply cannot shop around for the best arrangements for their retirement. 

Some of these fees may be reasonable and necessary, but earlier 

this year we heard testimony about a dizzying array of fees: revenue sharing fees, wrap fees, finders fees, shelf space fees, surrender fees, and 12(b)(1) fees. I am sure many workers, if they 

knew about these fees, would not be willing to pay them or would 

look for lower fees in those same categories. The negative consequences of these hidden fees can be significant. According to 

GAO, a 1 percentage point increase in fees would cut retirement 

income by almost 20 percent after 20 years and 30 percent over 30 

years. 

The 401(k) Fair Disclosure Retirement Security Act would require 401(k) plans to disclose in clear and simple terms all the fees 

that they are charging to plan participants. The legislation would 

require that 401(k) plans provide workers with key information on 

investment options and their risk, returns and fees. The legislation 

would also require employers to offer at least one low-cost index 

fund as an investment option for employees participating in 401(k) 

plans. 

Studies have shown that index funds outperform an overwhelming majority of actively managed, often higher-cost funds. 

Plan participants don’t have to choose to invest in the index fund 

if they don’t want to, but they should be able to make that choice 

for themselves. 

Finally, the legislation will assist employers by requiring that 

plan officials know the fees that will be charged before they contract for investment services and disclose any potential conflicts of 

interest they may have. 

After a lifetime of hard work, retirees ought to have the financial 

security that allows them to focus on family and friends without 

sacrificing their standard of living. Helping workers to make better-informed decisions about their retirement options is a critical 

step toward increasing retirement security for America’s workers. 

I would like to thank all of our witnesses today who are joining 

us. I look forward to their testimony and to hearing their thoughts 

on how we can move forward with this important piece of legislation. 

3

I would like now to recognize the senior Republican on our committee, Mr. Buck McKeon, from California. 

[The statement of Mr. Miller follows:]

Prepared Statement of Hon. George Miller, Chairman, Committee on 

Education and Labor 

Today the committee will hear testimony on H.R. 3185, the ‘‘401(k) Fair Disclosure for Retirement Security Act.’’

Over the last three decades, the number of Americans with 401(k)-style retirement savings plans has skyrocketed, while the number of Americans with traditional pension plans has plummeted. Today, 50 million workers have 401(k)-style 

plans. 

These plans were originally intended to help supplement workers’ retirement income, not to become the main source of their retirement income. Yet nearly twothirds of private sector workers (http://www.ebri.org/pdf/publications/facts/

0607fact.pdf) who have a pension have a 401(k)—and only a 401(k). 

The median 401(k) account balance is now $19,000. For many retirees, that’s not 

even enough to finance a single year of retirement. It’s no surprise that many Americans worry about how they will ever have enough savings to last them throughout 

retirement. 

Given the increasingly prominent role of 401(k) plans, it is critical that the plans 

provide the best possible deals for their participants. 

Unfortunately, far too many 401(k) plan participants are not getting the best 

deals possible. Many 401(k)-style plans charge hidden fees that can cut deeply into 

workers’ retirement savings. And many plan participants do not have access to lowcost investment options—index funds—that can help them boost their retirement 

savings. 

At a Committee hearing earlier this year, the Government Accountability Office 

testified about the problems posed by hidden 401(k) fees. Under current law, weak 

disclosure requirements mean that workers lack critical information about fees they 

are paying. 

According to the GAO’s testimony, 80 percent of workers did not know that fees 

were being taken out of their accounts. Without this information, workers simply 

cannot shop around for the best deals for their retirement. 

Some of these fees may be reasonable and necessary. But earlier this year, we 

heard testimony about a dizzying array of fees: ‘‘Revenue sharing fees.’’ ‘‘Wrap fees.’’ 

‘‘Finders’ fees.’’ ‘‘Shelf space fees.’’ ‘‘Surrender charges.’’ ‘‘12(b)(1) fees.’’

I’m sure that many workers, if they knew about these fees, would not be willing 

to pay them. 

The negative consequences of these hidden fees can be significant. According to 

GAO, a 1 percentage point increase in fees would cut retirement income by almost 

20 percent after 20 years and 30 percent over 30 years. 

The 401(k) Fair Disclosure for Retirement Security Act would require 401(k) plans 

to disclose in clear and simple terms all the fees that they are charging to plan participants. 

The legislation would require that 401(k) plans provide workers with key information on investment options and their risk, returns, and fees. 

The legislation would also require employers to offer at least one low-cost index 

fund as an investment option for employees participating in 401(k) plans. 

Studies have shown that index funds outperform an overwhelming majority of actively managed, often higher-cost funds. Plan participants don’t have to choose to 

invest in the index fund if they don’t want to, but they should be able to make that 

choice for themselves. 

Finally, the legislation will assist employers by requiring that plan officials know 

the fees that will be charged before they contract for investment services and disclose any potential conflicts of interest they may have. 

After a lifetime of hard work, retirees ought to have financial security that allows 

them to focus on family and friends without sacrificing their standard of living. 

Helping workers to make better-informed decisions about their retirement options 

is a critical step towards increasing retirement security for America’s workers. 

I would like to thank all of our witnesses for joining us today. I look forward to 

their testimony and to hearing their thoughts on how to move forward with this important legislation. 

Thank you. 

4

Mr. MCKEON. Thank you, Chairman Miller, for convening this 

hearing. As you know, this committee has been at the forefront 

when it comes to ensuring retirement security. I am pleased that 

you are continuing to focus on this critical issue. 

The pension reform laws enacted last year were the most sweeping in a generation. I am proud that those reforms originated in 

this committee. As those changes take hold, I believe they will 

make a real difference to workers, retirees and employers alike. 

We are here today to examine your bill, Mr. Chairman, to significantly increase disclosure requirements. Let me say first that I appreciate the opportunity to thoroughly review the legislation. I 

think legislative hearings are a critical tool for lawmakers. These 

hearings allow us to ask important questions of those who would 

be impacted. They also allow us to explore the potential consequences of a proposal, both intended and unintended. 

On the issue of disclosure, let me be clear. I am strongly supportive of providing meaningful, practical information to retirement 

plan participants. However, I cannot support massive new disclosure requirements without a clearly identified need for such requirements, which I fear do more harm than good. Surely, that 

must be our first imperative, to do no harm. 

Overburdened prescriptive regulations in this area, especially so 

soon after last year’s sweeping reforms, may do more harm than 

good for participants and providers alike. Too much information 

may actually prevent workers from seeing and understanding the 

information they genuinely need, and unmanageable requirements 

may force providers to pass along increased costs to workers or to 

leave the system entirely, a result that none of us would find acceptable. 

Anyone who has installed computer software surely understands 

the danger of excessive or impractical disclosure. When presented 

with lengthy, nearly incomprehensible disclosure statements on 

your computer screen, do you thoroughly read each and every 

word? Or do you merely check the box that says ‘‘I understand’’ in 

order to get the program you need? 

I am deeply concerned that if we are not careful, we could create 

a similar experience for employees trying to save for their retirement. If we provide them with volumes of information before we 

allow them to begin saving, do we run the risk that they merely 

check the box that says they understand? Worse, will the valuable 

information they need be buried within a document so lengthy as 

to be intimidating? 

At the same time, we want plan sponsors to get the information 

they need from service providers so they can discharge their fiduciary duties as custodians of plan assets reasonably and responsibly as required by law. But overwhelming plan sponsors or overburdening service providers with extensive disclosure schemes that 

do not produce meaningful information will serve only to increase 

costs, which will take money out of the pockets of retirees. Certainly, none of us support that. 

Finally, we must consider any proposed changes within the 

broader context of existing regulatory efforts. The Congress does 

not operate in a vacuum. We must bear in mind the implications 

of existing law and regulation when it comes to complex new manVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
5

dates. In that light, I am pleased that we have with us today the 

Assistant Secretary of Labor for Employee Benefits and Security, 

who will provide information about a number of regulatory initiatives directly relating to these issues that the Department has undertaken, some of which will become effective in the very near future. 

If current efforts satisfy a large number of concerns regarding 

disclosure, we must ask if it is really necessary to proceed with legislation that may have unintended consequences. I believe there 

are a number of significant concerns in this arena, and I hope we 

explore them thoroughly today. 

At the same time, I continue to keep an open mind about the 

broader issue of enhanced disclosure because it is an issue on 

which I believe we can find common ground. In that light, I hope 

that we can work together through an inclusive process, along with 

the groups and stakeholders affected by these reforms to determine 

whether legislation is necessary and, if so, craft legislation that creates the right balance. 

I look forward to the testimony of today’s witnesses and to a continued dialogue about the best way to protect and enhance retirement security for all Americans. 

I yield back the balance of my time. 

[The statement of Mr. McKeon follows:]

Prepared Statement of Hon. Howard P. ‘‘Buck’’ McKeon, Senior Republican 

Member, Committee on Education and Labor 

Thank you, Chairman Miller, for convening this hearing. As you know, this Committee has been at the forefront when it comes to ensuring retirement security, and 

I’m pleased that you are continuing to focus on this critical issue. 

The pension reform laws enacted last year were the most sweeping in a generation, and I’m proud that those reforms originated in this Committee. As those 

changes take hold, I believe they will make a real difference to workers, retirees, 

and employers alike. 

We are here today to examine your bill, Mr. Chairman, to significantly increase 

disclosure requirements. Let me say first that I appreciate the opportunity to thoroughly review the legislation. I think legislative hearings are a critical tool for lawmakers. These hearings allow us to ask important questions of those who would be 

impacted. They also allow us to explore the potential consequences of a proposal, 

both intended and unintended. 

On the issue of disclosure, let me be clear: I am strongly supportive of providing 

meaningful, practical information to retirement plan participants. However, I cannot 

support massive new disclosure requirements, without a clearly identified need for 

such requirements, which I fear could do more harm than good. 

And surely, that must be our first imperative: do no harm. 

Over-burdensome or proscriptive regulation in this area, especially so soon after 

last year’s sweeping reforms, may do more harm than good for participants and providers alike. Too much information may actually prevent workers from seeing and 

understanding the information they genuinely need. And unmanageable requirements may force providers to pass along increased costs to workers or to leave the 

system entirely—a result that none of us would find acceptable. 

Anyone who has installed computer software surely understands the danger of excessive or impractical disclosure. When presented with lengthy, nearly incomprehensible disclosure statements on your computer screen, do you thoroughly read each 

and every word? Or do you merely check the box that says ‘‘I understand’’ in order 

to get the program you need? 

I am deeply concerned that if we are not careful, we could create a similar experience for employees trying to save for their retirement. If we provide them with volumes of information before we allow them to begin saving, do we run the risk that 

they merely ‘check the box’ that says they understand? Worse, will the valuable information they need be buried within a document so lengthy as to be intimidating? 

6

At the same time, we want plan sponsors to get the information they need from 

service providers so they can discharge their fiduciary duties as custodians of plan 

assets reasonably and responsibly, as required by law. But overwhelming plan sponsors or overburdening service providers with extensive disclosure schemes that do 

not produce meaningful information will serve only to increase costs, which will take 

money out of the pockets of retirees. Certainly none of us support that. 

Finally, we must consider any proposed changes within the broader context of existing regulatory efforts. The Congress does not operate in a vacuum, and we must 

bear in mind the implications of existing law and regulation when it comes to complex new mandates. In that light, I am pleased that we have with us today the Assistant Secretary of Labor for Employee Benefits and Security, who will provide information about a number of regulatory initiatives directly relating to these issues 

that the Department has undertaken, some of which will become effective in the 

very near future. If current efforts satisfy a large number of concerns regarding disclosure, we must ask if it is really necessary to proceed with legislation that may 

have unintended consequences. 

I believe there are a number of significant concerns in this arena, and I hope we 

explore them thoroughly today. At the same time, I continue to keep an open mind 

about the broader issue of enhanced disclosure, because it’s an issue on which I believe we can find common ground. In that light, I hope that we can work together 

through an inclusive process, along with the groups and stakeholders affected by 

these reforms, to determine whether legislation is necessary and, if so, to craft legislation that strikes the right balance. 

I look forward to the testimony of today’s witnesses, and to a continued dialogue 

about the best way to protect and enhance retirement security for all Americans. 

I yield back the balance of my time. 

Chairman MILLER. I thank the gentleman for his statement. 

We are joined with an extraordinary panel of individuals who are 

very familiar with not only the legislation, but the underlying concerns. We are joined by Bradford P. Campbell who has served as 

Assistant Secretary of Labor for the Employee Benefits Security 

Administration since August of 2007. Mr. Campbell previously 

served a number of roles in the Department of Labor since 2001. 

David Certner is the director of legislative policy for government 

relations and advocacy at AARP. Mr. Certner has been with AARP 

since 1992, and he served as chairman of the 1994 ERISA Advisory 

Council for the Department of Labor. 

Tommy Thomasson is the co-founder and president and CEO of 

Daily Access Corporation, as well as the founder and president of 

Interserve, LLC. He also serves as chairman of the Council of Independent 401(k) Recordkeepers. 

Lew Minsky is the senior attorney of employee benefit plans for 

Florida Light and Power. Mr. Minsky serves on the ERISA Industry Committee’s Retirement Security Committee and the ProfitSharing 401(k) Council of the American Board of Directors. I got 

that all out. 

Jon Chambers is a principal at Schultz Collins Lawson Chambers, and he specializes in the analysis and design and implementation of investment programs for retirement plans. Mr. Chambers 

has served on the board of the Western Pension and Benefits Conference. 

Welcome to all of you to the committee. Your full statements will 

be put in the record in their entirety. We will begin with you, Mr. 

Secretary. I think you know the routine here. There will be a green 

light when you start for 5 minutes, and then an orange light when 

we would like you to wrap up, and a red light when we would like 

you to finish, but we want you to finish your thoughts and complete thoughts. 

7

So thank you and welcome to the committee. 

STATEMENT OF BRADFORD P. CAMPBELL, ASSISTANT SECRETARY OF LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, U.S. DEPARTMENT OF LABOR 

Mr. CAMPBELL. Thank you very much, Mr. Chairman, Mr. 

McKeon and the other members of the committee. I very much appreciate this opportunity to come and testify about the Department 

of Labor’s significant progress in promulgating regulations to improve the disclosure of fee expense and conflict-of-interest information in 401(k) and other employee benefit plans. Our regulatory initiatives in this area are a top priority for the Department. 

Over the past 20 years, the retirement plan universe has 

changed in some very significant ways. They have affected both 

plan participants and plan fiduciaries. More workers now control 

the investment of their retirement savings in participant-directed 

individual account plans such as 401(k) plans. At the same time, 

the financial services marketplace has increased in complexity. 

Plan fiduciaries who are charged by law with the responsibility of 

making prudent decisions when hiring service providers and paying 

only reasonable expenses in doing so, have found their jobs more 

difficult as the number and types of fees proliferate and as relationships between financial service providers become more complex. 

All of these trends cause the Department to conclude that despite 

the success we have been having with our education and outreach 

activities to educate fiduciaries and participants, that a new regulatory framework was necessary to better protect the interests of 

America’s workers, retirees and their families. That is why we initiated three major regulatory projects, each addressing a different 

aspect of this problem. 

The first regulation addresses the needs of participants for concise, useful, comparative information about their plan’s investment 

options, to help them make informed decisions. 

The second addresses the needs of plan fiduciaries who require 

more comprehensive disclosures by service providers to enable 

them to carry out their duties under the law and assess whether 

the cost that they are paying for the services they are receiving are 

reasonable and necessary. 

The third regulation addresses disclosures made by plan administrators to the public and the federal regulators in the Form 5500, 

the annual report filed by pension plans. 

I think it is essential, Mr. Chairman, to understand that the disclosure needs of these groups are different, and that therefore the 

disclosures that we would mandate via regulatory process would, 

in turn, be quite different. Participants are trying to choose and investment option from a defined universe of options within their 

plan. To do this, they need concise summary information to allow 

them to compare these options in meaningful ways. That includes 

information about fees, about the historical rates of return, the nature of these investments and other relevant factors in making 

those decisions. 

Plan fiduciaries are trying to decide if the services that they are 

receiving and the prices they are being charged are reasonable and 

necessary. They are taking into account the needs of the plan as 

8

a whole. They need to know whether the services provided are influenced by compensation arrangements between the service providers and third parties. They need to know what services are 

being provided and whether those services are necessary, and conduct that evaluation. The process by which they make these prudent decisions of necessity requires a more comprehensive and detailed disclosure. 

In response to our request for information on participant disclosures, which we issued earlier this spring, there seems to be a 

basic agreement among all parties, and I believe it is an interest 

shared by the members of this committee as well, that participants 

generally are not going to benefit from voluminous, lengthy disclosures. As Mr. McKeon mentioned, the software agreement analogy 

is an apt one. 

Also, it is important to recognize that participants bear the cost 

of producing these materials. If we produce disclosures that are voluminous and ignored, we have perversely increased the fees that 

participants pay without gaining a material advantage. 

I want to emphasize that we are not at the beginning of this regulatory process. In fact, we have been working on it for quite some 

time and are well underway and quite advanced in it. We proposed 

the first regulation of these three in July of 2006, dealing with public disclosures, and we will be promulgating a final regulation on 

this within the next few weeks. We have completed drafting and 

we have submitted into the regulatory clearance process within the 

administration a proposed regulation providing the comprehensive 

disclosures required for fiduciaries. This will be published within 

the next several months. As I mentioned, we concluded the RFI on 

participant disclosures, and we will be issuing a proposed regulation later in the winter based on the information that we have 

gathered there as we developed this regulation. 

I commend this committee for sharing our commitment and belief in the importance of enhanced disclosures, but I do think it is 

important to understand that it is not necessary from the Department’s perspective to have a legislative change to complete the regulations we have underway. The current statute provides us with 

the authority to embark on these regulations and to conclude them. 

I also think that there are many technical issues presented in 

compiling these disclosures, and the regulatory process is well suited to resolving some of those technical concerns. It is deliberative, 

open, and inclusive, and has been working well. I think we have 

heard from many of the other witnesses on this panel as we have 

gone through our deliberations at the Department. 

If the committee does decide to pursue legislation, however, I 

would ask that it bear in mind the work that we have already done 

in its efforts, and that it also bear in mind the need for participants to receive concise disclosures and evaluate the legislation as 

introduced in that light. I am also somewhat concerned about the 

mandate of a particular type of investment option for 401(k) plans, 

as this is a departure from how ERISA has traditionally worked 

and impinges on the ability of participants and employers to together decide what is a mutually appropriate plan environment. 

But in conclusion, Mr. Chairman, I would like to thank you for 

your interest in this and for the other members of the committee, 

9

because this is a very important issue, and it is one that we take 

very seriously. I am committed to completing our regulatory 

projects in a timely manner. 

I would be happy to answer any questions you have. 

[The statement of Mr. Campbell follows:]

Prepared Statement of Bradford P. Campbell, Assistant Secretary of Labor 

Good morning Chairman Miller, Ranking Member McKeon, and Members of the 

Committee. Thank you for inviting me to discuss 401(k) plan fees, the Department 

of Labor’s role in overseeing plan fees, and proposals to increase transparency and 

disclosure of plan fee and expense information. I am Bradford Campbell, the Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). 

I am proud to be here today representing the Department of Labor and EBSA. Our 

mission is to protect the security of retirement, health and other employee benefits 

for America’s workers, retirees and their families, and to support the growth of our 

private benefits system. 

Ensuring the security of retirement benefits is a core mission of EBSA, and one 

of this Administration’s highest priorities. Excessive fees can undermine retirement 

security by reducing the accumulation of assets. It is therefore critical that plan participants directing the investment of their contributions, and plan fiduciaries 

charged with the responsibility of prudently selecting service providers and paying 

only reasonable fees and expenses have the information they need to make appropriate decisions. 

That is why the Department began a series of regulatory initiatives last year to 

expand disclosure requirements in three distinct areas: 

1. Disclosures by plans to participants to assist in making investment decisions; 

2. Disclosures by service providers to plan fiduciaries to assist in assessing the 

reasonableness of provider compensation and potential conflicts of interest; and 

3. More efficient, expanded fee and compensation disclosures to the government 

and the public through a substantially revised, electronically filed Form 5500 Annual Report. 

Each of these projects addresses different disclosure needs, and our regulations 

will be tailored to ensure that appropriate disclosures are made in a cost effective 

manner. For example, participants are unlikely to find useful extensive disclosure 

documents written in ‘‘legalese’’—instead, it appears from comments we received 

thus far that participants want concise and readily understood comparative information about plan costs and their investment options. By contrast, plan fiduciaries 

want detailed disclosures in order to properly carry out their duties under the law, 

enabling them to understand the nature of the services being provided, all fees and 

expenses, any conflicts of interest on the part of the service provider, and indirect 

compensation providers may receive in connection with the plan’s business. 

We have made significant progress on these projects. We will be issuing a final 

regulation requiring additional public disclosure of fee and expense information on 

the Form 5500 within the next few weeks. A proposed regulation requiring specific 

and comprehensive disclosures to plan fiduciaries by service providers is currently 

in the clearance process, and we expect this proposal to be published this year. We 

also concluded a Request for Information seeking the views of the interested public 

on issues surrounding disclosures to participants. We are currently evaluating the 

comments received from consumer groups, plan sponsors, service providers and others as we develop a proposed regulation. 

The Employee Retirement Income Security Act of 1974 (ERISA) provides the Secretary with broad regulatory authority, enabling the Department to pursue these 

comprehensive disclosure initiatives without need for a statutory amendment. The 

regulatory process currently underway ensures that all voices and points of view 

will be heard and provides an effective means of resolving the many complex and 

technical issues presented. While I am pleased that we share the common goal of 

improving fee disclosure, I am concerned by a number of provisions in H.R. 3185, 

which I fear could disrupt our ongoing efforts to provide these important disclosures 

to workers. In addition, the legislation would fundamentally change the nature of 

ERISA’s fiduciary oversight by mandating inclusion of Department of Labor-approved investment products, limiting the ability of workers and employers to develop plans that best suit their mutual needs. I am also concerned that the legislation may not achieve the primary goal of participant disclosures—providing workers 

with useful and concise information—by mandating very detailed and costly disclosure documents. Disclosures intended for participants should illuminate, not confuse—excessively detailed disclosures are likely to be ignored by participants even 

10

1 Based on 2004 filings of the Form 5500. 

2See, e.g., Field Assistance Bulletin 2002-3 (November 5, 2002) and Advisory Opinions 2003-

09A (June 25, 2003), 97-16A (May 22, 1997), and 97-15A (May 22, 1997). 

as those participants bear the potentially significant cost of the preparation and distribution. In addition to these concerns, there are a number of issues regarding the 

practicality of administering the legislation’s requirements. 

My testimony today will discuss in more detail the Department’s activities related 

to plan fees. Also, I will describe the Department’s regulatory and enforcement initiatives focused on improving the transparency of fee and expense information for 

both plan fiduciaries and participants. 

Background 

EBSA is responsible for administering and enforcing the fiduciary, reporting, and 

disclosure provisions of Title I of ERISA. EBSA oversees approximately 683,000 private pension plans, including 419,000 participant-directed individual account plans 

such as 401(k) plans, and millions of private health and welfare plans that are subject to ERISA.1

Participant-directed individual account plans under our jurisdiction hold over $2.2 

trillion in assets and cover more than 44.4 million active participants. Since 401(k)-

type plans began to proliferate in the early 1980s, the number of employees investing through these types of plans has grown dramatically. The number of active participants has risen almost 500 percent since 1984 and has increased by 11.4 percent 

since 2000. EBSA employs a comprehensive, integrated approach encompassing programs for enforcement, compliance assistance, interpretive guidance, legislation, 

and research to protect and advance the retirement security of our nation’s workers 

and retirees. 

Title I of ERISA establishes standards of fiduciary conduct for persons who are 

responsible for the administration and management of benefit plans. It also establishes standards for the reporting of plan related financial and benefit information 

to the Department, the IRS and the PBGC, and the disclosure of essential plan related information to participants and beneficiaries. 

The Fiduciary’s Role 

ERISA requires plan fiduciaries to discharge their duties solely in the interest of 

plan participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable expenses of plan administration. In discharging their 

duties, fiduciaries must act prudently and in accordance with the documents governing the plan. If a fiduciary’s conduct fails to meet ERISA’s standards, the fiduciary is personally liable for plan losses attributable to such failure. 

ERISA protects participants and beneficiaries, as well as plan sponsors, by holding plan fiduciaries accountable for prudently selecting plan investments and service 

providers. In carrying out this responsibility, plan fiduciaries must take into account 

relevant information relating to the plan, the investment, and the service provider, 

and are specifically obligated to consider fees and expenses. 

ERISA prohibits the payment of fees to service providers unless the services are 

necessary, are provided pursuant to a reasonable contract, and the plan pays no 

more than reasonable compensation. Thus, plan fiduciaries must ensure that fees 

paid to service providers and other expenses of the plan are reasonable in light of 

the level and quality of services provided. Plan fiduciaries must also be able to assess whether revenue sharing or other indirect compensation arrangements create 

conflicts of interest on the part of the service provider that might affect the quality 

of the services to be performed. These responsibilities are ongoing. After initially selecting service providers and investments for their plans, fiduciaries are required to 

monitor plan fees and expenses to determine whether they continue to be reasonable 

and whether there are conflicts of interest. 

EBSA’s Compliance Assistance Activities 

EBSA assists plan fiduciaries and others in understanding their obligations under 

ERISA, including the importance of understanding service provider fees and relationships, by providing interpretive guidance2 and making related materials available on its Web site. One such publication developed by EBSA is Understanding Retirement Plan Fees and Expenses, which provides general information about plan 

fees and expenses. In conjunction with the Securities and Exchange Commission, we 

also developed a fact sheet, ‘‘Selecting and Monitoring Pension Consultants—Tips 

for Plan Fiduciaries.’’ This fact sheet contains a set of questions to assist plan fiduciaries in evaluating the objectivity of pension consultant recommendations. 

11

EBSA also has made available on its Web site a model ‘‘401(k) Plan Fee Disclosure Form’’ to assist fiduciaries of individual account pension plans when analyzing 

and comparing the costs associated with selecting service providers and investment 

products. This form is the product of a coordinated effort of the American Bankers 

Association, Investment Company Institute, and the American Council of Life Insurers. 

To help educate plan sponsors and fiduciaries about their obligations under 

ERISA, EBSA conducts numerous educational and outreach activities. Our campaign, ‘‘Getting It Right—Know Your Fiduciary Responsibilities,’’ includes nationwide educational seminars to help plan sponsors understand the law. The program 

focuses on fiduciary obligations, especially related to the importance of selecting 

plan service providers and the role of fee and compensation considerations in that 

selection process. EBSA has conducted 20 fiduciary education programs since May 

2004 in different cities throughout the United States. EBSA also has conducted 49 

health benefits education seminars, covering nearly every state, since 2001. Beginning in February 2005, these seminars added a focus on fiduciary responsibilities. 

EBSA will continue to provide seminars in additional locations under each program. 

Disclosures to Participants under Current Law 

ERISA currently provides for a number of disclosures aimed at providing participants and beneficiaries information about their plans’ investments. For example, information is provided to participants through summary plan descriptions and summary annual reports. Under the Pension Protection Act of 2006, plan administrators 

are required to automatically furnish pension benefit statements to plan participants and beneficiaries. The Department issued a Field Assistance Bulletin in December 2006 to provide initial guidance on complying with the new statutory requirements. Statements must be furnished at least once each quarter, in the case 

of individual account plans that permit participants to direct their investments, and 

at least once each year, in the case of individual account plans that do not permit 

participants to direct their investments. Other disclosures, such as copies of the 

plan documents, are available to participants on request. 

Additional disclosures are required by the Department’s rules concerning whether 

a participant has ‘‘exercised control’’ over his or her account. ERISA section 404(c) 

provides that plan fiduciaries are not liable for investment losses which result from 

the participant’s exercise of control. A number of conditions must be satisfied, including that specified information concerning plan investments must be provided to 

plan participants. Information fundamental to participants’ investment decisions 

must be furnished automatically. Additional information must be provided on request. 

EBSA Participant Education and Outreach Activities 

EBSA is committed to assisting plan participants and beneficiaries in understanding the importance of plan fees and expenses and the effect of those fees and 

expenses on retirement savings. EBSA has developed educational brochures and 

materials available for distribution and through our Web site. EBSA’s brochure entitled A Look at 401(k) Plan Fees for Employees is targeted to participants and beneficiaries of 401(k) plans who are responsible for directing their own investments. 

The brochure answers frequently asked questions about fees and highlights the 

most common fees, and is designed to encourage participants to make informed investment decisions and to consider fees as a factor in decision making. Last fiscal 

year, EBSA distributed over 5,400 copies of this brochure and over 46,000 visitors 

viewed the brochure on our Web site. 

More general information is provided in the publications, What You Should Know 

about Your Retirement Plan and Taking the Mystery out of Retirement Planning. 

In the same period, EBSA distributed over 86,000 copies of these two brochures and 

almost 102,000 visitors viewed these materials on our Web site. EBSA’s Study of 

401(k) Plan Fees and Expenses, which describes differences in fee structures faced 

by plan sponsors when they purchase services from outside providers, is also available. 

Regulatory Initiatives 

EBSA currently is pursuing three initiatives to improve the transparency of fee 

and expense information to participants, plan sponsors and fiduciaries, government 

agencies and the public. We began these initiatives, in part, to address concerns 

that participants are not receiving information in a format useful to them in making 

investment decisions, and that plan fiduciaries are having difficulty getting needed 

fee and compensation arrangement information from service providers to fully satisfy their fiduciary duties. The needs of participants and plan fiduciaries are growVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
12

ing as the financial services industry evolves, offering an increasingly complex array 

of products and services. 

• Disclosures to Participants 

EBSA currently is developing a proposed regulation addressing required disclosures to participants in participant-directed individual account plans. This regulation will ensure that participants have concise, readily understandable information 

they can use to make informed decisions about the investment and management of 

their retirement accounts. Special care must be taken to ensure that the benefits 

to participants and beneficiaries of any new requirement outweigh the compliance 

costs, given that any such costs are likely to be charged against the individual accounts of participants. 

On April 25, 2007, the Department published a Request for Information to gather 

data to develop the proposed regulation. The Request for Information invited suggestions from plan participants, plan sponsors, plan service providers, consumer advocates and others for improving the current disclosures applicable to participantdirected individual account plans and requesting analyses of the benefits and costs 

of implementing such suggestions. The Department specifically invited comment on 

the recommendation of the Government Accountability Office that plans be required 

to provide a summary of all fees that are paid out of plan assets or directly by participants, as well as other possible approaches to improving the disclosure of plan 

fee and expense information. 

In connection with this initiative, EBSA is also working with the Securities and 

Exchange Commission to develop a framework for disclosure of information about 

fees charged by financial service providers, such as mutual funds, that would be 

more easily understood by participants and beneficiaries. Improved mutual fund disclosure would assist plan participants and beneficiaries because a large proportion 

of 401(k) plan assets are invested in mutual fund shares. We are working closely 

with the SEC to ensure that the disclosure requirements under our respective laws 

are complementary. 

We are hopeful that improved fee disclosure will assist plan participants and 

beneficiaries in making more informed decisions about their investments. Better disclosure could also lead to enhanced competition between financial service providers 

which could lead to lower fees and enhanced services. 

• Disclosures to Plan Fiduciaries 

EBSA will shortly be issuing a proposed regulation amending its current regulation under section 408(b)(2) to clarify the information fiduciaries must receive and 

service providers must disclose for purposes of determining whether a contract or 

arrangement is ‘‘reasonable,’’ as required by ERISA’s statutory exemption for service 

arrangements. Our intent is to ensure that service providers entering into or renewing contracts with plans disclose to plan fiduciaries comprehensive and accurate information concerning the providers’ receipt of direct and indirect compensation or 

fees and the potential for conflicts of interest that may affect the provider’s performance of services. The information provided must be sufficient for fiduciaries to make 

informed decisions about the services that will be provided, the costs of those services, and potential conflicts of interest. The Department believes that such disclosures are critical to ensuring that contracts and arrangements are ‘‘reasonable’’ 

within the meaning of the statute. This proposed regulation currently is under review within the Administration. 

• Disclosures to the Public 

EBSA will shortly promulgate a final regulation revising the Form 5500 Annual 

Report filed with the Department to complement the information obtained by plan 

fiduciaries as part of the service provider selection or renewal process. The Form 

5500 is a joint report for the Department of Labor, Internal Revenue Service and 

Pension Benefit Guaranty Corporation that includes information about the plan’s 

operation, funding, assets, and investments. The Department collects information on 

service provider fees through the Form 5500 Schedule C. 

Consistent with recommendations of the ERISA Advisory Council Working Group, 

the Department published, for public comment, a number of changes to the Form 

5500, including changes that would expand the service provider information required to be reported on the Schedule C. The proposed changes more specifically define the information that must be reported concerning the ‘‘indirect’’ compensation 

service providers received from parties other than the plan or plan sponsor, including revenue sharing arrangements among service providers to plans. The proposed 

changes to the Schedule C were designed to assist plan fiduciaries in monitoring the 

reasonableness of compensation service providers receive for services and potential 

conflicts of interest that might affect the quality of those services. EBSA has comVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
13

3Letter from David Certner, Legislative Counsel and Director of Legislative Policy, Government Relations and Advocacy, AARP, to the Employee Benefits Security Administration (July 

24, 2007), at page 9, available at http://www.dol.gov/ebsa/pdf/Certner072407.pdf. 

pleted its review of public comments on the proposed Schedule C and other changes 

to the Form 5500 and expects to have a final regulation and a notice of form revisions published by mid-October. 

We intend that the changes to the Schedule C will work in tandem with our 

408(b)(2) initiative. The amendment to our 408(b)(2) regulation will provide up front 

disclosures to plan fiduciaries, and the Schedule C revisions will reinforce the plan 

fiduciary’s obligation to understand and monitor these fee disclosures. The Schedule 

C will remain a requirement for plans with 100 or more participants, which is consistent with long-standing Congressional direction to simplify reporting requirements for small plans. 

EBSA’s Enforcement Efforts 

EBSA has devoted enforcement resources to this area, seeking to detect, correct 

and deter violations such as excessive fees and expenses, and failure by fiduciaries 

to monitor on-going fee structure arrangements. Over the past nine years, we closed 

354 401(k) investigations involving these issues, with monetary results of over $64 

million. 

In carrying out its enforcement responsibilities, EBSA conducts civil and criminal 

investigations to determine whether the provisions of ERISA or other federal laws 

related to employee benefit plans have been violated. EBSA regularly works in coordination with other federal and state enforcement agencies, including the Department’s Office of the Inspector General, the Internal Revenue Service, the Department of Justice (including the Federal Bureau of Investigation), the Securities and 

Exchange Commission, the PBGC, the federal banking agencies, state insurance 

commissioners, and state attorneys general. 

EBSA is continuing to focus enforcement efforts on compensation arrangements 

between pension plan sponsors and service providers hired to assist in the investment of plan assets. EBSA’s Consultant/Adviser Project (CAP), created in October 

2006, addresses conflicts of interest and the receipt of indirect, undisclosed compensation by pension consultants and other investment advisers. Our investigations 

seek to determine whether the receipt of such compensation violates ERISA because 

the adviser or consultant used its status with respect to a benefit plan to generate 

additional fees for itself or its affiliates. The primary focus of CAP is on the potential civil and criminal violations arising from the receipt of indirect, undisclosed 

compensation. A related objective is to determine whether plan sponsors and fiduciaries understand the compensation and fee arrangements they enter into in order 

to prudently select, retain, and monitor pension consultants and investment advisers. CAP will also seek to identify potential criminal violations, such as kickbacks 

or fraud. 

Concerns Regarding H.R. 3185

I applaud the Chairman’s concern about enhancing participant disclosure and protection in 401(k)-type plans and his efforts to highlight the importance of this issue 

. But while H.R. 3185 and the Department’s regulatory initiatives share the common goal of providing increased transparency of fee and expense information, I am 

concerned that the legislation could disrupt the Department’s ongoing efforts to provide these important disclosures. 

• Participant Disclosure Requirements 

Unlike plan fiduciaries, who require highly detailed fee, expense and conflict of 

interest information to carry out their duties, participants are most likely to benefit 

from concise disclosures that allow them to meaningfully compare the investment 

options in their plans. In response to our April Request for Information, the Department received many comments highlighting the importance of brevity and relevance 

in disclosures to participants. For example, AARP cautioned that ‘‘To be effective, 

investment and fee disclosures should be short, easy to read and provide meaningful 

information,’’ and cited several studies supporting shorter, more concise disclosure 

materials.3

The very detailed scope of H.R. 3185’s disclosure requirements could result in 

many participants ignoring the complicated disclosures. For example, under the bill 

as introduced, the first of several disclosures participants would receive is an annual 

notice containing a list of specific disclosure items, including a ‘‘fee menu.’’ The fee 

menu, which would list all potential fees that could be assessed, would divide all 

potential fees into one of three categories, and then further divide the fees within 

14

each of the three categories into one of four subcategories. Each fee within the 

twelve subcategories would be accompanied by a ‘‘general description of the purposes for each fee.’’ This could result in a complex disclosure that describes literally 

dozens of potential fees, regardless of their relevance to the participant’s decision 

in selecting an investment option. One tool for plan fiduciaries developed jointly by 

a number of financial service providers lists more than 100 different kinds of fees 

and expenses common to 401(k)-type plans—categorizing and describing each of 

these fees could result in a very lengthy disclosure document. Many commenters, 

in response to our Request for Information, suggested that one or more methods of 

aggregating fee information would provide participants with more meaningful and 

useful disclosure. 

• Mandated Investment Options 

The legislation also takes an unprecedented step by requiring the Department of 

Labor to approve by regulation a mandatory investment option for all participantdirected individual account plans. In addition to limiting the ability of workers and 

employers to develop plans that best suit their mutual needs, this provision would 

result in the Labor 

Department dictating which ‘‘nationally-recognized market-based index funds’’ are 

eligible for mandatory inclusion by plans. Plan fiduciaries—accountable for their decisions and acting in a transparent, efficient marketplace—should select service providers rather than a Federal agency. Further, the criteria for eligible index funds 

are not defined. Funds must offer a combination of returns, risk and fees ‘‘that is 

likely to meet retirement income needs at adequate levels of contribution,’’ but it 

is not clear from this language what standard the Department should use in determining what ‘‘retirement income needs’’ or ‘‘adequate levels of contribution’’ are. 

• Provision of ‘‘Services’’ to Small Employers 

The Department of Labor is very active in providing education and compliance assistance to plan sponsors, and focuses specifically on the needs of small employers. 

For example, we developed publications such as 401(k) Plans for Small Businesses, 

Choosing a Retirement Solution for Your Small Business, SIMPLE IRA Plans for 

Your Small Business, and conduct year-round fiduciary education seminars that are 

particularly designed for small employers. However, the legislation goes beyond education and outreach, requiring the Department to provide ‘‘services designed to assist small employers in finding * * * affordable investment options.’’ I am concerned 

that this provision may well conflict with the Department’s duty to enforce the law, 

as both the plans and the service providers could be potential targets of our investigations. 

While the Department has a number of concerns in addition to the three specific 

issues discussed above, such as the duplicative nature of the new advisory body created by the bill and the requirement to ‘‘widely disseminate’’ the names of certain 

noncompliant service providers to more than 400,000 plans and nearly 45 million 

participants, we will provide technical comments to the Committee addressing these 

issues at a later time. 

Conclusion 

Mr. Chairman and Members of the Committee, thank you for the opportunity to 

testify before you today. The Department is committed to ensuring that 401(k) plans 

and participants pay fair, competitive and transparent prices for services that benefit them—and to combating instances where fees are excessive or hidden. We are 

moving as quickly as possible consistent with the requirements of the regulatory 

process to complete our disclosure initiatives, and we believe they will improve the 

retirement security of America’s workers, retirees and their families. I will be 

pleased to answer any questions you may have. 

Chairman MILLER. Thank you. 

Mr. Certner? 

STATEMENT OF DAVID CERTNER, LEGISLATIVE COUNSEL AND 

LEGISLATIVE POLICY DIRECTOR, AARP 

Mr. CERTNER. Thank you, Mr. Chairman and members of the 

committee. I am David Certner, the legislative counsel and legislative policy director at AARP. Thank you for convening this hearing. 

We appreciate the opportunity to discuss the important issues 

15

raised in the 401(k) Fair Disclosure for Retirement Security Act of 

2007. 

AARP believes that all workers need access to a retirement plan 

in addition to Social Security. In 2006, there were approximately 

50 million active participants in 401(k) plans, which are now the 

dominant employer-based pension vehicle. Those participating in 

these plans shoulder the risk and the responsibility for their investment choices, and ultimately their retirement. As a result, better plan information is essential. 

We all have a stake in ensuring that participants receive accurate and informative disclosures from their 401(k) plan, including 

expenses. However, plan expense and fee information is often scattered or difficult to access or nonexistent. Meaningful information 

is vital because fees significantly reduce the assets available for retirement. Plan fees compound over time and the larger the fee, the 

bigger the reduction. As you noted earlier, GAO recently estimated that $20,000 left 

in a 401(k) account that had a 1 percentage point higher fee for 20 

years would result in an over 17 percent reduction, or over $10,000 

in the account balance. We estimate that over a 30-year period, the 

account would be about 25 percent less. Even a difference of over 

0.5 percent, 50 basis points, reduced the value of the account by 

13 percent over 30 years. 

In short, fees and expenses can have a huge impact on the retirement income security levels. AARP recently surveyed 401(k) participants to gauge their understanding of plan fees in investment 

choices. Our survey indicates that participants don’t have a clear 

understanding of their investments. When asked if they know the 

names of all the funds in which they have money invested through 

the 401(k) plan, almost 65 percent of survey respondents said no; 

27 percent didn’t know whether their plan offered a stock fund; 29 

percent didn’t know if the plan had a bond fund. 

In addition, many 401(k) participants lack basic knowledge of 

plan fees. When asked whether they pay any fees for their plan, 

less than one-fifth said they did. Almost two-thirds responded that 

they don’t pay fees, and 18 percent said they didn’t know. 

Respondents were questioned in detail about the fees that may 

be charged for mutual funds and other types of investments. The 

answers indicate that 401(k) participants do not fully understand 

what types of fees their plans charge. For example, when asked 

whether their 401(k) plan charged an administrative fee, 24 percent said yes, 21 percent no, and 55 percent said they didn’t know. 

Finally, when they were told that plans often charge fees, 83 percent said they didn’t know how much they paid in fees. 

It is clear that better information is needed. We applaud the introduction of H.R. 3185, which would require greater transparency 

of fee and expense information for both participants and plan sponsors. 

Comprehensive information on plan fees and expenses will enable plan sponsors to fulfill their fiduciary responsibility to ensure 

that fees and expenses are reasonable. H.R. 3185 would establish 

a solid framework for providing that information to them. Employers who are doing due diligence need to have access to costs associated with various components, not just total costs. Requiring servVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
16

1 EBRI Issue Brief No. 308, August 2007. 

ice providers to give comprehensive information to plan sponsors is 

important to participants, since the costs are often passed directly 

on to them. 

Clear information is also necessary for participants to better 

manage their own accounts. Participants face a range of potential 

fees. And while these fees vary in scope and size, they have one 

thing in common: they all reduce the level of assets available for 

retirement. H.R. 3185 would require notice to participants of plan 

investment choices, including the risks and fees. 

We recommend that information on the investment fees also 

demonstrate how they impact the balance over time. We believe 

that all individual account participants need to have access to investment and fee information. I would also add that the legislation’s comprehensive annual benefits statement would provide a 

more complete picture of a participant’s 401(k) status. 

We commend you, Mr. Chairman, for introducing this bill to 

strengthen 401(k) disclosures. The significant impact of fees on retirement security highlights the need for clear investment and fee 

information. We think that the greater disclosure that is required 

under this legislation would help to drive down fees and enable 

plan sponsors and plan participants to be better consumers, and 

will ultimately lead to greater retirement income security. 

We look forward to working with this committee to ensure that 

employers and participants have the information they need. 

Thank you for the opportunity to testify. 

[The statement of Mr. Certner follows:]

Prepared Statement of David Certner, Legislative Counsel and Legislative 

Policy Director, AARP 

Mr. Chairman and members of the Committee, I am David Certner, Legislative 

Counsel and Legislative Policy Director at AARP. Thank you for convening this 

hearing on comprehensive, informative and timely disclosure of 401(k) plan investments and fees. AARP appreciates the opportunity to discuss this important issue, 

as well as H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act of 2007. 

With more than 39 million members, AARP is the largest organization representing the interests of Americans age 50 and older and their families. About half 

of AARP members are working either full-time or part-time. All workers need access 

to a retirement plan that supplements Social Security’s solid foundation. For those 

who participate in a defined contribution plan, such as a 401(k), better and easy 

to understand information is essential to help them make sound plan decisions. This 

is especially true for plans in which the participants have investment choices to 

make. Informed decision-making is key to future retirement income security. 

There were approximately 50 million active participants in 401(k) plans in 2006, 

and overall, 401(k) plans held more than $2.7 trillion dollars in assets.1 These plans 

have become the dominant employer-based pension vehicle. We all have a stake in 

ensuring that participants receive timely, accurate, and informative disclosures from 

their 401(k) plans—the better the understanding of how the plan operates, the better participants will be able to prepare for retirement. Today, it is clear that better 

disclosure of fee information is needed. The fee information participants currently 

receive about their plan is often scattered among several sources, difficult to access, 

or nonexistent. Even if it is accessible, plan investment and fee information is not 

always presented in a way that is meaningful to participants. 

Meaningful and easy to understand information is vital because the fees and expenses charged to participants significantly reduce the amount of assets available 

for retirement. Plan fees compound over time and the larger the fee, the bigger the 

bite that is ultimately taken out of the participant’s retirement nest egg. Both plan 

sponsors and participants need to have the right information in order to make deciVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
17

2 Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better 

Information, GAO-07-21 (November 2006).

sions that safeguard the plan’s retirement income returns and enhance workers’ retirement savings. 

Some have suggested that added focus on fees and expenses is not important, that 

such costs do not add up to a significant impact. After all, even an additional 1% 

in fees—100 basis points—is only $1.00 out of every hundred dollars. But this argument understates the impact that fees and expenses have on total return, especially 

compounded over long periods of time. 

The U.S. Government Accountability Office (GAO) recently estimated that $20,000 

left in a 401(k) account for 20 years could grow to $70,555 at 7% interest return 

minus a 0.5 percent charge for fees (6.5% net return). The same $20,000 would grow 

to only about $58,400 if the annual fees are 1.5% (5.5% net return).2 The one percent fee differential has a dramatic impact—resulting in an over 17 percent reduction in the account balance over the 20-year period. Using GAO assumptions, AARP 

has estimated that over a longer 30-year period, the same $20,000 with a 0.5 percent charge would grow to $132,287, while a charge of 1.5 percent would reduce that 

growth to $99, 679—about a 25 percent reduction in the account balance. Even a 

difference of only 50 basis points, from 0.5 percent to 1.0 percent, would reduce the 

value of the account by $17,417, or a little over 13 percent over the 30-year period. 

The chart assumes a 7 percent rate of return before fees are assessed. 

Clear, usable information about plan investments and fees will help plan sponsors 

fulfill their fiduciary responsibility and avoid potential fiduciary concerns. It is important that there be greater transparency of fees and other expense information 

in order for plan sponsors to make prudent choices. Employers are obligated to ensure that fees paid to service providers and other plan expenses are reasonable, and 

they are required to monitor these expenses over time. Employers doing due diligence need to have access to costs associated with various components, not just total 

costs. This responsibility is of great importance for participants, since costs are often 

passed directly on to them. 

In order to better manage their own accounts, individuals also need greater disclosure to better understand the numerous fees and expenses in the plan. Participants 

face a range of potential fees, including plan administration fees, investment fees 

and fees for individual plan services. Within these categories are a range of potential fees. For example, plan investment choices may include sales charges and investment advisory fees. The level of these fees can vary greatly depending on plan 

size and service provided. But these fees all have one thing in common—they will 

reduce the level of assets available for retirement. 

Sound information can also provide participants with better tools to enforce their 

rights under the plan, including recovering lost benefits as a result of a breach of 

fiduciary duty. At least a dozen cases involving 401(k) fees have been filed in federal 

district courts, claiming fiduciary violations with respect to plan administration. The 

complaints center on allegations that 401(k) plans incurred unreasonable and excessive fees that were not adequately disclosed to participants. 

Given the importance of fee information to both plan sponsors and plan participants, we applaud introduction of the 401(k) Fair Disclosure for Retirement Security 

Act of 2007 (H.R. 3185) by Chairman Miller. The legislation would require greater 

transparency of fee and expense information for both plan sponsors and plan participants. The greater disclosure required under this legislation will help drive down 


cert.eps
18

fees in the marketplace, will enable plan sponsors and plan participants to be better 

consumers, and will ultimately lead to greater retirement income security. 

AARP’s Survey Results: Participants’ Understanding of Fees 

While plan participants have been asked to take on more risk and responsibility 

for their 401(k) plan, they often find the plan investment choices, as well as their 

associated fees and expenses, a mystery. AARP recently surveyed 1,584 401(k) participants to gauge their understanding of the fees they pay and the factors they consider in selecting the investments offered by their plans. ‘‘401(k) Participants’ 

Awareness and Understanding of Fees, July 2007’’ indicates that participants do not 

always have a clear grasp of the investment options offered by their plans or what 

they are invested in. When asked if they know the names of all the funds in which 

they have money invested through the 401(k) plan, almost 65% of survey respondents said no. And, when types of investments were described, survey respondents 

did not always know whether they had money in that investment. For example, 27% 

did not know whether their plan offered a stock fund and about as many, 29%, did 

not know whether their plan had a bond fund. 401(k) participants would benefit 

from additional information about the investment options in the plan. 

When asked about the sources of information used to make investment decisions, 

57% of respondents who make investment decisions for their 401(k) plan indicate 

they refer to a summary of the plan’s investment choices. Other sources include 

prospectuses (34%), research analysts’ recommendations (22%), financial articles 

(17%), and televised financial broadcasts (14%). The fact that more than half of the 

respondents consulted the plan’s summary of investment materials helps emphasize 

the importance of plan-provided summary information. 

In addition, many 401(k) participants lack basic knowledge of the fees associated 

with their plan. When asked whether they pay any fees for their 401(k) plan, less 

than one-fifth (17%) said they do pay fees. Almost two-thirds responded that they 

do not pay fees (65%) and 18% stated that they do not know. 

When told that 401(k) providers often charge fees for administering the plans and 

that the fees may be paid by the employer as a sponsor or by the participants in 

the plan, 83% of those surveyed acknowledged that they do not know how much 

they pay in fees, while 17% said they did. 

Respondents were questioned in some detail about the kinds of fees that may be 

charged for mutual funds and other types of investments. The answers indicate that 

401(k) participants do not necessarily understand what types of fees their plans are 

charging. For example, when asked whether their 401(k) plan charged an administrative fee, 24% said yes, 21% said no, and 55% replied that they did not know. A 

similar question was posed about redemption fees. Seven percent of the survey respondents said they were charged a redemption fee, but 27% replied that they were 

not and 65% did not know. 

When participants were provided possible definitions of an administrative and a 

redemption fee, 51% of the respondents correctly identified the administrative fee 

and 38% correctly identified the redemption fee. Approximately one third (37%) stated they did not know which statement correctly identified an administrative fee and 

more than half (55%) said they did not know which statement correctly identified 

a redemption fee. 

The 401(k) Fair Disclosure for Retirement Security Act of 2007

The 401(k) Fair Disclosure for Retirement Security Act of 2007 (H.R. 3185) would 

ensure that 401(k) service providers provide plan sponsors with comprehensive information on service fee and expense information. The bill would also require notice 

to participants of investment option information, including risk and fees to the participant. It would create a new annual benefit statement and require that at least 

one plan investment option be a nationally recognized market-based index fund. 

H.R. 3185 would establish a solid framework for providing comprehensive information to plan sponsors that could then be synthesized and given to participants 

along with required investment option information. In establishing itemization of 

different categories of fees, bundled service arrangements would essentially have to 

be un-bundled for clearer presentation of the costs. Requiring that plan service providers give comprehensive information to plan sponsors will provide the plan sponsors with the resources they need to fulfill their fiduciary duties. 

H.R. 3185 would not extend disclosure requirements to all individual account 

plans, just 401(k) plans. Participants in other individual account plans, such as 

ERISA-covered 403(b) plans, are also subject to investment costs or administrative 

fees, and those participants have a right to know what is being charged to their accounts. AARP urges that all individual account plan participants have access to investment and fee information. 

19

3 Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better 

Information, GAO-07-21 (November 2006). 

The provision establishing a new annual benefit statement would provide a comprehensive picture of a participant’s status in the 401(k) plan. This provision will 

need to be coordinated with the new Pension Protection Act requirements for a 

quarterly benefit statement in order to enhance consistency and effectiveness of the 

information. 

AARP supports the bill’s requirement that the plan investment options include a 

nationally recognized market-based index fund. This option would ensure that all 

plans provide participants with access to the market at the generally lower expense 

levels associated with index funds. 

AARP recommends that information on an investment’s fees demonstrate how 

they will affect the participant’s account balance over time. Participants need to 

know how fees and expenses of an investment compare with others offered by the 

plan as well as similar investments in the market. GAO recently suggested that 

participants be provided the expense ratio for each investment as an effective way 

to compare fees, especially within the context of the investment’s risk and historical 

performance.3

AARP also recommends including in the information furnished to participants 

whether employer stock is an investment option because the plan terms so provide. 

Too many employees continue to hold excessively large amounts of employer stock 

in their 401(k) plans. Clarifying why employer stock is among the available choices 

may help participants choose investments that reflect their personal goals, rather 

than reflect a value judgment about the return or risk associated with the employer 

stock. H.R. 3185 already includes a provision requiring that employer stock fees be 

included in the disclosure to participants. This information, which would complement the Pension Protection Act’s provisions on disclosure and diversification, 

would add additional context to the information about employer stock that would 

help participants make a more informed decision. 

Conclusion 

AARP commends Congressman Miller for introducing H.R. 3185 to strengthen investment and fee disclosures to 401(k) sponsors and participants. The legislation 

represents an important step to require necessary information and ensure that it 

is effectively communicated. The significant impact of fees on retirement security, 

as well as the results of AARP’s survey of 401(k) participants, highlights the need 

for clear investment and fee information. We look forward to working with this 

Committee to ensure that both employers and participants have the information 

they need to best ensure an adequate retirement income level. 

Thank you for the opportunity to testify today. 

Chairman MILLER. Thank you very much for your testimony. 

In the introductions, I skipped over Mr. Scanlon. My apologies to 

you, Mr. Scanlon. Mr. Scanlon is the head of Americas Institutional 

Business for Barclays Global Investors. He also serves on the finance board of City College of San Francisco and he received his 

master’s in accounting from Northwestern University. Welcome to 

the committee. Thank you. 

STATEMENT OF MATTHEW H. SCANLON, MANAGING 

DIRECTOR, BARCLAYS GLOBAL INVESTORS 

Mr. SCANLON. Chairman Miller, Ranking Member McKeon and 

members of the committee, on behalf of Barclays Global Investors, 

I appreciate the opportunity to testify today regarding the 401(k) 

Fair Disclosure for Retirement Security Act of 2007. 

Headquartered in San Francisco, BGI is one of the world’s largest institutional asset managers. We have approximately $2 trillion 

in assets under management, including hundreds of billions of dollars of ERISA plan assets. BGI’s services to its clients are focused 

on investment management. We do not provide other services such 

as recordkeeping. 

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An increasing number of Americans rely on employer-sponsored 

defined-contribution plans to help them accumulate the savings 

they need for retirement, but far too many 401(k) plans fail to 

achieve their purpose if they are meant to provide worker security 

in retirement. There are three main reasons for this: inadequate or 

no contributions into the plan; low investment returns with high 

fees; and a lack of distribution strategies to fund consumption in 

retirement. 

The technology for saving and investing today to receive a benefit 

far in the future is already in use by well-managed defined benefit 

plans. We need to bring some of these practices into the DC marketplace and the bill under discussion today would take an important step in this direction. 

I think we can all agree that the goal of any disclosure framework should be to provide relevant information in a cost-effective 

manner to enable the best possible decisions. Plan sponsors need 

adequate information about investment options, including their 

fees and expenses, so that they can exercise their fiduciary responsibility to choose the investment options available under the plan. 

Plan sponsors also have the fiduciary obligation to choose other 

plan service providers and to understand the cost of those services. 

Today, the information the plan sponsor needs is sometimes difficult to obtain and difficult to compare. BGI supports legislative efforts to require service providers to provide specific disclosures by 

fee category so as to make plan sponsors’ decision-making less burdensome. 

Defined contribution plan service arrangements generally fall 

into two principal categories. The arrangements may be bundled, 

that is recordkeeping combined with asset management services together; or unbundled, where the plan sponsor selects its investment 

options separately from its recordkeeper and other service providers. Bundled service arrangements may be appropriate for some 

plans, particularly smaller ones, but even then the fee components 

of both recordkeeping and asset management must separately and 

clearly be disclosed. 

Clear, comparable and fully disclosed information about these 

changes and these charges will allow the plan sponsor to more easily and adequately meets its fiduciary responsibility under ERISA 

to determine that the fees and expenses are reasonable. The most 

fundamental decisions that plan participants need to make are 

whether and at what level to participate in the plan; which investment options to choose; whether and when to change their investment allocations; and when to take distributions from the plan. 

The bill requires plan sponsors to list every service fee assessed 

against the participant’s account. We believe that the average participant might be better served with a summary of these charges 

grouped into categories with the additional detail available upon 

request or on the plan’s website. Participant disclosures should provide a consistent, comparable measure of fee and expense information and should allow plan participants to easily understand investment performance after all fees and expenses are paid by the 

participant. 

21

In addition, again in a comparable format, these disclosures 

should include the investment objective and strategy, key investment risks, and historical performance for each investment option. 

We support the adoption by the Department of Labor of standardized fund fact sheets as the form of disclosure for plan participants. There are a broad variety of investment types that can be 

offered to plan participants in 401(k) plans, and they are subject 

to a variety of different regulatory regimes. We know of no regulatory impediment, however, to providing comparable disclosure to 

participants across all such investment types, regardless of legal 

structure. 

We support the bill’s conflict-of-interest disclosure requirements 

and urge that this provision be clarified to ensure that plan sponsors receive information that is specific to the plan sponsor and the 

particular service provider. 

In conclusion, many DC plans currently have challenges with all 

three of the major components: the contribution or savings component; the investment performance component; and the retirement 

distribution component. By promoting such features as auto-enrollment and automatic contribution escalation, the Pension Protection 

Act of 2006 has already focused on the first challenge. 

By promoting more effective disclosure of fees and expenses to 

plan sponsors and plan participants, the 401(k) Fair Disclosure for 

Retirement Security Act of 2007 would improve the second component. Transparency can be an important catalyst for making DC 

plans perform more like DB plans in the balance of costs and investment performance, and thereby improving the future income of 

all retirees. 

I will welcome your questions. Thank you. 

[The statement of Mr. Scanlon follows:]

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Chairman MILLER. Thank you. 

Mr. Thomasson? 

STATEMENT OF TOMMY THOMASSON, PRESIDENT–CEO, DAILY 

ACCESS CORP., CHAIR, COUNCIL OF INDEPENDENT 401(K) 

RECORDKEEPERS 

Mr. THOMASSON. Thank you, Mr. Chairman, Ranking Member 

McKeon and members of the committee. My name is Tommy 

Thomasson, and I am the CEO of Daily Access Corporation in Mobile, Alabama. My firm is a leading provider of retirement plan 

services to small businesses throughout the country. 


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I currently serve as the chair of the Council of Independent 

401(k) Recordkeepers, or CIKR. The members of CIKR provide 

services for over 70,000 retirement plans covering three million 

participants, with approximately $130 billion in retirement assets. 

CIKR is a subsidiary of the American Society of Pension Professionals and Actuaries, which has thousands of members nationwide. As independent service providers, we support and actively 

practice full fee disclosure. 

I want to thank Chairman Miller for his leadership in shining 

the light on 401(k) fees. We believe this bill would help American 

workers increase their retirement savings. 

The 401(k) plan industry delivers investments and services to 

plan sponsors and their participants using two primary business 

models, commonly known as bundled and unbundled. Generally, 

bundled providers are large financial service companies whose primary business is selling investments. They bundle their proprietary investment products with affiliate-provided plan services into 

a package that is sold to plan sponsors. 

By contrast, unbundled or independent providers are primarily in 

the business of offering retirement plan services. They will couple 

such services with a universe of unaffiliated, nonproprietary investment alternatives. The business model of the provider determines 

the approach to selling and charging for plan services, although the 

scope of plan services under either model is relatively the same. 

Plan fiduciaries must follow prudent practices and procedures 

when they are evaluating service providers and investment options. 

This prudent evaluation should include an apples-to-apples comparison of services provided and the costs associated with those 

services. The only way to determine whether a fee for a service is 

reasonable is to compare it to a competitor’s fee for that service. 

It is important to recognize that employees are totally dependent 

upon the employer’s decision-making process and have to manage 

their retirement assets based upon the plan that has been chosen 

for them. If the fees are unnecessarily high, the worker will ultimately pay the price. That is why the disclosure made to plan fiduciaries is so critically important. 

The Department of Labor has proposed rules that would require 

enhanced disclosures on unbundled or independent service providers, while exempting the bundled providers from doing so. While 

we applaud the DOL’s interest in addressing fee disclosure, we do 

not believe that any exemption for a specific business model is in 

the best interest of plan sponsors and their participants. 

Without uniform fee disclosure, fiduciaries will have to choose between a single-price business model and a fully disclosed business 

model that will not permit them to appropriately evaluate competing provider services and fees. Knowing only the total cost will 

not allow fiduciaries, particularly less sophisticated small business 

owners, to evaluate whether certain plan services are sensible and 

reasonably priced. 

In addition, if a reasonable breakdown of fees is not disclosed initially and over time, fiduciaries will not be able to evaluate cost for 

services as participant account balances grow. Take a $1 million 

plan serviced by a bundled provider that is only required to disclose a total fee of 125 basis points, or $12,500. If that plan grows 

31

to $2 million in assets, the fee doubles to $25,000, although the 

level of plan services and the costs of providing such services has 

generally remained the same. 

The bundled providers want an exemption, while demanding that 

unbundled providers be forced to adhere to disclosure rules and 

regulations. Simply put, they want to be able to tell plan sponsors 

that they can offer retirement plan services for free, while independents are required to disclose the fees for the same services. 

Of course, there is no free lunch and there are no free services 

provided in the 401(k) market. In reality, the costs of these free 

plan services are being shifted to participants, in many cases without their knowledge. The uniform disclosure of fees is the only way 

that fiduciaries can effectively evaluate the retirement plan they 

will offer to their workers. To show it can be done, attached to my 

written testimony is a sample of how uniform plan fiduciary disclosure would look. By breaking down plan fees in only three simple 

categories—investment management, recordkeeping and administration, and selling costs and advisory fees—we believe plan fiduciaries will have the information they need to satisfy their ERISA 

duties. 

The retirement system in our country is the best in the world 

when competition is fostered in innovations in investments and 

service delivery. However, the spirit of Chairman Miller’s bill recognizes that important changes are needed to ensure that the retirement system in America remains robust and effective into the 

future. By enabling fair competition and supporting plan fiduciaries through uniformity of disclosure of fees and services, American workers will have a better chance of building retirement assets and living the American dream. 

Thank you, and I welcome your questions. 

[The statement of Mr. Thomasson follows:]

Prepared Statement of Tommy Thomasson, President/CEO of DailyAccess 

Corp., on behalf of ASPPA and CIKR 

Chairman Miller, Ranking Member McKeon, and distinguished members of the 

Committee, my name is Tommy Thomasson, President/CEO of DailyAccess Corporation. My company, based in Mobile, Alabama, provides retirement plan recordkeeping and administration services to thousands of small and medium-sized 401(k) 

plans throughout the country. I am here today on behalf of the American Society 

of Pension Professionals & Actuaries (ASPPA) and the Council of Independent 

401(k) Recordkeepers (CIKR), for which I currently serve as Chair, to testify on important issues relating to 401(k) plan fee disclosures addressed in Chairman Miller’s 

legislation, the ‘‘401(k) Fair Disclosure for Retirement Security Act of 2007’’ (H.R. 

3185). 

ASPPA is a national organization of more than 6,000 retirement plan professionals who provide consulting and administrative services for qualified retirement 

plans covering millions of American workers. ASPPA members are retirement professionals of all disciplines, including consultants, administrators, actuaries, accountants and attorneys. ASPPA’s large and broad-based membership gives ASPPA 

unusual insight into current practical problems with ERISA and qualified retirement plans, with a particular focus on the issues faced by small to medium-sized 

employers. ASPPA’s membership is diverse, but united by a common dedication to 

the private retirement plan system. 

CIKR is a national organization of 401(k) plan service providers. CIKR members 

are unique in that they are primarily in the business of providing retirement plan 

services as compared to larger financial services companies that are primarily in the 

business of selling investments and investment products. As a consequence, the 

independent members of CIKR, many of whom are small businesses, make available 

to plan sponsors and participants a wide variety of investment alternatives from 

32

various financial services companies without bias or inherent conflicts of interest. 

By focusing their businesses on efficient retirement plan operations and innovative 

plan sponsor and participant services, CIKR members are a significant and important segment of the retirement plan service provider marketplace. Collectively, the 

members of CIKR provide services to approximately 70,000 plans covering three 

million participants holding in excess of $130 billion in assets. 

ASPPA and CIKR applaud Chairman Miller’s leadership and strongly support his 

efforts to improve the transparency of 401(k) fee and expense information at both 

the plan fiduciary and plan participant levels. ASPPA and CIKR share Chairman 

Miller’s concern about making sure plans and plan participants have the information they need—in a form that is both uniform and useful—to make informed decisions about how to invest their retirement savings plan contributions. This information is critical to millions of Americans’ ability to invest in a way that will maximize 

their retirement savings so that they can achieve adequate retirement security. 

While both 401(k) plan fiduciaries and participants need clear and consistent information to assess the reasonableness of fees charged for various plan services, the 

degree of detail that could be required in these disclosures could differ significantly. 

My testimony will discuss ASPPA’s and CIKR’s views on the need for uniform disclosure requirements from service providers to plan fiduciaries, regardless of how 

plan services are delivered, along with our suggested simplifications to the new plan 

service provider disclosure requirements in H.R. 3185. We will follow this up with 

our views on the need for sensible and understandable 401(k) plan participant disclosures, along with our suggested modifications to the participant disclosure requirements in H.R. 3185. 

Need for Uniform Disclosure to Plan Fiduciaries 

Overview of the 401(k) Plan Marketplace 

There are currently no rules governing the disclosure of fees charged by plan service providers, and thus disclosure is generally inconsistent and too often nonexistent. ASPPA and CIKR generally support requiring plan service providers to 

disclose fees that will be charged to assist plan fiduciaries in fulfilling their responsibility to assess the reasonableness of such fees. Such a requirement is included 

in H.R. 3185. Specifically, the disclosure to plan fiduciaries in H.R. 3185 would require a description of the plan services to be provided, the expected costs of various 

categories of services, the identity of the service provider and potential conflicts of 

interest. 

ASPPA and CIKR strongly believe that any disclosures required of service provider fees to a plan fiduciary must be provided in a uniform manner, regardless of 

how plan services are delivered. There are generally two main methods for delivering retirement plan services—‘‘bundled’’ and ‘‘unbundled.’’ • Bundled providers are primarily in the business of selling investments and 

package their own proprietary investments with recordkeeping, administration and 

other retirement plan services. They typically are large financial services companies 

like mutual funds and insurers. • Unbundled providers are primarily in the business of providing retirement plan 

operations and services and will offer such services along with a menu of independent, unaffiliated investment options, often referred to as an ‘‘open architecture’’ 

platform of investments. Although there are some larger unbundled providers, the 

vast majority of them are smaller businesses serving the unique needs of their small 

business clients. 

Although they use very different business models, both bundled and unbundled 

providers deliver the same kind of plan services to plan sponsors and participants. 

Bundled and unbundled providers, however, do collect their fees in different ways. 

In general, a bundled provider collects its fees from plan assets. In the case of a 

mutual fund, for example, that would be in the form of the ‘‘expense ratio’’ assessed 

against the particular investment options chosen by participants, reducing their rate 

of return for the year.1 In the case of an insurance company, the fee can also be 

in the form of a percentage fee assessed against total plan assets referred to in the 

industry as a ‘‘wrap fee.’’ In either case, fees collected by bundled providers are generally always charged against participants’ accounts. Because the plan sponsor is 

not paying a fee for services directly to the service provider, bundled providers will 

present the plan to the plan sponsor as having ‘‘free’’ recordkeeping and administration. There is currently little to no disclosure of this to either plan sponsors or plan 

participants. There are literally tens of thousands of 401(k) plans that report zero 

costs for recordkeeping and administration on their annual report (Form 5500) filed 

with the Department of Labor. In actuality, participant accounts are being charged 

for these ‘‘free’’ plan services in the form of investment fees assessed against their 

accounts. 

33

Unbundled providers, by contrast, generally collect fees for the services they provide in two ways—revenue sharing from the company providing the plan’s investment options and by a direct charge to the plan and/or plan sponsor, depending on 

the willingness of the plan sponsor to bear such costs. A portion of the expense ratios for the plan’s investment options includes a component for recordkeeping and 

administration.2 Since an unbundled provider, not an investment company, is performing recordkeeping and administration, the investment company will typically 

pass on a portion of the expense ratio to the unbundled provider to compensate 

them for performing such services. This is commonly known in the industry as revenue sharing. Depending on the size of the plan and the willingness of the plan 

sponsor to pay directly for retirement plan services, the amount of revenue sharing 

may be used to offset what would otherwise be charged directly to the plan and/

or plan sponsor for recordkeeping and administration. Since the unbundled provider 

usually receives revenue sharing from an investment company on an omnibus basis 

(for all plans serviced by the provider but not on a per plan basis), the unbundled 

provider must employ a reasonable method, usually based on plan assets, for allocating the revenue sharing it receives to each plan for which it provides services. 

Complete and Uniform Disclosure is Necessary to Determine ‘‘Reasonableness’’ of 

Fees 

A central point of contention is the position the Department of Labor (DOL) took 

in proposed Form 5500 regulations, which would exempt bundled service providers 

from certain fee disclosure requirements applicable to unbundled/independent service providers. Specifically, in the proposed 2008 Form 5500, payments received by 

service providers from third parties (even though not from plan assets) would need 

to be disclosed. So, for example, allocable revenue sharing payments received by a 

third party administrator (TPA) for recordkeeping and administration in connection 

with the plan would need to be disclosed on the form. However, the regulation 

would exempt bundled providers from this disclosure requirement, with the result 

being that bundled providers would not have to disclose comparable internal revenue sharing payments to the affiliated entity or division providing recordkeeping 

and administration services.3

To satisfy their ERISA-imposed fiduciary duty, plan fiduciaries must determine 

that the fees charged for recordkeeping, administration and other plan services are 

‘‘reasonable,’’ requiring a comparison to fees charged by other providers, both bundled and unbundled. Inconsistent disclosure requirements between bundled versus 

unbundled providers will lead to a distorted analysis by plan fiduciaries as they review 401(k) plan fees. For instance, it will be virtually impossible for plan fiduciaries to determine the true costs for plan services provided through a bundled arrangement, which, as noted earlier, are often presented as having no cost. Uniform 

fee disclosures are needed for plan fiduciaries to make an ‘‘apples to apples’’ comparison of fees for various plan services offered by competing providers. 

A breakdown of fees for various plan services will also allow plan fiduciaries to 

evaluate whether all the various plan services are really needed. The fee assessed 

by a bundled provider is akin to a ‘‘prix fixe’’ menu at a restaurant. There is only 

one price for the package and usually no choice about which services are included. 

Without any reasonable segregation of the costs for plan services, less sophisticated 

plan fiduciaries, such as small business owners, may not appreciate the fact that 

the bundled package includes services they may not want or need yet—services they 

may be paying for under a single ‘‘bundled’’ price arrangement. With this information, plan fiduciaries will be in the position to question the necessity and cost of 

some of the services, potentially leading to lower costs to the plan and participants. 

Plan fiduciaries also need a reasonable breakdown of fees for various services so 

they can continue to monitor the reasonableness of fees as a plan grows and costs 

increase. For example, assume a plan with assets valued at $1 million being service 

by a bundled provider for an ‘‘all-in’’ price of 125 basis points or $12,500. If, through 

growth of the company and increases in the market value of assets, plan assets 

grew to $2 million, the fee would be $25,000. However, without any reasonable allocation of fees to services, such as recordkeeping and administration, the plan fiduciary will not be in a position to ask why the fee has doubled even though the level 

of services has remained essentially the same. 

As provided for in H.R. 3185, disclosure of conflicts of interest is also critical. It 

should not be presumed that plan fiduciaries and participants, particularly those at 

small businesses, recognize and understand inherent conflicts of interest and their 

potential impact. A bundled provider will naturally prefer to sell a packaged 401(k) 

plan with only its own proprietary investments, as opposed to one with investments 

provided by other financial services companies, since in the former case it will retain all the fees. 

34

Exempting bundled providers from 401(k) plan fee disclosure rules will also greatly interfere with an extremely competitive 401(k) plan marketplace. Enhanced 

transparency requirements that only apply to unbundled arrangements may make 

them appear to have higher fees even though the total fees to the plan may in fact 

be similar, or perhaps even less. Similarly, a provider that has the ability to offer 

both proprietary investments and investments managed by unrelated investment 

managers will have an even greater advantage marketing its proprietary investments, because the cost of an arrangement of primarily proprietary investments will 

appear to be lower than that of an arrangement comprised of primarily independent 

investments. Small business plan sponsors with less sophistication will be more susceptible to these misperceptions in fee disclosure. Not only does this have the potential for creating a competitive imbalance in the service provider marketplace; even 

worse, it sets up the possibility that small business plan sponsors will lose an opportunity to choose a plan that will better serve their workers’ retirement planning 

needs. 

The bundled providers specifically argue against being subject to a uniform set 

of disclosure requirements by stating that it would be too expensive to break down 

the internal or affiliate-provided service costs. They further suggest that any such 

breakdown would be inherently artificial since any internal cost allocations are 

merely for budgeting and accounting purposes. The bundled providers also argue 

that any conflicts of interest between a service provider and its affiliates should be 

readily apparent to the plan fiduciary. 

ASPPA and CIKR respectfully disagree with the position of the bundled providers. 

We believe it is possible with very little cost to develop an allocation methodology 

to provide a reasonable breakdown of fees for plan services. We discuss in more detail below how such a simplified breakdown of plan fees could be presented to plan 

fiduciaries. We note that it is the position of the bundled providers that unbundled 

providers, their competitors, should disclose such a breakdown of fees along with 

their allocation methodology, while they should be exempt.4 As noted earlier, since 

unbundled providers received revenue sharing on an omnibus basis, not on a per 

plan basis, such an allocation will be necessary and we believe can be reasonably 

accomplished.5 We find it ironic that the bundled providers, all large financial institutions, suggest that unbundled providers, mostly small businesses, be required to 

do something that they apparently are incapable of doing. Fundamentally, we believe the position of the bundled providers is an attempt to get a competitive advantage through law and/or regulation. Simply put, they want to be able to tell plan 

sponsors that they can offer retirement plan services for free while unbundled providers are required to disclose the fees for the same services. 

The disclosure requirements in H.R. 3185 uniformly apply to all service providers, 

and ASPPA and CIKR strongly support H.R. 3185 in this respect. The breakdown 

of fees required in the Miller bill will allow plan fiduciaries to assess the reasonableness of fees by comparison to other providers and will also allow fiduciaries to determine whether certain services are needed, leading to potentially even lower fees. 

It is also worthy of note that bundled service providers do provide a breakdown 

of fees for various plan services to their larger plan clients—clients who have the 

negotiating power to ask for this detailed cost information. Less sophisticated small 

businesses without access to this information will not appreciate the conflicts of interest and will be steered toward ‘‘prix fixe’’ packages that include services that they 

may not need to pay for. Uniform and consistent disclosure, regardless of how plan 

services are delivered, is necessary to ensure a level playing field and an efficient 

marketplace, ultimately leading to more competitive fees benefiting both plan sponsors and participants. 

Plan Fiduciary Disclosure Proposal 

H.R. 3185 would add new ERISA §111(a) to require an annual disclosure from 

service providers of all fees and conflicts of interest to employers sponsoring 401(k) 

plans. Plan fiduciaries would not be allowed to enter into a contract with a service 

provider unless the service provider provides a written annual statement identifying 

who will be performing services for the plan, a description of each service and the 

expected annual costs of each service, including any amounts to be paid to affiliated 

or other third party service providers under the contract. In other words, the rules 

of disclosure would be the same regardless of whether the services are provided on 

a ‘‘bundled’’ or ‘‘unbundled’’ basis. 

ASPPA and CIKR strongly support the goals of H.R. 3185, and particularly applaud the bill’s even, equitable application of its disclosure rules to all plan service 

providers, regardless of their business structure (i.e., whether bundled or 

unbundled). The bill’s requirement that service providers disclose to plan sponsors 

all direct and indirect charges against participants’ accounts will ensure a level 

35

playing field in an extremely competitive marketplace. That is good news for plan 

participants’ retirement asset accumulation needs and goals. 

However, we recommend that the disclosure requirements be clarified to provide 

a more simplified service provider fee disclosure that will break down the fees for 

all services under the following components: (1) Investment Management Expenses; 

(2) Administrative and Recordkeeping Fees; and (3) Selling Costs and Advisory 

Fees. All fees charged to 401(k) plans can be allocated to one of these components, 

and we would suggest that any further breakdown would be unnecessarily confusing 

to plan fiduciaries. These component expenses would be disclosed under three categories based on how they are collected—as fees on investments, fees on total plan 

assets and fees paid directly by the plan sponsor. We would also support the H.R. 

3185 requirement that there be a conflicts of interest statement disclosing any conflicts. To demonstrate that a simplified disclosure form can be accomplished, we 

have attached to this testimony a sample form for the Committee to review and consider. 

Need for Sensible and Understandable Disclosure to Plan Participants 

Overview 

The level of detail in the information needed by 401(k) plan participants differs 

considerably than that needed by plan fiduciaries. Plan participants need clear and 

complete information on the investment choices available to them through their 

401(k) plan, and other factors that will affect their account balance. In particular, 

participants who self-direct their 401(k) investments must be able to view and understand the investment performance and fee information charged directly to their 

401(k) accounts in order to evaluate the investments offered by the plan and decide 

whether they want to engage in certain plan transactions. 

The disclosure of investment fee information is particularly important because of 

the significant impact these fees have on the adequacy of the participant’s retirement savings. In general, investment management fees (which can include investment-specific wrap fees, redemption fees and redemption charges) constitute the majority of fees charged to 401(k) participants’ accounts and therefore have a significant impact on a participant’s retirement security.6 For example, over a 25-year period, a participant paying only 0.5% per year in plan expenses will net an additional 

28% in retirement plan income over a participant in a similar plan bearing 1.5% 

in participant plan expenses per year. ASPPA and CIKR strongly support a requirement that plan sponsors disclose to plan participants, in a uniform, readily understandable format, all the information that the participant needs to make an informed choice among the investment options offered to them. 

There are currently no uniform rules on how this information is disclosed to plan 

participants by the various service providers. As stated in GAO Report 07-21, this 

is in large part due to the fact that ERISA requires limited disclosure by plan sponsors and does not require disclosure in a uniform way, which does not foster an easy 

comparison of investment options. Furthermore, the various types of investments offered in a 401(k) plan (e.g., mutual funds, annuities, brokerage windows, pooled separate accounts, collective trusts, etc.) are directly regulated by separate Federal and 

State agencies and are not likely to have uniform disclosure rules anytime soon. 

401(k) plan participants—as lay investors—generally do not have easy access to 

fee and expense information about their 401(k) investment options outside of the information that is provided by their plan sponsor and service provider. Further, 

while the existence of disclosure materials is a significant issue, accessibility and 

clarity of disclosure are equally compelling concerns. If the information is buried 

within page upon page of technical language, it is effectively unavailable to participants. If it is provided in an obvious manner, but the structure of the information 

is such that a participant cannot understand it or compare it to similar information 

for an alternate investment, it is also effectively unavailable. Therefore, insufficient 

or overly complicated information will often result in delayed or permanently deferred enrollment, investment inertia and irrational allocations. 

It is all too easy to overwhelm plan participants with details they simply do not 

need, and in many cases do not want. And an overwhelmed participant is more likely to simply ignore all the basic and necessary information that he or she does need 

to make a wise investment decision, or worse, to simply decline to participate in the 

plan. Thus, it is critical that the amount and format of information required to be 

disclosed to plan participants be well balanced to include all the information participants need, but no more than the information they need. To do otherwise risks putting participants in a position of simply declining to participate in the retirement 

plan, or making arbitrary—and potentially adverse—allocations of their retirement 

contributions. 

36

Further, there is a cost to any disclosure. And that cost is most often borne by 

the plan participants themselves. To incur costs of disclosure of information that 

will not be relevant to most participants will unnecessarily depress the participants’ 

ability to accumulate retirement savings within their 401(k) plans. Thus, appropriate disclosure must be cost-effective, too. The result of mandatory disclosure 

should be the provision of all the information the plan participant needs, and no 

more. To require otherwise would unjustifiably, through increased costs, reduce participants’ retirement savings. Those participants who want to delve further into the 

mechanics and mathematics of the fees associated with their investment choices and 

other potential account fees should have the absolute right to request additional information—it should be readily available on a Web site, or upon participant request. 

This will take care of those participants who feel they need more detailed information. 

Accordingly, ASPPA and CIKR recommend that plan sponsors provide to plan 

participants upon enrollment and annually thereafter information about direct fees 

and expenses related to investment options under their 401(k) plan as well as other 

charges that could be assessed against their account. This mandatory disclosure 

must be in an understandable format that includes sufficient flexibility to enable 

various types of potential fees to be disclosed within the context of uniform rules. 

This simple, uniform, carefully crafted disclosure would allow participants to make 

more informed decisions regarding their 401(k) accounts by allowing them to simply 

compare the various fees and expenses charged for each investment option, and by 

making them aware of the possible other fees they can occur depending on the decisions they make. 

To accomplish this objective, ASPPA and CIKR strongly support the requirement 

in the Miller bill that an exemplary ‘‘fee menu’’ be provided to plan participants 

upon enrollment, and annually thereafter, that would provide a snapshot of the direct fees and expenses that could potentially be charged against a participant’s account (discussed further below). The plan fiduciary would be responsible for ensuring that the fee disclosure document is made available to the participants, but generally would obtain the necessary fee data (and in most cases, the disclosure form 

itself) from the plan’s service provider. 

Participant Fee Disclosure Proposal 

H.R. 3185 would add new ERISA §§111(b) and (c) to require two separate disclosure requirements to 401(k) plan participants: (1) an advance notice to 401(k) plan 

participants of investment election information, which would include a plan-level 

forward-looking ‘‘fee menu’’ that would provide participants at the beginning of the 

year a summary of all the fees (including investment specific fees, account-based 

fees and transaction costs) that could be assessed against the account; and (2) an 

‘‘after-the-fact’’ participant-specific fee statement that would detail all the various 

fees assessed against the account of the participant during the past year. 

For the reasons below, ASPPA and CIKR fully support the forward-looking ‘‘fee 

menu’’ participant-specific fee statement. We further support the goal of the ‘‘afterthe-fact’’ participant-specific disclosure so that participants will have sufficient information on investment fees so they can assess whether their investment options 

continue to be appropriate. Given that participants will be receiving a ‘‘forward-looking’’ fee menu setting forth detailed information of any potential fees and expenses 

for each investment alternative in their plan, we believe that the ‘‘after-the-fact’’ information should be limited to reflect the gross return and net return after fees on 

each investment alternative available (as discussed below). 

Forward-looking ‘‘Fee Menu’’ Notice Requirement 

New ERISA §111(b) would require plan administrators to provide an advance notice to plan participants with specific information for each investment option 15 

days prior either to the beginning of the plan year and/or any effective date of any 

material change in investment options. The notice must contain the name of the option, investment objectives, level of risk, historical return and percentage fee assessed against amounts, an explanation of differences between asset-based fees and 

annual fees and how additional plan-specific information may be obtained. 

Along with this notice, ERISA §111(b) would require an annual ‘‘fee menu’’ be provided to participants listing all potential service fees that could be assessed against 

their account in any given plan year. It is to be written in a manner easily understood by the average participant. The ‘‘fee menu’’ would disclose fees in the following 

three categories: (1) fees depending on a specific investment option (including expense ratio, participant-specific asset-based fees, possible redemption fees and possible surrender charges); (2) fees assessed as a percentage of total assets; and (3) 

administrative and transaction-based fees. The fee menu must also include any poVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
37

tential conflicts of interest that may exist with service providers or parties in interest, as determined by DOL. 

ASPPA and CIKR support the requirement that an advance, annual notice be provided to participants that would incorporate a forward-looking annual ‘‘fee menu,’’ 

which would provide sufficient information to plan participants to make an informed 

evaluation of all the potential fees that could affect their accounts. This fee menu 

requirement is consistent with the recommendations ASPPA and CIKR provided to 

the DOL on July 20, 2007, in response to their request for information (RFI) regarding fee and expense to disclosures in individual account plans. Attached to this testimony is the sample one-page fee menu submitted to DOL along with our response 

to the RFI. 

‘‘After-the-fact’’ Notice Requirement of Plan Expenses 

New ERISA §111(c) also requires an additional ‘‘after-the-fact’’ participant-specific 

fee statement that would detail all the various fees assessed against the account of 

the participant during the past year. The annual participant benefit statement 

would require a high level of detail to be provided 90 days after the close of each 

plan. 

Specifically, the following specific information would be required: (1) starting balance, vesting status, employer/employee contributions, earnings, fees, ending balance and asset allocation by investment option from the preceding plan year; (2) an 

extensive list of fees charged against each participant’s account for each investment 

option from the preceding plan year; and (3) historical return and risk level information of each investment option and the estimated amount a participant needs to 

save each month to retire at age 65. 

ASPPA and CIKR support the concept of providing ‘‘after-the-fact’’ information on 

the investment alternatives so that plan participants can consider the relevant investment return information, along with the effect of fees on each investment, to 

make a truly informed decision as to whether the options they have selected remain 

appropriate. Since the proposed fee menu would provide participants with detailed 

information of any potential fees that could be charged to their accounts, the ‘‘afterthe-fact’’ information should be limited to gross return and net return after fees on 

each investment alternative. Providing information in this manner would reduce 

costs and provide participants with relevant and understandable information that 

would allow them to make an informed comparison of each investment option, without overwhelming them with too much detail that they do not need. 

Accordingly, ASPPA and CIKR recommend that the ‘‘after-the-fact’’ disclosure be 

limited to the gross and net return of each investment alternative, to be provided 

in conjunction with the annual ‘‘fee menu’’ of potential fees for each investment option. We believe these disclosures will provide participants with well-balanced and 

understandable information to decide on the investments appropriate for them, 

while helping to ultimately reduce costs for the plan participants who will likely pay 

for these additional disclosures. 

DOL Regulatory Initiatives 

It has been suggested by some that Congress should wait until the DOL concludes 

its currently ongoing regulatory project on new fee disclosure requirements. These 

initiatives include: (1) a modification to Schedule C of the 2008 Form 5500; (2) guidance on what constitutes ‘‘reasonable’’ compensation under ERISA §408(b)(2) between service providers and plan fiduciaries; and (3) increased disclosure requirements under ERISA §404(c). ASPPA and CIKR believe that while the DOL guidance 

on this issue is a very important factor in Congress’ decision on 401(k) fee disclosure 

requirements, it is ultimately the right and responsibility of the Congress to make 

the determination whether more fee disclosure is required, and if so, its appropriate 

scope and frequency. 

Further, the DOL’s jurisdiction over fee disclosure issues may be limited to the 

voluntary ERISA §404(c) plans that are subject to DOL’s disclosure rule-making. Arguably, plans that are not operating under the voluntary 404(c) liability protections 

would also not be subject to DOL’s fee disclosure requirements. Guidance applicable 

only to 404(c) plans would be an unfortunate result that could harm those participants whose employers sponsor non-404(c) plans. 

ASPPA and CIKR recommend that the Education and Labor Committee proceed 

with this inquiry, and with appropriate legislation, regardless of the current status 

of the DOL regulatory effort. It will not be too late to modify either the legislation 

or the regulatory guidance if and when either initiative reaches a stage in the process where it would be appropriate to defer one to the other. 

38

Summary 

In summary, ASPPA and CIKR applaud this committee, and in particular, Chairman Miller, for his leadership on the important issue of required 401(k) fee/expense 

disclosure. We support complete and consistent disclosure requirements to both plan 

fiduciaries and plan participants. We believe that any new disclosure requirements 

to plan fiduciaries should apply uniformly to all service providers, regardless of the 

form of their business structure (i.e., ‘‘bundled’’ or ‘‘unbundled’’). Respecting plan 

participant disclosures, ASPPA and CIKR fully support a forward-looking annual 

‘‘fee menu’’ being provided annually to plan participants in a simple, concise format 

so that they can make an informed evaluation of all the potential fees that could 

affect their accounts. Both of these disclosure requirements are included in H.R. 

3185, and we commend Chairman Miller for his insight and efforts into these issues. 

Again, thank you for this opportunity to testify on these important issues. ASPPA 

and CIKR pledge to you our full support in creating the best possible fee disclosure 

rules. I will be happy to answer any questions you may have. 

ENDNOTES

1 A mutual fund prospectus provides more detail of what is contained in an expense ratio, 

which includes the cost for recordkeeping as well as promotional costs (i.e., Rule 12b-1 fees). 2 As discussed earlier, this will be explained in more detail in the investment prospectus. 

3DOL will also soon propose regulations under ERISA §408(b)(2) to resume the requirement 

of retirement plan service providers to disclose expected fees to plan fiduciaries at ‘‘point of 

sale.’’ It is expected that the rules will be comparable to the disclosures required in the Form 

5500 when finalized. 4See Testimony of Mary Podesta on behalf of the Investment Company Institute before the 

ERISA Advisory Council Working Group on Fiduciary Responsibilities and Revenue Sharing 

Practices (Sept. 20, 2007). 5 An allocation on the basis of the value of plan assets is one possible allocation method. 

6GAO Report 07-21 cited a 2005 industry survey estimating that investment fees made up 

about 80 to 99 percent of plan fees, depending on the number of participants in the plan. 

Chairman MILLER. Thank you very much. 

Mr. Minsky? 

STATEMENT OF LEW MINSKY, SENIOR ATTORNEY, FLORIDA 

POWER AND LIGHT CO. 

Mr. MINSKY. Thank you, Mr. Chairman. 

I would like to make several points today. First, the vast majority of 401(k) participants pay substantially lower fees than they 

would pay as individual retail investors. 

Second, we believe that legislative action should be deferred until 

the Department of Labor promulgates its new rules so that Congress can assess the impact of fee disclosure regulations. 

Third, we are concerned that H.R. 3185 goes too far. Compliance 

costs and litigation threats will increase as a result of added complexity and new requirements, most of which are not necessary to 

enhance the ability of plan participants to make sound investment 

choices or to enhance the ability of plan sponsors to select the best 

service provider. 

Recent studies of defined contribution plans have found that 

total plan costs average between 6 and 159 basis points, depending 

largely on plan size, participant account balances, asset mix, the 

type of investments, and the level of services being provided. While 

we feel that fee costs overall are reasonable, we all agree that continuing improvement is both obtainable and desirable. 

I want to take a moment to explain our desire that Congress 

wait for the DOL to complete its work before proceeding. Major 

substantive changes in fee disclosure to both plan sponsors and 

plan participants are expected to result from the DOL fee initiatives. We believe that the regulatory process of soliciting input and 

39

issuing proposed rules and final rules based on comments from all 

affected parties will result in a more responsive rule and will avoid 

unintended consequences. 

Moreover, regulatory guidance is dynamic. It can be clarified and 

amended to adapt to changing conditions. Legislation, on the other 

hand, is cast in stone until changed, and change can be very difficult to enact for reasons often totally unrelated to the core issues. 

One need look no further than the uncertain future of the technical 

changes to last year’s Pension Protection Act for clarification and 

confirmation of this point. 

The bill creates a new set of complex rules and sanctions regarding service provider disclosures to plan participants. The DOL’s expected approach, on the other hand, builds upon existing well-established fiduciary and prohibited transaction rules and sanctions. 

We prefer the DOL’s approach. 

The bill also requires that information received by the plan sponsor be made available to plan participants. We believe that such 

disclosure is unlikely to provide information that is meaningful to 

participants, and we fear that it will be used to spur frivolous litigation that will result in fewer plans ultimately being offered to 

workers. 

This bill requires the unbundling of fees in a bundled service arrangement. Many sponsors, especially small businesses, prefer a 

bundled arrangement with one overall cost. As long as sponsors are 

fully informed of the services being provided and the total cost, we 

believe that they can evaluate whether the overall fees are reasonable without being required to analyze each fee on an itemized 

basis. 

The participant fee disclosures in the bill are unlikely to provide 

information that is meaningful to them. We believe that plan participants need to know what fees are that impact their decision to 

participate in the plan and the specific fees associated with their 

investment allocation decision. Meaningful disclosure should be relatively simple: the aggregate fee that is paid from a participant’s 

account, rather than the components of that fee. To do otherwise 

will result in a lengthy and confusing disclosure. 

The bill requires plans to include a nationally recognized marketbased index fund. We strongly believe that the law should not mandate specific investment options. Such a requirement would set a 

precedent for further mandates regarding the investment of plan 

assets which is counter to ERISA’s focus on a prudent process and 

would preempt the judgment of plan investment fiduciaries. 

In conclusion, we support enhanced fee disclosure. However, H.R. 

3185 as presently drafted is flawed in many regards. We strongly 

believe that the additional flexibility inherent in the regulatory 

process makes the DOL initiatives the appropriate vehicle for new 

disclosure requirements. Any new legislative requirements would 

only delay those efforts, resulting in delayed reforms. If the committee proceeds with H.R. 3185, we recommend a comprehensive 

rewrite that ensures a more streamlined regime. 

We appreciate the opportunity to appear before you today and to 

testify on this very important matter. Thank you. 

[The statement of Mr. Minsky follows:]

40

Prepared Statement of Lew Minsky, Senior Attorney, Florida Power and 

Light Co. 

Chairman Miller, Ranking Member McKeon, and Members of the Committee, 

thank you for the opportunity to appear before you today to discuss H.R. 3185, the 

401(k) Fair Disclosure for Retirement Security Act of 2007. My name is Lew Minsky 

and I am a Senior Attorney at Florida Power and Light Company. I am responsible 

for the legal issues relating to FPL’s employee benefit plans and executive compensation arrangements. We currently offer two defined contribution plans covering 

15,000 participants. I am testifying today on behalf of The ERISA Industry Committee (ERIC), the Society for Human Resources Management, the National Association of Manufacturers (NAM), The United States Chamber of Commerce, and the 

Profit Sharing/401k Council of America (PSCA). 

ERIC is a nonprofit association committed to the advancement of America’s major 

employer’s retirement, health, incentive, and compensation plans. ERIC’s members’ 

plans are the benchmarks against which industry, third-party providers, consultants, and policy makers measure the design and effectiveness of other plans. These 

plans affect millions of Americans and the American economy. ERIC has a strong 

interest in protecting its members’ ability to provide the best employee benefit, incentive, and compensation plans in the most cost effective manor. 

The Society for Human Resource Management (SHRM) is the world’s largest association devoted to human resource management. The Society serves the needs of HR 

professionals and advances the interests of the HR profession. Founded in 1948, 

SHRM has more than 225,000 members in over 125 countries, and more than 575 

affiliated chapters. 

The NAM is the nation’s largest industrial trade association, representing small 

and large manufacturers in every industrial sector and in all 50 states. The vast 

majority of NAM members provide 401(k) plans for their employees and thus have 

a significant interest in this legislation. 

The U.S. Chamber of Commerce is the world’s largest business federation, representing more than three million businesses and organizations of every size, sector, 

and region. The Chamber represents a wide management spectrum by type of business and location. Each major classification of American business—manufacturing, 

retailing, services, construction, wholesaling, and finance—is represented. Also, the 

Chamber has substantial membership in all 50 states, as well as 105 American 

Chambers of Commerce abroad. Positions on national issues are developed by a 

cross-section of Chamber members serving on committees, subcommittees, and task 

forces. More than 1,000 business people participate in this process. 

Established in 1947, PSCA is a national, non-profit association of 1,200 companies 

and their 6 million plan participants. PSCA represents its members’ interests to federal policymakers and offers practical, cost-effective assistance with profit sharing 

and 401(k) plan design, administration, investment, compliance and communication. 

PSCA’s services are tailored to meet the needs of both large and small companies. 

Members range in size from Fortune 100 firms to small, entrepreneurial businesses. 

Let me begin by saying that we all strongly support concise, effective, and efficient fee disclosure to participants. We support increased transparency between 

service providers and plan sponsors, and between plan sponsors and participants. 

We all share strong concerns that H.R. 3185 would sharply increase compliance 

costs and litigation threats by adding complexity and new requirements well beyond 

what is necessary to enhance the ability of plan participants to make good investment choices or the ability of plan sponsors to select the best service provider. 

The Current System 

Numerous aspects of ERISA already safeguard participants’ interests and 401(k) 

assets. Plan assets must be held in a trust that is separate from the employer’s assets. The fiduciary of the trust (normally the employer or committee within the employer) must operate the trust for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering 

the plan. In other words, the fiduciary has a duty under ERISA to ensure that any 

expenses of operating the plan, to the extent they are paid with plan assets, are 

reasonable. 

It is important that as it considers new legislation, Congress fully understand the 

realities of fees in 401(k) plans. The vast majority of participants in ERISA plans 

have access to capital markets at lower cost through their plans than the participants could obtain in the retail markets because of economies of scale and the fiduciary’s role in selecting investments and monitoring fees. The level of fees paid 

among all ERISA plan participants will vary considerably, however, based on variables that include plan size (in dollars and/or number of participants), participant 

41

account balances, asset mix, and the types of investments and the level of services 

being provided. Larger, older plans typically experience the lowest cost. 

A study by CEM Benchmarking Inc. of 88 US defined contribution plans with 

total assets of $512 billion (ranging from $4 million to over $10 billion per plan) and 

8.3 million participants (ranging from fewer than 1,000 to over 100,000 per plan) 

found that total costs ranged from 6 to 154 basis points (bps) or 0.06 to 1.54 percent 

of plan assets in 2005. Total costs varied with overall plan size. Plans with assets 

in excess of $10 billion averaged 28 bps while plans between $0.5 billion and $2.0 

billion averaged 52 bps. In a separate analysis conducted for PSCA, CEM reported 

that, in 2005, its private sector corporate plans had total average costs of 33.4 bps 

and median costs of 29.8 bps. 

Other surveys have found similar costs. HR Investment Consultants is a consulting firm providing a wide range of services to employers offering participant-directed retirement plans. It publishes the 401(k) Averages Book that contains plan 

fee benchmarking data. The 2007 edition of the book reveals that average total plan 

costs ranged from 159 bps for plans with 25 participants to 107 bps for plans with 

5,000 participants. The Committee on the Investment of Employee Benefit Assets 

(CEIBA), whose more than 115 members manage $1.4 trillion in defined benefit and 

defined contribution plan assets on behalf of 16 million (defined benefit and defined 

contribution) plan participants and beneficiaries, found in a 2005 survey of members 

that plan costs paid by defined contribution plan participants averaged 22 bps. 

It is important that before Congress consider any legislation in an effort to enhance disclosure of these fees, that they fully understand the great deal many employees are already enjoying in their 401(k) plans. 

Current Regulatory Action on Fees 

Fee disclosure and transparency present complex issues. Amending ERISA 

through legislation to prescribe specific fee disclosure will lock in disclosure standards built around today’s practices and could discourage product and service innovation. The Department of Labor (DOL) has announced a series of regulatory initiatives that will make significant improvements to fee disclosure and transparency. 

We support the DOL’s efforts and have been active participants in them. While legislative oversight of DOL’s disclosure efforts is appropriate, we believe that this is 

the best approach to enhance fee transparency in a measured and balanced manner 

and we urge Congress to delay taking legislative action until the Department has 

completed its work. 

Among DOL’s fee disclosure efforts are revised annual reporting requirements for 

plan sponsors. We expect DOL to release finalized modifications to the Form 5500 

and the accompanying Schedule C, on which sponsors report compensation paid to 

plan service providers, within the next few weeks. The modifications will expand the 

number of service providers that must be listed and impose new requirements to 

report service provider revenue-sharing. The final regulations implementing the new 

Form 5500 are expected to first be applicable to the 2009 plan year. 

DOL also intends later this year to issue a revised regulation under ERISA Section 408(b)(2), which is a statutory rule dictating that a plan may pay no more than 

reasonable compensation to plan service providers. The expected proposal is designed to ensure that plan fiduciaries have access to information about all forms 

and sources of compensation that service providers receive (including revenue-sharing). Both sponsors and providers will be subject to new legal requirements under 

these proposed rules, including an anticipated requirement that all third party compensation be disclosed in contracts or other service provider agreements with the 

plan sponsor. 

The DOL’s remaining initiative focuses on revamping participant-level disclosure 

of defined contribution plan fees. DOL issued a Request for Information (‘‘RFI’’) in 

April 2007 seeking comment on the current state of fee disclosure, the existing legal 

requirements, and possible new disclosure rules. Several of us filed individual comments and we all issued a joint response with seven other trade associations. DOL 

has indicated that it intends to propose new participant disclosure rules early in 

2008 that will likely apply to all participant-directed individual account retirement 

plans. 

Principles of Reform 

As I said earlier, we do not oppose effective and efficient disclosure efforts. Working together with seven other trade associations, we developed a comprehensive set 

of principles that should be embodied in any efforts to enhance participant fee disclosure. 

42

• Sponsors and Participants’ Information Needs Are Markedly Different. Any new 

disclosure regime must recognize that plan sponsors (employers) and plan participants (employees) have markedly different disclosure needs. 

• Overloading Participants with Unduly Detailed Information Can Be Counterproductive. Overly detailed and voluminous information may impair rather than enhance a participant’s decision-making. 

• New Disclosure Requirements Will Carry Costs for Participants and So Must 

Be Fully Justified. Participants will likely bear the costs of any new disclosure requirements so such new requirements must be justified in terms of providing a material benefit to plan participants’ participation and investment decisions. 

• Information About Fees Must Be Provided Along with Other Information Participants Need to Make Sound Investment Decisions. Participants need to know 

about fees and other costs associated with investing in the plan, but not in isolation. 

Fee information should appear in context with other key facts that participants 

should consider in making sound investment decisions. These facts include each 

plan investment option’s historical performance, relative risks, investment objectives, and the identity of its adviser or manager. 

• Disclosure Should Facilitate Comparison But Sponsors Need Flexibility Regarding Format. Disclosure should facilitate comparison among investment options, although employers should retain flexibility as to the appropriate format for workers. 

• Participants Should Receive Information at Enrollment and Have Ongoing Access Annually. Participants should receive fee and other key investment option information at enrollment and be notified annually where they can find or how they 

can request updated information. 

We strongly urge that the requirements of H.R. 3185 be measured against these 

background principles. 

H.R. 3185’s Service Disclosure Statement 

H.R. 3185 would require plan service providers to provide a ‘‘service disclosure 

statement’’ that describes all plan fees, in twelve specific detailed categories, as a 

condition of entering into a contract. The proposal would also require that this information be broken down by each cost component or be ‘‘unbundled.’’ The statement 

must describe the nature of any ‘‘conflicts of interests,’’ the impact of mutual fund 

share class if other than ‘‘retail’’ shares are offered and if revenue sharing is used 

to pay for ‘‘free’’ services. 

In general, we are concerned that the bill effectively makes plan sponsors liable 

for the actions of service providers. Such a structure would create an endless opportunity for litigation as lawyers seek to make plan sponsors guarantors of investment 

success. This would likely lead some plan sponsors to drop or curtail their plans to 

avoid the liability created by the bill. 

Disclosure Provisions 

We also have several concerns with the specific disclosure provisions included in 

this section of the bill. First, the requirements of H.R. 3185 are duplicative with the 

existing fiduciary requirement that fees paid with plan assets be reasonable. The 

DOL’s pending proposed regulatory changes under section 408(b)(2) likely will result 

in similar disclosures, provided at the same general point in time, as this new provision. Under the DOL’s approach, the disclosures will be incorporated into fiduciary 

requirements regarding plan fees, making noncompliance a prohibited transaction. 

Second, we believe that the requirement to ‘‘unbundled’’ bundled services and provide individual costs in many detailed categories is not particularly helpful and 

would lead to information that is not meaningful. It also raises significant concerns 

as to how a service provider would disclose component costs for services that are 

not offered outside a bundled contract. Any such unbundling would be subject to a 

great deal of arbitrariness. The posting of detailed unbundled services information 

could also force the public disclosure of proprietary information regarding contracts 

between service providers and plan sponsors. Compliance with this provision will require a substantial expenditure of time and effort to generate numbers that currently do not exist, are at best gross approximations, and are of extremely little 

practical value. These costs will ultimately be passed on to plan participants 

through higher administrative fees. 

ERISA currently requires plan administrators to ensure that the aggregate price 

of all services in a bundled arrangement is reasonable at the time the plan contracts 

for the services and that the aggregate price for those services continues to be reasonable over time. For example, asset-based fees should be monitored as plan assets 

grow to ensure that fee levels continue to be reasonable for services with relatively 

fixed costs such as plan administration and per-participant recordkeeping. The plan 

administrator should be fully informed of all the services included in a bundled arVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
43

rangement to make this assessment. Many plan administrators, however, may prefer reviewing costs in an aggregate manner and, as long as they are fully informed 

of the services being provided, they can compare and evaluate whether the overall 

fees are reasonable without being required to analyze each fee on an itemized basis. 

Conflict of Interest Provisions 

We also have concerns regarding the ‘‘conflicts of interest’’ provisions. ERISA already prescribes strict rules for prohibited activities for service providers who are 

parties-in-interest or fiduciaries to a plan. While disclosure of conflicts is important, 

the provision goes much further by requiring the disclosure of relationships and affiliations between different providers, regardless of whether these relationships involve a conflict of interest. Plan sponsors are expected to be provided with considerably expanded disclosures in the near future as the result of the DOL initiatives 

(in all likelihood sooner than if new legislation is enacted). 

We are concerned that these provisions might be seen as creating a new set of 

fiduciary obligations on plan administrators and increase the likelihood of litigation. 

We are concerned that a plan sponsor fiduciary might find itself challenged for retaining a service provider after having a financial or personal relationship disclosed 

to it because the proposed legislation labeled the relationship as one involving a conflict of interest. It should be clear that this section does not create any new conflictof-interest definitions and mirrors the prohibited transactions in ERISA. 

Share Class Disclosure 

The purpose of the share class disclosure requirement is not clear. Depending on 

the size of a plan and its service needs, participants may pay fees that are lower, 

higher, or the same as ‘‘retail’’ prices. There are myriad costs associated with administering a 401(k) plan that do not apply to individual ownership of a mutual fund 

and, for this reason, participants in some plans, particularly new small business 

plans, may pay additional costs. A comparison with an ‘‘institutional’’ share in this 

situation could result in an incorrect conclusion that the plan is paying more than 

reasonable expenses. 

Estimates 

While we appreciate the attempt to ease the burden of calculating numbers which 

are not known and in many cases unknowable and/or unobtainable from a practical 

perspective by allowing for the use of some estimates, this section would create substantial potential liability for plan sponsors. This section’s language would result in 

plan sponsors litigating whether it had ‘‘known’’ such information (the scope of 

which is very unclear) and whether its estimate of expenses was ‘‘reasonable.’’ Additionally litigation could arise regarding whether estimates were ‘‘materially incorrect.’’ The substantial risk of litigation would ultimately lead many, especially small 

and mid-size, plan sponsors to discontinue or substantially curtail their retirement 

programs—a result that is in no one’s best interest. 

H.R. 3185’s Plan Participant Disclosure 

The requirements of H.R. 3185 for participant fee disclosure are numerous, burdensome, complex, and likely to increase participant confusion rather than enhance 

participant knowledge. Under H.R. 3185, plan administrators must provide an advance notice of investment election information to participants and beneficiaries, 

generally 15 days prior to the beginning of the plan year. The notice must include 

the name of the option; investment objectives; risk level; whether the option is a 

‘‘comprehensive investment designed to achieve long-term retirement security or 

should be combined with other options in order to achieve such security’’; historical 

return and percentage fee assessment; explanation of differences between assetbased and other annual fees; benchmarking against a nationally recognized marketbased index or other benchmark retirement plan investment; and where and how 

additional plan-specific and generally available investment information regarding 

the option can be obtained. 

The notice must include a statement explaining that investment selection should 

not be based solely on fees but on other factors such as risk and historical returns. 

The notice must include a fee menu of the potential service fees that could be assessed against the account in the plan year. Fees must be categorized as, 1) varying 

by investment option (including expense ratios, investment fees, redemption fees, 

surrender charges); 2) asset-based fees assessed regardless of investment option selected; and 3) administration and transaction fees, including plan loan fees, that are 

either automatically deducted each year or result from certain transactions. The fee 

menu shall include a general description of the purpose of each fee, i.e., investment 

management, commissions, administration, recordkeeping. The menu will also inVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
44

clude disclosure of potential conflicts of interest that may exist with service providers or parties in interest, as directed by the Secretary of Labor. 

Again, we support disclosure of relevant fee information, but flexibility should be 

provided to ensure that the plan administrator can tailor the disclosure to meet the 

needs of plan participants. The participant disclosure requirements as presently 

drafted will likely result in lengthy ‘‘legalese’’ documents that would confuse most 

participants and possibly hinder rather than help them make investment decisions. 

The scope and detail of the disclosure might well result in a document that, at best, 

is ignored and, at worst, deters participation in the plan. 

We agree that fee information should not be provided in a vacuum. Doing so 

would lead some participants to merely select the lowest cost option without regard 

to whether the risk and return of that option are appropriate for the participant. 

Some of the required data elements and comparisons in the legislation use confusing 

terminology, have overlapping requirements, or are excessively detailed. For example, a ‘‘benchmark retirement plan investment’’ does not currently exist and no single benchmark is appropriate for every kind of investment. In many cases the required participant disclosure item would apply to some products and not others, and 

could be difficult to calculate, especially by the plan administrator. 

H.R. 3185’s Annual Benefit Statement 

H.R. 3185 would also require plan administrators to provide a detailed annual 

benefits statement that is impractical and costly. It includes starting balance; vesting status; contributions by employer and employee during the plan year; earnings 

during the plan year; fees assessed in the plan year; ending balance; asset allocation 

by investment option, including current balance, annual change, net return as an 

amount and a percentage; service fees charged in the year for each investment, including, separately, investment fees (expense ratios and trading costs), load fees, 

total asset based fees (including variable annuity charges), mortality and expense 

charges, guaranteed investment contract (GIC) fees, employer stock fees, directed 

brokerage charges, administrative fees, participant transaction fees, total fees, and 

total fees as a percent of current assets; and the annual performance of the investment options selected by the participant as compared to a nationally recognized 

market based index. 

Recordkeeping systems are not currently able to meet all the requirements of the 

annual benefit statement in H.R. 3185. Additional costs to participants will result 

from the significant system changes needed to comply and simpler disclosure would 

provide much of the same benefits to participants. Much of the required data about 

the plan and the participant’s account that can be ascertained by the plan administrator is already required to be disclosed in the new benefit statement mandated 

under the Pension Protection Act, yet there is no coordination of the two requirements. 

H.R. 3185’s Index Fund Mandate 

H.R. 3185 would mandate that plans include at least one investment option which 

is a nationally recognized market-based index fund that, as determined by the DOL, 

offers a combination of historical returns, risks, and fees that is likely to meet retirement income needs at adequate levels of contribution. 

We strongly believe that specific investment options should not be mandated by 

law (with resulting fiduciary liability if the investment is found not to meet statutory and regulatory requirements). The provision would override a plan’s ability to 

select and monitor plan investments by reaching a values conclusion that this investment is appropriate for all plans. It sets a precedent for further mandates regarding the investment of plan assets which is counter to ERISA’s focus on a prudent process and would preempt the judgment of investment professionals. It is unlikely that any one ‘‘market-based index’’ alone is ‘‘* * * likely to meet retirement 

income needs.’’ Further, embedding a particular investment option in law may lead 

participants to believe that this is either the ‘‘best’’ option or the government-sanctioned option, thereby steering plan participants into the investment which may not 

be appropriate for the individual participant. 

H.R. 3185’s Effective Date 

The effective date of H.R. 3185 is unrealistic. Numerous changes to recordkeeping 

systems would be required to meet the bill’s various provisions. In addition, the bill 

includes no transition period for plan administrators who currently have contracts 

with service providers and would seem to endanger to the contractual relationships 

that exist between those parties. 

45

Conclusion 

We support effective fee disclosure. However, H.R. 3185 is flawed in many regards. We strongly believe that the additional flexibility inherent in the regulatory 

system make DOL a more appropriate place for new disclosure requirements. DOL 

already has numerous initiatives underway to enhance disclosure between plan 

sponsors and participants and between plan sponsors and service providers. Any 

new legislative requirements would likely only slow those efforts resulting in delayed reforms. 

Plan sponsors and service providers alike are committed to creating new investment options and administrative techniques to improve retirement security. Automatic enrollment, automatic contribution step-ups, target-date and lifecycle funds, 

managed accounts are just some of the numerous innovations that have benefited 

401(k) participants—indeed some of them may not even have been participants if 

not for such products—and enhanced their retirement security. Statutory requirements for fee disclosure would freeze disclosure in the present, making enhancements and innovations more difficult in the future. 

If the Committee proceeds with H.R. 3185, we recommend a comprehensive rewrite than ensures it comports with the principles we have outlined in our testimony. Any other result could jeopardize the future of the defined contribution system at a time when it is increasingly critical for American workers. We appreciate 

the opportunity to appear before you today and testify on this very important matter. 

Chairman MILLER. Thank you. 

Mr. Chambers? 

STATEMENT OF JON CHAMBERS, PRINCIPAL, SCHULTZ, 

COLLINS, LAWSON, AND CHAMBERS, INC. 

Mr. CHAMBERS. Chairman Miller, Ranking Member McKeon and 

distinguished members of the committee, thank you for the opportunity to present my views on 401(k) fee disclosure to this committee. 

As an investment consultant to defined contribution plans, I 

focus a significant portion of my practice on helping plan sponsors 

and other fiduciaries to quantify and understand the fees incurred 

in relation to their plans. For our clients, we typically review fee 

structures once a year. Additionally, we are regularly engaged in 

managing more formal requests for proposal or RFP processes intended to help plan fiduciaries select a new plan provider or to 

validate the retention of an existing provider. 

Since we examine 401(k) fees for a broad cross-section of plans, 

we are well positioned to see a variety of fee arrangements. I would 

like to share some real-world examples from our practice that will 

highlight how H.R. 3185 would help plan fiduciaries make better 

decisions. 

As the committee has heard, one of the more contentious elements of 401(k) fee structures is revenue sharing, which essentially 

is the transfer of investment fees to cover administrative costs. I 

would like to share a few examples about revenue sharing and how 

it can be used positively or negatively, and how even the largest 

employers frequently misunderstand it. 

Recently, we were engaged by a large 401(k) plan sponsor to help 

with investment issues related to a fund mapping. This particular 

plan sponsor hadn’t worked with an investment consultant in the 

past. Fiduciary reviews were conducted by the financial firm that 

served as the plan recordkeeper, working with the company’s own 

treasury staff. 

46

The company would not have engaged an independent consultant 

if it hadn’t been for these mapping issues. That didn’t mean that 

they didn’t provide regular fiduciary reviews of the choices, but 

they did it working with the financial services firm, rather than 

with an independent consultant. The company’s contract with the 

financial firm provided for no explicit fee payments. Recordkeeping 

and compliance services were covered by profit margins on the financial firm’s proprietary funds, as well as revenue sharing payments from nonproprietary funds that were offered through the 

plan. 

The plan sponsor thought the plan fees must be reasonable because as they reviewed each investment option, each investment 

option had reasonable fees. Now, as we worked on the mapping 

project, we also did a fee reasonableness study. We demonstrated 

that the total fees being generated by the financial firm were approximately $1 million higher than were necessary in an 

unbundled arrangement. This company was able to negotiate share 

class changes with their financial services provider and save plan 

participants approximately $1 million a year. 

I would like to stop and highlight here that one of the important 

elements of H.R. 3185 is the need to disclose different share class 

availability. That is something that most plan sponsors wouldn’t 

know about unless they either worked with an independent consultant or there were a requirement that it be disclosed to them. 

As an investment consultant, we work with large plans primarily. We don’t get an opportunity to work with smaller clients 

most of the time. They can’t afford our services. We believe that 

H.R. 3185 would bring the type of information that we provide to 

larger plans to bear for smaller plans. 

Third, briefly I would like to talk about an RFP that we manage 

for a smaller plan, a plan with about $15 million in assets. When 

we run an RFP, we typically include proposals from both bundled 

and unbundled service providers. We ask both the bundled and 

unbundled providers to separately propose fees for administrative 

and investment management services. This helps the fiduciaries 

make an informed decision about the cost and quality of each service element. 

A recent proposal that we ran for this regional bank solicited five 

proposals—two from insurance companies, two from mutual fund 

companies, and one from an unbundled TPA provider. One of the 

insurance companies refused to propose unbundled services and we 

neglected to consider their proposal further. Another insurance 

company said, ‘‘Yes, we will unbundle services,’’ and they actually 

had the highest fees. However, they said zero fees were available 

if their fixed account were used as an option. 

The two fund companies had mostly unbundled arrangements. 

One fund company had higher management fees and lower direct 

fees. The other had lower fund fees and higher administrative fees. 

And finally, the TPA had the lowest overall costs. 

Our client chose to go with the relatively low-cost mutual fund 

company because they had the information to make an informed 

decision. We believe that H.R. 3185 would provide the opportunity 

for plan sponsors to get enough information to make informed deciVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
47

sions, thereby driving down total costs of plan administration for 

all Americans. 

Thanks for the opportunity to testify. 

[The statement of Mr. Chambers follows:]

Prepared Statement of Jon C. Chambers, Principal With Schultz Collins 

Lawson Chambers, Inc. 

Chairman Miller, Ranking Member McKeon and distinguished members of the 

Committee, my name is Jon C. Chambers and I am a principal in the San Francisco, 

California investment consulting firm of Schultz Collins Lawson Chambers, Inc. 

Since 1995, our firm has provided a broad range of investment consulting services 

to defined contribution plan sponsors. My client base is primarily comprised of 

401(k) plans. I consult to plans sponsored by approximately 30 employers on a recurring basis, and also serve other clients on a one-time project basis. My clients 

include a mixture of publicly traded and privately held companies, as well as notfor-profit organizations and governmental entities. Prior to joining Schultz Collins 

Lawson Chambers, Inc., I spent ten years as a retirement plan consultant with the 

accounting firm Coopers & Lybrand. 

As an investment consultant to defined contribution plans, I focus a significant 

portion of my practice on helping plan sponsors and other fiduciaries to quantify 

and understand the fees incurred in relation to their plans. For our recurring clients, we typically review fee structures at least once a year. Additionally, we are 

regularly engaged to manage a more formal Request for Proposal (RFP) process intended to help plan fiduciaries select a new plan provider, or to validate the retention of an existing provider. We generally manage between two and six RFP projects 

each year, although with the recent heightened attention on 401(k) fees, we have 

been seeing an increased demand for our RFP services. Since we examine 401(k) 

fees for a broad cross-section of plans, we are well positioned to see a variety of fee 

arrangements. 

I am actively involved in the retirement plan consulting community. I am a member of the Profit Sharing/401(k) Council of America (PSCA), the American Society 

of Pension Professionals & Actuaries (ASPPA) and a member and past president of 

the San Francisco Chapter of the Western Pension & Benefits Conference (WP&BC). 

However, it’s important to note that my testimony today is my own, and is not intended to reflect the views of any of these organizations. Over the past year, I’ve 

spoken on 401(k) fees at conferences sponsored by WP&BC and ASPPA. During this 

period, I have met with officials from the Securities and Exchange Commission 

(SEC), the Government Accountability Office (GAO) and the Department of Labor’s 

Employee Benefit Security Administration (EBSA) to discuss the issue of improving 

disclosure of 401(k) fees. 

I very much appreciate the opportunity to present my views on 401(k) fee disclosure to this Committee. The issues being discussed are challenging and technical, 

yet a reasonably successful resolution of the problem would go a long way towards 

improving the retirement security of millions of Americans. I commend Chairman 

Miller and this Committee for tackling such an important topic. 

Background on the 401(k) Fee Issue 

401(k) fees have been a predominant discussion topic in the retirement plan consulting community over the past five years. There are several reasons why 401(k) 

fees have recently become a critical issue: 

• The 2000-2002 stock market plunge reminded 401(k) plan participants that investment returns could be negative, and that fund expenses compound losses. While 

participants arguably should have been equally sensitive to fund expenses during 

the bull market of the late 1990s, participants seeing losses in their 401(k) accounts 

focus greater attention on fees. 

• With many companies freezing or terminating their defined benefit plans, 

401(k) plans are transitioning from being a supplemental savings vehicle to the primary retirement plan for many Americans. 

• Outreach by the Department of Labor has encouraged both plan sponsors and 

participants to pay greater attention to 401(k) fees. 

• Numerous stories in the popular media, including such diverse venues as PBS’ 

Frontline, the Los Angeles Times, and Money magazine have highlighted 401(k) fee 

issues, with particular attention focused on egregious examples of excessive fees. 

• Litigation (seeking class action status) has been filed against many of the largest companies in America, claiming that 401(k) fees were excessive and not properly 

disclosed. 

48

• Congressional activities, including hearings held by this Committee, have focused national attention on the 401(k) fee issue. 

• Following up on results from hearings and an independent study also published 

in 1997, as well as on recommendations published in 2004 by the ERISA Advisory 

Council’s Working Group on Plan Fees and Reporting on Form 5500, the Department of Labor has announced a series of regulatory initiatives to improve disclosure 

of 401(k) fees. 

Despite all this attention, the way that most 401(k) service providers charge for 

fees hasn’t changed much over the past decade. As this Committee heard in March, 

more than 90% of 401(k) fees are investment based. Generally, investment based 

fees are paid by plan participants, and are not typically disclosed to participants, 

at least not, in my view, in a clear and obvious manner. While speakers at the 

March 6 hearings disagreed about whether the aggregate level of 401(k) fees was 

excessive, there was general consensus that at least some fee arrangements are excessive, and that more rigorous and comprehensive disclosure standards are necessary. The debate is not about whether more disclosure is desirable, but rather, 

it is about what type of disclosure should be made, to whom, in what form, and who 

should bear the cost of that disclosure. Much of the debate centers around whether 

new disclosure requirements should be imposed by statute or by regulation. 

Statutory Changes are Necessary to Resolve the 401(k) Fee Disclosure Problem 

I personally believe that we need a material change in the statutory framework 

governing how 401(k) plans must disclose fees. To understand why this is so requires a brief review of the legislative history of ERISA, and the development of the 

modern 401(k) plan. ERISA—the Employee Retirement Income Security Act of 

1974—was enacted when defined benefit plans were the nation’s predominant retirement plan. The tax code changes permitting 401(k) plans were not enacted until 

1978, and 401(k)s weren’t broadly adopted and did not enter the mainstream 

vernacular until the 1980s. ERISA could not have contemplated disclosure rules for 

401(k)s because 401(k)s did not exist when ERISA was enacted. 

One question that can be asked is if ERISA sets general standards for retirement 

plans, why should the rules that apply to 401(k)s be any different? There were certainly defined contribution plans operating in the 1970s. Why can’t the general 

ERISA disclosure rules be sufficient for 401(k)s? The answer to this question turns 

on the unique environment in which the modern 401(k) operates. Today, most 

401(k) plans are: 

• Participant directed (which means that participants choose their own investment approach from a menu of funds selected, directly or indirectly, by their employer); 

• Invested (either directly or indirectly) in mutual funds; 

• Valued daily, with daily trading; and 

• Administered by financial services firms. 

While the typical 401(k) plan’s daily valued, participant directed structure provides significant investment flexibility for participants, it also introduces numerous 

administrative costs. Participants must be educated about the funds on the menu, 

and how to make rational asset allocation decisions. Call centers and Web sites 

must be established and maintained to provide participants with information about 

their accounts, and to permit participants to initiate daily trades. Accounts must be 

balanced and reconciled daily. And of course, since 401(k) plans operate through 

payroll deduction, the process of converting salary deferrals into fund purchases on 

each and every pay date makes 401(k) administration transactionally intensive. 

Cost Sharing Arrangements and Employer Conflicts of Interest 

Fees for 401(k) plans are generally shared between participants and the employer, 

with the participants paying investment costs, and the employer paying for the costs 

of plan administration, to the extent that revenue sharing payments from the plan’s 

investments are not available to offset administrative costs. Various surveys indicate that, on average, more than 90% of 401(k) fees are investment related. 

As I mentioned earlier, we manage the RFP process for many 401(k) plans. In our 

experience, when a mid-sized or larger plan (typically, at least $10 million in total 

plan assets), with average participant account balances of at least $50,000, sends 

out an RFP, the most typically quoted price for administrative and compliance services necessary to run the plan is ‘‘zero.’’ Of course, the true cost of providing these 

services is not zero. Investment expenses may have been increased to generate additional revenues, which are then used to cover the costs of the administrative services. But an unsophisticated employer conducting an RFP for 401(k) services that 

sees a zero fee quote for the administrative component from the majority of the respondents very quickly concludes that zero is the right price for these services. Most 

49

employers don’t worry too much about why the explicit fee is zero. They don’t realize 

that their employees must be implicitly paying for plan administration through 

higher than necessary investment fees. They don’t know to ask whether the increased investment fees are more costly to participants than would be the case if 

the investment and administrative services were engaged separately. They usually 

choose one of the zero cost fee providers, and move forward. 

Unlike the modern employer offering a 401(k) as its primary retirement plan, defined benefit plan sponsors have always had a vested interest in minimizing investment expenses incurred by their plans. Since a defined benefit plan’s funding requirements are at least partially determined by the plan’s net investment returns, 

cutting investment expenses has the direct effect of reducing required contributions 

from the plan sponsor. When ERISA was drafted, employers were presumed to have 

the same objective as employees—to minimize investment fees, to the extent practical. But under a modern 401(k) plan, an employer has an understandable incentive 

to select funds with investment fees that are high enough that the employer incurs 

no administrative costs. Worse yet for the plan participants, under existing ERISA 

rules, there is no requirement that they receive any disclosure about fees that may 

be applied to their account. And finally, unless the employer is savvy enough to 

press the proposing vendor about fee transfers and revenue sharing arrangements, 

there is no current requirement for fee disclosure from the plan provider to the employer. A federal district court ruling dismissing all claims in one of the recently 

filed 401(k) excessive fee lawsuits highlighted this point. In support of his decision 

to dismiss the case, Judge John C. Shabaz notes: 

A review of the report [the ERISA Advisory Counsel Report of the Working Group 

on Plan Fees and Reporting on Form 5500] confirms that the revenue sharing issue 

raised by plaintiffs’ complaint is a matter of policy concern within the Department 

of Labor. It also unequivocally confirms that present regulations do not require disclosure of the information. See particularly the report’s Recommendations for Regulatory Change at p. 8. Whether, as a policy matter, additional reporting of revenue 

sharing arrangements should be required, it is not presently required and failure 

to include such information does not violate existing ERISA standards for disclosure. Accordingly, defendants’ failure to so disclose is not a violation of the present 

statute of [sic] regulations and does not state a claim for breach of the duty of disclosure. (emphasis added) Hecker v. Deere & Co., No. 06-C-719-S (W.D.Wis. June 

21, 2007) 

In my experience, employers aren’t actively pushing for a transfer of plan costs 

from employer to employee, they are simply reacting rationally to how the financial 

services industry presents plan fees today. Most employers with whom we work seek 

to pay a fair fee for plan services, without causing their employees to pay excessive 

fees. But when employers are presented with a range of proposals for 401(k) services, all of which provide for zero explicit fees, they presume that zero fees are 

standard practice for the industry, without understanding the impact of implicit, 

fund based fees on their employees. One of the key benefits of H.R. 3185 is that 

employers would be able to make informed decisions about how plan administrative 

costs would be shared between plan participants and the employer. Employers that 

choose to pass through all plan costs to participants would still be permitted to do 

so, either through implicit revenue sharing payments, or through explicit allocation 

of hard dollar costs (provided, of course, that such plan costs could properly be 

charged to the plan under ERISA). 

Under current law, employers face potential liability if they do not satisfy their 

fiduciary duty to ensure that 401(k) plan fees are reasonable. This potential liability 

has recently been made manifest in very real litigation. However, in many cases, 

employers lack the information necessary to prudently evaluate fee structures. Furthermore, financial firms regularly price their 401(k) services in a manner that 

causes employers to focus less on fees paid by participants and more on fees paid 

(or avoided) by the employer. Larger employers have the financial resources and 

perspective necessary to engage consulting firms such as ours to help them make 

reasonable and prudent fiduciary decisions. While I believe that employers should 

continue to play a fiduciary oversight role with respect to their retirement programs, I also believe that we need a statutory solution that requires that financial 

firms provide employers with sufficient disclosures and other information so that 

the employers are able to make an informed decision before selecting a 401(k) provider. I also believe that participant disclosures should be enhanced, such that participants better understand the true cost of investing through a 401(k) plan. With 

better informed employers, and better informed 401(k) participants, over time, competitive market pressures will reduce the cost of 401(k) investing, thereby improving 

retirement security for all Americans. 

50

Stories From the Trenches: Real World Examples of How Fiduciaries Currently 

Evaluate 401(k) Fees and Revenue Sharing Arrangements 

I’d like to share a few examples about revenue sharing, and how it can be used 

positively or negatively, and how even the largest employers frequently misunderstand it. 

Large Plan Uses Information About Revenue Sharing to Reduce Participant Costs 

Recently we were engaged by a large 401(k) plan sponsor to help with investment 

issues relating to a fund mapping. This particular plan sponsor did not work with 

an investment consultant on a regular basis. Fiduciary investment reviews for this 

plan were conducted by the financial firm serving as the plan recordkeeper, in conjunction with the sponsor’s own treasury staff. Since treasury staff also managed 

investment manager reviews for the company’s defined benefit pension plan, they 

felt that they did not need an independent review of their 401(k) plan. In fact, this 

company would not have engaged an independent investment consultant had it not 

been for the need to do a mapping study. The company’s contract with the financial 

firm serving as the plan recordkeeper provided for no explicit fee payments—recordkeeping and compliance services were covered by profit margins on the financial 

firm’s proprietary funds, as well as revenue sharing payments from non-proprietary 

funds that were offered through the plan. The plan sponsor presumed that the plan 

fees must be reasonable, because the expense ratio on each fund offered through the 

plan, when considered in isolation, seemed reasonable. 

As a tangential element of the mapping project for which we were engaged, we 

were able to demonstrate to this company that the total explicit and implicit revenue sharing used to support plan administration generated more revenue than the 

approximate ‘‘market rate’’ for the recordkeeping and compliance functions provided 

by the financial firm. Based on the information we presented, the company negotiated share class transitions that saved participants more than $1 million per year. 

We considered this a huge success. But the main point that I want to emphasize 

to this Committee is that, in this particular fact pattern, we were able to improve 

the 401(k) fee structure for a large group of plan participants that already benefited 

from low cost investment options, and from relatively sophisticated fiduciary oversight. This large employer simply did not understand revenue sharing arrangements 

well enough to negotiate further improvements without getting information from an 

independent investment consultant. Better disclosure of 401(k) fees could help many 

plans whose assets measure in the millions (or even in the hundreds of thousands), 

and not in the billions, to negotiate more favorable arrangements for their participants. Most of these smaller plans simply cannot afford to engage independent consultants to review their fee arrangements. 

Smaller Plan Refuses Zero Fee Arrangement 

I understand that certain commentators argue that the ‘‘unbundling’’ of fee arrangements proposed under H.R. 3185 is unnecessary, and could potentially lead to 

increased costs if plan service providers are forced to calculate what portion of an 

aggregate fee applies to specific service elements. These commentators argue that 

any new requirement should only require the disclosure of aggregate plan level fees. 

Additionally, some commentators argue that bundled providers are not able to determine how costs break down between investment and administrative services, so 

they cannot provide this information. 

When we manage an RFP for a company, we typically include proposals from both 

bundled and unbundled service providers. Furthermore, we ask both the bundled 

and unbundled providers to separately propose fees for administrative and investment management services. This permits the fiduciaries selecting the vendors to 

make an informed decision regarding the cost and quality of each service element. 

In our experience, virtually all bundled providers are willing and able to propose 

services in this manner, although some bundled providers will only present 

‘‘unbundled’’ pricing to larger plans. 

Our experience managing an RFP process for a regional bank with about $15 million in plan assets earlier this year may help illustrate why we believe that any new 

disclosure requirements should require unbundling of fees. On behalf of the bank, 

we requested proposals from five different types of providers representing three different business models: large financial firms including two mutual fund companies 

and two insurance companies, as well as an unbundled arrangement led by an independent third party administrator (TPA). 

One of the insurance companies refused to provide unbundled pricing, simply 

claiming that its fees would be zero. This proposal was rejected without further review. The second insurance company proposed a relatively high hard dollar fee 

under an unbundled pricing structure, with the hard dollar fee offset by any revVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
51

enue sharing payments received by the insurer. Alternately, this insurance company 

suggested that if the plan’s current money market position were invested in a fixed 

rate account managed by the insurer, all explicit fees would be waived. This insurance company was invited to make a finals presentation to the plan fiduciaries. 

The two mutual fund company proposals presented primarily unbundled pricing, 

with explicit fees that were somewhat lower than the second insurance company’s 

unbundled pricing, but with a requirement that at least some of the fund company’s 

own proprietary funds be offered through the plan. One fund company proposed 

lower hard dollar fees, but offered more expensive funds. The other fund company 

proposed higher hard dollar fees, but offered less expensive funds. The fund company with the lower cost funds was invited to the finals presentations. 

The TPA was named as the third finalist. This proposal featured the lowest hard 

dollar fees of any of the three finalists, and complete flexibility for investment 

choice. Without knowing the identity of the other finalists, the TPA suggested that 

funds from the low cost fund company would be good investment choices. 

In this case, the bank selected the low cost fund company as its new 401(k) provider. While the TPA presented the least expensive and most flexible proposal, the 

bank was concerned that the TPA’s administrative capabilities did not appear to be 

as deep as the fund company’s. 

Conclusions 

401(k) fees have been identified as a potential problem for at least a decade. The 

Department of Labor and the ERISA Advisory Council have focused on this topic 

since at least 1997. However, other than educational initiatives, very little real 

progress has been made towards rationalizing, or even better understanding, 401(k) 

fee structures. In the past five years, 401(k) fee issues have become even more 

prominent, and it appears that the Department of Labor is now poised to release 

a series of regulations that will improve 401(k) fee disclosure. However, various 

commentators have noted that the Department’s proposed regulations may be insufficient to address many of the issues faced by employers today, such as properly 

comparing bundled and unbundled service arrangements. In fact, it appears that 

the Department’s proposed regulations will require less disclosure from bundled arrangements than will be required from unbundled arrangements. Such an uneven 

disclosure regimen could have the unintended and unwarranted consequence of favoring one type of service provider over another, which could lead to reduced competition and higher fees. 

In its current form, H.R. 3185 may not be a perfect bill. The litany of required 

fee disclosures may be excessive, and it’s possible that certain types of fee disclosures could be collapsed and streamlined to reduce costs of complying with the bill 

and to improve the comprehensibility of the fee disclosure. The basic concepts behind H.R. 3185, however, the concepts of increased disclosure of fees and costs to 

401(k) plan fiduciaries and 401(k) plan participants, are, in my opinion, quite sound 

and are badly needed to protect and improve the retirement security of American 

workers, 

I would like to add that the current bill’s proposed requirement that 401(k) plans 

include some form of balanced index fund might establish a dangerous precedent for 

statutory endorsement of specific investment approaches. In my view, it is better to 

let the competitive and ever changing forces of the marketplace, with enhanced and 

effective disclosure of 401(k) fees and investment costs, drive the choice of investment vehicles for 401(k) plans. As a practical matter, if H.R. 3185 or a similar bill 

is enacted, we are likely to see index funds featured more prominently in 401(k) 

plans simply because the enhanced disclosure regimen makes low cost index funds 

look relatively attractive, and not because the statute requires that they be offered. 

Chairman MILLER. Thank you very much. 

Thank you all for your testimony and your insights. 

Let me explain the situation to the committee and to the witnesses. We are going to begin a series of six votes here that I believe will take us a good part of 1 hour. We are going to begin the 

round of questioning and go as long as we can so that members can 

still make the votes, but I think at that point I will ask the members whether or not we let the panel go, rather than sit here for 

1 hour. We would obviously like to be able to submit questions to 

you in writing, but I just think it would be unfortunate if we had 

you hang in here for 1 hour. I don’t know that 1 hour will be 

52

enough time, unfortunately, with the way the votes are currently 

structured. 

If that meets with the approval of the members of the committee 

and with the witnesses—I can see that you are crestfallen that you 

are going to get out of here in a few minutes. [Laughter.] 

Okay, we will stick around and you guys will wait here 1 hour. 

No. [Laughter.] 

Okay. We will do it that way. I will try to abbreviate because I 

know there is interest among the members here. 

Just quickly, Mr. Thomasson, if I might just ask you, the suggestion is made time and again that this is all information that the 

average person won’t understand, can’t use or won’t use, and really 

doesn’t provide any additional insights for them in the management of their plans. I would say in some cases that even suggests 

for the sponsors of the plan speaking to the individual. Yet we see 

from the GAO report and from calculations that many people have 

done a small differential can mean a lot of money over a period of 

years. I just wondered if you might explain. You have handed out 

how you thought it could be done with your testimony, but if you 

might explain your take on the question of complexity and whether 

this is all too much for the consumer. 

Mr. THOMASSON. Thank you very much, Mr. Chairman. There 

are two levels of disclosure, as illustrated in the bill itself. One is 

a plan fiduciary disclosure. The other is a participant disclosure. 

While recordkeeping services, recordkeeping administration and 

some investment services are complex from the standpoint of being 

able to explain it, with multiple categories of fees and expenses, we 

think and we believe that a summary of these fees on the plan 

sponsor side, from the standpoint of investment management, recordkeeping and administration, as well as selling advisory services, 

are the three categories that are what plan sponsors need information on to be able to evaluate different service providers. 

They have an obligation to do so. If they do not have a breakdown of some type to be able to evaluate plan operations, selling 

and advisory fees, and the investment management itself, then 

they have no comparison with which to delineate whether a certain 

provider is better than another. 

Now, that does not preclude the fact that in either case, a plan 

sponsor will roll out and eventually have a total overall cost, but 

the comparison for their fiduciary responsibility to determine 

whether a service from a provider is appropriate, they need that 

breakdown. 

On the participant side, we agree that participant activity is 

really driven by the type of information they get. There are studies 

that say the participant disclosures, if they are too much for them, 

it actually will not be in their best interest to deliver that information to them because they will not be able to make appropriate decisions. 

What we have done and what we think is appropriate from the 

participant perspective is to examine what participants really need 

to make those decisions. Now, keep in mind that when a participant even gets the opportunity to make a decision, the universe of 

choices that they make has already been selected for them by the 

plan fiduciary. If a fiduciary selects a plan provider or a set of servVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00056 Fmt 6633 Sfmt 6602 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
53

ices and investments from a specific provider regardless of whether 

they are bundled, unbundled, or whoever they are, those decisions 

have already been made. 

So whatever that provider gives them, whatever the investments 

that have been selected, that is the universe that participants are 

able to choose from. Therefore, there is a subset of things that participants need to make those decisions. The investment expenses 

are obvious. In a situation where participants need to select the investments on their own behalf for their retirement security, they 

need to know what that management cost is going to be. 

If there are other fees on total plan assets—in other words, wrap 

charges, other types of fees that are assessed against the entire account as a plan or against individual participant accounts or 

against individual investments, they need to know what those are. 

And then the summary of those two together is total investment 

fees. 

In addition, since participants have the ability to execute instructions or give instructions to the provider or to the plan sponsor fiduciary relative to activities that they want to undertake, such as 

distributions or loans or initiate a loan process or other items like 

that, a fee menu of transaction expenses is kind of like a menu at 

a restaurant. It is something that they understand they need and 

they will say, ‘‘Okay, I will be charged this if I initiate this transaction.’’

So those are three categories that we think need to be done—the 

investment expenses with all the fees on plan assets and the fee 

menu itself. 

Chairman MILLER. Thank you. 

Mr. McKeon? 

Mr. MCKEON. Thank you, Mr. Chairman. I agree with your decision. It is unfortunate that the votes were called at this time because this is an outstanding panel, and I would like to hear more 

from them. Maybe we could, at some other day, continue this discussion, because they have a lot to tell us about this. 

I am going to go as quickly as I can. One of the things that I 

noticed in most of your testimony, you are really talking a lot about 

fees. I heard very little about net return. If a fee is 1⁄2 point and 

the return is 10 percent; if the fee is 1 point and the return is 20 

percent, I think that is what is most important to the ultimate beneficiary. I would really like to get into this a lot more. 

Also, some funds obviously have higher returns than others. We 

have been talking kind of like everything is kind of the same, and 

that kind of information needs to be disclosed. 

We have two members—I would like to yield my time to Mr. 

Kline and Mr. Castle. They have some specific questions they 

would like to ask, if that is all right, Mr. Chairman. 

Mr. KLINE. I thank the gentleman for yielding. 

Just a quick comment. I couldn’t help but notice, Mr. Certner, 

when you were talking about the AARP survey, that you had an 

astonishing number of participants who didn’t know the names of 

their funds; didn’t know if they were equity; didn’t know if they 

were bond. And yet we are going to give them numbers on recordkeeping, and office supplies and so forth that I think is just a tad 

too much. 

54

Clearly, a subject of interest that has gone up and down the 

table is the issue of bundling. There must be some advantages to 

bundling. I wonder, Mr. Minsky, if you could tell us, is there an 

advantage or should we just spread this all out in a big laundry 

list? 

Mr. MINSKY. Thank you, Congressman. 

I think it is a difficult question for me to answer because I am 

not a service provider, but let me give you my perspective as a plan 

sponsor, which is that I think in any arrangement, it is really degrees of bundling. I have yet to see in my experience any relationship with a service provider that is completely unbundled. There 

are always some services that are included and some that are not. 

So for me, it is really more a question of the level of transparency, and that is what the business model is. I think for plan 

sponsors of different sizes, the degree of bundling or unbundling 

that makes sense will vary. For each individual situation, it will 

vary. I think Mr. Chambers raised a really interesting point, with 

a much smaller plan than ours, which is that they had a competitive process. They saw a number of business models, some that 

were more bundled than others. 

Ultimately, they chose a service provider that was slightly more 

expensive than the least-bundled one. My guess is that for them, 

that made a lot of sense because of the services being provided. I 

think that is an appropriate decision for a plan sponsor and a plan 

fiduciary to make. 

Mr. KLINE. Thank you. 

Mr. CHAMBERS. Could I comment just briefly on that? 

Chairman MILLER. I am very concerned about our time for responses to these from other members. Excuse me. 

Mr. CASTLE. I will be brief, and I will submit a question in writing, which you can respond to. It is a little bit off the subject, perhaps, so I will just state what it is going to be about. 

I think we basically are running into what is going to be a crisis 

in this country. I speak to many retired individuals or people getting ready to retire who believe that Social Security is going to be 

sufficient for them to live on. I think Mr. Miller in his opening 

statement indicated the amount of money that people have in their 

401(k) plans, and while a lot of people have 401(k) plans, there are 

people who do not have 401(k) plans. We can worry about the actual information which is reported to them, which is what the legislation is all about, and I have no particular judgment about that, 

except that hopefully competition would make that work. I think 

it should be clearer than it is. 

But I am very concerned about what we are doing to make sure 

that people understand that they are not going to have a defined 

benefit, that Social Security probably will not be enough, and they 

better have a 401(k) plan for their future, and make absolutely 

sure that that is being told to these folks out there. I am not just 

worried about the details of the investment. I am worried about the 

people who are not in it. 

Mr. Certner indicated how many people are in it, but I am worried about all those who are not in it, who need to be in it. And 

they need to understand how much money they are going to need. 

Do they really understand what happens at the end of it when they 

55

get to be 65 years of age and they have $20,000 in the plan, what 

do they expect to get from that? 

So I am going to ask you what is being done about spreading 

that information, because we need to do something in this country 

if we are going to be able to meet the needs of our senior citizens 

when they retire. 

Chairman MILLER. Mr. Andrews? 

Mr. ANDREWS. Thank you. 

We have read your testimony. We appreciate it. This is the lightning round. 

So Mr. Scanlon, am I correct in reading your testimony that you 

do think there should be a distinction between what is disclosed to 

plan sponsors and what is disclosed to participants. Is that correct? 

Mr. SCANLON. Yes, and let me explain that. We believe that plan 

sponsors, being fiduciaries, are in a position to disclose information 

to their participants in a format that allows comparability——

Mr. ANDREWS. Right. 

Mr. SCANLON [continuing]. And allows the individual participant 

to make the best choices against other competing choices. 

Mr. ANDREWS. I do appreciate it. I didn’t want to rush you. 

Mr. Minsky, Mr. Scanlon suggests a disclosure to employees, 

which if I understand it, has three pretty simple categories: recordkeeping, money management and other. What is wrong with that? 

What would be wrong with presenting those three generic categories? 

Mr. MINSKY. I am not sure that anything is inherently wrong 

with that. It is just that the devil is in the details with regard to 

‘‘other.’’ My only concern is that we not provide participants with 

disclosure that confuses them and ultimately leads to them making 

irrational decisions. 

Mr. ANDREWS. And finally, very quickly, Mr. Thomasson, do you 

support requiring funds to offer an index fund as one of the options 

for investors? 

Mr. THOMASSON. Thank you, Congressman. 

I might pass that over to Mr. Chambers, who is the investment 

advisor. 

Mr. ANDREWS. Do you, Mr. Chambers? 

Mr. CHAMBERS. Frankly, sir, I don’t believe that it is necessary. 

At the same time, I think that index funds would be far more prevalent in 401(k) plans than they are today if H.R. 3185 were enacted, simply because the disclosures would lead people to select 

index funds. 

Mr. ANDREWS. Thank you very, very much. 

Gentlemen, thank you. 

Chairman MILLER. Thank you again. My apologies. These votes 

were supposed to be here later this afternoon, but here we are this 

morning. I thank you very much for taking time to come before the 

committee. 

We will keep the record open for 14 days for those who want to 

make submissions. We will be contacting you with some questions 

that I know that I have. So thank you very much. 

[The statement of Mr. Altmire follows:]

56

Prepared Statement of Hon. Jason Altmire, a Representative in Congress 

From the State of Pennsylvania 

Thank you, Mr. Chairman, for holding this hearing on the 401(k) Fair Disclosure 

for Retirement Security Act of 2007 (H.R. 3185). 

As we discovered in our previous hearing on 401(k) plans, the fees associated with 

these plans vary greatly and can have a significant impact on the amount of money 

participants are able to accumulate in their plans. Further, because 401(k) plans 

have become the primary way that most Americans save for retirement, the amount 

of money employees are able to accumulate in these plans directly relates to their 

retirement security. 

I am pleased that Chairman Miller has offered legislation that will increase the 

disclosure of 401(k) plan fees, potentially helping plan sponsors and plan participants make better investment decisions. I look forward to hearing more from our 

witnesses on how the specific provisions in the 401(k) Fair Disclosure of Retirement 

Security Act will impact 401(k) plan administrators, sponsors and participants. In 

particular, I am interested in hearing more about what amount of information 

should be disclosed to plan sponsors and plan participants. 

Thank you again, Mr. Chairman, for holding this important hearing. I yield back 

the balance of my time. 

[Additional submissions from Mr. McKeon follow:]

Prepared Statement of the American Benefits Council and American 

Council of Life Insurers and Investment Company Institute 

The role of section 401(k) plans in providing retirement security has grown tremendously over the last 25 years and is continuing to grow. In that light, legislative 

and regulatory actions with respect to such plans similarly take on an increased importance. Applicable legislation and regulations should ensure that these plans function in such a way as to help participants achieve retirement security. At the same 

time, we all must bear in mind that unnecessary burdens and cost imposed on these 

plans will slow their growth and reduce participants’ benefits, thus undermining the 

very purpose of the plans. 

It is in this spirit that the American Benefits Council (the ‘‘Council’’), the American Council of Life Insurers (‘‘ACLI’’), and the Investment Company Institute 

(‘‘ICI’’) submit this statement with respect to H.R. 3185, the 401(k) Fair Disclosure 

for Retirement Security Act of 2007. 

The Council is a public policy organization representing principally Fortune 500 

companies and other organizations that assist employers of all sizes in providing 

benefits to employees. Collectively, the Council’s members either sponsor directly or 

provide services to retirement and health plans that cover more than 100 million 

Americans. 

The ACLI represents 373 member companies accounting for 93 percent of the life 

insurance industry’s total assets in the United States. Life insurers are among the 

country’s leaders in providing retirement security to American workers, providing 

a wide variety of group annuities and other products, both to achieve competitive 

returns while retirement savings are accumulating and to provide guaranteed income past retirement. 

ICI is the national association of U.S. investment companies, which manage about 

half of 401(k) and IRA assets. ICI advocates policies to make retirement savings 

more effective and secure. 

Legislative and Regulatory Processes 

At the outset, we want to address the legislative and regulatory processes with 

respect to plan fees. Chairman Miller has introduced H.R. 3185, which addresses 

the disclosure of plan fees by a service provider to a plan administrator, as well as 

the disclosure of plan fees by a plan administrator to participants. Other Committees and Members have also indicated interest in exploring the issues related to disclosure of plan fees. In addition, the Department of Labor has been working on regulatory initiatives with respect to plan fees. The Department’s initiatives address 

three issues: the same two issues addressed by Chairman Miller’s bill plus plans’ 

obligations to report plan fees to the Department and the Internal Revenue Service 

on the annual Form 5500. 

We have been very active participants in the legislative and regulatory processes. 

For example, we have participated with other trade groups in providing extensive 

input to the Department on their initiatives. 

57

The Department is nearing completion of the Form 5500 project. The Department 

will likely, in the next month or two, issue proposed regulations relating to disclosure of plan fees by service providers to plan fiduciaries. We understand that the 

Department intends to issue proposed regulations on disclosures to plan participants in late 2007 or early 2008. 

We support improvement to the rules regarding plan fee disclosure. Effective plan 

fee disclosure to participants can enable them to understand their options and 

choose the investments best suited to their circumstances. Disclosure to plan fiduciaries equips fiduciaries to negotiate and shop for the best services at reasonable 

prices. In addition, clarity with respect to both sets of rules can provide plan fiduciaries with a means of helping their participants without incurring potential liability. 

In the effort to improve the fee disclosure rules, we believe that it is very important that the legislative and regulatory processes be coordinated. For example, it 

would be very harmful for the system for one set of rules to apply for a year or two, 

only to be supplanted by a different set of rules. The additional programming and 

data collection costs caused by such a scenario would be enormous, not to mention 

the resulting confusion among participants and plan fiduciaries. Such cost would, 

of necessity, be absorbed by plan participants or possibly to some extent by plan 

sponsors. Plan sponsors could react by reducing benefits and possibly even eliminating or failing to adopt plans; plan participants would simply receive smaller benefits, which would be very unfortunate. 

Accordingly, we urge both Congress and the Department to consider how best to 

coordinate their efforts to avoid very adverse consequences. 

Plan Fee Issues 

We welcome this opportunity to share our views on H.R. 3185. We very much appreciate the open manner in which Chairman Miller has invited input on his bill. 

We present our views in the context of a list of principles that we believe should 

guide the development of plan fee disclosure rules. This is not by any means a comprehensive list; we would, of course, be very pleased to work with the Committee 

on additional important issues related to plan fee disclosure. 

Disclosure to Plan Participants 

At the outset, it is critical to emphasize that the disclosure rules should take into 

account the sharply different circumstances of participants and plan fiduciaries. 

Participants need clear, simple, short disclosures that effectively communicate the 

key points that they need to know to decide whether to participate and, if so, how 

to invest. Excessive detail can prevent employees from reading or understanding the 

disclosure and can also serve to obscure key points. Plan fiduciaries need more detailed information since it is their duty to understand fully the options available and 

to make prudent choices on behalf of all of their participants. 

We support improved disclosure of plan fees to participants (and improved disclosure to plan fiduciaries, as discussed below). As noted, participants need disclosures 

that are simple and concise. At the same time, however, participants need to understand the fees they are paying within the context of the investment and other services they are receiving. This means that participants must recognize that fees are 

only one factor to consider in choosing an investment option. Fee disclosure must 

not be elevated in a manner that discourages plan participants from considering potential or expected investment returns, their projected retirement date, their risk 

tolerance, and other factors when making investment decisions, as well as decisions 

regarding participation in, contributions to, and distributions from the plan. 

In this context, we offer the following principles that we believe should guide plan 

fee disclosure rules with respect to participants. In connection with each principle, 

we discuss briefly our concerns with H.R. 3185. 

• The disclosure needs to be short, simple, and easy to understand. As noted, 

H.R. 3185 requires extensive fee disclosure. We believe that participants will be far 

more likely to read and use information that is shorter and simpler. One possible 

solution could be to require affirmative delivery of basic fee information and make 

more comprehensive fee information available on request. 

• Disclosure should include key information important to participants, generally 

including, for example, the investment objectives, risk level, fees, and historical returns of investment options. Undue emphasis on fees will only mislead participants 

by elevating fees above other equally or more important factors. We are concerned 

that the volume of fee information required by H.R. 3185 outstrips the volume of 

other information, such as information regarding investment objectives, historical 

return, and risk level. This over-emphasis on fees could cause participants to make 

imprudent choices or possibly could cause them not to participate in the plan. 

58

Again, one possible solution could be to require affirmative delivery of basic fee information and make more comprehensive fee information available on request. 

• Reform of existing rules regarding electronic communication is needed to facilitate less expensive, more efficient forms of communication, including the use of 

internet and intranet postings. Consideration should be given to adopting rules at 

least as workable as the Internal Revenue Service’s rules regarding electronic communication. Such rules ensure that electronic communications are only used with 

respect to participants who can access such communications; at the same time, the 

Service’s rules are also generally workable for plans. H.R. 3185 does not address 

electronic communication. Without the effective ability to use electronic communication, compliance with extensive new disclosure rules would be unreasonably costly 

and burdensome. 

• Participant-level disclosure rules should apply to all participant-directed plans 

not just 404(c) plans. H.R. 3185 applies the disclosure rules to all participant-directed plans. 

• Fee information should be provided upon enrollment and updated annually. 

H.R. 3185 is generally consistent with this principle. However, on a related note, 

it is critical that the annual benefit statement required by H.R. 3185 be coordinated 

with the existing benefit statement requirements. Fee information should be disclosed in the manner in which fees are charged. Artificial division of a single fee 

into components that are not available separately is costly and serves no purpose. 

This issue applies to disclosure both to participants and to plan fiduciaries. Because 

it applies more acutely in the latter context, it is discussed below. 

• Where disclosure of exact dollar amounts would be costly, the use of estimates 

or examples based on prior year data should be permitted. H.R. 3185 can be read 

to require the exact dollar amount of fees to be determined for plans and for participants. This could be enormously costly. For example, for participants moving in and 

out of investment options all year, determining the precise dollar amount of fees 

charged for the year would require tremendous work as well as new recordkeeping 

systems. Very helpful fee information can be conveyed efficiently through the disclosure of expense ratios and reasonable estimates; the cost of turning those estimates 

into precise numbers would be very high and clearly not justified by the marginal 

difference between a reasonable estimate and the exact number. 

• Plan fiduciaries should retain flexibility to determine the format for disclosure 

based on the nature, expectations, and other attributes of their workforce. H.R. 3185 

generally does not require a specific format for disclosure. 

• The rules must be flexible enough to accommodate the full range of possible investment options. H.R. 3185 establishes a very detailed disclosure regime that will 

not be able to cover all the products that are or may be used in the 401(k) plan 

market. While it seeks to set out specific disclosure elements for many investment 

products used in 401(k) plans today, the bill’s framework does not easily accommodate certain other products, such as those providing a guaranteed rate of return 

based on the general assets of the provider. The framework also may be inadequate 

or inappropriate to address new types of products that may develop. We would be 

pleased to continue working with this Committee on how to address these issues. 

Disclosure by Service Provider to Plan Fiduciary 

We support improved disclosure of plan fees by service providers to plan fiduciaries. Plan fiduciaries need fee information in order to negotiate and shop effectively for services. In this regard, we offer the following guiding principles and related comments on H.R. 3185. 

• Fee information should be disclosed in the manner in which fees are charged. 

Artificial division of a single ‘‘bundled’’ fee into components that are not available 

separately serves no purpose. Service providers should be required to disclose what 

services are included in the ‘‘bundle’’ and what services can be purchased separately 

by the plan fiduciary. H.R. 3185 can be read to require ‘‘unbundling the bundle’’, 

i.e., to require that a service provider ascribe separate fees to services that are not 

sold separately by the service provider. This is not meaningful information. It is 

burdensome and costly to produce; it has no significance since the services cannot 

be purchased separately from the service provider; and accordingly, it would not further fiduciaries’ understanding of their options. 

Plan fiduciaries can reasonably make the decision whether to purchase services 

on a bundled or unbundled basis. Some fiduciaries believe, for example, that bundling provides economies of scale and facilitates efficient shopping for service providers, especially with respect to plans maintained by small employers. In some circumstances, it may be easier and more efficient to compare service providers that 

provide bundled services than to construct a full array of plan services from mulVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
59

tiple vendors and to try to compare services from such vendors that are significantly 

different in scope. 

A plan fiduciary purchasing services on a bundled basis retains the duty to determine if (1) the bundled package of services is appropriate for the plan, and (2) the 

bundled price is reasonable, both initially and over time. This will require the plan 

fiduciary to monitor, for example, whether any asset-based fees continue to be reasonable, especially with respect to services that do not vary based on the size of the 

plan assets. Again, for some fiduciaries, those monitoring tasks may be simpler in 

the bundled context than where there are multiple providers with respect to a single 

plan. 

• Where disclosure of exact dollar amounts would be costly, the disclosure of fee 

formulas should be permitted. As in the case of participant disclosure, disclosure of 

exact fee dollar amounts to plan fiduciaries could be extremely expensive in circumstances where fees are based on a percentage of assets. Plan fiduciaries only 

need the fee formula (such as the basis points charged); that gives them all the tools 

they need to evaluate the cost of the service. The high cost of calculating exact dollar amounts clearly outstrips the value of such exactitude. 

• Disclosure of revenue sharing received by plan service providers from third parties should be required. Disclosure of the affiliation between two or more service 

providers should also be disclosed. However, payments from one service provider to 

another affiliated service provider are not revenue sharing and should not be required to be disclosed. H.R. 3185 can be read to require payments among affiliates 

to be disclosed. Affiliates are part of one economic unit, so that any explicit payments between them may not reflect an arm’s length transaction and thus may have 

little or no significance. Moreover, financial relationships between affiliates can be 

complex, including numerous non-market transactions, such as the exchange of 

services without any charges; in this context, calculating the value of ‘‘revenue sharing’’ would require identifying and valuing all of these non-market transactions and 

would thus be enormously difficult and uncertain. 

In short, determining the value of intra-affiliated group payments would be costly 

and filled with speculation and uncertainty. Also, in light of the relationship between the entities, such payments are not revenue sharing in a true sense. We look 

forward to working further with the Committee on this issue. 

• Fees paid by plan sponsors should not be subject to any of the disclosure rules. 

Where plan assets are not involved, ERISA’s rules are not implicated. H.R. 3185 

should be clarified in this regard. 

• Fees charged by service providers to plans should be disclosed. Fees charged to 

service providers by their suppliers have no relevance to plans and should not be 

required to be disclosed. H.R. 3185 can be read to require disclosure of a service 

provider’s transactions with almost all of its suppliers, which could be a huge number. These suppliers have no contractual relationship to the plan, thus making the 

massive disclosure requirement meaningless for the plan. 

Investment Option Requirement 

H.R. 3185 requires one specific type of index fund to be offered under all participant-directed plans. This would set a dangerous precedent, as it would (1) substitute 

Congress’ current judgment regarding investments for the judgment of plan fiduciaries who are familiar with their workforce and (2) establish an investment rule 

based on today’s thinking that does not take into account future investment trends 

and principles. This provision could also send a signal to participants that this particular investment option is the best one, despite the fact that another option might 

better fit their circumstances. 

We urge that this provision be deleted. 

‘‘Conflicts of Interest’’

H.R. 3185 requires disclosure of conflicts of interest to both participants and plan 

fiduciaries. Conflicts of interest are prohibited by ERISA’s prohibited transaction 

rules, so it is not clear which if any permitted practices must be disclosed under 

these rules. The disclosure rules in H.R. 3185 may simply be aimed at requiring disclosure that a service provider is selling its own products or the products of an affiliate or business partner. If so, it is very important that a different term—- other 

than ‘‘conflict of interest’’—- be used. As long as a service provider is not acting as 

a fiduciary, selling its own products or those of an affiliate or business partner is 

simply selling, not a conflict of interest. Labeling such actions as a conflict of interest is technically incorrect and will create confusion for all parties, including participants who could be unnecessarily discouraged from participating in the plan. 

60

Effective Date 

Any revisions to the fee disclosure rules will require (1) interpretation and implementation by the Department of Labor, (2) extensive systems changes, and (3) development of effective communication methods. Accordingly, it is critical that legislation not be effective prior to plan years beginning at least 12 months after the 

publication of final regulations interpreting the legislation. 

[FILED ELECTRONICALLY], 

July 24, 2007. 

U.S. Department of Labor Employee Benefits Security Administration, Office of Regulations and Interpretations, Constitution Avenue, NW, Washington, DC. 

Attention: Fee Disclosure RFI

Re: Fee and Expense Disclosures to Participants in Individual Account Plans

DEAR SIR OR MADAM: The undersigned twelve organizations representing both 

employer sponsors of defined contribution retirement plans as well as the financial 

institutions that provide services to such plans respectfully submit the attached 

joint recommendations in response to the Request for Information (‘‘RFI’’) issued by 

the Department of Labor (the ‘‘Department’’) regarding fee and expense disclosures 

to participants in individual account plans, published at 72 Fed. Reg. 20,457 (April 

25, 2007). We appreciate the opportunity to provide input on this important matter. 

Several of the undersigned organizations worked together last year to develop and 

submit joint recommendations and a fee and expense reference tool with respect to 

the Department’s ongoing project under ERISA Section 408(b)(2) related to fee disclosure between plan fiduciaries and service providers. With the same goal of 

achieving consensus on how to enhance fee disclosure, an even broader group of interested organizations has worked together over the past several months to develop 

joint recommendations regarding participant-level disclosure of defined contribution 

plan fee information. On this important issue, our organizations believe the Department has both the statutory authority and institutional expertise to improve disclosure of fee information to participants without new legislation. We hope the attached recommendations, which have the support of this broad array of organizations active in the retirement policy arena, will be of significant use to the Department as it considers what changes to current disclosure requirements may be appropriate. 

Our organizations would welcome the opportunity to meet with Department officials to discuss the attached recommendations and will plan to be in contact in this 

regard. In the meantime, please feel free to contact any of the individuals and organizations listed below. 

Sincerely, 

AMERICAN BANKERS ASSOCIATION, 

AMERICAN BENEFITS COUNCIL, 

AMERICAN COUNCIL OF LIFE INSURERS, 

COMMITTEE ON INVESTMENT OF EMPLOYEE BENEFIT ASSETS, 

ERISA INDUSTRY COMMITTEE, 

FINANCIAL SERVICES ROUNDTABLE, 

INVESTMENT COMPANY INSTITUTE, 

NATIONAL ASSOCIATION OF MANUFACTURERS, 

PROFIT SHARING/401(K) COUNCIL OF AMERICA, 

SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION, 

SOCIETY FOR HUMAN RESOURCE MANAGEMENT, 

U.S. CHAMBER OF COMMERCE. 

Joint Submission to the Department of Labor:

Recommendations for Participant-Level Disclosure of Defined Contribution 

Plan Fee Information 

• Disclosure Regarding Fees is Important to Defined Contribution Plan Participants. An increasing number of Americans rely on employer-sponsored defined contribution plans (such as 401(k)s) to help them accumulate the savings they will need 

for a secure retirement. Many defined contribution plan participants make their 

own investment elections from among the options offered by the plan and it is important that they have appropriate information to assist them in making these decisions. Disclosure about the fees associated with the plan and its investment options 

are an important component of this information. All defined contribution plans have 

costs. Participants often pay these costs under arrangements that differ from plan 

to plan. We believe it is beneficial for participants to have a general understanding 

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1DOL has authority under ERISA Section 505 to require that all participants who have the 

right to direct investment of their accounts have basic information about plan investment options. ERISA Section 505 grants DOL authority to issue such regulations as are necessary or 

appropriate under Title I of ERISA, which includes the statute’s fiduciary responsibility requirements. In addition, ERISA Section 109 grants DOL authority to prescribe the content of various 

reports and documents, including materials furnished or made available to participants. 

of their plan’s fee structure and the overall magnitude of the costs they bear as well 

as to receive fee information that is material in selecting specific investments for 

their accounts. Disclosure requirements should be evaluated based on whether information provided will be useful to typical plan participants in making investment selections. The benefits to participants should be real rather than hypothetical. More 

disclosure will not always be better. Under existing legal standards, plan fiduciaries 

(typically the employer plan sponsor) and service providers have worked hard to 

provide participants with meaningful, clear and concise information about key characteristics of plan investment options, including fees, and they continually seek to 

enhance these disclosures. Our organizations are eager to work with policymakers 

to improve existing legal standards regarding disclosure, where appropriate, to ensure that participants have information to make sound investment decisions. Any 

prospective enhancements to current law should foster simplicity, flexibility and efficiency in fee disclosure so that the result is a stronger defined contribution system 

for plan participants rather than one weakened by complex and costly disclosure 

that fails to serve participants’ interests. • Enhanced Disclosure Requirements Regarding Fees Should Extend to All Participant-Directed Retirement Plans. New fee disclosure requirements should apply 

to all participant-directed individual account retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) rather than only to ERISA 

404(c) plans. In this regard, the Department of Labor (DOL) has the authority to 

promulgate disclosure standards for all participant-directed individual account retirement plans under ERISA.1 The focus of policymakers should be on improving 

disclosure practices in all participant-directed plans, as this will serve participants’ 

interests more than a detailed reworking of the ERISA 404(c) regulations. • Fee Disclosure to Participants Serves Different Needs Than Fee Disclosure to 

Plan Fiduciaries. The purposes behind fee disclosure to plan fiduciaries and plan 

participants are fundamentally different. In selecting and monitoring service providers and in selecting a plan’s menu of investment options, plan fiduciaries engage 

in acts subject to ERISA-imposed obligations, including to act prudently and in the 

best interest of participants, to pay no more than reasonable compensation and to 

avoid prohibited conflicts of interest. Such fiduciary determinations are aided by 

having detailed information about the services provided, fees charged and compensation earned by plan service providers (including through revenue sharing from 

third parties). Participants, on the other hand, do not select among service providers 

or determine the menu of plan investment options. They choose investments for 

their account from a menu of plan investment options selected by the plan fiduciary. 

The fees associated with the plan and its investment options are only one of a number of important criteria for making sound investment decisions. The voluminous 

and detailed information about plan fees and provider compensation (including revenue sharing) that is typically appropriate for plan fiduciaries to consider will not 

help participants select among plan investment options. Rather, providing this detail to plan participants could impair sound decision-making by overloading them 

with information, elevating fees above other investment selection criteria (which can 

produce poor investment decisions) and contributing to the decision paralysis that 

keeps some participants from joining plans. In light of the many other disclosures 

plans are required to provide to participants, an additional notice that is unduly detailed or technical will often be a source of aggravation to participants, reducing 

their interest in plan information generally. Policymakers should keep in mind the 

distinct purposes behind plan fiduciary and plan participant fee disclosure as they 

craft new participant disclosure rules. 

• Disclosure to Participants Should Include Expenses That Affect Participants’ 

Choices. Participants should be informed of the asset-based fees they will be 

charged for participating in the plan (typically expressed as a rate, in basis points), 

whether such fees are levied by particular investment options or charged regardless 

of the specific investment options selected by the participant. Fee disclosure to participants about investment options should also include any additional per-participant charges associated with the investment, such as charges for buying, selling or 

redeeming the investment (such as front- and back-end sales charges, redemption 

fees and market value adjustment charges). Plans also should inform participants 

about the existence of any plan administration or ongoing service charges that parVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
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ticipants will pay on a per account (rather than an asset-based) basis. In some 

plans, asset-based charges on investments not only finance investment management 

but also defray other plan costs (such as plan administration). Where this is the 

case, participants should receive a general disclosure that the asset-based fees on 

investments defray other plan costs. More detail about the components of assetbased fees is not relevant to the total cost of investing, which is the information participants need. By disclosing the rate of asset-based fees together with information 

on any additional per account administrative charges, participants will be provided 

with a clear understanding of the costs of investing under the plan. Participants 

should also be informed that some transactions or services (e.g., plan loans or use 

of investment advice, managed account or brokerage window services) will result in 

additional charges to participant accounts, the specifics of which will be disclosed 

at the time the participant uses these services. Because most of these transactional 

charges will never apply to most participants, requiring detailed disclosure to all 

participants as to the specifics of such charges would make fee disclosure cumbersome and obscure the core information. Detailed information about costs for participant-initiated transactions and services should be made available upon participant request and provided at the time of the transaction. Plan fiduciaries should 

have flexibility to determine the precise form of the key fee disclosures discussed 

herein based on the facts and circumstances, but they will typically be expressed 

as a rate (in basis points) and/or as an illustrative dollar charge. • Fee Information Should Appear Alongside Other Key Information Participants 

Need to Make Investment Decisions. Fees should be disclosed along with other information participants need to make informed investment decisions. Fee information 

should not be elevated so as to suggest that fees are the most important factor in 

selecting investments from among the plan’s options. An undue focus on fees in new 

required disclosures might encourage participants to select the plan’s lowest-cost investment option, which may not be the best choice for a participant. Instead, fees 

associated with a plan’s investment option should be disclosed together with other 

key information: the option’s investment objective and product characteristics, its 

historical performance and risks and the identity of the investment advisor or product provider. This information should be conveyed in clear and simple terms, and 

plan fiduciaries should have flexibility to determine the format in which the information is communicated to participants. Web-based disclosure of information about 

investment options will often be the most useful because it permits participants to 

browse multiple interrelated pieces of information and access more detailed information about a given investment option or topic of interest to them. • Policymakers Should Be Sensitive to Costs When Imposing New Disclosure Requirements. While participant disclosure should provide sufficient information on 

fees and other key investment option characteristics for participants to make sound 

investment decisions, new disclosure requirements come with added costs. Such 

costs must be justified in terms of providing a material benefit to participants selecting among plan investments. The costs of some potential disclosure requirements 

would simply be exorbitant and unjustified. Any new disclosure requirements necessarily will impose expenses and burdens on both plan sponsors and plan service 

providers and will come on top of the multitude of new and costly disclosures required under the Pension Protection Act of 2006. The costs of new disclosure requirements are likely to be reflected in higher prices for plan administrative services, which are payable from plan assets. As a result, in many defined contribution 

plans the added costs of new disclosure requirements are likely to be borne in substantial part by plan participants. Plan fiduciaries and providers also will be concerned that expanded disclosure requirements could result in new and costly liabilities, a result that would further increase expenses in the system. New disclosure 

costs and potential liabilities could deter some small employers from sponsoring a 

qualified retirement plan for employees. Given these considerations, it is imperative 

that new participant disclosures be focused squarely on providing participants with 

information that will actually be useful in making investment decisions. 

• Use of Electronic Technologies to Provide Plan Investment and Fee Information 

Should Be Strongly Encouraged. One important way to reduce costs and provide 

more useful information is to take full advantage of electronic mechanisms for delivering and providing access to information. New rules should move beyond existing 

regulations to permit, and indeed encourage, employers to use internet or intranet 

posting to deliver and provide access to fee and other information on plan investment options. (We recognize that certain participants without computer access will 

continue to need access to paper copies.) Notifying participants about the posting 

or availability of required disclosures on websites will typically be the most inexpensive method of delivery and should be promoted under new disclosure rules. As is 

common today, plan fiduciaries will work with service providers to provide required 

63

information on plan investment options to participants and should be able to connect participants directly to content on the websites of service providers (via clickthrough web links or otherwise) rather than having to maintain all information on 

plan investment options and fees on their own internet or intranet site. 

• Disclosure of Fees and Other Plan Investment Information Should Facilitate 

Comparisons. While plan fiduciaries should retain flexibility to determine the specific format for communicating fee and other plan investment information to their 

particular participant population, they should strive to disclose the information in 

a form that facilitates comparison across the plan’s investment options. At the same 

time, unique features of particular investment options also would have to be communicated. Web-based disclosure methods and tools are likely to be the most useful 

as they can visually convey the full range of plan investment options while allowing 

participants to access more detailed information about each option via click-through 

web links. 

• Participants Should Have Access to Fee and Other Investment Information at 

Enrollment and Annually Thereafter. Participants should receive disclosure about 

plan fees (asset-based fees, transaction charges associated with investment options, 

any separate per account administrative fees and the potential for participant-initiated transaction and service charges) and the other key characteristics of investment options when they enroll in the plan and select plan investments for the first 

time. Some plans, particularly ones that have formulas for reducing plan fees as assets grow, will not know in advance the exact asset-based or per account fee levels 

that participants can expect in the year ahead. As a result, plan fiduciaries should 

be permitted to use fee levels from the most recently concluded plan year in the fee 

disclosures they make to participants at enrollment. In addition, on an annual basis, 

plan fiduciaries should inform participants where they can find or how they can request updated information on fees and other characteristics of plan investment options (by providing a click-through web link or directing them to an internet or 

intranet website, telephone number or plan official). Plan fiduciaries should have 

flexibility as to whether to make this annual disclosure—regarding where participants can find or how they can request such information—a stand-alone communication or a component of an existing disclosure document. Plan fiduciaries should ensure that the underlying general information on fees and other characteristics of 

plan investment options is updated annually to reflect any changes. 

• Plans Should Disclose to Participants Administrative and Transaction Dollar 

Charges Deducted from Participant Accounts. Participants should receive disclosure 

regarding any administrative or transaction flat dollar charges that have been deducted from their accounts. Such charges would include per account flat dollar 

charges imposed on all participants for the costs of plan administration as well as 

any dollar charges that result from purchases or sales of particular investments or 

from participant-initiated transactions or services (such as plan loans). Plan fiduciaries should have flexibility as to the means and timing of such disclosures. For 

example, some fiduciaries may include this information in quarterly benefit statements while others may include it in a confirmation notice following a particular 

transaction. 

• Participants Have Access to Education Materials that Provide Context for Fee 

and Other Plan Investment Information. Participants make the best use of information about their plan investment options (including information regarding fees) 

when this information builds on basic investment education. The Pension Protection 

Act of 2006 (PPA) requires that participants have access to investment education 

materials and a new requirement in this area is not needed. Under PPA, the quarterly benefit statements provided to participants who direct their retirement plan 

investments must include a notice directing participants to a Department of Labor 

(DOL) website on individual investing and diversification (http://www.dol.gov/

ebsa/investing.html). This website includes the DOL’s brochure, A Look at 401(k) 

Plan Fees. Plan sponsors may wish to direct participants to this resource at other 

times, including at enrollment when they provide participants with initial information on plan investment options and fees. Plan sponsors will also likely want to continue to draw on investment education materials that they and their service providers develop. Given the extensive work by the private sector in the investment 

education area and the new prominence of the DOL’s individual investing website 

as a result of the PPA requirement, we recommend that the DOL establish a formal 

and periodic process to seek private-sector input regarding the contents of its site. 

64

Prepared Statement of Larry H. Goldbrum, Esq., General Counsel, the 

SPARK Institute 

Chairman Miller, Ranking Member McKeon, honorable members of the Committee, my name is Larry Goldbrum and I am General Counsel of The SPARK Institute, an industry association that represents the interests of a broad based cross 

section of retirement plan service providers, including members that are banks, mutual fund companies, insurance companies, third party administrators and benefits 

consultants. It is an honor for me to share our organization’s views on the proposed 

401(k) Fair Disclosure for Retirement Security Act of 2007. 

Although The SPARK Institute1 has publicly supported and promoted meaningful 

fee disclosure by employers, retirement plan service providers and investment providers, we are concerned about the unnecessarily burdensome and costly approach 

taken in the 401(k) Fair Disclosure for Retirement Security Act of 2007 (the ‘‘Bill’’). 

We believe the Bill will ultimately serve to weaken, not strengthen, the defined contribution system. The Bill, as currently proposed, will discourage new plan formations, will significantly increase plan costs, will discourage employee participation 

and savings, and will create fertile ground for frivolous lawsuits brought by plaintiffs’ lawyers primarily seeking settlements from perceived deep pockets. 

Background 

The disclosure provisions in the Bill require plan sponsors to make certain disclosures to plan participants and for plan service providers to make certain disclosures 

to plan sponsors. Earlier this year, the Department of Labor’s (‘‘DOL’’) issued a Request for Information (‘‘RFI’’) regarding plan participant disclosures. Included in our 

response to the RFI, were guiding principles that we believe should be followed by 

legislators and regulators in developing any participant disclosure rules and regulations. The principles are: 

1. Fee information is only one of many data points and arguably not the most important one that participants should consider in making investment decisions. 

2. Over-emphasis on fees and expenses may lead to poor investment decisions, as 

well as lower employee participation and contributions to employer sponsored retirement plans. 

3. Participant fee disclosure must be short and simple to have any chance of being 

effective. 

4. Only information that is reasonably likely to be read and influence the investment decisions of otherwise passive participant investors in choosing among their 

plans’ investment options should be included in any required disclosure. 

5. Participants will ultimately bear the costs of any required disclosure and access 

to additional information. 

Fee disclosure requirements should neither favor any one retirement plan or investment industry segment nor disrupt the current competitive balance among such 

service providers. 

The following is a section-by-section analysis of our views regarding some of the 

more significant provisions of the Bill. 

Plan Sponsor Fees and Conflicts Disclosures 

A. General disclosure requirements 

A plan may not enter into a contract involving compensation to a service provider 

of $1,000 or more unless the ‘‘plan administrator’’ receives advance written disclosure from the service provider of certain required information. The required disclosures include identification of who provides the services under the agreement, including affiliates and third parties. Additionally, the disclosures must include: (1) 

a description of the services, (2) an itemized list of the expected annual ‘‘cost’’ of 

each component of such services, and (3) information about amounts paid to affiliates and third parties. Sections 111(a)(1) & (9). 

1. The SPARK Institute represents the interests of a broad based cross section 

of retirement plan service providers, including members that are banks, mutual 

fund companies, insurance companies, third party administrators and benefits consultants. Our members include most of the largest service providers in the retirement plan industry and our combined membership services more than 95% of all 

defined contribution plan participants. 

2. Exiting regulations under ERISA Section 404(c), and the proposed qualified default investment alternative regulations are safe-harbors that plan sponsors are not 

obligated to comply with. 

SPARK Institute Observations—We are concerned that these requirements obligate service providers to disclose proprietary information that will become readily 

available to their competitors. The proposal is extremely broad and would require 

65

record keepers who subcontract out certain services that have nothing to do with 

participant investments to reveal the identity of their suppliers and the financial 

terms of their arrangements. 

The proposal requires disclosure of the ‘‘cost’’ of the services. We presume that the 

reference is intended to mean the cost of such services to the plan or the participant, not the service provider’s costs. We are concerned that the language in the 

proposal is susceptible to confusion and misinterpretation. Additionally, the requirement that the service provider provide an itemized breakdown of the costs of the 

underlying component services will be onerous for bundled service providers. The information required for such breakdowns is generally not available and requiring an 

itemized breakdown is contrary to the bundling concept. 

Additionally, the proposal does not take into account the fact that generally neither the plan nor the plan sponsor enters into agreements with the mutual fund 

companies that manage the funds used by the plans. If the proposal were to require 

such agreements the disruption to plan sponsors, retirement plan service providers, 

and investment companies would be significant. The time and resources necessary 

to obtain such agreements would be staggering. Moreover, it would be unreasonable 

to require retirement plan record keepers to enter into such agreements and make 

the disclosures on behalf of the investment funds selected by a plan. 

B. Required minimum disclosures—The proposal includes a long list of information that must be disclosed by all service providers. The list includes sales commissions, start-up fees, investment management expenses, investment advice expenses, 

estimated trading expenses, expenses for administration and record keeping, legal 

fees, trustee fees, termination or surrender charges, total asset-based fees, 12b-1 

fees, and soft dollars. Section 111(a)(2)(A). Expense estimates can be used if the actual amounts are not known. However, estimates that are later discovered to be materially incorrect must be corrected as soon as practicable. Section 111(a)(2)(B). 

SPARK Institute Observations—We are concerned that the required minimum 

disclosures create a rigid and inflexible list of information that plan sponsors must 

receive from every service provider they deal with. Without restating the reasons 

we provided in other documents, we note that a conceptual framework that allows 

service providers flexibility to customize disclosures for their products and services 

should be established instead of detailed lists of disclosures. 

Additionally, we are concerned that the proposal requires plan specific dollar disclosures or estimates instead of expressly allowing for the requirements to be satisfied by using fee or rate disclosures. Dollar disclosures and estimates of certain fees 

that are driven by factors beyond the control of the service provider can be difficult 

to calculate. Such fees include, for example, loan origination, distribution, and participant investment advice fees. A calculation or estimate of any of such fees is dependant upon decisions made by participants that cannot always be predetermined. 

Additionally, dollar estimates of asset-based fees can vary significantly due to market fluctuation. Service providers will have to monitor their actual fees and compare 

them to their estimates on a regular basis in order to be able to make corrections 

required by the proposal. We are concerned that this entire process creates unnecessary additional work for plan sponsors and service providers when the same goal 

can be accomplished through simple rate disclosures. 

C. Conflicts disclosure—The Bill requires detailed written disclosure regarding 

any potential conflicts that the service provider may have ‘‘due to [a] financial or 

personal relationship’’ that the service provider may have with the plan sponsor, the 

plan or other service providers, and for which the service provider receives payment 

for services. Such disclosure must include information about the use of the service 

provider’s proprietary investment products and whether the service provider receives payments from third parties for making such third parties investment products available. Section 111(a)(3). 

SPARK Institute Observations—We are concerned that the language of this provision is needlessly broad, potentially confusing and susceptible to misinterpretation. 

We are concerned about the references to ‘‘personal relationships’’ and conflicts with 

other service providers which appear to be unnecessary. We believe that a more appropriate provision would be to require service providers to disclose potential conflicts that they may have with the plan, plan sponsor and plan participants as a 

result of financial compensation they may receive from third parties in connection 

with the plans that they service. 

D. Mutual fund share classes—Service providers must disclose that the ‘‘share 

prices’’ of certain mutual funds share classes may be different from the funds’ retail 

share classes. The proposal appears to incorrectly refer to ‘‘share prices’’ instead of 

the expense ratio of the funds. Section 111(a)(4). 

SPARK Institute Observations—Although we generally understand what we presume to be the point of this provision, i.e., to let plan sponsors know that there may 

66

be other share classes offered by a fund, the specificity of the provision causes it 

to miss its objective. Many funds offer multiple non-retail classes of shares (e.g., 

trust and institutional shares) that may be available to retirement plans and cheaper than retail classes. We are concerned that the focus on retail shares will likely 

defeat the purpose of the provision. We also note that the focus of the proposal on 

retail shares suggests that the drafters appear to be operating under the incorrect 

assumption that the expense ratios of retail shares classes are generally lower than 

the expense ratios of share classes used by retirement plans. We are also concerned 

that the assumed underlying purpose of this provision only applies solely to mutual 

funds. We believe that a more appropriate approach would be to establish a general 

conceptual requirement that meets the intended objective. 

E. ‘‘Free services’’—The proposal requires that any service provider that provides 

services ‘‘without charge or for fees set at a discounted rate or subject to rebate’’ 

must disclose the extent to which and the amount such service provider is paid by 

others from participant accounts. Section 111(a)(5). 

SPARK Institute Observations—We are concerned that this provision, which appears to be intended to force disclosure of potential conflicts of interest, is too broad, 

duplicative with other provisions of the proposal, potentially confusing and susceptible to misinterpretation. We note that other provisions in the proposal specifically 

require the disclosure of potential conflicts of interest. Service providers typically 

publish a ‘‘standard’’ price list for their services but generally discount such prices 

due to industry competition. The price lists are generally used for broad marketing 

purposes and during the very early sales stages (e.g., prospecting phase). Service 

providers generally do not publish or disclose publicly the actual fees that they are 

willing to accept for their services because that information is considered confidential and proprietary. Additionally, service providers’ fees are frequently negotiated 

with the plan sponsor and change based on many factors, including for example, the 

plan’s service needs and demographics. We are concerned that virtually every deal 

would be subject to the disclosure requirements of this provision merely because 

service providers generally charge less than the fees set forth in their standard publicly available fee schedules. 

F. Model statements—The DOL is directed to issue a model statement for the 

foregoing disclosures. Section 111(a)(6). 

SPARK Institute Observations—We are concerned that the DOL is being directed 

to accomplish the impossible. As we have stated before in other documents, a one 

size fits all disclosure form that is suitable for and acceptable to the various retirement plan services and investment providers, takes into account all of the products 

and investment structures, maintains the competitive balance in the affected industries, and is cost effect to produce will be virtually impossible to create. Although 

we recognize that service providers will not be required to use the model, we are 

concerned that some plan sponsors may demand it. Consequently, certain service 

providers may be competitively disadvantaged during the sales process. 

G. Annual Disclosure—The written disclosure must be provided at least annually, 

and within 30 days of any material change. Section 111(a)(7). 

SPARK Institute Observations—We are concerned that this requirement is needlessly burdensome. Service providers should not be required to produce the required 

plan specific dollar disclosures or estimates annually unless they materially change 

their rates or their compensation from third parties changes materially. We note 

that ERISA already limits a plan fiduciary’s ability to unilaterally increase the compensation it receives from a plan. A more appropriate alternative may be that service providers should only be required to update their plan sponsor disclosures when 

there are material changes relating to (i) the amounts charged by the service provider to the plan sponsor, the plan or plan participants, or (ii) the compensation the 

service provider may receive from others, including third parties and the funds that 

are used by the plan. 

H. Availability of required disclosures—The written disclosure statement must be 

made available to plan participants upon request, and must be posted on the plan 

sponsor’s website or, we presume, by the service provider for the plan sponsor. Section 111(a)(8). 

SPARK Institute Observations—We are concerned that the proposed disclosure 

requirements include proprietary and confidential information that service providers 

should not be forced to provide to plan participants. Given the specific plan participant disclosure requirements, the role of the plan sponsor, and the nature of the 

required plan sponsor disclosures, the information that is included in the plan sponsor disclosure statement is of little value to plan participants. Moreover, the information that will be included in such statement will be complex, will confuse the vast 

majority of participants, and will be subject to misinterpretation. Plan sponsors and 

service providers should not be put in a position of having to explain this informaVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
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tion to participants who have no control over the plan sponsor level decisions that 

such information is intended to facilitate. Moreover, by requiring such information 

to be provided to participants and posted on websites, the confidential and proprietary information included in such statements will easily become available to each 

service provider’s competitors. Additionally, we are concerned that the confidential 

and proprietary information will become readily available to plaintiffs’ lawyers and 

will create fertile ground for frivolous and costly lawsuits brought by such lawyers 

primarily seeking settlements from plan sponsors and service providers who are perceived to have deep pockets and who are concerned about their public reputations. 

III. Participant Investments and Fees Disclosures 

A. Advance notice of investment options—Generally, participant directed plans 

must provide a written notice to participants at least annually, no less than 15 days 

before each plan year, regarding the plan’s investment options. Such notice must 

also be provided in advance of any change in investment options, or when an employee begins participation in the plan. Section 111(b)(1). The proposal includes a 

long and detailed list of information that must be included in the participant notice. 

Section 111(b)(2). 

SPARK Institute Observations—We are concerned that these mandated detailed 

disclosures are inconsistent with the guiding principles that The SPARK Institute 

believes should be taken into account in connection with the development of any 

new rules and regulations relating to participant fee disclosure. Among the problems with the notice requirement are that the notice will overwhelm and confuse 

participants instead of enlightening them, and will be costly to produce and maintain. 

B. Required information—The Bill requires the notice to include the following information regarding each investment option: name, investment objectives, level of 

risk, whether the option is a comprehensive solution, historical performance, historical fees, an explanation of the difference between asset-based and annual fees, comparative benchmark information, and how to get additional information. The notice 

must include a cautionary statement about relying too much on fees as the basis 

for investment decisions. Additionally, the notice must include a fee menu in an 

easy to understand format for the average participant. The fee menu must include 

such information that the DOL determines is necessary to allow participants to 

evaluate the services that may be provided in connection with the investment options and the fees that could be charged. Fees must be categorized among the following three categories: (i) fees that vary based on the investments selected by the 

participant (e.g., expense ratios), (ii) fees that vary based on the total assets in the 

participants account regardless of the investment option, and (iii) administration 

and transaction based fees (e.g., loan origination fees). The notice must also include 

a description of the purpose of each fee, including whether such fee is for investment 

management, commissions, administration or record keeping. The notice must include information about potential conflicts of interest that any person receiving fees 

may have. Sections 111(b)(2) & (3). Estimates can be used if the actual amounts are 

not known. Section 111(b)(5). 

SPARK Institute Observations—We are concerned that these disclosure requirements are extremely and needlessly complex, and as noted above, the information 

is likely to confuse participants rather than enlighten them. Many of the concepts 

required to be disclosed cannot be explained in a short, easy to understand format 

that the average participant will understand. In order to preclude after the fact 

claims by plaintiffs’ lawyers that such disclosures were not understandable or insufficient, most notices will become lengthy and detailed with technical disclosures intended to mitigate the risk of litigation. This will make the disclosures useless to 

the vast majority of participants. 

The requirements do not take into account the fact that the list of information 

may not be available for or apply to non-mutual fund investment options (e.g., expense ratios for annuity products). Additionally, many plans offer plan specific asset 

allocation funds or portfolios to plan participants as investment options. Such plan 

specific portfolios are typically not mutual funds, but they may use mutual funds 

as their underlying investments. We are concerned that suitable benchmarks may 

not always be available for such portfolios. The list of required disclosures also excludes some information that should be provided, such as the identity of the type 

of security (e.g., mutual fund, annuity, etc.), the identity of the investment manager 

or guarantor (in the case of guaranteed products), and non-performance factors for 

insurance type products. 

The purpose of the proposed expense categories is unclear, such categories will require fees to be disclosed in awkward ways, and will create confusion. For example, 

mutual fund expense ratios would be disclosed under category ‘‘i’’ because they vary 

68

based on the investment selected, but redemption fees associated with a fund presumably would have to be disclosed under category ‘‘iii’’ because they are transaction based. 

Plan sponsors and service providers should not be required to develop and provide 

specific disclosures of the underlying components of the investments fees (e.g., mutual fund expense ratio components) and the purpose of such fees. Such disclosure 

should be available upon request only and should be provided through materials 

otherwise available from a fund (e.g., profile prospectus or a full prospectus). 

Plan sponsors should not be required to provide potential service provider conflict 

of interest disclosures to plan participants when such information has no direct impact on participant decisions. For example, a potential conflict of a broker that is 

properly disclosed to a plan sponsor should not have to be disclosed to participants 

who will never come in contact with such broker. In such cases the information will 

only create needless confusion and potential suspicion. However, if the potential conflict is that the broker’s compensation may vary based on how participants invest 

their accounts and the broker may talk to participants about their plan investments, 

then such disclosure may be meaningful. However, such disclosure should be included in more appropriate documents (e.g., investment education materials used by 

the broker) instead of a mandated annual disclosure form. 

C. Model notice—The DOL is directed to issue a model notice for the foregoing 

disclosures. Section 111(b)(4). 

SPARK Institute Observations—We are concerned that the DOL is being directed 

to accomplish the impossible. As we have stated before in other documents, a one 

size fits all disclosure form that is suitable for and acceptable to the various retirement plan services and investment providers, takes into account all of the products 

and investment structures, maintains the competitive balance in the affected industries, and is cost effect to produce, will be virtually impossible to create. Although 

we recognize that service providers would not be required to use the model, we are 

concerned that some plan sponsors may demand it. 

IV. Annual Participant Benefits Statement 

A. In addition to providing the participant investment notice discussed above, participant directed plans would be required to provide an annual benefits statement 

that discloses very specific and detailed fee information. The statements would have 

to be provided within 90 days of the close of each plan year. Most of the required 

information, or similar information, is already provided on quarterly participant 

statements. However, the proposal requires detailed dollar disclosure of the fees 

charged against the participant’s account for each investment, including the underlying investment fees (e.g., expense ratios and trading costs), loads, total asset-based 

fees (including variable annuity charges), mortality and expense charges, guaranteed investment contract fees, employer stock fees, directed brokerage charges, plan 

administration fees, participant transaction fees, total fees, and total fees as a percentage of current assets. Section 111(c)(2). The statement must compare the performance of the investment options to a nationally recognized market-based index. 

Estimates can be used if the actual amounts are not known. Section 111(c)(4). 

SPARK Institute Observations—We are concerned that these requirements are in 

many respects extremely complex, and in certain other respects, duplicative to existing quarterly participant statement requirements. We are also concerned that providing this statement is impractical and will be expensive. Plans already provide 

quarterly participant statements. However, most record keeping systems are not designed to produce a single cumulative annual statement. Additionally, most systems 

are not currently able to gather, calculate and present the detailed fee information 

required under the proposal. Most of the information related to the fees of the underlying investments is embedded within the underlying investment funds. In the 

case of mutual funds, the information that plan sponsors would have to provide is 

simply not on the record keeping systems because such information by its very nature is embedded in the investment fund. It is not clear whether rate disclosures 

would be sufficient under the proposal when the participant level dollar disclosures 

are not readily available, even if they could be calculated at a cost. The detailed 

items that must be disclosed to participants will also have to be explained to them 

and will most likely confuse instead of enlighten. Concerns about potential litigation 

among plan sponsors and service providers will cause the statement content to expand, become complex and ultimately, be overwhelming for the average participant. 

In summary, the proposal will, if implemented, result in the creation of a statement 

that is more confusing than anything that plan participants currently receive or 

have access to regarding any of their investments. 

Additionally, redesigning record keeping systems to produce the statements and 

complying with these requirements on an ongoing basis will be expensive. Such 

69

costs will ultimately be borne by participants for little or no perceived benefit because, for the vast majority of participants, the information will either be ignored 

or will not motivate better participant saving and investment behavior. 

B. The DOL is directed to issue a model notice for the foregoing disclosures. Section 111(c)(5). 

SPARK Institute Observations—As we noted previously, we are concerned that 

the DOL is being directed to accomplish the impossible. 

Other Disclosure Provisions 

A. The disclosure requirements are not intended to limit or serve as a basis for 

any inference regarding a plan fiduciary’s responsibility to discharge its duties with 

respect to the plan for the purpose of, among other things, defraying the reasonable 

expenses of administering the plan (see ERISA Section 404(a)(1)(A)(ii)). Section 

111(d). 

SPARK Institute Observations—As noted previously, we are concerned that these 

disclosure requirements will create fertile ground for frivolous and costly lawsuits 

brought by plaintiffs’ lawyers primarily seeking settlements from plan sponsors and 

service providers who are perceived to have deep pockets and who are concerned 

about their public reputations. 

B. The disclosure requirements of the Bill would be effective for plan years beginning after enactment. 

SPARK Institute Observations—We are concerned that the service providers that 

will be expected to facilitate compliance with the plan sponsor and other disclosure 

requirements will need significantly more time to prepare for such requirements. 

For example, the system functionality that would be necessary in order to produce 

the annual participant statements does not exist today and will take a significant 

amount of time to develop. Additionally, we are concerned that the plan sponsor disclosure requirements will apply to existing service agreements. Service providers 

will be overwhelmed with having to provide customized plan specific disclosures for 

thousands, and for some providers, tens of thousands of plans that they service. 

Index Fund Requirement 

Participant directed plans must include at least one investment option which is 

a nationally recognized market-based index fund which offers a combination of returns, risk and fees that is likely to meet the retirement income needs at adequate 

levels of contributions. Section 402(c). 

SPARK Institute Observations—We presume that the intent of this provision is 

to make ‘‘low cost’’ investment options available to plan participants. However, we 

are concerned about the potential misconception that requiring such options to be 

added will meet its objective. Requiring such funds to be added will not change the 

economics of servicing a plan. Regardless of which funds are used in any plan, plan 

service providers must have a source of revenue to get paid. If an index fund offers 

a class of shares that provides revenue sharing to unaffiliated plan service providers, such class will most likely be used when necessary to generate adequate revenue for the service providers. Service providers may choose to only offer funds that 

provide such adequate revenue. Alternatively, record keepers can assess additional 

asset-based charges to fund accounts to generate the necessary revenue. In both 

cases the plan sponsor and service provider can agree to fee arrangements that 

maintain the current revenue and economics of the plan. We note that plan sponsors 

will have the option, which they have today, to pay for most plan fees out of their 

own assets or impose such fees on plan participants. Consequently, mandating the 

use of index funds will not meet the presumed objectives and seems unnecessary. 

Additionally, the requirement that the index fund is one that ‘‘offers a combination of returns, risk and fees that is likely to meet the retirement income needs at 

adequate levels of contributions’’ is too subjective. Reasonable investment experts 

are likely to disagree on which funds satisfy such requirements. The subjective nature of the requirement makes it untenable. Plan sponsors should not be required 

to select a fund based on such criteria. Additionally, we are concerned that these 

subjective requirements will inevitably expose plan sponsors to after the fact claims 

from plaintiffs’ lawyers that the fund selected did not or will not generate enough 

income for participants. 

Finally, we are unaware of any existing rules or regulations that require a plan 

to include a specific fund as an investment option.2 Index funds should not be mandated through legislation and given a Congressional ‘‘seal of approval’’ as an investment option. Additionally, we note that the index fund mandate will not change participant behavior. Participants who are not otherwise engaged in making investment 

decisions will not become engaged as a result of having this option available. Participants who are otherwise engaged and investment savvy will simply consider this 

70

option among the others available to them and will evaluate it based on its merits, 

which will include many factors other than fees. However, plan sponsors should not 

be forced to include such funds in their plans. Instead, market forces and the suitability of such funds for use in plans should be allowed to drive plan sponsor decisions. 

Advisory Council 

The Bill would establish the Advisory Council on Improving Employer-Employee 

Retirement Practices. Section 519. The Council would have 12 members, half of 

whom will represent the interests of plan participants and the other half will represent employers. 

SPARK Institute Observations—Setting aside whether or not such Council is necessary, beneficial or will be effective, we are concerned that the proposal does not 

include any representation from the retirement services and investment products industries. Long-term improvement to retirement plan and investment products ultimately requires the products, support and services from such industries. We believe 

that any council of this type would be more productive, effective, and benefit from 

the inclusion of appropriate industry experts. 

Conclusion 

Although The SPARK Institute supports and encourages greater fee transparency, 

we are concerned that the Bill will be unduly burdensome for plan sponsors and 

service providers. We believe that the proposal will impose significant additional 

burdens on plan sponsors, and create needless complication that could have a detrimental effect on the voluntary employer sponsored retirement plan system. 

The required disclosures place too much emphasis on fees, will be lengthy, complex and intimidating for participants. Such disclosures will likely not be read and 

will not change the behavior of the vast majority of plan participants. The proposal 

also appears to rely on paper-based notices instead of promoting the use of the internet and other electronic means of disclosure. 

Additionally, we are concerned that service providers’ proprietary and confidential 

information will become readily available to their competition. The requirements 

will expose plan sponsors and service providers to new types of frivolous and costly 

lawsuits brought by plaintiffs’ lawyers primarily seeking settlements from plan 

sponsors and service providers who are perceived to have deep pockets and who are 

concerned about their public reputations. Such requirements, among others of the 

Bill, will disrupt the competitive balance in the retirement plan and investment industries. 

We are also concerned that the proposed rules are in certain respects duplicative 

with existing requirements under ERISA, and in certain other respects, may be inconsistent with requirements under rules and regulations of other regulatory agencies. Duplication and inconsistencies make compliance more complicated and costly 

for everyone involved. 

The SPARK Institute believes that regulators, such as the DOL and Securities 

and Exchange Commission, should be permitted to address and resolve the perceived disclosure issues under existing law through their regulatory authority. If 

regulators believe that additional laws are needed in order to facilitate solving such 

concerns, then Congress should adopt legislation that fills the ‘‘gaps’’ identified by 

the regulators. 

On behalf of The SPARK Institute, I thank the Committee for the opportunity to 

share our views on this important issue. 

A Primer on Plan Fees and an Analysis of H.R. 3185, the 401(k) Fair 

Disclosure for Retirement Security Act of 2007

American Bankers Association; Committee on Investment of Employee Benefit Assets; the ERISA Industry 

Committee; the Financial Services Roundtable; Investment Adviser Association; Investment Company Institute;

National Association of Manufacturers; Profit Sharing/401k Council of America; Securities Industry and 

Financial Markets Association; Society for Human Resource Management; United States Chamber of Commerce 

ERISA provides many safeguards for the protection of workers’ retirement assets. 

Plan assets must be held in a trust that is separate from the employer’s assets. The 

fiduciary of the trust (normally the employer or committee within the employer) 

must operate the trust for the exclusive purpose of providing benefits to participants 

and their beneficiaries and defraying reasonable expenses of administering the plan. 

In other words, the fiduciary has a duty under ERISA to ensure that any expenses 

of operating the plan, to the extent they are paid with plan assets, are reasonable. 

71

1One basis point is one-hundredth of one percent—100 basis points equals one percent. 

Plan fees 

As Congress examines retirement plan fees, it is critically important that policymakers have accurate information regarding such fees. The vast majority of participants in ERISA plans have access to capital markets at lower cost through their 

plans than the participants could obtain in the retail markets because of economies 

of scale and the fiduciary’s role in selecting investments and monitoring fees. The 

level of fees paid among all ERISA plan participants will vary considerably, however, based on variables that include plan size (in dollars and/or number of participants), participant account balances, asset mix, and the types of investments and 

the level of services being provided. Below is data from surveys conducted by various organizations that monitor and analyze plan fees. The studies reflect, in particular, the impact of plan size and average account balances on fees: 

CEM Benchmarking Inc.—CEM is a benchmarking company that serves 300 of 

the world’s largest public and corporate pension plans in the US, Canada, Europe 

and Australia. A study of 88 US defined contribution plans with total assets of $512 

billion (ranging from $4 million to over $10 billion per plan) and 8.3 million participants (ranging from fewer than 1,000 to over 100,000 per plan) found that total 

costs ranged from 6 to 154 basis points1 (bps) of plan assets in 2005. Total costs 

varied with overall plan size. Plans with assets in excess of $10 billion averaged 28 

bps while plans between $0.5 billion and $2.0 billion averaged 52 bps. Further, costs 

depended on the average account balance. Plans with an average account balance 

less than $55,000 paid four bps more in administrative compliance costs than plans 

with an average account balance exceeding $55,000. Total costs were also affected 

significantly by asset mix. Costs rose as the proportion of plan assets invested in 

domestic small cap stock and alternative investments (i.e., real estate) increased. In 

a separate analysis conducted for the Profit Sharing / 401k Council of America, 

CEM reported that, in 2005, its private sector corporate plans had total average 

costs of 33.4 bps and median costs of 29.8 bps. 

HR Investment Consultants—HR Investment Consultants is a consulting firm 

providing a wide range of services to employers offering participant-directed retirement plans. It publishes the 401(k) Averages Book that contains plan fee 

benchmarking data. The 2007 edition of the book reveals that average total plan 

costs ranged from 159 bps for plans with 25 participants to 107 bps for plans with 

5,000 participants. 

Committee on Investment of Employee Benefit Assets (CIEBA)—CIEBA is the 

voice of the Association of Financial Professionals (AFP) on employee benefit plan 

asset management and investment issues. CIEBA represents more than 115 of the 

country’s largest pension/retirement funds. Its members manage $1.4 trillion in defined benefit and defined contribution plan assets, on behalf of 16 million (defined 

benefit and defined contribution) plan participants and beneficiaries. A 2005 survey 

of 109 CIEBA members revealed that plan costs paid by defined contribution plan 

participants averaged 22 bps. 

Department of Labor fee transparency initiatives 

Fee disclosure and transparency present complex issues. Amending ERISA 

through legislation to prescribe specific fee disclosure will lock in disclosure standards built around today’s practices and could discourage product and service innovation. The Department of Labor (DOL) has announced a series of regulatory initiatives that will make significant improvements to fee disclosure and transparency. 

The undersigned support the DOL’s efforts. We believe that this is the best approach to enhance fee transparency in a measured and balanced manner and we 

urge Congress to delay taking legislative action until the Department of Labor has 

completed its work. The DOL’s initiatives are as follows: 

Annual Reporting Requirements—Among the new impending fee disclosure obligations are revised annual reporting requirements for plan sponsors. DOL is about 

to finalize modifications to the Form 5500 and the accompanying Schedule C, on 

which sponsors report compensation paid to plan service providers. The modifications will expand the number of service providers that must be listed and impose 

new requirements to report service provider revenue-sharing. The final regulations 

implementing the new Form 5500 are expected in the very near future and are expected to first be applicable to the 2009 plan year. 

Service Provider Disclosure Obligations—DOL also intends later this year to issue 

a revised regulation under ERISA Section 408(b)(2), which is a statutory rule dictating that a plan may pay no more than reasonable compensation to plan service 

providers. The expected proposal is designed to ensure that plan fiduciaries have acVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00075 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
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cess to information about all forms and sources of compensation that service providers receive (including revenue-sharing). Both sponsors and providers will be subject to new legal requirements under these proposed rules, including an anticipated 

requirement that all third party compensation be disclosed in contracts or other 

service provider agreements with the plan sponsor. 

Participant Disclosure Rules—The DOL’s remaining initiative focuses on revamping participant-level disclosure of defined contribution plan fees. DOL issued a Request for Information (‘‘RFI’’) in April 2007 seeking comment on the current state 

of fee disclosure, the existing legal requirements and possible new disclosure rules. 

Comments were filed by July 24, 2007. DOL has indicated that it intends to propose 

new participant disclosure rules early in 2008 that will likely apply to all participant-directed individual account retirement plans. 

Principles for reform 

We support regulatory reforms that reflect the following principles: 

• Sponsors and Participants’ Information Needs Are Markedly Different. Any new 

disclosure regime must recognize that plan sponsors (employers) and plan participants (employees) have markedly different disclosure needs. 

• Overloading Participants with Unduly Detailed Information Can Be Counterproductive. Overly detailed and voluminous information may impair rather than enhance a participant’s decision-making. 

• New Disclosure Requirements Will Carry Costs for Participants and So Must 

Be Fully Justified. Participants will likely bear the costs of any new disclosure requirements so such new requirements must be justified in terms of providing a material benefit to plan participants’ participation and investment decisions. 

• Information About Fees Must Be Provided Along with Other Information Participants Need to Make Sound Investment Decisions. Participants need to know 

about fees and other costs associated with investing in the plan, but not in isolation. 

Fee information should appear in context with other key facts that participants 

should consider in making sound investment decisions. These facts include each 

plan investment option’s historical performance, relative risks, investment objectives, and the identity of its adviser or manager. 

• Disclosure Should Facilitate Comparison But Sponsors Need Flexibility Regarding Format. Disclosure should facilitate comparison among investment options, although employers should retain flexibility as to the appropriate format for workers. 

• Participants Should Receive Information at Enrollment and Have Ongoing Access Annually. Participants should receive fee and other key investment option information at enrollment and be notified annually where they can find or how they 

can request updated information. 

Analysis of H.R. 3185 (generally applicable to participant-directed individual account plans) 

Disclosures to plan administrators Under H.R. 3185, plan service providers are 

required to provide a ‘‘service disclosure statement’’ that describes all plan fees, in 

twelve specific detailed categories, as a condition of entering into a contract. The 

proposal would also require that this information be broken down by each cost component or be ‘‘unbundled.’’ The statement must describe the nature of any ‘‘conflicts 

of interests,’’ the impact of mutual fund share class if other than ‘‘retail’’ shares are 

offered and if revenue sharing is used to pay for ‘‘free’’ services. Estimates are permitted only when actual amounts are not known. Service disclosure statements 

must be posted on the employer’s intranet site and be provided to participants upon 

request. 

The requirements of H.R. 3185 are duplicative with the existing fiduciary requirement that fees paid with plan assets be reasonable. The DOL’s pending proposed 

regulatory changes under section 408(b)(2) likely will result in similar disclosures, 

provided at the same general point in time, as this new provision. Under the DOL’s 

approach, the disclosures will be incorporated into fiduciary requirements regarding 

plan fees, making noncompliance a prohibited transaction. 

The purpose of the requirement to ‘‘unbundle’’ all fees for all services is unclear. 

It is likely to be costly and is not likely to provide additional helpful information. 

Bundled service providers incorporate all services under a single price or several 

broad categories of prices. Plan administrators must ensure that the aggregate price 

of all services in a bundled arrangement is reasonable at the time the plan contracts 

for the services and that the aggregate price for those services continues to be reasonable over time. For example, asset-based fees should be monitored as plan assets 

grow to ensure that fee levels continue to be reasonable for services with relatively 

fixed costs such as plan administration and per-participant recordkeeping. The plan 

administrator should be fully informed of all the services included in a bundled arVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00076 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
73

rangement to make this assessment. Many plan administrators, particularly small 

employer plan administrators, may prefer reviewing costs in an aggregate manner 

and, as long as they are fully informed of the services being provided, they can compare and evaluate whether the overall fees are reasonable without being required 

to analyze each fee on an itemized basis. Imposing ‘‘unbundled’’ fee disclosure also 

raises significant concerns as to how a service provider would disclose component 

costs for services that are not offered outside a bundled contract. The posting of detailed unbundled services information could also force the public disclosure of proprietary information regarding contracts between service providers and plan sponsors. The provision relating to ‘‘conflicts of interest’’ should be substantially revised. 

ERISA already prescribes strict rules for prohibited activities for service providers 

who are parties-in-interest or fiduciaries to a plan. While disclosure of conflicts is 

important, the provision goes much further by requiring the disclosure of relationships and affiliations between different providers, regardless of whether these relationships involve a conflict of interest. Plan sponsors are expected to be provided 

with considerably expanded disclosures in the near future as the result of the DOL 

initiatives (in all likelihood sooner than if new legislation is enacted). This additional information will be very helpful to plan sponsors in meeting their fiduciary 

requirements related to administering an ERISA-covered retirement plan. 

The purpose of the share class disclosure requirement is not clear. Depending on 

the size of a plan and its service needs, participants may pay fees that are lower, 

higher, or the same as ‘‘retail’’ prices. There are myriad costs associated with administering a 401(k) plan that do not apply to individual ownership of a mutual fund 

and, for this reason, participants in some plans, particularly new small business 

plans, may pay additional costs. A comparison with an ‘‘institutional’’ share in this 

situation could result in an incorrect conclusion that the plan is paying more than 

reasonable expenses. 

Disclosures to plan participants Under H.R. 3185, plan administrators must provide an advance notice of investment election information to participants and beneficiaries, generally 15 days prior to the beginning of the plan year. The notice must 

include the name of the option; investment objectives; risk level; whether the option 

is a ‘‘comprehensive investment designed to achieve long-term retirement security 

or should be combined with other options in order to achieve such security’’; historical return and percentage fee assessment; explanation of differences between assetbased and other annual fees; benchmarking against a nationally recognized marketbased index or other benchmark retirement plan investment; and where and how 

additional plan-specific and generally available investment information regarding 

the option can be obtained. The notice must include a statement explaining that investment selection should not be based solely on fees but on other factors such as 

risk and historical returns. The notice must include a fee menu of the potential 

service fees that could be assessed against the account in the plan year. Fees must 

be categorized as, 1) varying by investment option (including expense ratios, investment fees, redemption fees, surrender charges); 2) asset-based fees assessed regardless of investment option selected; and 3) administration and transaction fees, including plan loan fees, that are either automatically deducted each year or result 

from certain transactions. The fee menu shall include a general description of the 

purpose of each fee, i.e., investment management, commissions, administration, recordkeeping. The menu will also include disclosure of potential conflicts of interest 

that may exist with service providers or parties in interest, as directed by the Secretary of Labor. 

Plan administrators must also provide an annual benefit statement that includes 

starting balance; vesting status; contributions by employer and employee during the 

plan year; earnings during the plan year; fees assessed in the plan year; ending balance; asset allocation by investment option, including current balance, annual 

change, net return as an amount and a percentage; service fees charged in the year 

for each investment, including, separately, investment fees (expense ratios and trading costs), load fees, total asset based fees (including variable annuity charges), mortality and expense charges, guaranteed investment contract (GIC) fees, employer 

stock fees, directed brokerage charges, administrative fees, participant transaction 

fees, total fees, and total fees as a percent of current assets; and the annual performance of the investment options selected by the participant as compared to a nationally recognized market based index 

The new disclosure requirements that would be imposed by H.R. 3185 are overly 

complex and costly. We support disclosure of relevant fee information about the 

plan, but flexibility should be provided to ensure that the plan administrator can 

tailor the disclosure to meet the needs of plan participants. The participant disclosure requirements as presently drafted will likely result in lengthy ‘‘legalese’’ docuVerDate 0ct 09 2002 10:33 Aug 25, 2008 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6621 G:\DOCS\110TH\FC\110-67\38002.TXT HBUD1 PsN: DICK
74

ments that would confuse most participants and possibly hinder rather than help 

them make investment decisions. The scope and detail of the disclosure might well 

result in a document that, at best, is ignored and, at worst, deters participation in 

the plan. 

We agree that fee information should not be provided in a vacuum. Some of the 

required data elements and comparisons in the legislation use confusing terminology, have overlapping requirements, or are excessively detailed. For example, a 

‘‘benchmark retirement plan investment’’ does not currently exist and no single 

benchmark is appropriate for every kind of investment. In many cases the required 

participant disclosure item would apply to some products and not others, and could 

be difficult to calculate, especially by the plan administrator. 

Recordkeeping systems are not currently able to meet all the requirements of the 

annual benefit statement in H.R. 3185. Additional costs to participants will result 

from the significant system changes needed to comply and simpler disclosure would 

provide much of the same benefits to participants. Much of the required data about 

the plan and the participant’s account is already required to be disclosed in the new 

benefit statement mandated under the Pension Protection Act, yet there is no coordination of the two requirements. 

Minimum investment option requirement—Plans must include at least one investment option which is a nationally recognized market-based index fund that, as determined by the DOL, offers a combination of historical returns, risks, and fees that 

is likely to meet retirement income needs at adequate levels of contribution. 

Plans should not be required to include a particular investment (with resulting 

fiduciary liability if the investment is found not to meet statutory and regulatory 

requirements). The provision would override a plan’s ability to select and monitor 

plan investments by reaching a values conclusion that this investment is appropriate for all plans. It sets a precedent for further mandates regarding the investment of plan assets which is counter to ERISA’s focus on a prudent process and 

would preempt the judgment of investment professionals. It is unlikely that any one 

‘‘market-based index’’ alone is ‘‘* * * likely to meet retirement income needs.’’ Further, embedding a particular investment option in law may lead participants to believe that this is either the ‘‘best’’ option or the government-sanctioned option, thereby steering plan participants into the investment which may not be appropriate for 

the individual participant.

Prepared Statement of the Investment Company Institute1

Hearing on ‘‘H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act of 

2007’’ Committee on Education and Labor U.S. House of Representatives October 

4, 2007

The Investment Company Institute1 welcomes the interest of Chairman Miller 

and the House Education and Labor Committee in enhancing disclosure in 401(k) 

plans and appreciates the opportunity to provide its views in connection with this 

hearing on H.R. 3185, the ‘‘401(k) Fair Disclosure for Retirement Security Act of 

2007.’’ The Institute has long supported effective disclosure to participants in individual account plans and the employers who sponsor those plans.2 Mutual funds 

currently provide the most complete disclosure of any investment product available 

in 401(k) plans and the Institute has extensively studied what information is useful 

to and used by investors. 

Chairman Miller has been open in soliciting comments on H.R. 3185 and we value 

the opportunity to offer constructive input as the Committee explores these issues. 

The defined contribution system of 401(k) and similar plans has been a huge success. As of 2006, Americans have saved $4.1 trillion in private defined contribution 

plans, and another $4.2 trillion in IRAs. (Estimates suggest about half of all IRA 

assets originate from 401(k) and other employer plans.) Around half of all of the assets in defined contribution plans and IRAs are invested in mutual funds.3

Collaborative research between the Employee Benefit Research Institute (EBRI) 

and the Institute demonstrates that participants generally make sensible choices in 

allocating their investments4 and that a full career with 401(k) plans produces adequate replacement rates at retirement.5 Institute research also suggests that plan 

participants and plan sponsors are cost conscious when selecting mutual funds for 

their 401(k) plans. On an asset-weighted basis (that is, taking into account where 

401(k) participants concentrate their assets), the average asset-weighted expense 

ratio for 401(k) stock mutual fund investors was 0.74%, half of the simple average 

stock mutual fund expense ratio in 2006 (1.50%).6

The biggest challenge in ensuring adequate retirement security for all Americans 

lies in encouraging workers to contribute and encouraging employers to offer a 

75

workplace plan. Disclosure reform should seek to improve the 401(k) system without 

imposing burdens, costs and liabilities that deter employers from offering plans. For 

these reasons, we urge the Committee to proceed carefully as it considers specific 

changes to the 401(k) disclosure regime. 

Initiatives to strengthen the 401(k) disclosure regime should focus on the decisions that plan participants and sponsors must make and the information they need 

to make those decisions. The purposes behind fee disclosure to plan sponsors and 

participants differ. Participants have only two decisions to make: whether to contribute to the plan (and at what level) and how to allocate their account among the 

investment options the plan sponsor has selected. Disclosure should help participants make those decisions. Voluminous and detailed information about plan fees 

could overwhelm the average participant and could result in some employees deciding not to participate in the plan. On the other hand, plan sponsors, as fiduciaries, 

must consider additional factors in hiring and supervising plan service providers 

and selecting plan investment options. Information to plan sponsors should be designed to meet their needs effectively. 

Comments on H.R. 3185

• Disclosure to plan sponsors should provide information that allows them to fulfill their fiduciary responsibilities. 

ERISA requires that plan fiduciaries act prudently and solely in the interest of 

plans and participants. Plan assets can only be used for the exclusive purpose of 

providing benefits and defraying reasonable expenses of administering plans. 

ERISA’s prohibited transaction rules require that a contract with a service provider 

be for necessary services and provide only reasonable compensation. The Institute 

has consistently supported efforts to ensure that plan sponsors have the information 

they need as fiduciaries to select and monitor service providers and review the reasonableness of plan fees.7 The Institute’s views on disclosure to plan sponsors are 

set out in greater detail in the attached testimony we recently presented to the 

ERISA Advisory Council. 

H.R. 3185 would require plan sponsors to obtain very detailed fee and financial 

relationship information from plan service providers. We recommend instead that 

the requirements be streamlined. In our view, plan sponsors should obtain information from service providers on the services that will be delivered, the fees that will 

be charged, and whether and to what extent the service provider receives compensation from other parties in connection with providing services to the plan. These payments from other parties, commonly called ‘‘revenue sharing,’’ often are used in bundled and unbundled service arrangements to defray the expenses of plan administration. 

We also recommend that a service provider that offers a number of services in 

a package be required to identify each of the services and total cost but not to break 

out separately the fee for each of the components of the package. If the service provider does not offer the services separately, requiring the provider to assign a price 

to the component services will produce artificial prices that are not meaningful. In 

today’s competitive 401(k) market, bundled and unbundled providers compete effectively for plan business. This healthy competition has helped spur innovation in 

401(k) products and services, such as new education and advice programs and target 

date funds. Forcing a 401(k) provider to quote separate prices for component services would constitute an inappropriate decision by policymakers to favor one business model over another. So long as plan fiduciaries can compare the total cost of 

recordkeeping and investments of a bundled provider with the total costs of recordkeeping and investments of an unbundled provider, they have the relevant information to discharge their fiduciary obligations. 

The Institute supports disclosure of revenue sharing by requiring that a service 

provider disclose to plan sponsors information about compensation it receives from 

other parties in connection with providing services to the plan. This information will 

allow the plan sponsor to understand the total compensation a service provider receives under the arrangement. It also will bring to light any potential conflicts of 

interest associated with revenue sharing payments, for example, where a plan consultant receives compensation from a plan recordkeeper. 

Allocations among affiliated service providers are not revenue sharing. When 

services are provided by affiliates of the service provider, a plan sponsor should understand all the services that will be provided and the aggregate compensation for 

those services. The service provider should not be required to disclose how payments 

are allocated within the organization. These allocations are not market transactions 

and any pricing of these transactions will be artificial, and, thus, of little value. Disclosure of allocations within a firm will not inform the plan sponsor of additional 

76

compensation retained by the firm and will not inform the plan sponsor of a potential conflict that is not already apparent given the affiliation of the entities. • Disclosure to plan participants should be simple and focused on key information. 

Participants should receive the following key pieces of information for each investment product offered under the plan: • Types of securities held and investment objective of the product • Principal risks associated with investing in the product • Annual fees and expenses expressed in a ratio or fee table • Historical performance • Investment adviser that manages the product’s investments 

This list is informed by research on what information investors actually consider 

before purchasing mutual fund shares.8 The research also found that investors find 

a summary of information more helpful than a detailed document. This basic information should be provided on all investment options available under the plan, regardless of type.9 The need for cost-effective, simple disclosure focusing on the key 

information participants need to make informed choices enjoys broad support, as reflected in the attached joint recommendation by 12 trade associations to the Department of Labor.10

ERISA disclosure rules should encourage and facilitate electronic delivery of investment information to participants. Plans should be allowed to provide online disclosure for every investment option for those employees who have reasonable access 

to the Internet. 

Fees and expenses are only one piece of necessary information. While the fees associated with a plan’s investment options are an important factor participants 

should consider in making investment decisions, no participant should decide 

whether to contribute to a plan or allocate his or her account based solely on fees. 

In many plans the lowest fee option is a money market fund or other low-risk investment because these funds are the least costly to manage. It is not appropriate 

for most participants to invest solely in these relatively lower return options.11

H.R. 3185 would require extensive disclosure to participants at enrollment and in 

annual statements. We do not believe this type of extensive disclosure is effective. 

Instead, participant disclosure should be short and concise and focused on the key 

information, described above, that participants need to make informed decisions in 

allocating their accounts. This is the approach the SEC is taking in developing a 

new streamlined disclosure document for mutual funds that easily could be adapted 

for all 401(k) investment products.12

The SEC’s experience in developing mutual fund disclosure requirements is relevant also with respect to two other matters covered in H.R. 3185. First, H.R. 3185 

would require the disclosure to sponsors and participants of the trading costs of a 

mutual fund or other collective fund used as a 401(k) plan investment. The SEC has 

repeatedly examined how best to disclose a mutual fund’s ‘‘trading costs’’ 13 and has 

determined that the fund’s turnover ratio is the best proxy for the trading costs of 

the fund. The turnover ratio can be easily calculated by funds, is easily understood 

by investors and is readily comparable among funds. It is expected that the SEC 

will include the fund portfolio turnover ratio as a prominent element of the new mutual fund profile it is developing. We recommend that any ERISA requirement to 

provide information to plan participants or sponsors about trading costs of pooled 

accounts use the portfolio turnover ratio as the appropriate proxy. 

Second, H.R. 3185 would require that plans translate asset-based fees of plan investments into dollar amounts. The SEC concluded in 2004 that the most comparable and cost-effective way to give shareholders an understanding, in dollar 

terms, of the implications of asset-based fees on their account was to require a fee 

example in shareholder reports showing the fee paid on each $1,000 invested.14

More complex dollar disclosures simply impose unnecessary costs and would not facilitate comparability. In 401(k) plans these costs would generally be borne by participants. We recommend that any ERISA requirement to provide participants with 

disclosure about the impact of fees on their accounts use a similar hypothetical example. 

• Congress should not mandate a 401(k) plan’s investment line-up. 

H.R. 3185 would require a 401(k) plan to offer an index fund meeting requirements specified in the bill. The Institute is concerned with mandating in federal law 

that 401(k) plans offer a particular type of investment option. Congress should not 

substitute its judgment for investment experts and mandate investment choices 

properly reserved to plan sponsors as fiduciaries. It also should not endorse one type 

of investment strategy (indexing) over another (active management). This represents 

a significant departure from the basic fiduciary structure of ERISA and the Institute is concerned about the precedent this provision would set. 

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The mutual fund industry is committed to meaningful 401(k) disclosure, which is 

critical to ensuring secure retirements for the millions of Americans that use defined contribution plans. We thank the Committee for the opportunity to submit this 

statement and look forward to the opportunity for continued dialogue with the Committee and its staff. 

ATTACHMENTS

• Institute Policy Statement on Retirement Plan Disclosure (January 30, 2007) • Institute Statement to ERISA Advisory Council (September 20, 2007) • Joint Trade Association Recommendations on Fee and Expense Disclosures to 

Participants in Individual Account Plans (July 24, 2007) • Institute Comment Letter to Department of Labor on Fee Disclosure RFI (July 

20, 2007) 

ENDNOTES

1 Institute members include 8,889 open-end investment companies (mutual funds), 675 closedend investment companies, 471 exchange-traded funds, and 4 sponsors of unit investment 

trusts. Mutual fund members of the Institute have total assets of approximately $11.339 trillion 

(representing 98 percent of all assets of US mutual funds); these funds serve approximately 93.9 

million shareholders in more than 53.8 million households. 2 Attached to the testimony is a Policy Statement on Retirement Plan Disclosure adopted by 

the Institute Board of Governors in January 2007 that reaffirms and chronicles the Institute’s 

long record in support of better disclosure. 3 Brady and Holden, The U.S. Retirement Market, 2006, ICI Fundamentals, vol. 16, no. 3 

(July 2007), available at http://www.ici.org/pdf/fm-v16n3.pdf. 4For example, in 2006, participants in their 20s allocated 59.7% of their accounts to pooled 

equity investments and company stock, and only 18.4% to GICs and other fixed-income investments. Participants in their 60s allocated 35.6% to GICs and other fixed-income investments. 

See Holden, VanDerhei, Alonso, and Copeland, 401(k) Plan Asset Allocation, Account Balances, 

and Loan Activity in 2006, ICI Perspective, vol. 13, no. 1, and EBRI Issue Brief, Investment 

Company Institute and Employee Benefit Research Institute, August 2007, available at http:/

/www.ici.org/pdf/per13-01.pdf. The 2006 EBRI/ICI database contains 53,931 401(k) plans with $1.228 trillion in assets and 20.0 million participants. 5See Holden and VanDerhei, Can 401(k) Accumulations Generate Significant Income for Future Retirees? and The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions 

on 401(k) Accumulations at Retirement, ICI Perspective and EBRI Issue Brief, Investment Company Institute and Employee Benefit Research Institute, November 2002 and July 2005, respectively, available at http://www.ici.org/pdf/per08-03.pdf and http://www.ici.org/pdf/per11-

02.pdf, respectively. 6 Holden and Hadley, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 

2006, ICI Fundamentals, vol. 16, no. 4 (September 2007), available at http://www.ici.org/pdf/

fm-v16n4.pdf. 7For example, see Statement of the Investment Company Institute on Disclosure to Plan 

Sponsors and Participants Before the ERISA Advisory Council Working Groups on Disclosure 

(September 21, 2004), available at http://www.ici.org/statements/tmny/04—dol—krentzman—

tmny.html. 8See Understanding Investor Preferences for Mutual Fund Information, Investment Company 

Institute (2006), available at http://www.ici.org/pdf/rpt—06—inv—prefs—full.pdf. 9 As described in more detail in the attached Institute comment letter to the Department of 

Labor, disclosure of this information is appropriate for mutual funds, insurance separate accounts, bank collective trusts, and separately managed accounts. The same key pieces of information are relevant and should be disclosed for fixed-return products, where a bank or insurance company promises to pay a stated rate of return. In describing fees and expenses of these 

products, for example, the disclosure should explain that the cost of the product is built into 

the stated rate of return because the insurance company or bank covers its expenses and profit 

margin by any returns it generates on the participant’s investment in excess of the guaranteed 

rate of return. In describing principal risks of these products, the summary should explain that 

the risks associated with the guaranteed rate of return include the risks of interest rate 

changes, the long-term risk of inflation, and the risks associated with the product provider’s insolvency. 10 Also attached is the Institute’s comment letter to the Department of Labor regarding improvements to participant disclosure. 11 In 2006, the asset-weighted average total mutual fund expense ratio for money market 

funds held in 401(k) plans was 0.43%, compared with 0.56% for bond mutual funds and 0.74% 

for stock mutual funds. See Holden and Hadley, supra note 6. In plans offering investment in 

employer stock, the employer stock option fund may be the lowest fee option because essentially 

no active investment management is involved, but it also would not be appropriate for participants to invest solely in one security. This point is made in the Department of Labor’s publication for participants, Taking the Mystery Out of Retirement Planning, page 11, available at 

http://www.dol.gov/ebsa/publications/NRTOC.html. 12See Statement of the Securities and Exchange Commission Before the House Financial 

Services Committee (June 26, 2007), available at http://www.house.gov/apps/list/hearing/

financialsvcs—dem/sec—testimony—(6-2607).pdf. 13The trading costs of a pooled investment product such as a mutual fund, collective trust, 

or insurance company separate account include not only brokerage commissions, but also costs 

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that cannot be quantified or expressed with accuracy, including bid-ask spreads and ‘‘market 

impact’’ costs. 14See Securities and Exchange Commission, Final Rule, Shareholder Reports and Quarterly 

Portfolio Disclosure of Registered Management Investment Companies, 69 Fed. Reg. 11244 

(March 9, 2004). 

[Internet address to Investment Company Institute (ICI) Fee Disclosure RFI to U.S. Department of Labor, dated July 20, 2007, follows:]

http://www.ici.org/statements/cmltr/arc-ret/07—dol—fee—disclose—com.html 

ICI Policy Statement — Retirement Plan Disclosure

Adopted by ICI’s Board of Governors, January 30, 2007

In 2005, there were 47 million active participants in 401(k) plans, with their retirement savings invested not only in mutual funds but also a wide range of other 

investment products. As 401(k) plans assume increasing importance for future retirees, plan sponsors must be able to make the right choices in setting up their plans 

and participants must have the information necessary to make informed investment 

decisions. To that end, the Institute urges that the Department of Labor clarify the 

requirements for disclosure of the fees and expenses associated with 401(k) plans 

to assist plan sponsors in making meaningful comparisons of products and service 

providers. Similarly, we support action by the Department of Labor to require 

straightforward descriptions of all the investment options available to participants 

in self-directed plans. To achieve these important goals: • The Department of Labor should require clear disclosure to employers that 

highlights the most pertinent information, including total plan costs. 

We believe required disclosure to employers should focus on the total fees paid 

by the plan to a service provider (in the form of a percentage or ratio) and how expenses are allocated between the sponsor and participants. Required disclosure also 

should address the various categories of expenses associated with a plan, including 

arrangements where a service provider receives some share of its revenue from a 

third party. Under ERISA, the obligation to provide this information should rest 

with those parties having a direct relationship with the employer. 

The Investment Company Institute (ICI) is the national association of the U.S. 

mutual fund industry, which manages more than half of 401(k) assets and advocates 

policies to make retirement savings more effective and secure. 

In the late 1990s, the Institute, in cooperation with other private-sector organizations, created a Model 401(k) Plan Fee Disclosure Form, which is posted on the Department of Labor website. More recently, the Institute also helped develop a list 

of service- and fee-related items that plan sponsors should discuss with potential 

providers. These tools serve to identify what services will be provided for the fees 

charged, show all forms of expenses, and help employers make meaningful comparisons among the products and services offered to the plan. The tools also can be useful to the Department in crafting regulations and other guidance. 

• The Department of Labor should require that participants in all self-directed 

plans receive simple, straightforward explanations about each of the investment options available to them, including information on fees and expenses. 

In making investment elections under a plan, individuals should receive information on: 

• investment objectives, 

• principal risks, 

• annual fees (expressed in a ratio or fee table), 

• historical performance, and 

• the investment adviser that manages the product’s investments. 

The Department should expand the current disclosure requirements to require 

plan administrators to provide participants with a concise summary of these ?ve key 

pieces of information for each investment option. One effective way to deliver this 

information is through email and other forms of electronic communication. Additional information, such as how fees and expenses are allocated among service providers, should be made available to participants (for example, posted on the Internet). 

Such disclosure requirements would ?ll gaps in the information currently required 

to be provided to participants. The existing disclosure regime does not cover all 

plans in which participants make investment decisions for their accounts. For plans 

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that are covered, participants must receive full information about mutual funds, in 

the form of the fund prospectus. For other products, important information—such 

as operating expenses and historical performance—is available only on request. We 

support revising current rules to require a summary document for all self-directed 

plans that provides, for each investment product, the type of information that investors value and use. This information will empower participants in self-directed plans 

to manage their accounts effectively. 

The mutual fund industry is committed to meaningful disclosure. Over the past 

30 years, the Institute has supported efforts to improve the quality of information 

provided to plans and participants and the way in which that information is presented. Meaningful disclosure is critical to ensuring secure retirements for millions 

of Americans. 

APPENDIX

ICI’s Record: 30 Years of Advocating Better Disclosure 

The Institute has long acted both in conjunction with other organizations and on 

its own to enhance the ability of employers to make appropriate choices for their 

plans. The Institute also has consistently called for effective disclosure to plan participants about investment options. This appendix describes the Institute’s efforts 

over time to improve disclosure for both plan sponsors and participants. 

Disclosure to Participants 

For more than 30 years, the Institute has provided speci?c recommendations to 

the Department of Labor on the disclosure participants in self-directed plans should 

receive about investment options. Through letters and testimony before the Department and the ERISA Advisory Council, we recommended regulatory measures to ensure that participants and bene?ciaries receive adequate information on which to 

base their investment decisions. 

• In a 1976 letter to the Department, the Institute advocated that when an individual becomes a participant, he or she should receive complete, up-to-date information about plan investment options, and, thereafter, regular and current information 

as to his or her investments. 

• In 1987, the Institute recommended that under then-proposed 404(c) regulations, participants should receive the kind of information included in a mutual fund 

prospectus or Statement of Additional Information for all investment options—not 

just investment options subject to federal securities laws. We repeated this suggestion in 2001 to the Department and in testimony in 2004 and 2006 before the 

ERISA Advisory Council. 

• In 1992, the Institute recommended that where a 404(c) plan has a limited 

number of investment alternatives, plan ?duciaries should be required to provide 

suf?cient investment information about each option up front. We urged the Department to specify the investment information that would be deemed sufficient, including information on fees and expenses and investment objectives. 

• In testimony before the Department in 1997, the Institute asked the Department to address gaps in the disclosure regime, especially disclosure of administrative fees charged to participant accounts and information on annual operating expenses, which, for non-mutual fund investment vehicles, are required to be provided 

only upon request. 

• In 1999, the Institute urged the Department to expand the scope of its proposed 

rules on electronic delivery to cover a broader range of disclosures and recipients. 

• In testimony before the ERISA Advisory Council in 2004 and 2006, the Institute 

called for participants to receive clear and concise summaries of each investment option, including the product’s investment objective, principal risks, fee/expense ratio 

(in the form of a fee table), and information about the investment adviser. In 2006, 

we added historical performance to the list. In the 2006 testimony, we also urged 

that this disclosure regime should apply to all self-directed plans—not just 404(c) 

plans—and that the Department update and expand its electronic disclosure rule in 

light of the increasing role of the Internet. 

Disclosure to Plan Sponsors 

The Institute likewise has consistently advocated clear rules for disclosure to plan 

sponsors and has developed various tools for use by sponsors and service providers. 

• In 1999, the Institute published a Uniform 401(k) Plan Fee Disclosure Form, 

developed jointly with the American Bankers Association (ABA) and American 

Council of Life Insurance (ACLI). The form, which the Department posted on its 

website, is designed to help employers identify and monitor 401(k) plan fees and expenses and compare the fees and services of different providers. 

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• In testimony before the ERISA Advisory Council in 2004, the Institute called 

for clear, meaningful, and effective disclosure to plan sponsors. We recommended 

that plan sponsors be required to obtain complete information about investment options before adding them to the plan menu and obtain information concerning arrangements where a service provider receives some share of its revenue from a third 

party. The Institute offered to organize a task force to assist the Department in developing a disclosure regime for these compensation arrangements. 

• In 2005, the Institute published a Model Disclosure Schedule for Plan Sponsors 

that might be used to disclose information on receipt by service providers of revenue 

from unaf?liated parties in connection with services to a plan. The Institute began 

discussions with other trade associations on developing an appropriate disclosure regime. 

• In 2006, the Institute published a 401(k) plan fee and expense reference tool, 

developed jointly with the ACLI, ABA, Securities Industry Association, and American Benefits Council. The tool is a list of fee and expense data elements that plan 

sponsors and service providers may want to discuss when entering into service arrangements. We have asked the Department to post the tool on its website. 

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[Whereupon, at 11:30 a.m., the committee was adjourned.]

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