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49–691 2009

THE APPROPRIATENESS OF RETIREMENT 

PLAN FEES 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

OCTOBER 30, 2007 

Serial 110–64 

Printed for the use of the Committee on Ways and Means 

( 

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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

JANICE MAYS, Chief Counsel and Staff Director 

BRETT LOPER, Minority Staff Director 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to prepare 

both printed and electronic versions of the hearing record, the process of converting between 

various electronic formats may introduce unintentional errors or omissions. Such occurrences 

are inherent in the current publication process and should diminish as the process is further 

refined. 

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C O N T E N T S 

Page 

Advisory of October 24, 2007, announcing the hearing ........................................ 2 

WITNESSES 

The Honorable Bradford P. Campbell, Assistant Secretary of Labor, Employee 

Benefits Security Administration, U.S. Department of Labor ......................... 6 

W. Thomas Reeder, Esq., Benefits Tax Counsel, Office of Tax Policy, U.S. 

Department of the Treasury ................................................................................ 20 

Andrew J. Donohue, Director, Division of Investment Management, U.S. Securities and Exchange Commission .................................................................... 26 

Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security 

Issues, U.S. Government Accountability Office ................................................. 35 

Burgess A. ‘‘Tommy’’ Thomasson, Jr., President and CEO, DailyAccess Corporation, Mobile, Alabama, on behalf of the American Society of Pension 

Professionals & Actuaries, and the Council of Independent 401(k) Recordkeepers .................................................................................................................. 81 

Harold L. Jackson, President and CEO, Buffalo Supply, Inc., Lafayette, Colorado, on behalf of the U.S. Chamber of Commerce ........................................... 96 

Allison R. Klausner, Assistant General Counsel—Benefits, Honeywell International Inc., Morristown, New Jersey, on behalf of the American Benefits 

Council .................................................................................................................. 106 

Lew I. Minsky, Senior Attorney, Florida Power & Light Company, Juno 

Beach, Florida, on behalf of the ERISA Industry Commitee ........................... 121 

Paul Schott Stevens, President and CEO, Investment Company Institute ........ 131 

Bertram L. Scott, Executive Vice President, Strategy, Integration and Policy, 

TIAA–CREF, New York, New York .................................................................... 156 

Mindy L. Harris, President, National Association of Government Defined 

Contribution Administrators, Portland, Oregon ................................................ 166 

David L. Wray, President, Profit Sharing/401(k) Council of America, Chicago, 

Illinois ................................................................................................................... 171

Lisa A. Tavares, Esq., Partner, Venable Law Firm, LLP .................................... 178 

Norman P. Stein, Professor, University of Alabama School of Law, on behalf 

of the Pension Rights Center .............................................................................. 183 

David Certner, Legislative Counsel and Legislative Policy Director, AARP ...... 187 

SUBMISSIONS FOR THE RECORD 

American Council of Life Insurers, Statement ...................................................... 202 

Daniel Wintz, Omaha, Nebraska, Statement ........................................................ 204 

Gerald C. Schneider and Judith M. Schneider, Letter ......................................... 204 

Kevin Powell, Statement ......................................................................................... 205 

Massachusetts Mutual Life Insurance Company, Statement .............................. 209 

Matthew D. Hutcheson, Statement ........................................................................ 211 

South Carolina Retirement Systems, Letter ......................................................... 214 

Wayne H. Miller, Denali Fiduciary Management, Vashon, Washington, Statement ...................................................................................................................... 216 

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THE APPROPRIATENESS OF RETIREMENT 

PLAN FEES 

TUESDAY, OCTOBER 30, 2007 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS

Washington, DC. 

The Committee met, pursuant to notice, at 10:00 a.m., in room 

1100 Longworth House Office Building, Hon. Charles B. Rangel 

(Chairman of the Committee), presiding. 

[The advisory of the hearing follows:] 

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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

October 24, 2007 

FC–16 

Chairman Rangel Announces a Hearing on the 

Appropriateness of Retirement Plan Fees 

House Ways and Means Committee Chairman Charles B. Rangel today announced that the Committee on Ways and Means will hold a hearing on the appropriateness of fees that are charged to the pension plans of workers who participate 

in 401(k), 403(b), and 457 plans. This hearing will take place on Tuesday, October 30, 2007, in 1100 Longworth House Office Building, beginning at 10:00 

a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

FOCUS OF THE HEARING: 

This hearing will focus on the impact that administrative and investment fees 

have on workers’ ability to adequately save for their retirement. 

BACKGROUND: 

Over the past two decades, 401(k) plans have grown to be the most popular form 

of defined contribution (DC) retirement savings plans. As of 2006, approximately 50 

million American workers actively participated in a 401(k) plan, with an asset value 

of $2.753 trillion, which represents 16 percent of all retirement assets. 

Other common forms of DC plans are 403(b) annuity and 457 plans. According 

to a report by the Spectrum Group, there were approximately 31,450 Section 457 

plans in 2000. This market has grown over the last 7 years, as reflected in a recent 

report by the Employee Benefit Research Institute (EBRI) that examined 2004 data. 

The report estimated total Section 457 plan assets to be about $117 billion. More 

recent data on 457 plans for the first quarter of 2007 show assets of $161 billion, 

with more than 3.8 million participants. According to recent data released by the 

Investment Company Institute, Section 403 (b) plans held assets valued at $701 billion, with approximately 5.5 million workers participating in these plans. 

The growth in DC plans has resulted in a shift of the burden of saving for retirement. Today, the role of employers in these plans is shrinking while the role of the 

workers increases. The majority of workers who participate in these plans are responsible for making sure they set aside adequate savings to finance their retirement years. This includes making wise investment choices and monitoring account 

activity to ensure efficient use of funds. These funds can be easily eroded through 

excessive investment costs. 

According to the Bush Administration’s budget for fiscal year 2007, Federal tax 

expenditures for 401(k) plans were estimated at $39.8 billion for 2007 and a total 

of $233 billion over the next five years. Other employer-sponsored plans, including 

403(b) and 457 plans, were estimated to cost $52.4 billion for 2007 and a total of 

$228 billion over the next five years. 

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As assets in DC plans grow, so does the Federal subsidy for the savings held in 

these plans. The Committee is charged with the task of ensuring that these Federal 

tax subsidies are used as intended under the Internal Revenue Code. 

In announcing the hearing, Chairman Rangel said, ‘‘This is an important issue 

for millions of American workers who are being asked to shoulder the cost 

of saving adequately for their retirement. If we are going to ask our workers to fully take on this level of responsibility, and the Federal Government 

is going to subsidize these efforts, we have a duty to make sure that our 

Federal dollars are efficiently and effectively working for the benefit of our 

workers. We need to make sure that these subsidies are being reflected in 

the account balances of these workers.’’ 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘110th Congress’’ from the menu entitled, 

‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 

Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Tuesday, November 13, 2007. Finally, please note that due to the change in House mail policy, 

the U.S. Capitol Police will refuse sealed-package deliveries to all House Office 

Buildings. For questions, or if you encounter technical problems, please call (202) 

225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

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Chairman RANGEL. The Committee on Ways and Means will 

come together as we review the plan fees, how reasonable they are, 

and how we can protect our retirement system. We have now over 

700,000 plans serving more than 55 million workers, involving billions of dollars, and of course the excessive fees would erode these 

savings. Our Committee has a responsibility to see whether the 

Federal subsidy is fully going to the Beneficiaries, rather than in 

the hands of management, with assets of $2.5 trillion. Just a one 

percent rate of excess fees will divert $25 billion away from the 

workers. So, this hearing is to help us to have a better understanding of the problem so that we can work together with other 

Committees of jurisdiction to make certain that what we are subsidizing benefits the workers and not the management alone. So, 

I would like to yield to the Ranking Member, Jim McCrery, and I 

look forward to working with him in a bipartisan way. After he 

concludes, I would like to yield to Chairman Jim McDermott, who 

has spent a lot of time and has put a lot of good work into this 

problem and its solution. Mr. McCrery? 

Mr. MCCRERY. Thank you, Mr. Chairman. Today, our Committee will examine the fees that are charged within defined contribution retirement plans, what valuable services are being provided in exchange for those fees, how those fees are disclosed to 

both plan sponsors and participants and what the government is 

doing to ensure that workers’ savings are not eroded by excessive 

fees. These are necessarily complex issues, requiring a comprehensive analysis by the Committees of jurisdiction. This hearing will 

provide us with a better understanding of the intersection of retirement savings and the tax code. There is an expression I think that 

has been around here quite a while among policymakers and repeated often among staff and even lobbyists and that is that pension issues have always been bipartisan. This hearing is a perfect 

example of that sentiment. I want to thank Chairman Rangel and 

his staff who have worked so hard to put together this hearing and 

who have reached out to me and my staff from day one. Many of 

the witnesses here today are at our joint request. We welcome 

them and appreciate their contributions. 

Over many years, this Committee has provided tax preferred 

tools for Americans to save for their retirement. Employer-sponsored defined contribution plans like 401(k)s, 403(b)s, and 457 

plans enable workers to build nest eggs. The system is designed to 

make saving every pay period attractive, easy and rewarding. This 

is a success story. People are taking advantage of the savings opportunities we have provided them through the Tax Code. Participation is up. Workers are benefiting from the personal investment 

advice and automatic enrollment provisions we enacted as part of 

the Pension Protection Act of 2006, as well as a higher savings limits first enacted in 2001 and then made permanent in the Pension 

Protection Act. 

I am also encouraged that with respect to retirement plan fees 

and their disclosure to plan sponsors and participants, various government agencies are working together. They are listening to each 

other, considering all points of view. I look forward to hearing 

about those efforts today. The Congress, through its Committees of 

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jurisdiction, has a responsibility to ensure our policy goals for tax 

preferred retirement plans are being realized. 

Mr. Chairman, on the issue of helping Americans save, as on so 

many other important issues facing the country, I look forward to 

continuing our work together. I yield back and hope that the Committee will greet our witnesses, our great many witnesses today 

with enthusiasm and a search for understanding of these complex 

issues. Thank you. 

Chairman RANGEL. Thank you, Mr. McCrery. I think we are on 

common bipartisan ground, these Committees, especially the 

401(k)s were initiated to have private citizens assume more of their 

responsibility in their retiring years. Our Committee is there to 

provide the incentives to encourage them to do this. Certainly if we 

have found abuse in the system, there is no reason to believe why 

the Administration and Democrats and Republicans alike would 

not want to work together. So, I appreciate the outstanding quality 

of witnesses that we have before us today. I thank you not only for 

your written statements and your testimony, but I am hoping that 

you continue to work with our staffs in a bipartisan way so that 

we can come up with a solution that will have for political setbacks. As always, is when we are trying to correct something where 

people unfairly benefit, but if we act in a cooperative way and a 

bipartisan way, I am certain that the American people would believe that we are trying to do the right thing, so I thank you for 

the work that you have engaged in this subject already, and I want 

you to share the benefit of that experience with us to make certain 

that we are on the right track. 

At this time, I will ask that Chairman Jim McDermott to continue to chair this meeting and allocate the time as he and the 

Ranking Member would see fit. Mr. McDermott? 

Mr. MCDERMOTT [presiding]. Thank you very much, Chairman 

Rangel. We are here today to address a pocketbook issue affecting 

an increasing number of Americans because our laws simply have 

not kept pace with the changes in the American economic landscape. We know today that America’s future retirees will need to 

rely upon their personal savings more than any time since the second World War. Here is why: If you turn your attention to the 

monitors, you can see in graphic detail how pension plans have 

changed. Over the last 25 years, the availability of traditional defined benefit pension plans have plummeted from about 30 percent 

down to 5 percent,—if you look at the chart up there, you will see 

the red line—and so has the participation by the American people. 

In 1980, it was 30 percent and now we are at 5 percent. 

Now, defined contribution plans, 401(k) plans have basically replaced them and that is what that yellow line is on the graphic. 

The risk of retirement security has been shifted from employers to 

employees, workers. We are talking about the amount of money 

people have to live on and this shift of personal plans dramatically 

emphasizes the need to make every invested dollar count. So, it is 

critically important for people to consider the cost of administering 

a 401(k) plan and who pays the cost. The answer to these questions 

are startling. 

First, let’s look at the next slide. In a very recent survey, July 

2007, AARP determined that 83 percent of participants did not 

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even know how much they were paying in fees. They absolutely 

were ignorant of what the plan was costing them. In fact, 65 percent of the participants thought they paid no fees at all. 

Let me reiterate a shift in our economy to personal plans dramatically emphasizes the need to make every invested dollar count 

and grow. These fees, which come in all shapes and sizes, often 

seem relatively small but this next slide shows the impact. Now, 

even a 1 percent difference, and that slide is a little hard to see, 

but if you put $20,000 in and then let it accumulate over the next 

20 years. A 1 percent difference in fees will amount to $12,000. So, 

we are talking about a huge amount eaten up by these fees, and 

people are basically unaware of it. The Chairman is raising an 

issue today of whether we should require more disclosure of the 

fees associated with defined contribution pension plans and it is 

important and very timely. 

My colleague, Mr. Neal, and others is ahead of the curve and has 

already introduced legislation as did Chairman Miller of the Education and Labor Committee. So, I am looking forward to your testimony today because we must be sure that today’s workers and tomorrow’s retirees are adequately empowered and enabled to understand, invest and prepare for their retirement needs. 

We have a very distinguished panel to begin with today. The first 

of our panelists is the Honorable Bradford Campbell, who is the 

Assistant Secretary of Labor for employee benefits at the Department of Labor; Mr. Reeder is a Benefits Tax Counsel for the Office 

of Tax Policy at the Department of Treasury; Andrew Donohue is 

the benefits—or is the Division of Investment Management of the 

U.S. Securities and Exchange Commission; and Barbara Bovbjerg 

is the Director of Education and Workforce and Income Security 

issues for the government Accountability Office (GAO). So, Mr. 

Campbell, we look forward to your testimony. Your full testimony 

will be put into the record. We would like you to try and keep your 

testimony to 5 minutes and then we will turn the crew loose on you 

for questions. 

Mr. Campbell? 

STATEMENT OF THE HONORABLE BRADFORD P. CAMPBELL, 

ASSISTANT SECRETARY OF LABOR, EMPLOYEE BENEFITS 

SECURITY ADMINISTRATION, U.S. DEPARTMENT OF LABOR 

Mr. CAMPBELL. Yes, sir. Thank you, Mr. Chairman, Mr. 

McDermott, Mr. McCrery and the other Members of the Committee 

for this opportunity to testify today to discuss 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 of Labor. Over 

the past 20 years, the retirement plan universe has undergone significant changes, as Mr. McDermott noted, that affect both workers 

and plan fiduciaries. More workers now control the investment of 

the retirement savings and participant-directed individual account 

plans, such as 401(k) plans, and at the same time the financial 

services marketplace has increased in complexity. Plan fiduciaries, 

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able plan expenses, have found their jobs more difficult as the 

number and types of fees proliferate and as relationships between 

service providers become more complex. 

These trends cause the Department to conclude that despite the 

success of our fiduciary outreach and education efforts, a new regulatory framework was necessary to better protect the interest 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 disclosures, comparative information that helps them 

choose between their plan options. 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 to assess whether the cost of services are necessary, appropriate and reasonable. 

The third regulation addresses disclosures made by plan administrators to the public and the government via the Form 5500, the 

annual report filed by pension plans with the Department of Labor. 

It is essential to understand that the disclosure needs of each of 

these groups are different and that therefore the disclosures that 

we will require in our regulatory process are also different. 

Participants are choosing investments from among a defined universe of plan options and to do this they need concise summary information that allows them to compare these options in meaningful 

ways, taking into account the fees, the historical rates of return, 

the nature of the investment, and other information relevant to 

that decision. Plan fiduciaries are trying to decide if the services 

that they are receiving and the prices they are charged are reasonable and necessary, taking into account the needs of the plan as 

a whole. 

The fiduciaries also need to know whether the services that are 

provided will be influenced by compensation arrangements between 

the plan and third parties and the nature of the services provided 

their necessity and the reasonableness of the fees. The process by 

which plan fiduciaries make these prudent decisions necessitates a 

very detailed and comprehensive disclosure. 

Earlier this year, we issued a Request For Information on participant level disclosures and there appears, based on the responses 

we received, to be basic agreement that participants generally will 

not benefit from lengthy disclosure documents that contain large 

quantities of legalese and detailed information because they simply 

will not be used. Because participants typically bear the cost of producing these disclosure materials, doing so in that way could perversely have the effect of increasing plan fees without providing additional utility. 

I wanted to make sure that the Committee understands that we 

are not at the beginning of these regulatory projects, we are actually quite far advanced in the process. One of the three regulations 

will be final in the next several weeks, dealing with the disclosure 

to the public. We will also—we have completed drafting, and currently the Administration is reviewing and we will promulgate in 

the next several months these service provider disclosures to plan 

fiduciaries proposed regulation. We have also concluded, as I mensmartinez on PROD1PC70 with HEARING

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tioned, the Request For Information on participant level disclosures 

and anticipate issuing a proposed regulation in this area this Winter. 

I want to commend the Committee for its interest in this issue, 

but I also want to note that it is not necessary for there to be additional legislation for the Department to engage in these regulatory 

projects. We have the authority under current law to do so. I believe that our regulatory initiatives will address the issues that 

have been raised thus far and Congress’ consideration of these 

issues. I think also given the technical nature of many of the issues 

presented, the regulatory process is well suited to resolving many 

of the concerns that have come up. It is deliberative, it is open, it 

is inclusive in its design to resolve many of these complex issues. 

If the Committee does choose to pursue legislation, I would ask 

that it bear in mind the work that we have already done as it considers these issues. 

In conclusion, Mr. Chairman, I would like to thank you and Mr. 

McDermott and Mr. McCrery, you and your colleagues for your interest in this issue because it is very important to ensuring adequate retirement security for America’s workers. I am committed 

personally to ensuring that our regulatory projects are completed 

in a timely manner. I would be happy to answer any questions you 

may have. 

[The prepared statement of Mr. Campbell follows:] 

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Mr. MCDERMOTT. Thank you very much for your testimony. 

Thank you. 

Mr. Reeder? 

STATEMENT OF W. THOMAS REEDER, ESQ., BENEFITS TAX 

COUNSEL, OFFICE OF TAX POLICY, U.S. DEPARTMENT OF 

THE TREASURY 

Mr. REEDER. Mr. Chairman, Ranking Member McCrery, Members of the Committee, I appreciate the opportunity to appear 

today to discuss retirement plan investment fees and other expenses paid by participants and sponsors in tax preferred retirement plans. The administration commends this Committee in promoting the facilitation of establishment of retirement savings plans 

by as many employers as possible and encouraging participation in 

those plans by as many workers as possible. Transparency of the 

cost of investing the assets of these plans is certainly an important 

factor in making employer-sponsored savings plans more attractive 

to employers and workers. 

The Employee Retirement Income Security Act 1974, or ERISA, 

established minimum reporting, disclosure, fiduciary, and tax rules 

related to retirement plans, as well as remedies for violation of 

those rules. Responsibility for the interpretation and enforcement 

of ERISA was divided among the Labor Department, the Treasury 

Department, and the Pension Benefit Guaranty Corporation Originally, ERISA granted dual jurisdiction to both the Labor and 

Treasury Departments over certain issues but shortly after 

ERISA’s enactment, the ERISA Reorganization Plan No. 4 1978 allocated responsibility for particular issues between the two departments. The division of jurisdiction between Labor and Treasury has 

evolved into a balance that works very well to capitalize on the expertise in those two departments. 

Pursuant to ERISA and the Reorganization Plan, the Labor Department has primary jurisdiction over the reporting, disclosure, 

and fiduciary responsibility rules of ERISA. Nonetheless, the 

Treasury Department certainly shares with its partner agency the 

goals of minimizing plan expenses. The Internal Revenue Code contains substantial favorable tax treatment for retirement savings, 

and we all are working to maximize the efficiency of that favorable 

treatment. Dollars spent on plan fees, as has already been pointed 

out, and expenses are dollars not available for retired Americans. 

Over time, excessive or hidden fees will significantly erode a worker’s retirement savings. 

At Treasury and the IRS, we have worked hard to reduce the 

cost of sponsoring and maintaining tax qualified retirement plans. 

For example, we continue to expand plan sponsors’ ability to use 

pre-approved plans, which are much less expensive to sponsor and 

maintain than individually designed plans. We developed and continued to refine a correction program under which plan sponsors 

can voluntarily correct qualification problems in a structured, predictable, cost-effective manner rather than having to disqualify the 

plan completely. 

As described in more detail in my written testimony, we have 

also specifically addressed and continue to consider options for adsmartinez on PROD1PC70 with HEARING

21 

dressing plan fees and expenses in a limited number of contexts 

within the Treasury Department’s jurisdiction. 

We appreciate the Committee’s concern for enhancing participant 

disclosure and providing transparency of cost information. At the 

same time, we share the Labor Department’s concern that legislation in this area could disrupt the Labor Department’s significant 

ongoing deliberative efforts to enhance disclosures of plan fees. We 

are also concerned that the cost of additional disclosure will ultimately be borne by plan participants. In designing any new disclosure requirements, the expected participant cost should be carefully weighed against expected benefits to participants of additional 

disclosure. Excessive disclosures related to plan fees and costs 

could be confusing and thus could actually impair rather than enhance a worker’s ability to make informed decisions regarding their 

plan investments. 

Moreover, while fees and other costs are very important factors 

in a plan sponsor’s choice of third party investment and administrative service providers and in a participant’s choice of particular 

investment options, these costs are not the only factors: customer 

service, reliability, accuracy, communications, returns, management continuity and quality, and many other factors may be appropriate for plan sponsors and participants to consider. Care should 

be taken in structuring disclosure requirements so that fees and 

costs are not over emphasized. 

In conclusion, we look forward to working within the administration, as well as with Congress, to address issues regarding plan investment fee transparency in a manner that facilitates the establishment of more plans and maintenance of those plans by American employers for their workers and facilitates participation in 

these programs by their workers. 

I appreciate the opportunity to appear today, and I will be happy 

to answering any questions you may have. 

[The prepared statement of Mr. Reeder follows:] 

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Mr. MCDERMOTT. Thank you very much for your testimony, 

Mr. Reeder. 

Mr. Donohue? 

STATEMENT OF ANDREW J. DONOHUE, DIRECTOR, DIVISION 

OF INVESTMENT MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION 

Mr. DONOHUE. Chairman Rangel, Ranking Member McCrery, 

Mr. McDermott, and Members of the Committee, I am pleased to 

be here today to discuss the Securities and Exchange Commission’s 

perspective on the challenge of helping workers invest for their retirements. With a rapidly aging workforce, you have rightly identified this as an issue of current concern. 

In the 21st century, Americans will live significantly longer than 

their parents and longer than most of them planned for their retirement. A number of older Americans will face difficulties in 

making their retirement assets last an extra decade or more. 

Last year, the SEC launched the Seniors Initiative to address 

these issues from a number of angles, from investor education, to 

targeted examinations, to aggressive enforcement efforts. The hallmarks of this initiative have been partnership with other agencies 

like the relationship we have built with the Department of Labor 

with respect to our ongoing examination of the adequacy of disclosures available to investors concerning mutual funds and other investment vehicles in a typical defined contribution retirement plan. 

A significant part of the Commission’s regulatory responsibilities 

with respect to mutual funds involve the development and administration of mutual fund disclosure requirements. With over 96 million Americans investing in mutual funds for their retirements, 

their children’s education needs, and their other basic financial 

roles, it is important that mutual fund disclosure is effective. As a 

result, fund investors, including those who invest through defined 

contribution plans, should receive clear, concise and meaningful 

disclosure about key fund information. 

Today, I will outline the Mutual Fund Disclosure Reform Initiative that my staff is preparing for Commission consideration, and 

the way in which it could prove to be helpful in the defined contribution plan marketplace. 

In recent years, numerous commentators have suggested that investment information that is central to an investment decision 

should be provided in a streamline document with other more detailed information provided elsewhere. Furthermore, recent investor surveys indicate that investor prefer to receive information in 

consider, user-friendly formats. 

To gather perspectives from the public, in June of 2006, the Commission held a roundtable on interactive data and mutual fund disclosure reform issues. At the roundtable, representatives from investor groups, the mutual fund industry, analysts and others discussed how the Commission could change the mutual fund disclosure framework so that investors would be provided with better information. 

Significant discussion at the roundtable concerned the importance of providing mutual fund investors with access to key fund 

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pants focused on the importance of providing mutual fund investors 

with shorter disclosure documents containing key information with 

more detailed disclosure documents available to investors who 

choose to review the additional information. Roundtable participants identified the most important information that investors are 

likely to need to make an investment decision, such as information 

about a mutual fund’s fees and investment objectives and strategies, risks and performance. 

We have also benefited from the work of a Mutual Fund Task 

Force organized by the National Association of Securities Dealers 

(NASD). This Task Force concluded that investors would benefit 

from the creation of a profile plus document that would be available on the Internet and would include, among other things, basic 

information about a fund’s investment strategies, risks and total 

cost with hyper links to additional information on the fund’s prospectus. 

The Commission is examining ways to reform the mutual fund 

disclosure framework. The goal of this examination is to find the 

best way to get investors a concise summary document containing 

key information about a fund described in plain English and in a 

standardized order. The key information contained in a concise mutual fund summary potentially could include a fund’s fees and investment objectives and strategies, risks and performance. This reform initiative is intended to provide investors with information 

that is easier to use and more readily accessible while retaining the 

comprehensive quality of the information available today. This 

should help investors who are overwhelmed by the choices among 

funds, which are too often described in lengthy and legalistic 

prospectuses. A concise mutual fund summary could enable investors to readily access key information that is important to an informed investment decision, including information about fund fees. 

If the Commission determines to propose the reformed mutual 

fund disclosure framework, I am hopeful that we will receive helpful public comment on the utility of the proposed approach. As the 

staff works to develop a reform initiative, we will do it with a view 

toward making it useful for all fund investors, including those in 

defined contribution plans. Along these lines, my staff and I have 

been working with the Employee Benefits Security Administration 

of the Department of Labor (EBSA). We keep EBSA apprised of our 

progress on the mutual fund disclosure reform initiative. We also 

have been discussing how a concise mutual fund summary could 

dovetail with EBSA’s efforts in the defined contribution plan market. The work with EBSA has been helpful, cooperative, and mutually beneficial. Our staff and I will continue to work with Assistant 

Secretary Campbell and the EBSA as we move forward on mutual 

fund disclosure reform. 

Thank you for this opportunity to appear before the Committee, 

and I would be happy to answer any questions you may have. 

[The prepared statement of Director Donohue follows:] 

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Mr. MCDERMOTT. Thank you very much for your testimony, 

Mr. Donohue. 

Ms. Bovbjerg? 

STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME SECURITY ISSUES, U.S. 

GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. BOVBJERG. Thank you, sir, Mr. Chairman, Mr. McCrery, 

thank you so much for inviting me here today to speak about the 

importance of 401(k) fee information and providing it to plan sponsors and participants. Plan sponsors, as fiduciaries, need the expense information necessary to make plan design and administration choices that are in the best interest of the participants. For 

participants, information about the fees being charged is important 

if individuals are indeed to be responsible for making wise decisions about their accounts. 

I will speak first today about what information plan sponsors 

need, then discuss the information most necessary for participants. 

My statement is drawn primarily from our work last year on 401(k) 

fees. 

Plan sponsors need a broad range of expense information, including fees, to adequately fulfill their fiduciary duties. ERISA, the law 

governing employer pension plans, requires that sponsors evaluate 

fees for reasonableness. While sponsors likely know what fees are 

associated with the investment options they offer to plan participants, they know less about fees embedded in the costs associated 

with the outside vendors that many hire to perform plan services. 

Specifically, as we noted in our prior work, plan sponsors may not 

have information they need on business arrangements among these 

outside service providers. Such arrangements, including revenue 

sharing, can represent hidden fees and could embody conflicts of interest negatively affecting plan participants. We have made recommendations to require plan service providers to offer sponsors 

information of this nature. 

In our work with the pension industry, sponsor representatives 

and the Department of Labor, we have observed general agreement 

that sponsors should obtain such information. However, you should 

be aware that there is disagreement among pension professionals 

as to how much sponsors need to know about the so-called bundled 

arrangements, which are aggregations of services. Some feel that 

breaking down these consolidated fees into their component parts 

would raise plan costs and not provide particularly useful information. Others believe that not providing a break-out of such services 

and their costs would hide information from sponsors. However 

cost and fee information is provided, we believe fundamentally that 

it should be offered clearly and in a consistent way so sponsors can 

assure themselves, plan participants, and ultimately the Department of Labor that plan costs are reasonable. 

But let me turn now to what participants need to know. Although most participants are responsible for directing the investment of their 401(k) accounts, few know what they pay in fees or 

even if they pay fees at all according to an AARP survey and this 

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ings by 17 percent, so it is clear that participants need basic fee 

information. What is not so clear is what information is the most 

relevant. 

Most would agree that participants need to know what direct expenses are charged to their accounts. In our earlier report on this 

topic, we recommended that participants at least get information 

that allows them to make comparisons across investment options 

within their plans. We suggested that expense ratios would meet 

this need in most instances. Participants may also benefit from information on other types of fees, for example, annual fees or fees 

charged on a per transaction basis. Industry professionals we contacted also suggest that additional investment-specific fees might 

usefully be disclosed including sales charges, surrender charges, 

and so-called wrap fees. Some also suggest that participants receive information on returns net of fees to encourage them to consider fees in the context of an overall investment return rather 

than focusing on fee levels alone. 

However, even more so than for sponsors, keeping the information simple and consistent is important if participants are to read 

and make use of it. In prior work, we found that certain practices 

help people understand complicated information. The use of simple 

language, straightforward and attractive lay-out, brevity and multiple means of distribution are all key to documents the general 

public will obtain, read, and comprehend. The format content and 

means of conveying 401(k) fee information will be crucial to achieving not just disclosure, but also improved participant understanding. 

In conclusion, 401(k) sponsors and participants both need better 

and more consistent information on plan fees. Focusing on the most 

basic fee information, providing it in a way that participants will 

read and understand it, and being consistent in its provision across 

plans will be key. Providing information of this nature will not only 

inform plan participants in making retirement savings and investment decisions, it may also have the salutary effect of sharpening 

competition and, in the end, reducing fees charged to 401(k) plans. 

That concludes my statement, Mr. Chairman. I welcome your questions. 

[The prepared statement of Ms. Bovbjerg follows:] 

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Mr. MCDERMOTT. Thank you very much for your testimony. 

Without objection, I would like to enter into the record a statement 

by George Miller, the Chairman of the Education and Workforce 

Subcommittee. 

[The prepared statement of Mr. Miller follows:] 

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Mr. MCDERMOTT. Mr. Campbell, I read the GAO highlights 

from last year in September and it says, ‘‘Congress should consider 

amending ERISA to require sponsors to disclose fee information on 

each 401(k) investment option in the plan to participants and to require that 401(k) service providers disclose plan sponsors for compensation providers received from other service providers. In addition, GAO recommends that Labor require plan sponsors to report 

a summary of all fees paid out of assets or by participants. Labor 

generally agreed with the findings and conclusion of the report.’’ 

Why has nothing been done at this point? 

Mr. CAMPBELL. Well, actually, Mr. Chairman, I would take 

some issue with that, that nothing has been done. In fact, we have 

been quite active in this area for some time. 

Mr. MCDERMOTT. When will your regulations be issued? 

Mr. CAMPBELL. The first of the three regulations will be a final 

regulation within the next several weeks. That goes to disclosures 

to the public and to the government in the Form 5500. The proposed regulation for disclosures by service providers to plan fiduciaries is currently under review and will be promulgated within 

the next 2 months or so. The final regulation disclosures to participants, we completed a Request For Information (RFI) this summer 

to address those issues because those are some of the most technically difficult to address, and we will be issuing the proposed regulation this winter. 

Mr. MCDERMOTT. Let me be a little more specific, do any of 

those regulations exempt the disclosure of fees collected by bundled 

plans? 

Mr. CAMPBELL. No, this has been an issue that I think has become somewhat confused as two service providers with different 

business models look at our proposed regulation on the Form 5500 

and offer different perspectives in the comment process. We believe—the interest in the Labor Department is ensuring that fiduciaries of plans have the information they need to carry out their 

duties under the law, to be able to assess the reasonableness of 

fees. In order to do that, we believe some of those fees clearly need 

to be broken out by bundle providers and others may not necessarily have to be. It is a question of which fees are appropriate 

to that understanding. With that respect, transaction-based fees I 

think would clearly need to be broken out, fees that are taken out 

of assets under management, finders’ fees and fees that would 

cause a material conflict of interest on the part of service providers 

with respect to third parties. Those are all areas that I think additional disclosure would be necessary regardless of the business 

model employed by a various service provider. 

Mr. MCDERMOTT. Would that include fees paid by one provider, a manager, or received from another 401(k) plan that is 

being offered by the first provider, sort of—I do not know what you 

would call it, but some kind of return on investment, if I sell your 

stuff, do you give me something back? 

Mr. CAMPBELL. It could well. The issue would be the nature of 

the fee itself and whether it is material to the plan to understand 

that relationship and how it would impact the fees that plan is 

paying or the services it is receiving. If, for example, it is receiving 

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sideration, so we the plan fiduciary would need to be able to assess 

whether there were material conflicts of interest by that advice 

provider. 

Mr. MCDERMOTT. So, you are saying that revenue sharing 

would actually be covered in the things that are revealed? 

Mr. CAMPBELL. Well, as I said, I think it would depend on the 

category of the fee in terms of how it is broken out. I am not trying 

to dodge your question. It unfortunately gets rather difficult in 

breaking out the specific types of fees, what they are called versus 

what they actually do. For our purposes, we would look at, as I 

said, issues like are they transaction-based, and are they coming 

out of the assets under management to determine whether those 

fees are material. 

Mr. MCDERMOTT. Thank you. Mr. McCrery? 

Mr. MCCRERY. Mr. Campbell, it is my understanding that the 

Department of Labor under ERISA has the responsibility for oversight of the fiduciary responsibilities of sponsors, is that correct? 

Mr. CAMPBELL. Yes, sir. 

Mr. MCCRERY. Can you just give us a thumbnail sketch of what 

the standards are that plan sponsors are supposed to adhere to? 

Mr. CAMPBELL. Certainly, sir. With respect to selecting service 

providers, the plan fiduciaries are responsible and they are personally liable for losses that would result from a breach of these duties. They are responsible for ensuring that the plan is paying for 

only necessary and appropriate services and that these services are 

reasonable, that the contract is not of an excessive duration, that 

the amount being paid in relation to the services being received is 

appropriate. So, in the course of assessing that duty, it is incumbent on plan fiduciaries to go out and solicit information from various service providers to get a sense of how those fees relate to one 

another and whether the deal, so to speak, the offer they are looking at is appropriate and meets those duties. So, it is a process-oriented decision that goes into have you followed a prudent process 

in assessing those issues. 

Mr. MCCRERY. How does the Department of Labor enforce that 

responsibility under ERISA? 

Mr. CAMPBELL. Looking into the prudence of fees and the reasonableness of fees is one of the issues that we do conduct in our 

ongoing enforcement. In the last several years, we had something 

in the order of 350 cases that involved fee questions and recovered 

I believe something over $60 million for plans associated with 

those. But in part, it is because looking at this issue and the proliferation of new and different kinds of fees and the complexity of 

this marketplace, that we decided that education and outreach 

alone and enforcement alone were not sufficient, that what was 

necessary was an enhanced regulatory structure that would globally address these concerns and that is why we devised the three 

regulations that we are currently proposing. I think this particular 

issue that you are describing with disclosures by service providers 

to plans would be particularly addressed by our regulation that 

would essentially redefine what a reasonable contract is in order to 

qualify for the statutory exemption for a reasonable contract by 

specifying what disclosures are necessary, that they be in writing 

and these sorts of considerations. 

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Mr. MCCRERY. So, does the Department of Labor act as kind of 

the IRS over taxpayers, do you audit randomly plan sponsors and 

their plans? 

Mr. CAMPBELL. We target our investigations by a variety of 

methods. Some of it we determine by looking at data filed with us 

on the Form 5500. That would be sort of analogous to reviewing 

the 10forties and looking for anomalies. We do that. We also, of 

course, get tips from participants, from plan fiduciaries, from service providers. We do not generally conduct purely random audits 

given the size of this universe. We have determined that we can 

be more effective in our enforcement efforts by targeting areas that 

we believe, based on what we have seen in our investigations, need 

additional interest. Sort of a proxy for that random audit is that 

when we do an investigation of a plan, we do not look solely at the 

one issue that brought us there. We tend to look more comprehensively at a variety of issues which gives us a similar effect while 

still targeting our enforcement resources. 

Mr. MCCRERY. Did you say that the new regulations that you 

are developing, the three demonstration projects that you are undertaking now as well as any other re-formulation of regulations, 

will help you to audit and to discover instances of abuse? 

Mr. CAMPBELL. Yes, sir, we will be collecting additional information about fees and expenses on the Schedule C of the Form 

5500, which will assist us in that portion of targeting. It will also 

be in the 408(b)(2) regulation the disclosure by service providers to 

plans requiring written contracts with all the disclosures that we 

have been discussing here today, which will help us ensure that 

both service providers have complied and that fiduciaries have conducted their duties appropriately in evaluating that information. 

Mr. MCCRERY. Mr. Chairman, I think it is very important that 

we support and, if necessary, supplement the efforts of DOL in enhancing their ability to ensure that plan sponsors are being good 

fiduciaries. The reason I say that is to me, you have got the responsibility of the plan sponsors to act as fiduciaries for the participants. Basically, we are talking about employers acting as fiduciaries for their employees. I get stuff in the mail, I have got mutual funds, I have got a Thrift savings plan. I have got an IRA that 

I had before I came to Congress, and I get stuff. I get these reams 

of stuff in the mail. Do I read them? Heck, no. Raise your hands, 

you out in the audience, if you read all that stuff you get in the 

mail. You do not either. Lie detector test right here. My point is 

that the plan sponsor, the employer, is much better able to look at 

all of these fees and the appropriateness of these fees than I can 

or a plan participant, an employee. They are just not going to do 

it, so I think DOL, based on what I have heard today, is headed 

in the right direction of enhancing their ability to monitor, to audit, 

and, if necessary, to impose fines punishment for plan sponsors 

that are not being good fiduciaries rather than our focusing micro 

on what plan participants need to know about conflicts of interest 

and this and that and bundling and unbundling. That is fine, but 

what I want to know as a plan participant, is what is my cost over 

the years going to be, is it going to be one point higher than Plan 

B or one point lower? Then I can weigh what is the history of performance of Plan A versus B, that is all I need to know. I do not 

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need to know all this gobbledy gook, I will not look at it, I will not 

read it. 

Mr. MCDERMOTT. Although I did not read it all, I did find a 

report that the Department of Labor studied this issue in 1997, 

they wrote a report and that was the end of it. So, we hope that 

this time we do not just wind up with a report sitting on the shelf, 

they actually do come out with some regulations. I think it is time 

for there to be action taken. 

Mr. CAMPBELL. I assure you, Mr. Chairman, that is my intent. 

I cannot speak for what the Clinton Administration did or did not 

do. 

Mr. MCDERMOTT. This is not a partisan issue. This is an issue 

that has been all across and everybody has reason to be concerned 

about it. Mr. Rangel? 

Chairman RANGEL [presiding]. Well, it is not partisan unless 

you want to make it that. 

Mr. CAMPBELL. Not at all, sir. 

Chairman RANGEL. I agree with Mr. McCrery that just like insurance policies, all we want to know is are we getting a good deal 

and we do not want to know bad news. We want someone to kind 

of help us to be guided and believe that someone is taking care of. 

If it is not DOL or IRS, do not interfere, but at least allow us to 

know at the end of the day that the funds are being managed with 

a sense of fiduciary relationship. Having said that, I assume that 

all of you agree that the dramatic increase in these funds means 

that we should review how they are managed. Is there anyone that 

believes that we should just leave it alone and it will work its way 

out, work itself out? If we have to do something, have your departments and agencies ever come together to say that we have a problem in our country and make some contribution, as you definitely 

are this morning, to this panel in suggesting to us, as the GAO 

has, as to recommendations, as to what, if anything, we should be 

doing as the Legislative Branch of government? Mr. CAMPBELL? 

Mr. CAMPBELL. I believe all three agencies here have been coordinating very closely on this issue to ensure that we are within 

our different statutes, working in complementary fashion to address these concerns. 

Chairman RANGEL. You are doing that now? 

Mr. CAMPBELL. Yes, sir. 

Chairman RANGEL. All of you have had an opportunity to read 

the report of the GAO. Does that make any sense to the agencies 

that have managerial responsibilities of the funds? Have you taken 

any of the recommendations of the GAO into consideration? 

Mr. CAMPBELL. Yes, sir, we have indeed. In fact, in the development of these three regulations, the GAO’s work has been helpful to us as well as the other comments that we have received from 

the public. In our response to the report that Mr. McDermott mentioned, we said that we generally agreed with the findings of the 

GAO and that is correct, we do, and that is why we engaged in 

these projects, not in response to the GAO report but, in response 

to this problem that all of us are perceiving. 

Chairman RANGEL. Well, have any of their recommendations 

made any sense to you so that you have adopted any of them? 

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Mr. CAMPBELL. Yes, sir, I believe that we have. I think in the 

proposed regulations that will come out, it will be clear where the 

areas of agreement have been, and I think the general thrust of 

their comments are consistent with the thrust of our regulations. 

Chairman RANGEL. Well, absent—aside from the regulations, 

do you believe there is need for legislation by this Committee or 

any other Committee to assist you in monitoring how these funds 

are being managed? Do you think that the best thing we can do 

is to stay out, it or are there recommendations, legislative recommendations, you are prepared to make? 

Mr. CAMPBELL. Well, at this point we believe that we have the 

statutory authority already to pursue these regulations and that 

taken together these three regulations do cover the waterfront of 

the issues here and that the regulatory process is well suited to resolving these concerns. 

Chairman RANGEL. SEC agrees? 

Mr. DONOHUE. Chairman Rangel, the SEC does agree. We have 

worked closely with the Department of Labor and as we have been 

working with our simplified disclosure reform project, we have been 

keeping in touch with the Department of Labor with an effort to 

see how we can be helpful to make sure that America’s investors 

have access to the information that they need to make informed investment decisions when they have an opportunity to invest in 

products and mutual funds that are under our jurisdiction. We 

have had very good cooperation from the Department of Labor in 

that regard. 

Chairman RANGEL. Does the GAO agree that the departments 

are treating your recommendations with some degree of urgency or 

the respect that you think it deserves? 

Ms. BOVBJERG. I think that the Department of Labor is trying 

to address the three recipients of information that our three recommendations addressed. One was what information comes to the 

Department of Labor in the Form 5500; we made that recommendation to Labor and they are working on an enhanced disclosure for them to use in enforcing ERISA. The other two were 

recommendations to Congress to amend ERISA to improve information that sponsors can get from service providers and information 

that sponsors must provide to participants. When we were considering these recommendations, we thought very carefully before 

making a recommendation to Congress to amend a statute, and we 

did believe that there were questions about whether Labor’s regulations would cover all plans, for example, not just 404(c) plans, and 

whether they would indeed have the authority to regulate non-fiduciary service providers. Hence, we put these as recommendations to 

Congress. 

Chairman RANGEL. Let me take this opportunity to thank GAO 

for the good work that you continue to do. Tell me when did you 

say that this practice of regulations would be prepared so that we 

can take a look at it? 

Mr. CAMPBELL. The final Form 5500 regulation will be released 

within the next several weeks. The proposed service provider disclosure regulation will be released within the next 2 months approximately and the participant level disclosures, we concluded a 

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RFI this summer and will be releasing a proposed regulation this 

winter. 

Chairman RANGEL. To the GAO, having heard the broad jurisdiction that DOL claims to have, do you still think there is need 

for legislation outside of the regulations? 

Ms. BOVBJERG. We stand by our recommendations. We think 

it would enhance the likelihood that these disclosures would survive without challenge. 

Chairman RANGEL. Well, let’s continue to work together. We 

look forward to the package that you are going to present to us, 

and I want to thank you, Mr. Chairman. 

Mr. MCDERMOTT [presiding]. Mr. Herger? Mr. Lewis? Mr. 

Neal? 

Mr. NEAL. Thank you, Mr. Chairman. Mr. Reeder, in your testimony, you cautioned against mandating overly detailed and 

lengthy disclosures. As you may know, the approach I have taken 

in my bill is a limited disclosure in major categories of cost to both 

workers and employers with the hope that increasing transparency 

can allow for more competition amongst providers. You suggested 

that any increase in cost should be weighed against benefits. Do 

you agree that improved performance and lower fees or expenses 

may be worth the cost if it is offered as I suggest? 

Mr. REEDER. Yes, Mr. Neal, I do agree that increased disclosure 

will in fact be beneficial, and I think the approach of your bill is 

an interesting approach. I have to agree with my colleague from 

the Department of Labor that I think they can mandate that 

through regulations, however without an additional mandate from 

Congress. 

Mr. NEAL. You also recommend that allowing State and local 

government plans to continue to oversee their retirement plans, including an effort to ferret out hidden fees. But, as one expert witness on panel three will tell us later, many are already forced to 

hire independent consultants to assist in this process, as noted by 

‘‘The New York Times’’ yesterday as incidentally pretty good paying jobs apparently, would you agree that some limited and simple 

disclosure, either within the confines of the Tax Code or ERISA, 

could assist these local governments in getting the best deal from 

vendors? 

Mr. REEDER. It is difficult for me to take a position contrary to 

many years of experience and jurisprudence with Congress mandating stuff on States, but traditionally ERISA and the Code have 

exempted State and local governments from particular requirements for reasons of federalism issues, but I think that is Congress’ 

decision to make. 

Mr. NEAL. Ms. Bovbjerg, in your testimony, you cite the recommendations of one expert before the ERISA Advisory Committee 

who suggested that companies need to evaluate fees based on three 

categories of services: investment, administrative, and third party 

expenses. This is similar to the disclosure I have sought in my legislation. Do you think that disclosure in these three broad groups 

is feasible by both bundled and unbundled service providers? 

Ms. BOVBJERG. I would like to think that it is feasible. We are 

told by bundled providers that it would be costly and difficult for 

them to do that. We have not assessed how costly it would be, how 

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difficult it would be. So, we are operating on the premise that it 

is feasible, but don’t know at what cost. 

Mr. NEAL. Okay. I had intended to go to Mr. CAMPBELL before 

you, but I was concerned my time would expire. Mr. Campbell, a 

similar question. Is it true that the proposed DOL regulation would 

have exempted bundled service providers from any additional disclosure provided by unbundled providers? 

Mr. CAMPBELL. No, sir. I think, as I indicated before, there has 

been some dispute as to exactly what the proposed regulation 

would have required, and I think that is in some ways, the beauty 

of the notice of common process is the comments we received in response that help us analyze where we were clear and where we 

were not. As I indicated before, our concern is making sure that fiduciaries have the information they need and to the extent fees, 

such as transaction-based fees, fees that are coming out of assets 

under management, finder’s fees, and material conflicts of interest 

are at play, those should be broken out regardless of the business 

model of the service provider. 

Mr. NEAL. Well, if you heard that some bundled providers were 

already doing additional disclosure to some customers by segregating out major expenses, would you change your opinion of 

whether bundled providers can and should disclose more? 

Mr. CAMPBELL. Well, again, sir, our concern is ensuring that 

the plans have the information they need to make appropriate decisions. It is not in my view the place of the Department of Labor 

to specify which business model is the correct one. As long as the 

information necessary is coming out, then the interests of the law 

have been served. 

Mr. NEAL. Thank you, Mr. Chairman. 

Mr. MCDERMOTT. Thank you. Mr. Johnson? 

Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Campbell, when 

I was Chairman of the Subcommittee with jurisdiction over ERISA, 

I often said Congress so loved to find benefit plans, they wrapped 

them in so much red tape, they strangled them to death and that 

is what has happened. You get a bunch of Federal regulation and 

defined benefit plans went by the board. Later testimony by another witness asserts that inappropriateness of DOL Field Assistance Bulletin 20033 regarding what they call extraordinary fees, 

and you probably are aware, being charged individually to participants, could you discuss why it makes sense to change or charge 

divorce decree costs to individuals rather than the plan because it 

was being charged to the plan, which is another big expense? 

Mr. CAMPBELL. Yes, sir, the Field Assistance Bulletin you are 

referencing goes to the question of how plans account for the cost 

associated with the Qualified Domestic Relations Orders (QDRO). 

Essentially, in instances where couples divorce, there is a question 

as to which party receives which portions of pension funds and 

under what circumstances. Given that that is a cost that is directly 

linked to that particular participant and their unique situation, the 

Department determined that it was appropriate for plans to allocate the costs associated with administering that consent decree, 

that QDRO, to that particular participant rather than distributing 

that cost among all participants who would therefore bear the cost 

of the portion of them who had QDROs. 

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Mr. JOHNSON. No, I agree with you, I think you are right, and 

I am glad you made that statement. Could you tell me whether you 

think it is appropriate to disclose each cost associated with the 

bundled service provider or whether a single fee is appropriate or 

whether there is some middle ground on the issue? 

Mr. CAMPBELL. Well, I think the answer to your question, as 

we have discussed here today, is that there is some middle ground 

that is appropriate. The concern that we have is ensuring that fiduciaries get the information they need to assess the reasonableness 

of fees and whether the services are necessary and appropriate. To 

the extent relevant fees need to be unbundled, that is what we 

would provide in our regulation. To the extent fees can be aggregated without disturbing the ability of fiduciaries to conduct that 

analysis, that is not an issue the Department would need to disturb. Again, our position is not to select a business model for service providers, but rather to ensure fiduciaries can carry out their 

duty. 

Mr. JOHNSON. Yes, well, you remember we argued at length 

over whether or not to provide advice for the investors, and we 

more or less won that argument. But you guys are doing the right 

job over there. 

Mr. Reeder, you talked about systemic problems with respect to 

disclosure of fees and said you didn’t think it would warrant a new 

Federal program, and I happen to agree. Do you want to elaborate 

on that at all? 

Mr. REEDER. I just want to reiterate the work that the Department of Labor is doing, and I do think that the Department of 

Labor does have the tools that it needs to provide regulations in 

this area, and we have been working with them very closely, especially on this package that is about to come out because we have 

an interest in the reporting of various items as well. But I think 

the Department of Labor has the tools that it needs. 

Mr. JOHNSON. Thank you, sir. I yield back, Mr. Chairman. I 

will go on and talk some more. 

[Laughter.] 

Mr. MCDERMOTT. Mr. Doggett? 

Mr. DOGGETT. Thank you and thank you for your testimony. 

Mr. Campbell, when the Department of Labor had an opportunity 

over a year ago to comment on the findings of the GAO, did it take 

exception or make objection to any of the findings of the GAO report? 

Mr. CAMPBELL. I do not recall off the top of my head the exact 

language in our response. The issue on which we do have disagreement is the current statutory authority of the Department. We believe that section 505 of ERISA provides us general rulemaking authority to implement the provisions of section 404, which is the appropriate section. 

Mr. DOGGETT. So, is that with the exception that you do not 

think we need to do anything in the Congress about this. As far 

as the specific kinds of disclosures that they thought were necessary for plan participants and plan sponsors, you agreed with 

their conclusions? 

Mr. CAMPBELL. Again, in general, yes, sir. 

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Mr. DOGGETT. So, can we expect then that these regulations for 

plan participants that you eventually will get around to promulgating, will include addressing every recommendation GAO made, 

especially as it relates to bundled provider services? 

Mr. CAMPBELL. I think the issue there is to bear in mind the 

distinction between disclosures to participants and what they 

should contain versus disclosures to plan fiduciaries. 

Mr. DOGGETT. Yes, sir, and the GAO made recommendations 

concerning both and my question to you is as it relates specifically 

to plan participants, in these anticipated regulations, will you be 

addressing and attempting to implement every GAO recommendation, including those that relate to bundled services? 

Mr. CAMPBELL. I will not want to say ‘‘every’’ until I re-read 

the GAO recommendations. However, sir, I think we are in general 

agreement as to the direction these participant disclosures—— 

Mr. DOGGETT. How about just every one that you did not object 

to last year when you had the opportunity to do it? 

Mr. CAMPBELL. Well, again, sir, we did go through a request 

for information to provide additional information from the public, 

consumer groups, participants, plans, everyone. We need to evaluate the totality of that information in promulgating the final regulation. I can only say that again, we in the GAO, I think are on 

a very parallel path. 

Mr. DOGGETT. As it relates to your statutory authority, which 

you do not want any more—you do not want any more statutory 

authority in this area—do you believe that you have statutory authority to require an option in each one of these plans that they 

have a low cost index fund for participants to choose? 

Mr. CAMPBELL. No, sir, the statute does not specify. 

Mr. DOGGETT. So, if we wanted to provide that option so that 

the 401(k) investment that employees and employers are making is 

not eaten up with excessive fees, you do not have authority to address that by providing the low index fund option? 

Mr. CAMPBELL. No, sir, that would require a statutory change. 

Mr. DOGGETT. With reference to the pace at which you are responding to this problem, which many of us consider to be a rather 

significant problem for employees, that if they were out, able to invest on their own in an index fund, they would be having a much 

bigger investment nest egg built up than with some of the plans 

where they do not have information and there are very high fees 

involved. As far as whether anything is different today for a plan 

sponsor or a plan participant anywhere in America from where we 

were when the GAO put this report out, nothing has changed as 

of today? I understand you are studying it and you have got RFPs 

and you have got proposed regulations, but everything today is in 

exactly the same situation that it was when the GAO report came 

out, right? 

Mr. CAMPBELL. Yes, sir, that is correct. 

Mr. DOGGETT. Okay, and as far as whether anything is to 

change for plan participants in the future, if I understood your previous answers, you say that you will get around to proposing regulations this winter. I gather as a practical matter, given the normal 

pace at the Department of Labor, that probably means February 

but in practice is March or April? 

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Mr. CAMPBELL. I believe on a regulatory agenda it does say 

February. 

Mr. DOGGETT. Yes, sir, and so if you meet the deadlines the 

way other regulations in other areas are made, we are approaching 

the spring, though I suppose it is winter, and once you propose the 

regulations, that does not mean anything changes for plan participants either. It just means the process has started. Would you anticipate that before this Administration ends, that anything would 

actually be done that would change the experience of any worker 

or employee in America? 

Mr. CAMPBELL. Absolutely, sir, if—— 

Mr. DOGGETT. On plan participant regulations? 

Mr. CAMPBELL. Yes, sir, it is my intention to have a final regulation promulgated before the end of this Administration. 

Mr. DOGGETT. When would be a likely time to expect that that 

would happen? Can you give us any date before January 2009? 

Mr. CAMPBELL. I think it would be close to the end of 2008 

given the requirements of the legislative process—excuse me, regulatory process. 

Mr. DOGGETT. Finally, just let me say that I have the same experience that Mr. McCrery has. I get tons of paper and I do not 

read a lot of it, but the two things that I can read and compare 

with ease are net investment return and expense ratio, and it is 

that information and the opportunity to have the option if someone 

wants to include it as a part of their portfolio of a low index—of 

an index of low cost fund that I think we need to address. Thank 

you very much. Particularly thanks to the GAO for this important 

study that you have done in your testimony. 

Mr. MCDERMOTT. Mr. Pomeroy? 

Mr. POMEROY. Thank you, Mr. Chairman. I am very pleased 

that we are as a Committee looking at the whole area of pensions. 

Because we have not done that for a while, I am going to have my 

questions principally on defined benefits. So, I would ask the two 

Administration representatives whether the Administration believes defined benefit plans continue to offer something of value to 

plan participants in the marketplace? 

Mr. REEDER. Absolutely, Mr. Pomeroy, we agree. 

Mr. POMEROY. There is no Administration effort to press companies to either freeze pension plans or convert defined benefit 

pension plans into something other than defined benefit plans? 

Mr. CAMPBELL. No, sir. 

Mr. REEDER. No. 

Mr. POMEROY. Excellent. I would ask the Department of Labor 

what is your take on the shape of pension—when I say ‘‘pension,’’ 

I am talking about defined benefit plans; what is the shape of pension plan funding at the present time? 

Mr. CAMPBELL. The shape of pension plan funding has improved in the past year for a combination of factors, including the 

deficits of the Pension Benefit Guarantee Corporation (PBGC), 

which have also improved. I think the implementation of the Pension Protection Act will further improve the funding status. 

Mr. POMEROY. Well, let’s not go there yet. We are over 100 percent funded on average and that the cries of insolvency that drove 

the Pension Protection Act have largely gone away in light of the 

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mark to market accounting capturing higher stock market values 

and a higher interest rate environment, is not that correct? 

Mr. CAMPBELL. I do not know that I would necessarily agree 

that they have gone away. I think the situation has—— 

Mr. POMEROY. No, what is the status of plan funding? The status of plan funding you said was improved. Indeed, in fact, there 

have been several studies, including the Millman study, that shows 

it is over 100 percent on average and that the solvency of plans is 

a substantially improved circumstance from 2 years ago, is that 

correct? 

Mr. CAMPBELL. I believe that is correct, but the distinction I 

would make is the difference between funding at a particular point 

in time and the overall solvency of the system and whether in the 

long term it provides that same benefit. 

Mr. POMEROY. Do you have a concern that rate shock, funding 

rate shock could precipitate a significant number of freezes of existing pension plans? 

Mr. CAMPBELL. No, sir, I believe Congress struck the appropriate balance in the Pension Protection Act. 

Mr. POMEROY. I am interested that you say that. Do you take 

issue then with the McKenzie study that showed 50 to 75 percent 

of anticipated freezes over the next 3 years? 

Mr. CAMPBELL. I am afraid I have not reviewed that study, sir. 

Mr. POMEROY. You have not reviewed the study? Interestingly 

enough, PBGD told us they had not assessed whether the Pension 

Protection Act requirements would likely cause plan freezing. It 

seems to me that this is something you would want to look at. Do 

you accept as a concern that rate shock could freeze plans? 

Mr. CAMPBELL. Well, I certainly agree that that was a concern 

in the construction of the Pension Protection Act, which is why it 

was constructed as it was with a phased in sort of glide path to 

full funding. 

Mr. POMEROY. Well, the glide path starts January 1st relative 

to many items of plan funding and would you then accept the proposition that it is important employers know what the new funding 

requirements will be? 

Mr. CAMPBELL. Indeed, sir. 

Mr. POMEROY. Are the funding requirements largely going to 

be determined upon regulations to be developed by Labor and 

Treasury? 

Mr. REEDER. If it is okay with you, I will step in there. I think 

it is mostly Treasury’s bailiwick, and we have been working hard 

since the enactment of PPA, and we have been issuing pretty regular guidance on the issues of funding beginning the day after the 

law was signed. 

Mr. POMEROY. Well, I am interested to hear that because, as 

I understand it, there has yet to be final regulatory disposition of 

the following issues: the yield curve, asset smoothing rules, at risk 

rules, credit balance rules, the mortality table, lump sum valuation 

rules and benefit restrictions. Some of those have been preliminarily exposed, but none of them has been finally disposed. What 

is more important, something as critical as asset smoothing has yet 

to even be preliminarily addressed exposed. So, if you have been 

working on this from the beginning, you do not have much to show 

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for heading it into late in the calendar year. Look, I am from Congress, we do not have much to show for the time either, but the 

problem is we are about to have a very significant development, 

and, Mr. Chairman, I am going to ask leave to continue this questioning if I might because I think it is very important we get to 

the bottom of this. 

Mr. MCDERMOTT. We are going to have three votes in a very 

short period of time, and I would like to get a couple more Members in. 

Mr. POMEROY. But this may be the only opportunity we have 

in forum to get from the Administration. 

Mr. MCDERMOTT. Go ahead. 

Mr. POMEROY. When is it anticipated that there will be proposed rules in the various areas I have just mentioned? 

Mr. REEDER. Well, as you mentioned, nearly all of the rules do 

have—all the areas do have proposed rules out, and we have provided in those proposed rules that taxpayers can rely on those proposed rules as interpretations of the statue and with a minor correction also that on the yield curve, final guidance is out on the 

yield curve. 

Mr. POMEROY. What kind of public comment was sought on the 

yield curve? 

Mr. REEDER. Well, that is one of the problems with issuing final 

guidance is—— 

Mr. POMEROY. Yes, exactly right. There was none. The first 

word from the Treasury was the last word from the Treasury or 

yield curve, and the yield curve will substantially impact plan 

funding. Is it anticipated that asset smoothing will also be the first 

word and final word? 

Mr. REEDER. No, that will come out in a proposed regulation. 

Mr. POMEROY. Come in a proposed rule, so at what time will 

this period of comment run, how can it possibly be concluded by 

January 1st? 

Mr. REEDER. It cannot. As Mr. Campbell pointed out, the regulatory process, because it requires input from the public, this will 

take more than the time that we have before it goes into effect. 

Mr. POMEROY. Mr. Chairman, I raise these series of questions 

not to kind of poke partisan blame any direction whatsoever. I just 

think we need to take note as a Committee that plans have recovered in terms of the snapshot of their funding and that yet substantial new funding requirements are about to descend on plans 

as of January 1st, and they do not even know what the funding levels will be because the regulations have not been completed yet in 

critical areas. I believe that this weighs toward very much—begs 

Congress really to look at whether or not we want to give an extension before implementation of the Pension Protection Act in order 

not to have plans pushed into freezing their benefits—freezing 

their pensions. Thank you, Mr. Chairman. 

Mr. MCDERMOTT. Thank you. We will come back to this issue. 

Mr. Ryan? No questions? Mr. Kind? Oh, excuse me, Ms. Tubbs 

Jones. 

Ms. TUBBS JONES. Sorry, Mr. Kind. I sat down here for a long 

time waiting to ask questions. Let me try to be very quick and, Mr. 

Pomeroy, if you still want some more time, I will be glad to yield 

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you some of mine at the end. In conjunction with the questions 

that my colleague was asking, Ms [continuing]. Pronounce your last 

name for me. 

Ms. BOVBJERG. Bovbjerg. 

Ms. TUBBS JONES. Bovbjerg. 

Ms. BOVBJERG. Like ‘‘iceberg.’’ 

Ms. TUBBS JONES. Okay, what do plans and investors or employees really need to know to guide them through the situations 

or concerns that have been raised by my colleague, Mr. Pomeroy? 

Ms. BOVBJERG. For defined benefit plans? 

Ms. TUBBS JONES. Yes, ma’am. 

Ms. BOVBJERG. Well, they will need to know how their funding 

status will be measured. I would like to think that if they are at 

100 percent now, they probably do not have a lot to worry about 

under the Pension Protection Act, but they will need to know what 

sorts of interest rates they need to use and the yield curve. 

Ms. TUBBS JONES. How will that affect them if they do not 

have that information? 

Ms. BOVBJERG. It will be hard to plan ahead. 

Mr. POMEROY. Will the gentle lady yield? 

Ms. TUBBS JONES. I will yield. 

Mr. POMEROY. Thank you very much for that because it gets 

to what our witness said. Actually, the new funding requirements 

will attach irrespective of whether they are 100 percent funded. 

There will be a category, yet to be finally defined, called at-risk 

that might be deemed to be less than 100 percent funded, and they 

are going to have higher requirements and higher requirements 

yet. 

Ms. BOVBJERG. I was thinking about the at-risk plans status. 

Mr. POMEROY. But even fully funded 100 percent funded plans 

are going to have substantially higher funding requirements under 

the Pension Protection Act and in an unforeseeable way because 

the final rules have yet to be developed. 

Ms. TUBBS JONES. Are you done? 

Mr. POMEROY. Yes. 

Ms. TUBBS JONES. Okay. Let me ask—taking back some time 

that I have, it always seems that at a time when employees are at 

the risk of losing access to pensions, in my congressional district, 

I am looking at companies closing and saying, ‘‘Okay, here you 

have got $50,000, and I am going to send you back to school after 

you work 30 years.’’ In this environment, it seems awful that it 

would be that now companies and plans do not have information 

that they really need to operate to help these poor folks who are 

getting $50,000 for a lifetime of work. Do you believe that the current law provides adequate information to enable employers and 

employees to make informed choices among plans? I am going to 

start with you, and I will probably get 2 seconds left from everybody else. 

Ms. BOVBJERG. Well, in terms of 401(k)s—— 

Ms. TUBBS JONES. Yes. 

Ms. BOVBJERG [continuing]. Where employees do have choice, 

it will depend on what kind of plan they are in and what kind of 

information the sponsor provides, but what we found was that it 

is just not uniform, that people do not always have the information 

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they need, particularly with regard to fees. Now, we do want to say 

that fees are not the only thing, the only piece of information that 

a participant would need. You also want to know—— 

Ms. TUBBS JONES. If you will yield just for a moment, it may 

not be the only piece of information that they need, but it could be 

a significant factor in making the decision whether you choose one 

plan over another. 

Ms. BOVBJERG. Yes, we agree, absolutely, and they are not all 

getting that information. 

Ms. TUBBS JONES. Any other gentleman, any of you want to 

tackle any of the questions I have asked? 

Mr. CAMPBELL. Well, I would just say that it is precisely because we believe both participants and plan fiduciaries need additional information that we embarked on these regulatory projects. 

Ms. TUBBS JONES. That is wonderful that you say you embarked on the regulatory project, but if they do not have the information they need within a timely fashion, the fact that you embarked—the ship has already gone to sea. 

Mr. CAMPBELL. We began these projects in order to get them 

moving as quickly as we can. They are well advanced. I can only 

pledge again that it is my desire—— 

Ms. TUBBS JONES. Do you need more employees to help you do 

it? 

Mr. CAMPBELL. We have the staff necessary to carry out the 

process, it is just that, as I am sure you aware, there are legal requirements to the regulatory process, notice and comments, et 

cetera, that take time. We are doing it as expeditiously as we can. 

Ms. TUBBS JONES. So, my last question, since I know I am almost out of time, when are we going to have them? 

Mr. CAMPBELL. Well, again, we will have the final Form 5500 

regulation disclosures to the public within the next several weeks. 

We will have a proposal on the—— 

Ms. TUBBS JONES. You know that is not an answer, the next 

several weeks, next year? 

Mr. CAMPBELL. No, quite literally the final regulation will be 

published in the ‘‘Federal Register’’ within the next several weeks. 

Ms. TUBBS JONES. Okay, there are 7 weeks left in this year. 

There are 8 weeks left to this year. Those eight could be included 

in several, so you are making a commitment to me and the public 

that we are going to have it before the end of the year? 

Mr. CAMPBELL. Yes, ma’am. 

Ms. TUBBS JONES. Okay. Thank you, Mr. Chairman. 

Mr. MCDERMOTT. Mr. Kind? 

Mr. KIND. Well, thank you, Mr. Chairman. I know we have got 

a vote pending so I am going to try to be brief. I want to thank 

our panelists for your testimony here today but also thank the 

Committee for having this hearing on a very important issue. I 

think we can all agree sitting here and stipulate that better transparency is what is going to drive competition in the fund market, 

which is good, but also hopefully better investment decisions too at 

the end of the day. But the key, and I think, Mr. CAMPBELL, you 

alluded to this in your earlier opening statement, is to not get too 

cumbersome or complicated or legalese, I think is the term you 

used, so that plan participants are not just glancing at it and 

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throwing it away and not reading it and not really being informed 

with the decisions and whether we do that through rulemaking or 

the regulatory process, you are involved in the legislation I think 

is going to be the key to striking the right balance. But my question or my concern really, because it seems clear listening or reading through some of the written testimony and talking to a variety 

of people in regards to this hearing, is that what additional burden 

we ultimately end up with is going to be expenses ultimately 

passed on to the plan participants. My concern right now, because 

I have been working on this issue, is how do we simplify or make 

it easier for small businesses to be participating and to be offering 

a menu of retirement options too without driving them away? I do 

not know if that is a concern that Labor has been focused on as 

you move forward with your own regulatory scheme that you are 

coming up with but what can we do in order to make sure that 

small businesses still see this as a viable option, that we are not 

becoming too burdensome or too expensive for them to be able to 

offer these plans because I think that is kind of the great missing 

bulk of workers out there right now that we need to get into these 

plans and to be offering more options rather than driving them 

away. I think that is one of the concerns that I have that is shared 

with a variety of others. I do not know, Mr. CAMPBELL, if you 

want to address that or, Mr. Reeder, too if you have a thought on 

the subject? 

Mr. CAMPBELL. Obviously, one of our concerns at the Labor Department is to increase the availability of plans and the adoption 

of plans by particularly small employers. We focus a lot of education and outreach on small employers and compliance assistance 

programs to help them better comply and reduce that burden. For 

example, in the Form 5500 filing regulation I have mentioned, 

there is a reduced filing burden on small employers, steps of that 

nature we are on an ongoing basis taking. 

Mr. REEDER. I would just like to reiterate, our emphasis is on 

increasing the use of standardized plans that small employers can 

pull off the shelf and establish and maintain a very, very low cost. 

Mr. KIND. Great, thank you, thank you all. Thank you, Mr. 

Chairman. I yield back. 

Mr. MCDERMOTT. I am going to ask the panel, I am sorry for 

this interruption, but we do have three votes and we have 5 minutes left to get over and vote. We should be back some time close 

to 5 minutes to 12:00. If you could wait for us, there are still some 

Members who would like to question you, so for the moment I will 

hold the meeting in suspense. 

[Recess.] 

Mr. MCDERMOTT. The Committee will come back to order. Mr. 

Pascrell from New Jersey will inquire. 

Mr. PASCRELL. Thank you, Mr. Chairman. I have a question, 

my first question is for Mr. Donohue. Mr. Donohue, you noted in 

your testimony that Americans invest over $3 trillion in defined 

contribution plans and over half of that amount is invested in mutual funds, is that correct? 

Mr. DONOHUE. That is correct. 

Mr. PASCRELL. What role do you think can the Securities and 

Exchange Commission (SEC) play in ensuring that Americans are 

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making informed investments? I am going to ask you what do you 

think is an ‘‘informed investment’’? 

Mr. DONOHUE. I will start off by saying that we have an initiative underway that I discussed previously that is intended to assist 

investors, whether they are investors investing directly or investors 

who are investing indirectly through their 401(k)s to have information available to make informed choices about their investment 

needs and the choices that are available to them. This initiative we 

have been working in conjunction with the Department of Labor to 

see how this type of disclosure, this type of simplified information 

could be utilized in the 401(k) area also. So, it is something that 

is very, very important for investors. It is a top priority in my division. 

Mr. PASCRELL. So, you have information available? 

Mr. DONOHUE. The information that we are talking about is 

currently available but, as was noted previously, is included in 

rather lengthy documents that people wind up receiving. This is a 

very simplified form that we are contemplating, which is two or 

three pages long, and provides information about investment strategies, objectives, costs, expenses, and performance. 

Mr. PASCRELL. Mr. Donohue, what do you consider to be an informed investment in your estimation? 

Mr. DONOHUE. In my experience, an informed investment is 

someone making a choice, understanding what their investment 

goals are, appreciating the risks and returns that might be available from the investment choices they are making, taking into account appropriate diversification of their investments and seeking 

to really achieve their goals, understanding the attributes of those 

investments, including expenses. 

Mr. PASCRELL. But you know yourself, Mr. Donohue, that as 

you say, most of the information that is available is multi-pages. 

The average citizen does not read it obviously. Ninety percent, 85 

percent, 80 percent do not know what they are getting into in the 

first place, which does not say much about us, does it? It is like 

when you get to be 70 years of age, and you have to be prepared, 

if you have invested in certain plans, you have got to prepare to 

file and you have to know who to call. A lot of people are not prepared to make those decisions, and I really have some question 

about it. 

But I want to ask the next question of Ms. Bovbjerg? 

Ms. BOVBJERG. ‘‘Bovbjerg.’’ 

Mr. PASCRELL. Bovbjerg, I am sorry. 

Ms. BOVBJERG. It is hard, there are a lot of consonants. 

Mr. PASCRELL. Ms. Bovbjerg, we have responsibilities here, I 

just talked to the SEC, but the primary responsibilities are with 

the Labor Department of oversight and the Treasury Department. 

I want you to take a step back now because I know already Mr. 

Reeder said the Labor Department is best qualified to do this particular job of oversight, so I would imagine that we have had good 

oversight from the Labor Department on these issues, do they work 

together? 

Ms. BOVBJERG. They do work together, and I understand that 

they have been working together on this particular issue. It sounds 

like you are familiar with some of our other reports where we have 

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talked about the need to work together more closely, and that 

often, particularly with Labor and SEC, it has been an informal relationship. 

Mr. PASCRELL. But you do not have any question that the 

major effort should be, oversight should be Labor not Treasury, 

why would it not be Treasury? Why would not the Treasury Department have the major responsibilities of guarding people’s investments and the decisions they make about those investments, 

tell me? 

Ms. BOVBJERG. Well, under ERISA, IRS is responsible for determining the tax qualification status of plans, and they want to 

see certain things from sponsors in order to assure themselves that 

the plans are tax qualified. Labor is really responsible for employer-sponsored plans and assuming that the employers are behaving as responsible fiduciaries and doing prudent things that are 

in the best interest of the participants. Labor has the primary responsibility for fiduciary enforcement. 

Mr. PASCRELL. Well, Labor has been in front of us many times 

on many different issues and that is one of the things we talk 

about is whether they are fulfilling their obligations of oversight 

and what that means. So, Mr. CAMPBELL, if I may, according to 

your testimony, the number of active 401(k) plans has risen almost 

500 percent since 1984 and has increased by 11.4 percent since 

2000. To what do you attribute this great explosion in growth of 

401 plans, 401(k) plans, what is your estimate? 

Mr. CAMPBELL. I think there are a variety of factors that go 

to what plans suit the mutual needs of employers and workers. Defined benefit plans offer many very positive attributes, but they 

generally are not as portable for example so in a more mobile workforce, increasingly as we see workers with more than one career, 

more than one employer for workers, the 401(k) option may be 

more appropriate for some workers. Ultimately, our view is that 

both plans are very valuable, both basic designs, and it should be 

up to the employers and workers in a given industry sector to pick 

the plan that best works for them. 

Mr. PASCRELL. Mr. Chairman, could I ask one more quick question, please? 

Mr. MCDERMOTT. Well, we have kept them here waiting so. 

Mr. PASCRELL. Okay, quick. 

Mr. MCDERMOTT. Fine. 

Mr. PASCRELL. Has Federal regulation, Mr. Campbell, kept 

pace with the explosion in the use of 401(k) plans in your estimation? 

Mr. CAMPBELL. I believe that we have responded as changes 

are made and the three regulations we are doing in this area are 

an example of that. 

Mr. PASCRELL. I thought you would say that. Thank you. 

Thank you, Mr. Chairman. 

Mr. MCDERMOTT. Ms. Schwartz will inquire. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. Thank you for staying and thank you for a number of things from my colleagues on 

both sides of the aisle here, really saying to some extent very much 

the same thing, which is good and not so usual for us, and that is 

that we do believe that employees need more information and the 

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question is how to get that to them in a way that is comprehensible 

and will make a difference in some of the choices they make and 

assure that with the continued growth of 401(k) plans and our interest in helping to make sure that people save, that Americans 

save. They are not saving enough, this is a great way for them to 

do it. But with the enormous growth, the recent growth, there are 

two areas that I think we are sort of zeroing in on as I hear from 

some of my colleagues. 

I wanted to start first with the information. Ms. Bovbjerg, if you 

could just be a little more specific if you can about not only the 

kind of information that would get to employees, but I am interested in how an employee would even know what else is out there 

and how to really compare both what is being offered to them by 

their employer, but potentially what are other—what else might be 

out there that they might even ask about? One of my colleagues 

asked about index funds and whether that is offered or not, how 

would an employee even say to their employer, well, how do I compare this to what else might be offered in some other business or 

another employer situation, how do I compare what the average 

fees might be? If they just tell them exactly what is being offered, 

I believe it is very elaborate, how do they even know how to make 

some comparison or ask the questions? 

Ms. BOVBJERG. Well, of course, it is difficult to compare fees for 

different types of investment vehicles because the investment vehicles themselves might be different. 

Ms. SCHWARTZ. Is there an average? In the marketplace, is 

there some way to sort of average what the fees are in different 

kinds of offerings? Is there a way to do that that someone can say 

why are we paying above the industry average? If you are looking 

for more competition here, for more ways to make judgment, is 

there a way to do that? 

Ms. BOVBJERG. There is probably a way to do almost anything 

but bench marking is really difficult in this area. There is not a 

lot of good information about what is being paid in fees. It would 

depend on the type of investment option you were looking at, but 

that is why we at GAO think it is important that, whatever is provided to people, it not only be simple,e but it be consistent. It is 

not just so you might compare to your neighbor’s plan, that is not 

really what we were thinking about as much as instances where 

people move, people change employers. If they move from one employer to another, it would be helpful to them not to have to start 

all over to understand how the new employer is reporting fees. 

Ms. SCHWARTZ. I think that is very important for us to look at 

consistencies so that there is that ability. How often do you think 

an employee should get this information, just when they enroll, annually, any time they ask? How often should an employee get this 

kind of information? 

Ms. BOVBJERG. You want to trade off frequency with how burdensome it is on those providing the information. We have called 

for disclosures annually and at sign up, but you could do it a number of other ways. 

Ms. SCHWARTZ. Is this a plan sponsor’s responsibility to provide this information or is it one of the investment advisors, who 

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provides this information? Then who would check to see that it is 

consistent and appropriate? 

Ms. BOVBJERG. Well, it is fundamentally the plan sponsor’s responsibility. They are the fiduciary. They are the employer, and so 

they are responsible for providing accurate information clearly 

under the law. Then it would be the Department of Labor’s responsibility in almost any structure that we would set up for fee disclosure to assure that it is being done and that it is being done appropriately. 

Ms. SCHWARTZ. Certainly if the employer were to re-negotiate 

the agreement they have, would they have to tell the employees 

about that even if it is not annual or at sign up because they have 

a contract potentially with the people who are the plan sponsors? 

Ms. BOVBJERG. If it is a fee that affects the employee, yes, I 

think they should. 

Ms. SCHWARTZ. So, that would be another moment when they 

might need to have to disclose that we just re-negotiated this contract and your fees are going up or they are changing in some way? 

Ms. BOVBJERG. That is right. If we are expecting people to 

make decisions with their money, they need to know what their 

money is being used for. 

Ms. SCHWARTZ. One other question, I do not know if you would 

know this or whether this would be Mr. Campbell, whether in fact 

is there a difference in terms of how much information is provided 

depending on how big the employer is? I would imagine that large 

employers have human resource departments, they have people 

who could give this information for a small employer who might be 

offering a 401(k), is that much harder for them to handle that fiduciary responsibility and does that prevent them from engaging in 

401(k) plans, do you know? 

Ms. BOVBJERG. There is a variety of fairly simple approaches 

to this that I believe Mr. Reeder referred to earlier that are particularly helpful to small business. When you think about disclosure, if you keep it simple, direct and narrow, I think everybody 

should be providing that information. 

Ms. SCHWARTZ. One last question, if I may, for Mr. Campbell. 

You talked a little bit before about reviewing the Form 5500. Could 

you be any more explicit about how you could use that as a tool 

for enforcing fiduciary responsibility and being able to make sure, 

I think some of my colleagues talked about this, it is very difficult 

for individual employees to make some of these judgments. We 

want to get them information where they can be able to compare, 

but really the employer, the plan sponsor has enormous responsibility here to be making certain judgments, and the only one really 

looking over their shoulder is I guess the Department of Labor 

really and Treasury, so maybe between the two of you, I would 

think that many employees would be just trusting that somebody 

is watching and that the information they are getting from their 

employer is accurate and full disclosure. Can you speak to the specifics of how many times you have had to enforce or call on a plan 

sponsor who is not doing the job right? Can you give us any numbers on that, the number of people you had to shut down or 

change? 

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Mr. CAMPBELL. Sure. With respect to our overall enforcement efforts, in the last fiscal year, fiscal year ’06, we had about $1.4 billion in total monetary results and about 106 criminal indictments 

that flowed from our investigations. I had said earlier that we have 

had somewhere in the order 350 cases in recent years that deals 

more specifically with fee issues and all of this together helped us 

come to the conclusion that a regulatory structure needed to be improved and expanded upon rather than solely relying on enforcement or solely relying on education and outreach. 

Ms. SCHWARTZ. Well, that actually speaks to our—well, I know 

you got beat up a little bit earlier about not moving on regulation 

fast enough, and I think that certainly from my point of view, we 

need to see that move much more quickly to respond. That is a lot 

of complaints, a lot of concerns and with this enormous growth in 

this, we want to make sure that people have the information they 

need, and they are not being taken advantage of and have lots of 

savings at the end of the day, right? 

Mr. CAMPBELL. Well, I can assure that is our goal as well, and 

we are moving as quickly as the regulatory process allows us to. 

Ms. SCHWARTZ. Alright, and I think my time is up. Thank you, 

Mr. Chairman. 

Mr. MCDERMOTT. I want to thank the panel for both your testimony and for being patient with our schedule here in the House. 

Thank you. 

Mr. CAMPBELL. Thank you, sir. 

Mr. MCDERMOTT. Our next panel is Mr. Burgess Thomasson, 

who is President and CEO of DailyAccess Corporation; Harold 

Jackson, who is the President and CEO of Buffalo Supply of Lafayette, Colorado; Allison Klausner, Assistant General counsel for 

Honeywell, she is the benefits coordinator for Honeywell; and Lew 

Minsky, who is the Senior Attorney for Florida Power & Light; and 

Paul Schott Stevens, who is President and CEO of Investment 

Company Institute. As I said before, your testimony will be entered 

into the record in full, and we would appreciate you making your 

comments within the 5-minute time limit. Mr. Thomasson? 

STATEMENT OF BURGESS A. ‘‘TOMMY’’ THOMASSON, JR., 

PRESIDENT AND CEO, DAILYACCESS CORPORATION, MOBILE, ALABAMA, ON BEHALF OF THE AMERICAN SOCIETY OF 

PENSION PROFESSIONALS & ACTUARIES, AND THE COUNCIL 

OF INDEPENDENT 401(k) RECORDKEEPERS 

Mr. THOMASSON. Thank you, Mr. Chairman, and Members of 

the Committee. My name is Tommy Thomasson, and I am the CEO 

of DailyAccess Corporation of Mobile, Alabama. My firm is the 

leading provider of retirement plan services to small businesses 

throughout the country. As an independent service provider, we 

support and actually practice full fee disclosure. 

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 (ASPPA), which has thousands of members nationwide. 

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I am also here on behalf of the Small Business Council of America, which represents thousands of small businesses across the 

country. 

ASPPA and CIKR strongly support the Committee’s interest in 

shining a light on 401(k) fees. We are encouraged by the two currently pending fee disclosure bills in the House of Representatives, 

including a bill introduced earlier this month by Congressman Neal 

and cosponsored by Congressman Larson of this Committee. We 

support both bills’ uniform application of new disclosure rules to all 

plan service providers, and we encourage you to stay on this path. 

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

plan sponsors and their participants using two primary business 

models commonly known as bundled or unbundled. Generally, bundled providers are large financial services companies whose primary business is selling investments. They bundle their proprietary investment products with affiliate-provided plan services into 

a package that is sold to plan sponsors. By contrast, unbundled or 

independent providers are primarily in the business of offering retirement plan services. They will couple such services with a universe of unaffiliated non-proprietary investment alternatives. Bundled and unbundled providers have different business models, but 

for any company choosing a plan, the selection process is exactly 

the same. The company deals with just one vendor and one model 

is just as simple as the other. 

Plan sponsors must follow prudent practices and procedures 

when they are evaluating service providers and investment options. 

This prudent evaluation should include an apples to apples comparison of services provided and the cost 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 same service. 

The retirement security of employees is completely dependent 

upon the businessowner’s choice of retirement plan service provider. If the fees are unnecessarily high, the worker’s retirement 

income will be severely impacted. It is imperative that the 

businessowner have the best information to make the best choice. 

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 appreciate 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 or participants. Without uniform 

disclosure, plan sponsors will have to choose between a single price 

business model and a fully disclosed business model that will not 

permit them to appropriately evaluate competing provider services 

and fees. Knowing only the total cost will not allow plan sponsors 

to evaluate whether certain plan services are sensible and reasonably priced. In addition, if a breakdown of fees is not disclosed, 

plan sponsors will not be able to evaluate the reasonableness of 

fees as participants’ account balances grow over time. Take a $1 

million plan service by a bundled provider that is only required to 

disclose a total fee of 125 basis points or $12,500. If that plan 

grows to $2 million, the fee doubles to $25,000, although the level 

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of plan services and the cost of providing such services have 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 is no such thing as a free 

401(k). In reality, the cost 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 plan sponsors 

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 sponsor disclosure would look. By 

breaking down plan fees into only three simple categories: investment management, recordkeeping and administration, and selling 

cost and advisory fees, we believe plan sponsors will have the information they need to satisfy their ERISA duties. 

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

and competition has fostered innovations and investment and service delivery. However, important changes are still needed to ensure 

that the retirement system in America remains robust and effective 

into the future. By enabling competition and supporting plan sponsors through uniform disclosure of fees and services, American 

workers will have a better chance of building retirement assets and 

living the American dream. 

Thank you again, and I look forward to your questions. 

[The prepared statement of Mr. Thomasson follows:] 

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Mr. MCDERMOTT. Thank you for your testimony. 

Mr. Jackson. 

STATEMENT OF HAROLD L. JACKSON, PRESIDENT AND CEO, 

BUFFALO SUPPLY, INC., LAFAYETTE, COLORADO, ON BEHALF OF THE U.S. CHAMBER OF COMMERCE 

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

and Members of the Committee for this opportunity to appear before you today to discuss the appropriateness of retirement plan 

fees. My name is Harold Jackson. I am President and CEO of Buffalo Supply, a 25 employee, woman-owned small business, specializing in the sale and distribution of medical equipment. We are located in Lafayette, Colorado. 

I am pleased to testify today on behalf of the United States 

Chamber of Commerce where I am a member of the Small Business Council. I am here to bring a small business perspective to the 

issues. Buffalo Supply has been in the medical equipment and supply business since 1983. We implemented our 401(k) in 2005. The 

plan we have in place has a 1 year waiting period and covers fulltime employees. The company puts in 3 percent of salary, whether 

or not the employee contributes, and for the past two years, we 

have included an additional 2 percent profit sharing contribution. 

Currently, 17 employees are enrolled in our plan and 15 of those 

make personal contributions. The company pays the administration 

fees for the plan and the participant pays the quarterly investment 

fees. 

Prior to the 401(k) plan, the company sponsored a simple IRA. 

Before upgrading to the 401(k), we spent a lot of time debating internally the additional administrative burdens. Basically, we asked 

ourselves whether, it was worth the benefit to the employees that 

would be offset hassle. Fortunately, our majority owner has a Ph.D. 

in taxation and chair of the School of Business at the University 

of Colorado and had a lot of input on this subject. We determined 

that even though the administration would be a significant burden, 

it would be worth the benefit for the employees to be able to put 

additional savings away in a 401(k). 

Upon deciding to implement the 401(k), we did extensive research on our options with respect to service providers. We looked 

at different providers, researched various arrangements, including 

both bundled and unbundled packages. We concluded that separate 

pricing worked better for us because of the relatively small asset 

base in our plan. Once the assets in the plan grow, however, the 

bundling option becomes more attractive because of the pricing 

changes to accommodate the greater asset value. From my perspective, this is much like me giving a large customer a better deal because he is a large customer. 

Given our experience, I want to particularly stress the importance of Congress not mandating one type of service arrangement 

over another. Although we currently use unbundled services, we 

anticipate growth in our company and growth in our plan and can 

envision a time when bundled services would be a better option for 

us. As we have made our decisions, we have been doing so looking 

at both bundled and unbundled arrangements. Our decision was 

based on the needs of our company at that point in time, and those 

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needs change. I would like for our company to be able to have as 

many choices as possible in order to find an arrangement that is 

a best fit. That will not happen if Congress mandates the choice 

for us. 

Finally, I would ask that Congress proceed cautiously in its decision to implement additional notice requirements. We, of course, 

want our plan participants to have information that is helpful in 

making their investment decisions. However, notices that include 

unnecessary information and are overly burdensome in volume will 

only increase administrative burden and cost. Although the administration of the notices would be handled by our service provider, 

we have been told that if Congress implements additional notice requirements, the cost of administering the plan will increase. An increase in cost that does not help participant investment seems contrary to the goal of plan fee disclosure. 

As a participant of a small business plan, I appreciate the concerns and issues being addressed here today, and I hope you find 

my comments useful. I look forward to answering any questions. 

[The prepared statement of Mr. Jackson follows:] 

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Mr. MCDERMOTT. Thank you for your testimony. 

Ms. KLAUSNER. 

STATEMENT OF ALLISON R. KLAUSNER, ASSISTANT GENERAL 

COUNSEL, BENEFITS, HONEYWELL INTERNATIONAL, INC., 

MORRISTOWN, NEW JERSEY, ON BEHALF OF THE AMERICAN 

BENEFITS COUNCIL 

Ms. KLAUSNER. Thank you. Good afternoon, Chairman and 

Members of the Committee. My name is Allison Klausner, and I 

am Assistant General Counsel of Benefits in the New Jersey office 

of Honeywell International, Inc. We are a member of the American 

Benefits Council, on whose behalf I am testing today. 

I appreciate the opportunity to present testimony with respect to 

401(k) plan fees. Like you, Honeywell and the Council want a voluntary, employer-based 401(k) system to successfully provide workers with a reasonable opportunity to save for retirement. A successful 401(k) system requires that the cost of operating the system not 

outweigh the benefits. This in turn requires plan sponsors and 

service providers and other fiduciaries to engage in meaningful dialog. This will ensure, one, that plan sponsors implement services 

appropriate to maintain and operate plans; and, two, that the cost 

of such services is reasonable and appropriate. Finally, this dialog 

should enable plan sponsors to disclose to participants, appropriate 

information regarding the key elements of the plan, the services 

supporting the plan, and the cost of such services. 

At Honeywell, we have obtained the fee information from our 

401(k) service providers, and we are confident that the process enables us to provide our participants with a plan that successfully 

supports their retirement savings goals. We do believe, however, 

that the dialog between plan service providers and plan sponsors 

generally can be improved. 

There are three key points that I would like to note in my remaining time: First, Honeywell, like the other members of the 

Council, does not support legislative or other mandates that would 

increase the cost born by participants and would deter employers 

from offering 401(k) plans. We strongly believe that the fee disclosure to 401(k) participants should supplement and complement financial education regarding the benefits of savings within the parameters of a 401(k) plan. We encourage fee disclosure to be a part 

of financial education, as that coupling will ensure that plan participants consider fees together with other important investment 

considerations, such as diversification among asset classes, historical investment performance, and risk and return factors. The fee 

disclosure should not leave participants to mistakenly believe that 

choosing the lowest cost investment vehicle will result in the greatest savings. 

The information disclosed to participants must not be too complicated, too burdensome or too costly. If the information provided 

is overly detailed, the information will not be useful. The fee disclosure to participants should be designed to encourage participants 

to consider fees when making all their 401(k) decisions, including 

participation, rates of contributions, loans, withdrawals, and investments. The bottom line is that neither Congress nor the Desmartinez on PROD1PC70 with HEARING

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partment of Labor should require 401(k) plans to operate in a system that places a disproportionate focus on plan fees. 

Second, plan sponsors know their employee population and know 

what plan designs and features are important to encourage employees to maximize retirement savings within the employer’s 401(k) 

plan. Although plan features may be viewed as unnecessary bells 

and whistles, the decision to offer a robust 401(k) plan may be 

what is best for the employer’s population. Robust 401(k) plans require services to support them and these services will add to the 

total fees paid to run the plans. But if the 401(k) plan features are 

stripped down, employees may not participate at all. Thus, a focus 

on minimizing fees alone, without consideration of the overall 

401(k) plan design, may result in fewer 401(k) plan participants 

and fewer retirement dollars saved. 

Third, plan sponsors, like Honeywell, diligently consider the capabilities and qualities of vendors engaged to support our 401(k) 

plan. Not all 401(k) service providers could support our 401(k) 

plan, which has a significant amount of complexity due to Honeywell’s high volume of corporate acquisitions, mergers and 

divestitures. We cannot simply select a recordkeeper strictly on the 

basis of who bids the lowest fee. We need to engage a recordkeeper 

who can quickly and correctly implement necessary plan changes 

due in part to corporate activity. Honeywell must determine which 

vendors are capable of providing quality support for our 401(k) system and fees are only one component of that determination. 

In conclusion, Honeywell and the Council are pleased to support 

enhanced disclosure of plan fees, but undue focus on fees relative 

to other factors may simply result in additional cost being born by 

plan participants and fewer retirement savings in the employersponsored voluntary 401(k) system. 

I will be pleased to answer any questions that you may have. 

[The prepared statement of Ms. Klausner follows:] 

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Mr. MCDERMOTT. Thank you, Ms. Klausner. 

Mr. MINSKY. 

STATEMENT OF LEW I. MINSKY, SENIOR ATTORNEY, FLORIDA 

POWER & LIGHT COMPANY, JUNO BEACH, FLORIDA, ON BEHALF OF THE ERISA INDUSTRY COMMITTEE 

Mr. MINSKY. Thank you for the opportunity to discuss this complex and important topic that directly affects the retirement security of millions of Americans who participate in defined contribution retirement plans. Let me begin by making three key points: 

First, major employers urge Congress to defer legislative action 

until after the DOL completes its current fee disclosure projects 

and the results of these efforts can be evaluated. 

Second, major employers support efficient and effective fee disclosure and take their responsibilities for ensuring the reasonableness 

of plan fees very seriously. Our efforts have resulted in widespread 

access to the financial markets at fees typically lower than otherwise available. 

Third, major employers are concerned that missteps on fee disclosure could inadvertently damage the defined contribution system 

and threaten the retirement security of millions of American workers. We strongly urge Congress to defer legislative action until 

after the DOL completes its regulatory projects, which are already 

well underway. Adding new legislative requirements at this point 

would likely result in the substantial delay before enhanced disclosures become available to plan sponsors and participants. 

We believe that the flexibility inherent in the regulatory process 

makes it a more appropriate avenue for adopting new disclosure requirements. Adding rigid fee disclosure requirements to ERISA 

would inhibit the ability of plan sponsors and service providers to 

work together and create new investment options and administrative solutions that ultimately improve retirement security. That 

said, we want to be clear that we strongly support effective and efficient fee disclosure. ERIC, PSCA, the Chamber, NAM, and eight 

other organizations worked together to develop a comprehensive 

set of principles that should be embodied in any new fee disclosure 

requirements. We urge that any new legislation be measured 

against these basic principles, which are contained in our written 

testimony. 

The cost of any disclosure requirements must be justified by 

their benefits. The disclosure requirements currently being proposed would dramatically increase the administrative cost plan 

participants pay while overwhelming them with information that is 

of little practical value to them. 

With all of the current discussion surrounding the need for new 

disclosure requirements, it is important to remember that employers and plan fiduciaries are already playing an important role in 

controlling fees paid by 401(k) plan participants. The existing 

structure of ERISA requires that plan fiduciaries ensure that plan 

fees are reasonable. Major employers take this responsibility very 

seriously. We believe that a new set of rigid rules that govern the 

fiduciary process will ultimately lead to less appropriate decisions 

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ticipants in their plan. In considering the range of services and fees 

that make sense for their plan participants, prudent fiduciaries 

may come to different conclusions about what plan investments, 

services and service providers are appropriate. For example, employers with a more financially sophisticated workforce may choose 

a largely self-directed program, while employers with employees 

more apt to leave their investments unattended may select a program which focuses more on life cycle funds and managed accounts. 

The cost of these programs will vary significantly, but as long as 

the fees paid are reasonable for the services provided, plan sponsors should have the flexibility to create 401(k) plans that work for 

their workforces. 

We are extremely concerned about the misuse of fee disclosure 

requirements as the basis for litigation fishing expeditions. To date, 

more than a dozen lawsuits have been filed against employers with 

vague claims of fiduciary breaches related to plan fee disclosure. 

These often groundless allegations do great damage to the 401(k) 

system by diverting funds from employer contributions to increased 

legal and administrative expenses. 

In conclusion, we strongly believe that the regulatory process is 

the appropriate place to address 401(k) fee disclosure. We encourage the Committee to allow DOL to continue its work, evaluate the 

results and determine if new legislation is needed. It would be a 

tragic irony if legislation intended to improve the ability of plan 

participants to make good investment decisions ultimately leads to 

higher costs and lower participation in the retirement system. 

Thank you for the opportunity to testify on this important topic. 

I look forward to your questions. 

[The prepared statement of Mr. Minsky follows:] 

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Mr. MCDERMOTT. Thank you very much for your testimony. 

Mr. Stevens. 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CEO, INVESTMENT COMPANY INSTITUTE 

Mr. STEVENS. Thank you, Mr. Chairman and Members of the 

Committee. I am pleased to take part in today’s hearing on behalf 

of the Investment Company Institute (ICI), the national association 

of U.S. mutual funds. Mutual funds have helped foster the growth 

of the defined contribution retirement system. They manage more 

than half of the $4.1 trillion that Americans have invested in 

401(k) and other DC plans. For more than two decades, funds have 

sought to improve the services and investment options available to 

retirement savers, and ICI has advocated a regulatory framework 

that best serves America’s workers and employers. 

Today, I would like to cover three topics: First, I want to emphasize, based on our research and that of others, that the 401(k) system shows every sign of success and it will work even better as 

automatic enrollment and other recent reforms take hold. Secondly, 

I will discuss how we need to further improve the 401(k) system 

by addressing gaps in current disclosure. Finally, I will discuss the 

servicing of 401(k) plans and urge that Congress resist calls to dictate one business model for 401(k) service providers over another. 

With respect to the success of the 401(k), one must bear in mind 

that this system is only 26 years old. No worker in America has 

enjoyed a full career with 401(k) plans. But the system does warrant the confidence that American workers and businesses are 

placing in it. 

Our organization is a leading center of research on the 401(k) 

system. With the Employee Benefit Research Institute, we have developed the Nation’s largest database on 401(k) accounts. We have 

used this database to analyze the savings power of 401(k) plans, 

how workers use their accounts and how they allocate their investments. We have also used it to project how today’s young workers 

will fare when they retire 25 or 30 years hence. Our projections, 

based on typical career paths and worker behavior, indicate that 

participants at all income levels can expect 401(k) savings to replace a substantial portion of their pre-retirement income. 

Research indicates that 401(k) plans are working. Can they work 

even better? Yes. Better disclosure practices would help. It is high 

time we close gaps in disclosure rules and provide clear information to workers and employers. 

Research on investor behavior suggests that workers need a 

clear, concise summary of five items for each of the investment options available under a 401(k) plan. These items include the investment’s objectives, its historical performance, its risks, and information about the investment manager, and fees. Of all the investment 

options available in 401(k) plans today, mutual funds provide the 

most complete disclosure, including all of those items I just mentioned and much more. But required disclosure of this kind should 

not be limited to mutual funds. It should embrace, but does not 

today, every investment option available to workers in all defined 

contribution plans. 

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1 ICI members include 8,889 open-end investment companies (mutual funds), 675 closed-end 

investment companies, 471 exchange-traded funds, and 4 sponsors of unit investment trusts. 

Mutual fund members of the ICI have total assets of approximately $11.339 trillion (representing 98 percent of all assets of U.S. mutual funds). 

Now, fees are important, and they claim much of the attention 

in today’s debate. It is a further indication of the success of the 

401(k) system that workers investing in mutual funds have concentrated their assets in lower-cost funds. On average, 401(k) participants paid less than three quarters of 1 percent in mutual fund 

expenses in 2006. But fees are not the whole story. That is why a 

more complete approach to disclosure is vitally important. The lowcost option in the Enron 401(k) plan undoubtedly was Enron’s own 

stock. It also turned out to be the most expensive. Focusing on fees 

alone could lead workers to make decisions that would hurt, not 

help, their retirement savings. 

Money market mutual funds and stable value funds certainly 

have a place in one’s portfolio. They are also low-cost options, but 

not ones best suited to long-term investment horizon. 

Employers who sponsor plans also need effective disclosure. They 

should be informed of all payments that a service provider receives, 

whether directly from plan assets or indirectly from third parties. 

This will assist them, as fiduciaries, to judge the reasonableness of 

total fees and identify any potential conflicts of interest. 

Finally, with respect to the servicing of 401(k) plans, a highly 

competitive market has given rise to different business models. In 

some plans, the employer itself, or a consultant on its behalf, assembles the needed components: recordkeeping, investment management, participant services, compliance, and so forth. In other 

plans, the employer engages a full service provider to supply all 

these services. A recent survey by Deloitte Consulting found that 

three quarters of plan sponsors used the full-service or bundled approach. This approach has many advantages: the employer incurs 

a lower cost of contracting, gains easy access to additional services, 

and can hold one party accountable for the quality of the service. 

Now, some 401(k) recordkeepers, who bundle a part, but not all 

of the services required by a plan, want Congress to legislate their 

business model for the entire industry. They are seeking a law to 

require full-service providers to disclose separate prices for recordkeeping and investment management, even if both services are offered for a single fee. This is akin to a travel agent that only books 

airfare lobbying you to require its package tour competitors to 

break out hotel, transfers and other charges separately. We join 

numerous other organizations concerned about the success of the 

401(k) system in urging you to reject this special pleading. The ICI 

looks forward to assisting the Committee and the Congress on 

these and other issues as you work to improve the Nation’s retirement system. Thank you. 

[The prepared statement of Mr. Stevens follows:] 

Statement of Paul Schott Stevens, President and CEO, Investment 

Company Institute 

My name is Paul Schott Stevens. I am President and CEO of the Investment 

Company Institute, the national association of U.S. investment companies,1 which 

manage about half of 401(k) and IRA assets. The Institute has long called for effective disclosure to participants in individual account plans and the employers that 

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2For convenience, we refer to ‘‘employer’’ to mean the employer acting in its role as fiduciary 

to the plan. 3See 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. 4 U.S. Department of Labor, Employee Benefits Security Administration, Private Pension Plan 

Bulletin Historical Tables (March 2007); Cerulli Associates, ‘‘Retirement Markets, 2006,’’ Cerulli 

Quantitative Update (2006). 

sponsor those plans. I want today to reiterate the mutual fund industry’s support 

for rules giving participants and employers the information they need for the decisions they are required to make. We are pleased to testify before the Ways and 

Means Committee as it considers these important matters. 

My testimony today will be as follows. First I will address how research looking 

at 401(k)s from various angles demonstrates the success and bright future of the 

401(k) system. I will show that confidence in the 401(k) system is warranted and 

that under current regulations employers 2 and participants are able to make reasonable decisions in the areas in which they are called upon to act. I will then discuss how we can make the 401(k) system even better by addressing the gaps in current 401(k) disclosure and I will recommend principles that should guide reform. 

These principles, briefly stated, are that disclosure to participants should be simple, 

straightforward and focused on the key information, including but not limited to 

fees and expenses. This disclosure should apply to all investment products offered 

in 401(k) plans in a way that allows comparability. Finally, disclosure by service 

providers to employers should focus on the information employers need to fulfill 

their obligations as plan fiduciaries. Congress should not mandate rules to favor one 

business model over another. 

Success of the 401(k) System 

Growth in Retirement Savings 

Any discussion of the 401(k) system should begin by recognizing how successful 

401(k) plans have been in helping Americans save for retirement. Assets in the U.S. 

retirement system—all the tax-advantaged investments earmarked for retirement 

that supplement Social Security—have steadily increased as a share of household 

financial assets, from 12% of household financial assets when ERISA was passed 

in 1974 to nearly 40% at year-end 2006.3 401(k) plans, which have been around only 

26 years, numbered 30,000 in 1985 and have grown to almost half a million plans 

(450,000) in 2006.4 In 1985, there were about 10 million active participants compared with 50 million active participants now. 401(k) plans, which are now the predominant defined contribution plan, held $2.7 trillion in assets in 2006, which surpasses the assets held in all private defined benefit plans. The $2.7 trillion held in 

401(k) plans does not count 401(k) assets that have been rolled into IRAs. In fact, 

estimates suggest about half of the $4.2 trillion in IRAs in 2006 came from 401(k) 

and other employer-sponsored retirement plans. 

Critical Role of Mutual Funds 

Mutual funds play an important role in 401(k) and similar defined contribution 

plans. At year-end 2006, slightly more than half of the $4.1 trillion held in all defined contribution plans—which include 401(k), 403(b) and 457 plans—were invested in mutual funds. 

Defined Contribution Plan Assets and Amounts Held in Mutual Funds 

Billions of dollars, year-end, 1994–2006 

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5For example, in 1994, only about 27% of 401(k) assets were invested in mutual funds. See 

Brady and Holden, supra note 3. 6See 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. 7Many more individuals in today’s workforce will have career-long exposure to 401(k) plans. 

Academic research shows a trend towards greater participation, especially among younger age 

groups. The participant rate for workers between 25 and 29 increased from about 50% in 1984 

to close to 85% in 2003. See Poterba, Venti, and Wise, New Estimates of the Future Path of 

401(k) Assets, NBER Working Paper, No. 13083 (May 2007). 

e=estimated 

Other defined contribution plans include Keoghs and other defined contribution 

plans (profit-sharing, thrift-savings, stock bonus, and money purchase) without 

401(k) features. 

Note: Components may not add to the total because of rounding. 

Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, and American Council of 

Life Insurers 

401(k) Participants Asset Allocation Varies with AgePercent of assets, year-end 

2006 

Overall, mutual funds represent about 55% of the assets in 401(k) plans, 53% of 

403(b) plan assets, and 45% of 457 plan assets. These percentages have grown significantly over time relative to most other investment products. Both retirement 

savers and employers have come to rely on mutual funds because of the easy access 

to professional management, diversification, transparency, and liquidity.5 The remaining assets in defined contribution plans are held primarily in pooled investment vehicles that are similar in many respects to mutual funds, including insurance company separate accounts, collective trusts, and stable value funds. Separately managed accounts, guaranteed investment contracts, and employer stock also 

are often available in 401(k) plans. 

Ability of the 401(k) System to Provide Americans’ Retirement Security 

Some observers of the 401(k) system question the capacity of 401(k) plans to provide adequate retirement security. Some also question whether employers, acting as 

plan fiduciaries, obtain sufficient information to fulfill their obligations to keep plan 

costs reasonable and whether plan participants are equipped to make reasonable investment decisions for their accounts. Research by the Institute and others shows 

that these fears are largely unfounded. 

It is commonly reported that the median 401(k) account balance is about 

$19,000.6 Unfortunately, it is not commonly understood that the median account is 

not a meaningful number for assessing whether 401(k) savers will be prepared for 

retirement. By definition, the median account includes the newest and youngest 

participants (who are nowhere near retirement and whose accounts are understandably quite small) and those whose 401(k) accounts supplement a defined benefit 

plan. It does not account for employees who have 401(k) balances with both current 

and previous employers. Similarly, the median account balance does not reflect the 

$4.2 trillion held in IRAs. Finally, it is important to remember that the 401(k) system is still new enough that no one has had a full career with a 401(k) as the primary retirement savings vehicle.7

The Institute has undertaken extensive research on 401(k) plans. In a collaborative research effort, ICI and the Employee Benefit Research Institute (EBRI) cresmartinez on PROD1PC70 with HEARING


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8See Holden, VanDerhei, Alonso and Copeland, supra note 6. 

9Participants’ loan activity is modest. In 2006, only 18 percent of 401(k) participants eligible 

for loans had taken one. On average the loans amounted to only 12 percent of the remaining 

account balance. See Holden, VanDerhei, Alonso and Copeland, supra note 6. 10 Investment Company Institute, Financial Decisions at Retirement, ICI Fundamentals, vol. 

9, no. 6 (November 2000), available at http://www.ici.org/pdf/fm-v9n6.pdf. 11These percentages add to more than 100 percent because some respondents with multiple 

options chose to receive a partial lump-sum distribution with either a reduced annuity or reduced installment payments, or chose to defer receiving part of the proceeds. See Investment 

Company Institute, supra note 10. 12See 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. 

ated the largest and most representative repository of 401(k) account data. At yearend 2006, our database includes information on 20 million participants in almost 

54,000 employer-sponsored 401(k) plans, holding $1.2 trillion in assets.8 The EBRI/ 

ICI database, along with the extensive data we collect and analyze from mutual 

funds, allows us to examine the 401(k) system from many angles. 

The 401(k) system warrants the confidence that Congress, employers, and American workers have placed in it. Even in today’s workplace, where no one has had 

a 401(k) plan for a full career, the 401(k) system has demonstrated its savings 

power: 

• 401(k) account balances rise considerably with participant age and tenure. For 

example, the average account balance for participants in their 50s with between 

20 to 30 years of tenure is $174,272. Almost 50% of participants in this group 

have an account balance of greater than $100,000. 

• Consistent participation builds and strengthens account balances and allows 

participants to weather bear markets. When we examined consistent participants in the EBRI/ICI database—those who held an account balance at least 

during the seven-year period from 1999 to 2006 (which included one of the 

worst bear markets for stocks since the Great Depression): 

• The average 401(k) account balance increased at an annual growth rate of 

8.7% over the period, to $121,202 at year-end 2006. 

• The median 401(k) account balance increased at an annual growth rate of 

15.1% over the period, to $66,650 at year-end 2006. 

• Participants also generally use their 401(k) accounts for their intended purpose—providing income in retirement.9 In 2000, ICI surveyed recent retirees 

about their distribution decision from a defined contribution plan.10 One-quarter deferred some or all of the distribution, leaving a balance in the plan. About 

one-quarter received an annuity, and about 10 percent chose installment payments. About half of the recent retirees took a lump-sum distribution of some 

or all of their balance.11 Of those that took a lump-sum distribution, 92 percent 

of respondents said they reinvested all or some of the proceeds, in most cases 

in an IRA. Only 8 percent spent all of the proceeds. Those who spent all of the 

proceeds tended to have small distributions. In most instances, the proceeds 

were used for practical purposes, such as a primary residence, debt repayment, 

healthcare, or home repair. 

We also have examined in collaboration with EBRI whether a full career with 

401(k) plans can produce adequate income replacement rates at retirement.12 The 

EBRI/ICI 401(k) Accumulation Projection Model examines how 401(k) accumulations 

might contribute to future retirees’ income based on decisions workers make 

throughout their careers. The model looks at participants of varying income levels, 

modeling future accumulations under a range of market outcomes and using typical 

(and often imperfect) individual behaviors. For example, among individuals who 

were in their late twenties in 2000, after a full career with 401(k) plans, the median 

individual in the lowest income quartile is projected to replace half of his or her income using 401(k) accumulations. Social Security replaces the other half for the median person in this quartile. The model also demonstrates that when workers move 

into jobs that do not offer a 401(k) plan, median replacement rates fall significantly—by about half for workers in the lowest income quartile. In short, the worst 

thing that can happen to a worker is to be in a job that does not offer retirement 

savings plan coverage. 

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13 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/fmv16n4.pdf. 

Decision Making by Participants and Employers 

Our research suggests that under the current 401(k) regulatory system participants and employers have been able to make reasonable decisions in the areas in 

which they are called upon to act. Our research with EBRI has demonstrated that 

participants generally make sensible choices in investing their accounts. For example, older participants have a lower concentration in equities compared with participants in their twenties and a greater concentration in fixed-income securities. 

401(k) Participants Asset Allocation Varies with Age 

Percent of assets, year-end 2006 

*Includes mutual funds and other pooled investments. 

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data 

Collection Project 

Research also suggests that both employers and participants are cost conscious 

when selecting mutual funds for their 401(k) plans. The Institute has combined our 

extensive research on trends in mutual fund fees with our tracking of 401(k) plan 

holdings of mutual funds.13 Our research studies mutual fund fees in 401(k) plans 

because comparable information for other products offered in 401(k) plans is not 

readily available. 

401(k) Mutual Fund Investors Tend to Pay Lower-Than-Average Expenses 

Percent of assets, 1996–2006 

1The industry average expense ratio is measured as an asset-weighted average. 

2The 401(k) average expense ratio is measured as a 401(k) asset-weighted average. 

Note: Figures exclude mutual funds available as investment choices in variable annuities and tax-exempt mutual funds. 

Sources: Investment Company Institute; Lipper; Value Line Publishing, Inc.; CDA/ 

Wiesenberger Investment Companies Service; CRSP University of Chicago, used with 

permission, all rights reserved (312.263.6400/www.crsp.com); Primary datasource; 

and Strategic Insight Simfund 

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14These expense ratios include any payments a fund makes to recordkeepers to defray the 

cost of 401(k) plan administration. 15 401(k) investors in mutual funds also tend to hold funds with below-average portfolio turnover, which also helps keep down the costs of investing in mutual funds through 401(k) plans. 

See Holden and Hadley, supra note 13. 16 Academic research demonstrates the power of automatic enrollment to increase participation rates, particularly among lower income workers. See Choi, James J., David Laibson, 

Brigitte Madrian, and Andrew Metrick, For Better or For Worse: Default Effects and 401(k) Savings Behavior, NBER Working Paper, No. 8651 (December 2001); and Madrian, Brigitte C., and 

Dennis F. Shea. The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, NBER Working Paper, No. 7682 (May 2000). 17Letter from Matthew P. Fink, Associate Counsel, Investment Company Institute, to Morton 

Klevan, Acting Counsel, Plan Benefit Security Division, Department of Labor (June 21, 1976). 18See Statement of Investment Company Institute on Disclosure to Plan Sponsors and Participants Before the ERISA Advisory Council Working Group on Disclosure, September 21, 2004, 

available at http://www.ici.org/statements/tmny/04_dol_krentzman_tmny.html. 19See http://www.ici.org/pdf/ppr_07_ret_disclosure_stmt.pdf. 

We found that 401(k) savers tend to concentrate their assets in lower-cost funds. 

In 2006, the average stock mutual fund had an expense ratio of 1.50%. This is the 

simple average that does not reflect investment concentration: 77% of stock mutual 

fund assets in 401(k) plans were invested in funds with a total expense ratio of less 

than 1.00% at year-end 2006. On an asset-weighted basis, the average expense ratio 

incurred by all mutual fund investors in stock mutual funds was 0.88%. And the 

asset-weighted average expense ratio for 401(k) stock mutual fund investors was 

even lower: 0.74%. 

Similar results can be seen in each broad category of stock fund, as well as in 

bond funds. Overall, the asset-weighted average expense ratio across all mutual 

funds in 401(k) plans was 0.71% in 2006.14

There are several factors that contribute to the relatively low average fund expense ratios incurred by 401(k) plan participants.15 Employers, acting as plan fiduciaries, play a vital role in selecting and regularly evaluating the plan’s investment 

line-up to ensure that each option’s fees and expenses provide good value. Easy access to comparable and transparent mutual fund fee information helps employers 

and employees in selecting investments for their accounts. 

Improving Disclosure 

The employer-based 401(k) system has been a great success and has a bright future, but we also agree that it is time to ask whether we can build on the system 

to make it even better. Congress took a big step in the Pension Protection Act of 

2006 by codifying into law the automatic, or autopilot, 401(k) plan, with appropriate 

default investments designed for long-term saving.16 In the Institute’s view, the 

401(k) system could be further strengthened with appropriate disclosure reform. 

Meaningful and effective disclosure to 401(k) participants and employers remains 

an Institute priority. In 1976—at the very dawn of the ERISA era—the Institute 

advocated ‘‘complete, up-to-date information about plan investment options’’ for all 

participants in self-directed plans.17 We also have consistently supported disclosure 

by service providers to employers about service and fee arrangements.18 In January 

2007, the Institute’s Board of Governors adopted a Policy Statement on Retirement 

Plan Disclosure that reaffirms and chronicles the Institute’s long record in support 

of better disclosure.19 The Policy Statement calls upon the Department of Labor to 

require clear disclosure to employers that highlights the most pertinent information, 

including total plan costs, and to require that participants in all self-directed plans 

receive simple, straightforward explanations about the key information on each of 

the investment options available to them, including information on fees and expenses. 

Current Gaps in Disclosure Rules 

Fundamentally, there are two gaps in the current 401(k) disclosure rules. First, 

the Department of Labor’s rules produce unequal disclosure to participants. The Department of Labor’s rules cover only those plans relying on an ERISA safe harbor 

(section 404(c)); no rule requires that participants in other self-directed plans receive investment-related information. In plans operating under the safe harbor, the 

information participants receive depends on the investment product. Participants receive full information on products registered under the Securities Act of 1933, such 

as mutual funds, because the Department requires that participants receive the full 

SEC-mandated prospectus. For other investment products, such as bank collective 

trusts and separately managed accounts, key information, including annual operating expenses and historical performance, is required to be provided only upon request and only if that information has been provided to the plan. This disclosure 

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20 Report of the 2006 ERISA Advisory Council’s Working Group on Prudent Investment Process, available at http://www.dol.gov/ebsa/publications/AC_1106A_report.html. 21See Written Testimony of Assistant Secretary of Labor Before the Committee on Education 

and Labor (October 4, 2007), available at http://edworkforce.house.gov/testimony/ 

100407BradfordCampbellTestimony.pdf. See also Written Testimony of Assistant Secretary of 

Labor Before the Special Committee on Aging (October 24, 2007), available at http:// 

www.dol.gov/ebsa/newsroom/ty102407.html. 22 Investment Company Institute, Understanding Investor Preferences for Mutual Fund Information (2006), available at http://www.ici.org/pdf/rpt_06_inv_prefs_full.pdf. The Institute surveyed 737 randomly selected fund owners who had purchased shares in stock, bond, or hybrid 

mutual funds outside workplace retirement plans in the preceding five years. 

gap is particularly important because many 401(k) plans use pooled products that 

look and operate much like mutual funds, but which do not have disclosure requirements comparable to SEC requirements. The ERISA Advisory Council recently 

found that while mutual funds are the ‘‘easiest investment to understand,’’ they 

have the ‘‘heaviest burden’’ when it comes to disclosure and ‘‘less regulated and 

harder to understand investments might not even provide information regarding 

fees and performance.’’ 20

The second gap in current rules is that there is no specific requirement on service 

providers to disclose to an employer information on services and fees that allows the 

employer to determine the arrangement is reasonable and provides reasonable compensation. The Institute supports disclosure of payments a service provider receives 

directly from plan assets and indirectly from third parties in connection with providing services to the plan. Information on direct and indirect compensation allows 

employers to understand the total compensation a service provider receives under 

the arrangement. It also brings to light any potential conflicts of interest associated 

with receiving payments from another party, for example, when a plan consultant 

receives compensation from a plan recordkeeper. 

Efforts Underway to Improve Disclosure Rules 

The Department of Labor is taking steps to enhance 401(k) plan disclosure. As 

Assistant Secretary Bradford Campbell testified before the House Education and 

Labor Committee and the Senate Aging Committee, the Department of Labor has 

a three-pronged regulatory agenda to improve fee disclosures to participants, plan 

fiduciaries, and the government.21 These projects, in various stages of regulatory development, are intended to close the disclosure gaps described above. In addition, 

both Chairman George Miller and Subcommittee Chairman Richard Neal have introduced legislation (H.R. 3185 and H.R. 3765, respectively) addressing disclosure 

in the 401(k) and defined contribution market. 

Principles for Disclosure Reform 

Initiatives to strengthen the 401(k) disclosure regime should focus on the decisions that plan participants and employers must make and the information they 

need to make those decisions. The purposes behind fee disclosure to employers 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, or focusing on fees to the neglect of other important information, such as investment objective, historical performance, and risks. 

On the other hand, employers, as fiduciaries, must consider additional factors in hiring and supervising plan service providers and selecting plan investment options. 

Information to employers should be designed to meet their needs effectively. Finally, 

disclosure reform should be carefully considered so as to avoid imposing unnecessary costs, which often are borne by participants. 

1. Participants in all self-directed plans need simple, straightforward disclosure focusing on key information, including information on fees and 

expenses. 

Our extensive research into the information that mutual fund investors prefer and 

use in making investment decisions tells us that shareholders do not consult fund 

prospectuses or annual reports, which they find too long and difficult to understand. 

This is especially true among shareholders with less education: 75% of mutual fund 

shareholders with less than a four-year college degree say that a mutual fund prospectus is very or somewhat difficult to understand.22 Overwhelmingly (80%), shareholders prefer a concise summary rather than a detailed description. In making a 

fund purchase, mutual fund shareholders take into account certain key factors, insmartinez on PROD1PC70 with HEARING

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23See Statement of 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_(6–26–07).pdf. The SEC’s efforts are consistent with efforts to 

streamline mutual fund disclosure globally; both Canada and the European Union have proposed to amend their relevant disclosure documents to focus on key information. See Joint 

Forum of Financial Market Regulators, Point of Sale Disclosure for Mutual Funds and Segregated Funds (Proposed Framework 81–406, June 2007) (Canada); Committee of European Securities Regulators, Consultation Paper on Content and Form of Key Investor Information Disclosures for UCITS (CESR/07–669, October 2007) (European Union). 

cluding the historical performance (69% of investors considered this), fund risk 

(61%), types of securities held by the fund (57%), and the fees and expenses (74%). 

Based on this research, we believe that 401(k) participants should receive the following key pieces of information for each investment product available 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 • Identity of the investment adviser that manages the product’s investments 

Participants also need information about the plan fees that they pay, to the extent 

those fees are not included in the disclosed fees of the investment products. Finally, 

participants should be informed of any transaction fees imposed at the time of purchase (brokerage or insurance commissions, sales charges or front loads) or at the 

time of sale or redemption (redemption fees, deferred sales loads, surrender fees, 

market value adjustment charges). Disclosure reform should also leverage cost-effective new technologies like the Internet. 

Fees and expenses are only one piece of necessary information and must be disclosed in the context of other key information. The lowest fee option in many plans 

is the option with relatively low returns (such as the money market fund) or relatively higher risk (such as the employer stock) but it is not appropriate for most 

employees to invest solely in these options. For example, any disclosure of fees associated with employer stock also should describe the risks of failing to diversify and 

concentrating retirement assets in shares of a single company. In short, it is not 

enough to tell participants that fees are only one factor in making prudent investment decisions—they must be shown this by presenting fees in context. 

Streamlining disclosure to mutual fund investors to focus on key information is 

underway at the Securities and Exchange Commission.23 The SEC expects to propose this fall a new summary mutual fund prospectus that will focus on the information investors need to know, in a form they will use. With half of defined contribution plan assets in mutual funds, any changes to the disclosure system for plan 

participants should be consistent with the summary prospectus that the SEC develops for mutual funds; otherwise, 401(k) investors will bear the costs of mutual funds 

operating under different disclosure regimes. Both the SEC and the Department of 

Labor have indicated that the new summary fund prospectus, the work of years of 

study by regulators and the investment management community, could serve as a 

model for disclosure of other products. 

2. Disclosure should apply to all investment products regardless of type in 

a way that allows comparability. 

Any disclosure reform must ensure that participants receive basic information 

that allows them to evaluate and compare all investment options available under 

the plan. Disclosure of the key information we recommend is appropriate for mutual 

funds, insurance separate accounts, bank collective trusts, and separately managed 

accounts. In discussing fees and expenses, for example, the disclosure for any of 

these options should disclose the operating expenses of the fund or account. In discussing the principal risks, the disclosure should explain the risks associated with 

the stated investment objectives and strategies. 

The same key pieces of information also 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 

fixed rate of return. In describing principal risks of these products, the summary 

should explain that the risks associated with the fixed rate of return include, for 

example, the risks of interest rate changes, the long-term risk of inflation, and the 

risks associated with the product provider’s insolvency. 

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24Testimony of Robert J. Doyle, Director of Regulations and Interpretations, Employee Benefits Security Administration, Before the Working Group on Fiduciary Responsibilities Update 

and Revenue Sharing, Advisory Council on Employee Welfare and Benefit Plans (July 11, 2007). 25For example, if a plan has $50 annual per-participant fixed cost and charges every partici- pant the same $50 charge, a new or lower-paid participant with an account balance of only 

$1000 would pay 5% of his or her account balance in administration fees in a year. A participant 

with an account balance of $100,000 would only pay 0.05% of his or her account balance. ‘‘Mutualizing’’ the fixed cost by charging, for example, every participant 0.1% of his or her account, 

can help encourage participation by new and lower-income workers. 26Deloitte Consulting, LLP, International Foundation of Employee Benefit Plans and the 

International Society of Certified Employee Benefit Specialists, Annual 401(k) Benchmarking 

Survey 2005/2006 Edition. 

3. Employers should receive clear information about plan services and fees, 

including total costs, that allows them to fulfill their fiduciary duties. 

Employers should receive 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 third parties in connection with providing services to the plan. These payments from third parties, sometimes inaccurately referred to as ‘‘revenue sharing’’ but which are really cost sharing, often 

are used to defray the expenses of plan administration. We support requiring their 

disclosure by service providers. 

ERISA imposes clear responsibilities on employers, in their roles as fiduciaries, 

in entering into any service arrangement. Under ERISA section 404(a), fiduciaries 

must act prudently and for the exclusive purpose of providing benefits and defraying 

the ‘‘reasonable’’ expenses of administering the plan. Under section 408(b)(2), fiduciaries must ensure no more than reasonable compensation is paid for a contract 

for services. If a service arrangement does not meet these standards, section 

4975(d)(2) of the Internal Revenue Code imposes an excise tax against the service 

provider. Effective disclosure by service providers to employers is essential to enabling employers to enter into and maintain reasonable 401(k) service arrangements. 

While a wide variety of practices exist, many plans contract with a recordkeeper 

to receive both administrative services and access to an array of investment products from which plan fiduciaries construct the menu of investments offered under 

the plan. The recordkeeper is compensated for its services to the plan, in whole or 

in part, by asset-based fees paid in connection with the plan’s investment choices, 

which can either be proprietary or third party investment products. The Department 

of Labor has stated that ‘‘many of these arrangements may serve to reduce overall 

plan costs and provide plans with services and benefits not otherwise affordable.’’ 24

There are several reasons plans use asset-based fee arrangements. Using assetbased fees to cover administrative services effectively spreads the costs of acquiring 

necessary services over a shareholder or participant base. All mutual fund investors, 

whether in a 401(k) plan, IRA, or taxable account, experience ‘‘mutualization.’’ Some 

costs of administering a mutual fund shareholder’s account are relatively fixed, such 

as the costs of printing prospectuses, maintaining shareholder accounts, and sending shareholder statements. Because mutual funds charge asset-based fees, shareholders with larger accounts subsidize those with smaller accounts. Similarly, wrap 

fees in separately managed accounts or other brokerage accounts and M&E charges 

in insurance products mutualize certain costs in those products. 

In plans, asset-based fees allow new participants and those with lower wages or 

smaller accounts to participate without their fixed share of administration costs falling disproportionately, as a percentage of account balance, on them.25 Asset-based 

fee arrangements also help pay for plan start-up or service provider transition costs, 

which can be significant. To avoid the plan incurring all those expenses in the first 

year, asset-based fees allow a provider to recoup its expenses over several years as 

plan assets grow. 

There are practical reasons why plans, especially smaller plans, contract with one 

party—a recordkeeper—to receive all the services the plan requires. Using a single 

full-service provider to obtain administrative services and access to plan investments eliminates the cost to an employer of dealing with and monitoring multiple 

providers, and provides a single responsible party for all aspects of the arrangement. A recent survey by Deloitte Consulting and others found that 75% of plan 

sponsors used a ‘‘bundled’’ arrangement.26 In many of these arrangements, a service 

provider offers access for plan clients to its proprietary mutual funds, or bank or 

insurance products. 

We recommend that a service provider that offers a number of services in a package be required to identify each of the services and the total cost, but not to break 

out separately the fee for each of the components of the package. If the service provider chooses not to offer services separately, requiring the provider to assign a 

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27See Testimony of Tommy Thomasson on behalf of American Society of Pension Professionals 

& Actuaries and the Council of Independent 401(k) Recordkeepers Before the U.S. House Education and Labor Committee (October 4, 2007). 28For example, see Testimony of Lew Minsky on behalf of the ERISA Industry Committee, 

the Society for Human Resource Management, the National Association of Manufacturers, the 

United States Chamber of Commerce, and Profit Sharing/401k Council Of America Before the 

U.S. House Education and Labor Committee (October 4, 2007); Testimony of Robert G. Chambers on behalf of the American Benefits Council, the American Council of Life Insurers and the 

Investment Company Institute Before the U.S. Senate Special Committee on Aging (October 24, 

2007). 29The Department of Labor’s model ‘‘401(k) Plan Fee Disclosure Form’’ encourages employers 

to ask about the services included in a bundled arrangement, and the total cost, but does not 

require that the ‘‘price’’ for each service be disclosed. See http://www.dol.gov/ebsa/pdf/ 

401kfefm.pdf. The Department of Labor states in its just released ‘‘ERISA Fiduciary Adviser’’ 

interactive web tool: ‘‘In comparing estimates from prospective service providers, ask which services are covered for the estimated fees and which are not. Some providers offer a number of 

services for one fee, also called a ?bundled’ services arrangement, while others charge separately 

for individual services. Compare all services to be provided with the total cost for each provider.’’ 

See http://www.dol.gov/elaws/ebsa/fiduciary/q4g.htm. See also ‘‘Meeting Your Fiduciary Responsibilities,’’ http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html. 

price to the component services will produce artificial prices that are not meaningful 

to the employer in making comparisons. Many products and services are ‘‘bundles’’ 

of individual components that might not be offered separately at the same total 

price. So-called ‘‘package’’ vacation tours—often including airfare, hotel, ground 

transportation and entertainment and amenities all for a single price—are examples 

of bundled services. Components of the package are not separately priced, are more 

easily and conveniently secured as a group, and typically cost less in total than they 

would if purchased individually. Nonetheless, consumers can, and do, shop for vacations on an unbundled basis. 

If a recordkeeper offers to provide participant accounting, compliance services, 

and participant communications in a single package, it should not have to attribute 

separate fees to those components. Similarly, if a provider offers proprietary investment products as well as recordkeeping, it should not be required to price these separately if they are offered as a package for a total cost that is disclosed. 

In economic terms, products and services are bundled together because the provider believes it is efficient to do so, and it would not be efficient to track and 

disaggregate accurately the cost of any one component. Any attempt to ‘‘price’’ each 

component would be artificial. Mutual fund organizations are able to provide 401(k) 

administrative services efficiently in part because some of these services are similar 

to those they already provide to retail shareholders of their own funds. 

Proposals to Favor One Business Model 

One trade group whose members bundle many, but not all, of the 401(k) service 

components offered by other providers has asked Congress to mandate rules to favor 

its members’ business model. The American Society for Pension Professionals & Actuaries (ASPPA), along with its subsidiary, the Council of Independent 401(k) Recordkeepers, has asked Congress to mandate that service providers offering proprietary investment options disclose to employers a price for recordkeeping and administration and a separate price for investment management, even if this ‘‘price’’ has 

to be generated artificially and thus will be of questionable accuracy.27 This approach favors one business model—firms that just bundle together recordkeeping 

and other administrative services—over another business model—firms that offer 

recordkeeping and administration as well as investment management services, by 

imposing additional disclosure burdens on the full-service model. 

All 401(k) recordkeepers bundle together a variety of recordkeeping services, including transaction processing, participant statements, web access, and participant 

education. ASPPA’s recommendation is not that Congress mandate unbundling the 

price for the wide variety of administrative services its members provide. Rather, 

ASPPA seeks unbundling of investment management expenses from administrative 

and recordkeeping fees by providers that offer proprietary products. 

Numerous stakeholders, including those representing employer groups, service 

providers, and investment providers, have urged Congress not to mandate this 

unbundling.28 This disclosure is unnecessary, artificial, and would favor one business model over another. The breakout of investment management and recordkeeping expenses is not required by ERISA. As the Department of Labor has made 

clear, the key for plan fiduciaries is to compare the total cost of recordkeeping and 

investments of one provider with the total costs of recordkeeping and investments 

of another provider or group of providers.29

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Conclusion 

We applaud the Committee for examining this important topic and once again 

thank you for providing the Institute this opportunity to testify. We look forward 

to continuing to work with this Committee and its staff in these and other matters 

of importance to funds and their shareholders. 

f 

Mr. MCDERMOTT. Thank you very much for your testimony. I 

sort of imagine myself being a member of the public sitting and listening to this and realizing that their pension is being determined 

by this kind of a discussion. How many of you handle unbundled 

services? How many of you handle bundled services? So, we have 

got one here. Now, I think in the free enterprise system we think 

that competition is good, nobody ever has inferred that we should 

not have competition, how can you have competition without full 

disclosure of all the fees? How do you have that? I would like to 

hear some discussion from you about how anybody could argue 

against us having regulations that require everything to be disclosed because the government plans have it, and they are in the 

bidding prospect. When they go for our Thrift Savings Plan, that 

whole thing is there, so they are competitive. Yes? 

Mr. THOMASSON. Thank you, Congressman. I will say that as 

a representative of the Council of Independent 401(k) record keepers and also the president and CEO of DailyAccess Corporation, we 

are an unbundled, or what is termed in the definition of this hearing, as an unbundled provider. Actually, we totally agree with exactly what you just said, how can anyone have a decisionmaking 

process for buying or purchasing anything, services, products or 

anything, without disclosure of what is involved in those products 

or services. I also speak on behalf of my own plan, the DailyAccess 

Corporation 401(k) plan and trust, I am the fiduciary of that plan. 

I also happen to be in a reasonable position to understand a little 

bit about what this debate is regarding, and I still have trouble 

with other services that we are buying from other people determining what type of fees are associated, and I am a trained fiduciary. I have outside training regarding my fiduciary responsibility. 

Without full fee disclosure, competition does suffer. 

In my oral testimony, we talked about certain business models 

being able to claim that services on a bundled basis were free in 

certain cases, in certain circumstances and that is not exactly true. 

So, full fee disclosure does enable competition. 

Mr. MCDERMOTT. I heard the lawsuit business here. Now, 

there are some contentious employees out there who may bring a 

lawsuit on their employer. If their employer knows that the bundled fees are being slipped through on to the plan participant, the 

employee, and does not tell him that, does he get liability in that 

regard or she? Can they be sued for that? 

Mr. MINSKY. Well, Congressman, you can be sued for anything. 

Mr. MCDERMOTT. I know. That was a lawyer’s answer. Come 

on, I am not a lawyer, let’s talk here. 

Mr. MINSKY. I think that the fair question is what is the responsibility of the plan fiduciary to determine what costs are out 

there, and I guess I would differ from Mr. Thomasson a little bit 

in saying that I think I would frame the issue as one of transsmartinez on PROD1PC70 with HEARING

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parency, not one of bundled versus unbundled. I think that a plan 

sponsor who is acting as fiduciary has a responsibility to make sure 

that the total fee for what they are buying is reasonable, and 

ERISA provides that obligation and so to the extent they do not 

comply with it, they have potential liability. But on the other hand, 

I think a plan fiduciary can comply with that responsibility without 

breaking out services that are not naturally broken out. 

Mr. MCDERMOTT. Can the fiduciary have information that I as 

the employee do not have? 

Mr. MINSKY. Yes, I think, as we have heard from the last panel 

and I think you would hear consistently on this panel, there is 

some information that a plan sponsor, as a buyer of services, needs 

to have that is not necessarily relevant to the decision that a plan 

participant makes, which is, one, whether or not to participate in 

the plan; and then, two, if they decide to participate in the plan, 

which investment option from those available or which options is 

best for that participant. So, yes, I do think that there are some 

things that the plan fiduciary, who is negotiating the service contract needs, that may not be beneficial for the participant. 

Mr. MCDERMOTT. That may not be beneficial? Yes, Mr. 

Thomasson? 

Mr. THOMASSON. Thank you, Congressman. Mr. Minsky and I 

do agree that the issue is not bundled versus unbundled, it is one 

of uniformity. It is not about the business model, it is about plan 

sponsors as fiduciaries and the participants that they serve. So, 

how can a fiduciary not want more disclosure? Look at what the 

general public does when they go buy a car or they go on a trip? 

Mr. MCDERMOTT. Buy a mortgage. 

Mr. THOMASSON. Or a mortgage, they want to know as much 

detail about those decisions as they can even though they do want 

to know the total cost ultimately, but what are the decisions that 

they have to make, what are the cost components underneath it 

that they may be able to do something different with? It is the 

same thing. If you are fiduciary and you are handling money and 

making decisions for your employees retirement, how do you not 

ask for information from that perspective. So, we do agree that it 

is not bundled/unbundled, it is not about a business model. 

Mr. STEVENS. Mr. Chairman, could I respond? 

Mr. MCDERMOTT. Yes. 

Mr. STEVENS. It occurs to me that you can think about this in 

very simple terms. You have got two grocery stores on your block. 

You want to buy two apples. You can buy one from each at five 

cents each, and now you know you have got two apples for 10 

cents. Or you can go to one store and get both for 10 cents. The 

important thing is for the fiduciary to know what services are 

being received and what costs are being incurred for them. The 

reason that there is a preference is because going to a single provider makes life simpler for the thousands and thousands of small 

businesses who try to sponsor and run 401(k) plans. 

But I think it is important to add that Mr. Thomasson’s organization has been on both sides of this issue. In February 2005, there 

was a submission by ASPPA to the Labor Department that said, 

‘‘We do not believe it is necessary or appropriate for each specific 

fee or expense item to be separately disclosed so long as the total 

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costs payable out of the plan assets are disclosed.’’ That is our position. It was ASPPA’s position just 2 years ago. 

Mr. THOMASSON. I would really love to respond to that, Congressman. 

Mr. MCDERMOTT. As the Chairman, I should not, but I will let 

you answer that, and then we are going to move on. 

Mr. THOMASSON. Thank you, sir. Mr. Stevens and I do agree 

that, yes, our position a few years ago to Labor was that response. 

You know, quite frankly, the two ends of this table are not really 

on different sides of the fence. This argument is really related to 

one thing, that is uniformity of disclosure. The reason we are having a problem here is because of different business models not 

wanting to disclose what their model differences are versus others. 

Now, in our testimony to Labor, we did talk about the break out 

of fees and components, but we were also coming from this, coming 

at the argument from the standpoint of independent unbundled 

providers. It is natural for us to actually illustrate what our fees 

for our services are. That is the side of the business that we come 

from. So, we are not actually in opposition with Mr. Stevens in his 

opinion. It is about the same argument. We are all looking for the 

same thing, uniformity of disclosure. 

By the way, one other thing, it is easy to deal with an independent unbundled provider as well because there is usually one 

source of contact for that model, just like there is for a bundled 

model. Thank you, sir. 

Mr. MCDERMOTT. Mr. Herger? I apologize to the Committee for 

stepping on my prerogatives. 

Mr. HERGER. Thank you, Mr. Chairman. For Mr. Jackson, are 

fees for small plan sponsors generally higher or lower than for 

large sponsors? 

Mr. JACKSON. I am not an expert on that subject because I 

have never looked at it from the perspective of a large employer. 

I can tell you that we did shop, and we looked at bundled and 

unbundled packages. I am not an expert on 401(k)s, what I wanted 

to know was what is the total cost given my number of employees, 

my number of assets, and I feel that we got a good deal based on 

that shopping model without me knowing the breakdown of all of 

the various fees that went into that component. I was looking for 

the best overall cost. 

Mr. HERGER. Following up, is there a risk that additional legislative requirements could translate into an even greater burden for 

small businesses or worse, a decision by some businesses not to 

offer a 401(k) plan? 

Mr. JACKSON. That is certainly a concern that I have. It was 

a struggle for us to make the reach to go to a 401(k), and I do not 

have any statistics in front of me, but I would suggest that there 

are a few percentage of companies that have 25 and fewer employees that do have a 401(k) and the more burden you put on it, the 

fewer you are going to have. 

Mr. HERGER. In considering whether to sponsor a retirement 

plan for their workers, what concerns did small businesses express 

with respect to their fiduciary obligations and the possibility of 

lawsuits? 

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Mr. JACKSON. Well, certainly that is always a concern. While 

we are at a disadvantage in terms of not being a major player in 

the market in terms of providing the best price, we do have an advantage, and I can sit in a room with all 25 of my employees and 

get their input and discuss it and make them a part of the decisionmaking process, which I understand in a large company would 

not be a practical answer. 

So, yes, there is concern about lawsuits, but I think as long as 

we are trying to do the best thing that we can for our employees, 

I would point out that contributions do not require a matching contribution from the employee, so anything they get is above and 

aboard for them. But we designed the program to help us attract 

employees, that is one of the reasons for going to it. 

Mr. HERGER. Mr. Minsky, are you considering that too much 

focus on plan fees may have the unintended effect of discouraging 

employers from sponsoring retirement plans or discouraging workers from participating in them? 

Mr. MINSKY. I very much do. I think it likely could do that. I 

think also for people who continue to participate in plans, I am 

concerned that an over focus on fees means an under focus on other 

important issues and ultimately might lead to poor decisionmaking. 

A participant who is focused only on fees may select investments 

that ultimately do not lead to their long-term best interest. 

Mr. HERGER. So, you could have a plan that maybe is doing better out there, making more money, even if its fees were a little 

higher, it would ultimately give the employee far more money than 

one with lower fees that was not doing as well? 

Mr. MINSKY. Yes, I was struck by the comment earlier about 

the plan or the account that has 1 percent higher fees ultimately 

leading to 7 percent less retirement savings at the end of the day 

and thought, well, if that same plan account had 2 percent higher 

return, it would actually lead to 17 percent higher balances at the 

end of the day, so I think fees alone are not the right analysis. 

Mr. HERGER. Fees are certainly important, but probably far 

more important is the point that you just made. 

Mr. MINSKY. The total return. 

Mr. HERGER. What trends are occurring even without legislative action to increase transparency of plan fees? 

Mr. MINSKY. I can speak first and foremost about in the large 

plan market and tell you that I have been interacting with our 

service providers for several years and the level of transparency 

that we receive has changed significantly over that time period, to 

a point where I am very comfortable today saying that our relationship with our service providers is completely transparent. I think 

that that same thing cannot be said for smaller plans at this point, 

but I see the trend continuing and slowing down, and I think the 

advancements made by Honeywell and my company and other 

large companies are starting to be felt by smaller companies and 

ultimately the market is getting there. 

Mr. HERGER. Thank you. Thank you, Mr. Chairman. 

Mr. MCDERMOTT. Thank you. Mr. Neal will inquire. 

Mr. NEAL. Thank you, Mr. Chairman. Mr. Thomasson, I appreciate your kind comments and your testimony regarding my bill on 

fee disclosure. I agree with you that both bundled and unbundled 

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providers should be disclosing their fees. As you suggested in your 

testimony, it need not be item by item, but it can be done in broad 

categories and that is precisely what my legislation mandates. We 

have heard some testimony today though that says it is not possible for bundled providers to break out major categories of cost. 

My staff has given you a copy of a sales proposal from a great Massachusetts-based provider, Fidelity, comparing their cost to a competitor, which breaks out recordkeeping costs from expense ratio. 

Can you discuss how this type of information helps a small 

businessowner make decisions about their employees’ retirement 

plan? 

Mr. THOMASSON. Yes, sir, thank you, Congressman Neal. To 

answer the question fairly directly, the more information a fiduciary has regarding the selection of services for their participants 

in a plan that they would provide, there are an enormous number 

of details that are involved in how you process a plan. We know 

it, every other provider knows it, anybody that provides operations. 

So, what is relevant to a decisionmaking process is the summary 

of three main categories, which are investments, the investment 

expense, the management expense, it costs money to manage 

money, nobody is arguing that concept, it costs money to operate 

a plan for the generation of participant statements, recordkeeping, 

administration, trust, custody trading, all the operational components that are the same regardless of business model, and then any 

selling or advisory fees or outside third party fees that are associated with delivering services to that plan that may be compensated 

from plan assets or via some other mechanism. Those three categories will enable fiduciaries to make reasonable apples to apples 

comparison amongst providers. 

One of the basic premises that we are arguing here is business 

model differences should dictate non-uniformity of fee disclosure. 

Well, if you have specific categories under that disclosure scenario 

that are uniform across the marketplace, than fiduciaries of every 

plan size, small and large, will be able to differentiate between providers and the services that they are paying for. 

Mr. NEAL. Mr. Minsky, you seem to place great faith in the Department of Labor and the regulatory process, indicating that 

whatever they do must be satisfactory. Are you prepared to say 

today that you will forfeit any effort down the road to seek legislative relief if, in fact they, come back with a bad proposal? 

Mr. MINSKY. No, Congressman, not at all. 

Mr. NEAL. Are you saying you might shop for the best deal? 

Mr. MINSKY. I am not saying that either. What I am saying is 

that I think the DOL is first of all well advanced in their initiatives, my hope is that they will get guidance out relatively soon. 

That I think the best approach for Congress is to wait and see 

what DOL does and if what DOL does is satisfactory, great. If 

not—— 

Mr. NEAL. Emphasis on the word ‘‘guidance’’? 

Mr. MINSKY. Say it again, I am sorry? 

Mr. NEAL. Are you emphasizing the word ‘‘guidance,’’ that Congress ought to wait and seek guidance from the Department of 

Labor on this issue? 

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Mr. MINSKY. No, no, what I am saying is I think the regulatory 

process by its nature is more flexible and ultimately will be the 

better avenue for these important and difficult issues to be addressed. However, it is obviously Congress’ prerogative after—at 

any point, but particularly after the DOL acts, to wait and see and 

if DOL does not get the job done—— 

Mr. NEAL. Is it your prerogative to visit with your local Member 

of Congress to seek relief afterward if you do not like the proposal 

that DOL offers? 

Mr. MINSKY. Obviously, that is part of the political process. 

Mr. NEAL. Well, thank you. Ms. Klausner, we have heard your 

testimony today that regulations in this area might not come until 

late 2008 or beyond. Many of us feel that there is a need to act 

sooner, and that our companies and workers expect some movement toward greater disclosure. You and I have discussed my approach, more disclosure in broad, general categories. Is this something you think that companies and vendors can work with? 

Ms. KLAUSNER. I do think it is something that vendors and 

plan sponsors can work with. I have found that your bill is one 

which nicely lays out a difference between the dialog between plan 

service providers and plan sponsors and the dialog from plan sponsors to the participants. I think that that framework can be utilized in concert or cooperation ultimately with either working with 

Mr. Miller and his group to come out with a total bill package that 

is satisfactory to all Members, as well as listening to the guidance 

that comes out of the Department of Labor and seeing whether 

there can be some cooperation between all the different avenues of 

getting to the right result, which ultimately for all of us is excellent 

retirement savings and an understanding about the usefulness of 

a 401(k) plan. 

Mr. NEAL. So, you maintain that the process ought to remain 

fluid? 

Ms. KLAUSNER. Absolutely, the process should be fluid, it 

should be cooperative. What we do not want is for any Member of 

either Congress or the Department or plan sponsors or plan service 

providers to feel that they have sole ownership of the ability to find 

the right answer. 

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

Mr. MCDERMOTT. Mr. Pomeroy will inquire. 

Mr. POMEROY. Thank you, Mr. Chairman. I think that the testimony today has been very interesting, and it is my hope that by 

the time we are done working on this, we will have a clear disclosure format that really is one that the bundled and unbundled 

community can alike find merit in that is going to have value to 

plan participants. Having said that, I want to get back on the defined benefit issue because this is the only chance really that we 

have to talk about it. I value having the opportunity to question 

two significant employers in terms of what they are thinking about 

in terms of funding of questions with so many unknowns even as 

the new year and the new requirements will begin. So, I would ask 

Allison and then Lew, if you would, to talk about your commitment—do you have a defined benefit plan, what is your ongoing 

commitment to it? Do the questions about plan funding leave you 

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anxious about whether or not you will be able to continue to support both the DC and DB plan? 

Ms. KLAUSNER. Thank you, Mr. Pomeroy. Honeywell does have 

a significant defined benefit plan and other smaller defined benefit 

plans within its universe. At this point in time, we are committed 

to maintaining both a defined benefit plan, as well as our defined 

contribution plan. I personally do not work on a regular basis in 

the defined benefit community, my colleague does, but I understand from both Honeywell and other members of the American 

Benefits Council that we continue to support the types of plans, 

that we do support a 1 year delay of the PPA funding rules, which 

I know are of great interest to you. 

Mr. POMEROY. I absolutely believe we need—plan funding has 

improved based on this mark to market evaluation. Let’s just put 

this on hold for a year, we have done that with other pieces of legislation, and make certain we get the implementation right because 

if we get the implementation wrong, we may cause perfectly fine 

plans to be frozen rather than have the employers deal with the 

many uncertainties about continuing them. I appreciate very much 

your comment in support of a 1 year delay. I would ask Lew? 

Mr. MINSKY. Thank you, Congressman. FPL Group does sponsor a defined benefit plan, and we are committed to providing retirement security to our employees through both a defined benefit 

and defined contribution plan going forward. The funding issues 

are somewhat unique in our company because we have an extremely well-funded pension plan and are not anticipating any 

funding obligations in the near future. That said as a public policy 

matter, I agree wholeheartedly with the points you made earlier 

and if we were in a position where funding was a real prospect in 

the short term, it would be very difficult going forward not knowing 

what the rules would be. 

Mr. POMEROY. Within the ERISA Industry Committee, are you 

familiar with other members and what their thinking might be on 

this? 

Mr. MINSKY. Yes, well, having been at the ERIC board meeting 

recently, this was a popular topic, and I think there is a fair 

amount of concern and uncertainty about moving forward without 

a clear understanding of what the rules are. 

Mr. POMEROY. This week’s Pension and Investments Magazine 

has an article about the former head of PBGC, who is now working 

for a hedge fund that wants to pick up frozen pension plans and 

manage them. Now would you feel comfortable as a business that 

your fiduciary responsibility to plan participants would pass entirely to the hedge fund in such a laying off proposal, Mr. Minsky? 

Mr. MINSKY. I think that would depend largely on what type of 

framework was set up in order for that transfer to be made. This 

is outside of the area I came to talk about, but I think it would 

be difficult in the current regulatory scheme to do that, although 

I understand it is quite common in the UK, and they have a slightly different scheme. I think ultimately that is something that Congress may want to look at and something the DOL and the PBGC 

may look at more carefully. It is probably not something that is in 

the purview of my expertise. 

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Mr. POMEROY. Well, I think you have teed up the issues nicely. 

I want to put a copy of this article into the record, and I would further add I have got serious questions about this. My own notion is 

you cannot just simply shed your fiduciary responsibility to plan 

participants by transferring basically a plan to have them run off 

the assets. It also leaves in my own mind a very strong impression 

that this former PBGC official knows darn well these frozen pension plans are probably well funded on a realistic mark to market 

approach and that is why they are so comfortable taking on plan 

liabilities with the assets that the plan has to support them. In any 

event, I do not think anyone should be of the impression that Congress or the Administration is going to sit quietly by while these 

things just go willy nilly into the hedge funds without any government action taken, so thank you, Mr. Chairman, I will add this for 

the record. 

[The information follows:] 

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Mr. MCDERMOTT. Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. Just a couple of 

questions about how we are going to get to the kind of information 

both the plan sponsors and the participants really need. In hearing 

your conversation, one of the things that we have not discussed 

very much today is the fact that—well, one of the reasons we are 

here is we want to encourage the use of 401(k), we want it to be 

reasonable for plan sponsors, we want to encourage employers to 

do it, we want that information available for participants even not 

a terribly sophisticated workforce. Mr. Minsky suggested that a sophisticated workforce can handle some information, and a less sophisticated workforce cannot. I will get to that in a moment, I 

think that is of some concern because at least we are concerned 

about and interested in having workers be able to save, regardless 

of how sophisticated they are, and that is really one of the reasons 

we are talking here. 

The other is there is a significant cost to the government for 

401(k) plans. I think we do not talk about that very much. The tax 

subsidies for 401(k) plans are estimated at almost $4 billion for 

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2007 over the next 5 years. We are talking about $233 billion in 

taxpayer subsidies for 401(k) plans, so there is a reason in addition 

to the interest we might have in helping Americans to save. There 

is a substantial public dollar in this, and so if all taxpayers are 

contributing, we want to make sure that all workers or many workers have access to this. 

My question has to do with the competitiveness of the marketplace here and how well it is working in not only reducing fees, but 

also in providing a wide variety of different options for both employers and employees. So, my question, and I actually may be able 

to start with Mr. Thomasson, others may want to weigh in on this, 

do you believe that—who is benefiting in the marketplace? When 

an employer starts to go off and look for plan service providers, are 

there a lot of them out there that are available to them? Are they 

all as qualified? Will they be able to provide the kind of information they need? Will a small businessowner in particular, I think 

a larger employer has more options, in taking the time to do this 

but for small business in particular, how much time and effort goes 

into a small businessperson finding the right service provider and 

making that they actually get the information they need for them 

for themselves as the plan provider, but also for their employees? 

Mr. THOMASSON. Well, to answer your first question regarding 

competition and numbers of providers that are out there, there are 

literally thousands of providers that are out there, and they range 

from shops that provide administrative or consulting services only 

with one to two people all the way to the very large bundled providers and large unbundled providers or operations providers. 

Technology, services, product development, the marketplace itself, 

participant in-plan sponsor, direction have all added to the competitive nature of the entire environment. 

Ms. SCHWARTZ. Do you think this competition has brought 

more qualified—— 

Mr. THOMASSON. It happens everyday. There is so much pressure on provider fees today that pricing to value is probably upside 

down in many cases for many providers. It is under extreme pressure because of a lot of different reasons. 

Ms. SCHWARTZ. When an employer—they actually tend to get 

several different bids and then look at that and how do they actually make, how much time can they afford to spend sort of to actually do the due diligence obviously they have, a fiduciary responsibility to do this once they are involved but maybe, Ms. Klausner, 

it looks like you are anxious to respond to this? 

Ms. KLAUSNER. Yes, thank you. I wanted to actually make sure 

the record reflects that although the small providers might have 

more difficulty having leverage and there are a large number of 

service providers available for the plan sponsors of small businesses, we find that for Honeywell and other members of the Council, there are large providers, large plan sponsors, it is actually a 

smaller market of service providers available, and we do go out 

there and ask for all the information that is necessary to look for 

a competitive bid, but we are not only of course looking for the lowest fee available, we are recognizing that with a very varied workforce and the very complex plans we have, that in order to bring 

value, the cost may be higher than otherwise expected and may be 

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higher per head per person than even a small plan, so that each 

plan, large or small, has its unique challenges to finding good service and good value. 

Ms. SCHWARTZ. Well, let me just follow up since my time is 

running out here. You have talked about uniformity, but really one 

of the issues here of course is not only for the plan to get the right 

value, but then—maybe I will ask Mr. Minsky this, you sort of 

seemed to be more hesitant about how much an individual participant might be able to make the judgment and that is exactly why 

we are asking about what kind—and talking about what kind of information has been provided to participants. We don’t give them information they can use that is readable, that is understandable, 

and in a form that they can make decisions. Are you really suggesting that some of the workforce is just not going to be able to 

make these kinds of decisions that the employer does and that is 

good enough? 

Mr. MINSKY. Not exactly, but I agree with the point you are 

making, which is that we have to provide disclosure that is helpful 

to participants in making the decisions that ultimately they need 

to make, which are principally whether or not to participate in the 

plan and then if they choose to participate in the plan, how to invest. 

Now, I think the point I was trying to make about sophistication 

of the workforce is that a plan sponsor, acting as a fiduciary 

should, and in my experience does, look like the dynamics of its 

workforce in determining what products make sense in a plan so 

that, for example, a workforce that is maybe more likely not to take 

action, that plan sponsor may see that and say that they want to 

create a default in their plan that leads to success for those participants, so that may lead them to automatically enroll the participants, and if the participants do not elect an investment to default 

them into an age appropriate life cycle fund, for example, or a managed account, and that is an appropriate decision for a fiduciary to 

make, which may add cost, but still leads to better results. 

Ms. SCHWARTZ. I think our time is up but you raise some interesting points, but I think really one of the things that many of us 

understand is that as difficult it is to understand some of the information that employees are going to get, we are all going to have 

to learn a lot more about this and be able to provide information, 

those who understand it better, in a way that can work. 

Mr. MCDERMOTT. Mr. McCrery will inquire. 

Ms. SCHWARTZ. Thank you. 

Mr. MCCRERY. Thank you, Mr. Chairman. Ms. Klausner, according to the information on our list of witnesses, you are the assistant general counsel for benefits for Honeywell, is that right? 

Ms. KLAUSNER. That is correct. 

Mr. MCCRERY. So, your job, you are a lawyer? 

Ms. KLAUSNER. That is also correct. 

Mr. MCCRERY. Your job, among probably others, is to oversee 

the benefits that Honeywell gives to its employees, is that right? 

Ms. KLAUSNER. That is correct, that is one of my jobs and, just 

for the record, one of my other jobs is to be a member of our Savings Investment Committee, so it is a very specifically named fiduciary role as well, and I just wanted to make sure you knew that. 

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Mr. MCCRERY. Yes, thank you. So, I think you are an excellent 

witness to have before us today because that is what you do day 

in and day out is try to fulfill that fiduciary responsibility on behalf 

of the corporation or the employer or the sponsor of the plan. Do 

you think that plan sponsors are, under the current laws and regulations, able to meet your fiduciary obligations? 

Ms. KLAUSNER. I think that under today’s law, we are able to 

meet our fiduciary obligations and that is as a basis—as a product 

of training. On a regular basis, individuals do need to be trained 

to understand how to fulfill their fiduciary role. In the purchasing 

of vendor services for a 401(k) plan, they need to understand that 

although typically they might think of it as a business purchase, 

the same as business purchases or pencils or paper, that in fact 

that might be a starting point for the discussion, for the selection 

of a vendor service, but it goes much further and needs to be looked 

at from a fiduciary eye. So, with the training and with the understanding of the balance, that we are standing in the shoes of participants of making these choices, I do believe we can fulfill our 

function. 

Mr. MCCRERY. Including with respect to keeping plan fees reasonable? 

Ms. KLAUSNER. Yes, I do. In terms of keeping plan fees reasonable, of course ‘‘reasonableness’’ is also based upon its relative comparison to the value being provided. So, we respect the idea that 

a service provider could offer something which has a higher dollar 

value, but can allow us to do our job better in terms of providing 

the retirement savings for individuals. So, by way of example, we 

have a recordkeeper who today we have been partnering with for 

some time, and we have placed tremendous value on their ability 

to very quickly address acquisitions, divestitures, changes in statutory language, change in regulation. We rely upon them very heavily to be able to in a very sophisticated and timely manner, get the 

information to us so we can get it to our plan participants. 

Mr. MCCRERY. How often do you review what fees are being 

charged to your plan? 

Ms. KLAUSNER. On the recordkeeping and on the administration side, fees are reviewed regularly, I would say probably annually. However, there are intermittent conversations because as the 

services change and as our needs change, and we have to add them 

and therefore add a fee, we look at the picture as a whole. On the 

investment side, we meet no less frequently than quarterly. However, given today’s investment market and the financial market, I 

think we have met probably more than once a week to determine 

the impact of changes by investment managers and in the marketplace and how those may or may not impact our choices that we 

offer to our participants in the 401(k). 

Mr. MCCRERY. I assume you also have occasion to interact with 

regulatory agencies with respect to these plans, is that right? 

Ms. KLAUSNER. That is correct. 

Mr. MCCRERY. Do you think the appropriate government agencies are giving adequate attention to plan fee disclosure? 

Ms. KLAUSNER. I am very pleased, Honeywell is pleased, the 

American Benefits Council and its members are very pleased to see 

that there is this attention by both the Department of Labor, to a 

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smaller degree, but necessary degree, the SEC, and of course many 

Members of Congress. Again, as I said a couple of times in the testimony and in the prepared written testimony, we do want to continue to see the cooperation among all the different sectors. 

Mr. MCCRERY. Thank you very much. Mr. Stevens, quickly, do 

investors within a 401(k) plan pay more or less in investment fees 

generally than investors in the retail market? 

Mr. STEVENS. The research that we have done, Congressman, 

suggests that in the 401(k) market, they pay lower fees than they 

do in the retail market for mutual funds. I should say that there 

is a lot of information about mutual funds. I cannot necessarily 

make the same comparison between other investment options in a 

401(k) plan and the retail market, but our numbers are very clear. 

They get a lower price. 

Mr. MCCRERY. What is the trend with respect to cost for 401(k) 

investments? 

Mr. STEVENS. I think, again looking at the mutual fund component, it has been downward as investors move to lower-priced 

funds. 

Mr. MCCRERY. Is that due to competition, more competition? 

Mr. STEVENS. Enormous competition has driven that, and I 

think a high degree of transparency around how much the mutual 

fund costs. That has been something that has been a subject to detailed SEC disclosure for our industry for a very long time. 

Mr. MCCRERY. One last question, Mr. Chairman, there is a bill 

in Congress pending that would mandate that all 401(k) plans provide at least one index fund among the choices available to employees; what is your opinion on Congress mandating that? 

Mr. STEVENS. Well, index funds are terrific investments. Our 

industry really brought them to the fore and helped to popularize 

them, and they are certainly available in many, many plans as a 

result of the process that witnesses here have just described of employees selecting investment options. But I think it would be a dangerous precedent, Congressman, that legislation would begin to select investment options in 401(k) plans. 

In particular, I would say that there is no single index that is 

the perfect solution for every investor’s need over his or her investing lifetime. It has got to be mixed with other assets, other types 

of funds, and that is really what has given rise to the life cycle or 

lifestyle fund that tracks an investor over time and where the investments change, because there is no one index fund solution to 

the investor’s needs. 

Mr. MCCRERY. Thank you. 

Mr. MCDERMOTT. I want to thank the panel for your informative testimony, and we will perhaps talk to some of you again. 

Thank you very much. 

Our third panel has been waiting for a while. Unfortunately, we 

are going to have a couple of votes here shortly, but we will try and 

begin the panel and begin the process. Bertram Scott, who is the 

Executive Vice-President for Strategy, Integration and Policy for 

TIAA–CREF, which is an educational fund; Mindy Harris, who is 

President of the National Association of Government Defined Contribution Administrators; David Wray, who is the President of the 

Profit Sharing/401(k) Council of America; Lisa Tavares, who is a 

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Partner of the Venable Law Firm here in D.C.; Norman Stein, who 

is a Professor from the University of Alabama School of Law, on 

behalf of the Pension Rights Center; and David Certner, who is 

Legislative Counsel and Legislative Policy Director for AARP. 

Your testimony will be entered fully in the record, and we would 

like you to stick to the 5 minutes. Although we do not sometimes 

stick to 5 minutes, we would like you to. 

Mr. Scott? 

STATEMENT OF BERTRAM L. SCOTT, EXECUTIVE VICE PRESIDENT, STRATEGY, INTEGRATION AND POLICY, TIAA–CREF, 

NEW YORK, NEW YORK 

Mr. SCOTT. Chairman McDermott, Ranking Member McCrery, 

and Members of the Committee, I am Bert Scott, Executive VicePresident of TIAA–CREF, and I am very happy to be invited here 

to speak with you today. 

I want to start my testimony by telling you a little story if I can 

that I think is indicative of the 403(b) marketplace. I want to tell 

you about one of our customers, who worked for 30 years as a 

maintenance employee in the physical plant of a Big 10 university 

in the Midwest, someone you might not expect to have a large retirement savings, but because he participated in TIAA–CREF’s retirement plan where his contributions were matched by his employer, he ended up retiring as a millionaire. He enjoyed the power 

of compounding. Unfortunately, there are many people today who 

are not able to realize the same level of comfort, partially because 

of barriers that relate to increasing cost-of-living pressures faced by 

retirees and barriers facing plan sponsors. That is why TIAA– 

CREF is glad to be here today because it is important to eliminate 

barriers to saving for retirement. 

At TIAA–CREF, we believe in creating an income stream that 

will support everyone as long as they live. We are a market leader 

in 403(b) plans, a primary conduit for providing employer-based retirement for employees of not-for-profit institutions. We specialize 

in annuities, a key vehicle to achieving retirement security. We 

also hope this Committee will consider addressing issues surrounding limits on contributions, the impact of taxes, whether it 

makes sense to have incentives and enhancements that benefit 

both employers and employees. We believe there are public policy 

benefits to making it easier for employers to encourage savings and 

employees to save more. 

We were instrumental in working with Congress and the IRS in 

developing the original 403(b) plans or regulations. We pay out 

more than $10 billion annually in retirement income to over one 

half million people. Based on this expertise, let me explain how the 

403(b) plans work and their distinction. The 403(b) plans were created as a primary means of providing employer-based retirement 

income to employees of not-for-profit institutions with a defined 

contribution pension plan design to pay lifetime income. The 403(b) 

plans are historically simpler to administer, which has led to wider 

adoption of employer-sponsored plans. 

The 403(b) market was not conceived as a supplemental savings 

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service providers. A typical 403(b) plan may have three or four fullservice pension providers at the institutions, and they all compete 

for individual plan participants offering choice. 

In the 403(b) space, individuals typically save two to three times 

the industry average. We believe that is because our clients understand that this is a retirement plan, not just a short-term savings 

vehicle. Plan providers must offer a full complement of high-quality 

investment products, covering various asset classes to help their 

employees reach their retirement objectives. Investment choices include cash equivalence, equities, fixed income, guaranteed returns, 

and investment styles such as active and passively managed funds, 

index funds. 

Diverse investment options such as these allow participants 

within a plan to design a portfolio which best meets their investment goals, risk tolerance and time horizon. A unique feature of 

the 403(b) market is not only helping employers and employees 

build savings, but also a robust suite of pay-out options when they 

retire unlike the 401(k) market, which has historically been focused 

only on the accumulation phase. 

For a defined contribution plan to be successful, employees need 

advice about savings for retirement, asset allocation, managing risk 

and return. TIAA–CREF has a long history of providing education 

and guidance to plan participants to help them evaluate investment alternatives before they make decisions so that they know 

what they are getting. This year our non-commission consultants 

will hold more than 110,000 one-on-one counseling sessions with 

clients throughout the group, some will be your constituents. 

One of the most important variables considered by plan sponsors 

is the cost of expense of providing a 403(b) retirement plan. The 

range of costs in the market can vary significantly from vendor to 

vendor. At TIAA–CREF, we provide meaningful disclosure that 

helps people make informed decisions about that selection. We disclose all fees associated with investing in our registered investment 

products, in our annual prospectuses for the CREF variable annuity, and TIAA–CREF mutual funds. We break the expenses out into 

the categories of investment advisory expenses, administrative expenses, distribution expenses or 12(b)(1) fees is something you may 

be more familiar with, mortality and expense risk charges and acquired fund fees and expenses. In that same prospectus, we also 

provide individual investors with the impact of expenses on a hypothetical investment of $10,000 over a one, three, five and 10 year 

period. Our fund performance and prices are posted on our Web 

site. 

Once again, I want to commend the Committee for examining the 

ways to eliminate barriers to help individuals save for retirement 

and provide for a lifetime income stream. Some of the barriers we 

see are increasing cost for retiree health, inflation, complexity, tax 

incentives, coordination with defined contribution rates and a lack 

of financial literacy. We hope you will consider establishing incentives that eliminate some of these barriers. 

We want to make it easier—— 

Mr. MCDERMOTT. If you could sum up. 

Mr. SCOTT. Yes, I am right now. We want to make it easier for 

individuals to save more for retirement. We want that individual 

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that we talked about at the beginning—everyone to understand the 

benefit of compounding. Thank you for inviting me, and I look forward to your questions. 

[The prepared statement of Mr. Scott follows:] 

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Mr. MCDERMOTT. Ms. Harris. 

STATEMENT OF MINDY L. HARRIS, PRESIDENT, NATIONAL ASSOCIATION OF GOVERNMENT DEFINED CONTRIBUTION ADMINISTRATORS, PORTLAND, OREGON 

Ms. HARRIS. Thank you, Mr. McDermott and Mr. McCrery and 

Members of the Committee for having us here today. On behalf of 

NAGDCA, I would like to thank you for this opportunity to testify 

today on this most important issue that touches so many Americans, who may or may not have adequate income for their retirement needs. I also want to extend NAGDCA’s appreciation to this 

Committee and to Congresswoman Schwartz and Congressman 

Johnson for your Resolution for National Save for Retirement 

Week, which we celebrated last week. This is very helpful to plan 

sponsors across the country in helping us promote education and 

awareness to our participants and our employees, some of whom 

are prospective participants. 

We also applaud Congress and the Federal Government for its 

increasing interest in fee disclosure and transparency, and we really believe that these efforts will lead to higher levels of understanding by plan sponsors and participants of the fees being 

charged for the administration and investment of their retirement 

savings. We look forward to working with you as you review the 

issue of fees in defined contribution plans. As governmental entities ourselves, we always welcome and open and transparent process when it comes to managing and investing our public employees’ 

retirement savings. 

The very nature of local control and open government laws dictates a great deal of oversight in State and local government plans. 

There is also a significant amount of collaboration between the employees and the employers in developing these plans. Not only do 

our plans have elected officials who are accountable to the public 

and to our plans, but we also have rules affecting procurement, requiring most contracts to be reviewed with a prescribed regular frequency. 

NAGDCA believes that to achieve retirement security and to assure that millions of public sector employees will be self-supporting 

during their retirement years, that it is imperative to maintain a 

shared responsibility between employers and employees to fund retirement income. We believe that this is best accomplished through 

the combination of defined benefit retirement plans and our voluntary supplemental defined contribution plans. It is in this spirit 

that NAGDCA advocates for policies that enhance defined contribution plans to encourage public employees to save for retirement and 

to supplement their defined benefit pensions. The goal of any proposal to alter or significantly change employer-sponsored supplemental retirement savings plans should be to enhance or simplify 

the current procedures and to assure that the administrative costs 

to employers and participants are reasonable. 

It is in this vein that we recently undertook a survey of our 

membership regarding how fees are determined and how they are 

disclosed to employees. We have also surveyed our members regarding their views on the reasonableness of fees and how they 

evaluate them, and I look forward to sharing our findings with you 

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today. I will provide you with an overview and submit my testimony, including our actual survey in its entirety, for the record. 

About our fee disclosure survey, in summing up our survey findings, NAGDCA plan sponsor members indicated that they understand the importance of fees very well. When selecting a service 

provider for plan administration, fees are evaluated in plan decisions a great deal. Eighty-6 percent of our State government respondents and 55 percent of local and smaller governmental entities reported receiving fee disclosure information through quarterly 

website updates, participant statements and general communication brochures. 

Some additional questions were also raised as a result of our 

findings. For example, are participants receiving enough fee disclosure and education or are they receiving too much, which may lead 

to possible confusion? What should the expectations be for plan 

sponsors to monitor and understand fees and what should participants have to monitor and understand? 

It is our position that plan sponsors and plan participants have 

different levels of need for detailed fee information, and our plan 

sponsors recognize and work very hard to uphold their fiduciary responsibility by engaging in a higher level of education about fees 

and related issues in order to make careful, informed decisions on 

behalf of their participants. 

Seventy percent of our survey respondents also indicated that 

they review their plan’s administrative and investment management fees at least annually and, in some cases, multiple times 

throughout the year. Plan sponsors also indicated that they have 

a pretty good understanding of assessed fees. One area for possible 

improvement, however, is the understanding of fees that are not always included in every plan. Perhaps requiring a better explanation of this terminology would help increase the understanding 

of these types of fees. We found that passively managed index 

funds are perceived as being a lower cost option by plan participants, and the survey also found that these lower cost index funds 

are already available in most plans. 

Plan fees and plan disclosure is just one piece of the overall 

equation. Education should takes a holistic approach, providing information about the plan fees, as well as overall investment performance and how the two factors relate to one another. 

Over the past few years, with greater plan-sponsored education 

on fees, all government market segments responding to our survey 

agreed that fees have generally decreased. The public market is different from the private market in that bids for services and investment products are generally mandated to be reviewed or competitively bid within a normal cycle of time, typically three to five 

years. There is also a greater degree of public access for review of 

fees and disclosure of plan-related information, and, finally, there 

is a greater degree of accountability in the public market as consensus is reached and elected bodies publicly agree to contracts and 

their terms. 

Regarding reasonableness of fees, what plan sponsors acting as 

fiduciaries consider reasonable can be very subjective. The fiduciary has to consider many variables in determining what he or she 

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ered reasonable is commonly a collective decision by board members after an overall evaluation of many factors, including plan 

services and investment performance. The public sector has the advantage of open disclosure of fees during the public procurement 

process, which may have a positive impact on the amounts of fees 

that are charged in our plan. 

NAGDCA, in surveying our membership, found out the majority 

of plans have benchmarks to evaluate whether their fees are reasonable and have negotiated reasonable fees according to these 

benchmarks for their participants. In the end, trying to define what 

reasonable fees are may ultimately be a plan by plan and a local 

decision. 

In summary, I would like to emphasize the ongoing importance 

of education so that individuals and families will understand what 

their needs for retirement will be. Again, I would like to thank this 

Committee and this Congress for passing the Resolution for National Save for Retirement Week, which many of us celebrated last 

week. Your leadership on this issue has enabled us to plan retirement fairs and events, ensure significant advertising regarding 

saving for retirement, and has also encouraged the involvement of 

both the public and the private sectors in educating our participants about this important issue. 

We look forward to continuing to work with you as you review 

all of these issues, and I would be pleased to answer any questions 

that you may have today. Thank you very much. 

[The prepared statement of Ms. Harris follows:] 

Statement of Mindy L. Harris, President, National Association of 

Government Defined Contribution Administrators, Portland, Oregon 

Good morning Mr. Chairman and members of the Committee. I am Mindy Harris, 

President of the National Association of Government Defined Contribution Administrators (NAGDCA). I am also the Chief Financial Officer for Multnomah County, in 

Portland Oregon. 

On behalf of NAGDCA, I thank you for this opportunity to testify today on this 

most important issue that touches so many Americans who may or may not have 

adequate income for their retirement needs. We applaud Congress and the Federal 

Government for its increasing interest in fee disclosure and transparency and believe that these efforts will lead to higher levels of understanding by plan sponsors 

and participants of the fees being charged for the administration and investment 

of their retirement savings. We look forward to working with you as you review the 

issue of fees in defined contribution plans, and as governmental entities ourselves, 

we always welcome an open and transparent process when it comes to managing 

and investing our public employee’s retirement savings. 

The very nature of ‘‘local’’ control and ‘‘open government’’ laws, dictates a great 

deal of oversight in state and local government plans. There is also a significant 

amount of collaboration between the employees and the employers in developing the 

plans. Not only do our plans have elected officials who are accountable to the public 

and to our plans, but we have rules affecting procurement requiring most contracts 

to be reviewed with prescribed regular frequency. 

Ongoing education of plan sponsors is one of NAGDCA’s key missions, and as plan 

sponsors and administrators, we encourage and engage in counseling and education 

of participants as a matter of course. 

NAGDCA believes that to achieve retirement security—and to assure that millions of public employees will be self-supporting during their retirement years—it 

is imperative to maintain a shared responsibility between employers and employees 

to fund retirement income. We believe that this is best accomplished through the 

combination of defined benefit retirement plans and voluntary supplemental defined 

contribution plans. 

It is in this spirit that NAGDCA advocates for policies that enhance defined contribution plans to encourage public employees to save for retirement and to supplement their defined benefit pensions. State and local governments are proud of the 

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supplemental retirement savings plans that have been created by working jointly 

with the federal government, the resulting high savings rates in our plans, and the 

increased retirement preparedness of our employees. The goal of any proposal to 

alter or significantly change employer sponsored supplemental retirement savings 

plans should be to enhance or simplify the current procedures, and to assure that 

the administrative costs to employers and to participants are reasonable. 

It is in this vein that we undertook a recent survey of our membership to determine how fees are determined and how they are disclosed to employees. We have 

also surveyed our members regarding their views on the ‘‘reasonableness’’ of fees 

and how they evaluate them. Finally, we have asked our members to describe the 

make-up and structure of their boards, including the ratio of employees to employers (who are typically in the plans themselves) and the roles of labor and other key 

decision makers. 

I look forward to sharing our findings with you today. I will provide you with an 

overview and submit my testimony, including our actual survey, in its entirety, for 

the record. 

About NAGDCA: 

NAGDCA was founded in 1980 and is the leading professional association representing public employer sponsored deferred compensation and defined contribution plan administrators. NAGDCA represents administrators from all 50 states and 

over 150 local governmental entities, as well as private industry plan providers. 

These states have, under their auspices, over 5,000 local government deferred compensation plans. NAGDCA also represents nearly 100 industrial members that provide services to public plan sponsors. 

NAGDCA is an organization in which its members work together to improve state 

and local government defined contribution plans including § 457(b), § 401(k), 

§ 401(a), and § 403(b) plans through a sharing of information on investments, marketing, administration and laws relating to public sector defined contribution plans. 

Our members administer state and local government plans that are regulated 

under section 457 of the Internal Revenue Code (IRC). These plans, which supplement state and local defined benefit programs, provide a convenient vehicle for public employees across the country to save for retirement. In all cases, full time employees of the entity offering the plan are eligible to participate (and, in many cases, 

part time employees are also eligible to participate). Altogether state and local defined contribution plans administer approximately three trillion dollars in assets 

across the country. 

About NAGDCA’s Fee Disclosure Survey: 

The following results document the information gathered from our member survey 

conducted in August 2007 regarding fee disclosure in defined contribution plans. 

In summing up our findings, our survey shows that NAGDCA plan sponsor members understand the importance of fees, relative to the plan participants they represent. When selecting a service provider for plan administration, fees are evaluated 

in plan decisions ‘‘a great deal’’ (which was the answer by approximately 70% of all 

survey respondents). 

• When plan sponsors were asked how well their participants understood fees, the 

majority response was ‘‘somewhat’’ across all market segments (as opposed to 

‘‘understands very well,’’ ‘‘understands very little’’ or ‘‘not at all’’). This is despite the wide array of education/communication vehicles currently being utilized to disclose fees on a quarterly basis. 

• 86% of state government respondents and 55% of local and smaller governmental entities (55%) reported receiving fee disclosure information through 

quarterly web-site updates, participant statements, general communication brochures, and/or phone system updates.In addition, government members gave 

the industry an overall rating of 4 (with 5 being the highest) for providing education to plan sponsors on fees. Some additional questions were raised as a result of these findings. For example, are participants receiving enough fee disclosure/education, or are they receiving too much, which may lead to possible confusion? And, what should the expectations be for plan sponsors to monitor and 

understand fees, and what should plan participants monitor and understand? 

It is our position that plan sponsors and plan participants have different levels 

of need for detailed fee information, and our plan sponsors recognize and uphold 

their fiduciary responsibility by engaging in a higher level of education about 

fees and related issues in order to make careful and informed decisions for the 

benefit of their participants. 

• 70% of our respondents indicated that they review their plans’ administrative 

fees and investment management fees (also known as expense ratios) at least 

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annually and in some cases multiple times throughout the year. Larger entities 

indicated that they reviewed their fees more frequently than smaller entities. • Most governmental entities, approximately 70%, use an independent consultant 

to assist with the disclosure and understanding of fees. It is interesting to note 

that our survey revealed that smaller plans actually use Consultants more frequently than larger state plans. This is likely due to the availability of additional resources in larger governmental entities. • Plan sponsors indicated that they have a good understanding of assessed fees. 

One area for possible improvement, however, is the understanding of fees that 

are not always included in every plan (i.e., Mortality and Expense risk fees, 

Sub-transfer agency fees, and Finders fees). Perhaps a better explanation of this 

terminology would increase the understanding of these types of fees. • The opinion of our survey task force, based on our survey results, is that passively managed index funds are perceived as being a lower cost option by plan 

participants. The survey found that these lower cost index funds are already 

available. Of those entities responding to the survey, 100% of state entities and 

93% of local government entities indicated that they currently offer a passively 

managed index fund. This raises additional concerns. Is a lower cost option or 

a higher cost option (with better performance) the optimum retirement solution 

for plan participants? Plan fees and fee disclosure is just one piece of the overall 

equation. Education should take a holistic approach, providing information 

about plan fees, overall investment performance, and how the two factors relate 

to one another. • Conflicts of interest with regard to provider relationships were also explored in 

our survey as well as plan sponsor understanding of revenue sharing arrangements. Over 70% of plan sponsors responding to our survey stated that specific 

information about revenue sharing arrangements is provided at least annually, 

with more than 40% of these employers receiving a report on the total revenues 

that result from reimbursements and fees. With regard to other types of relationships, however, there appears to be less of an understanding of these arrangements; approximately 50% of plan sponsors require disclosure only when 

renewing contracts or bidding for a new contract/vendor. • Most plan sponsor respondents, across all market segments, indicated they were 

concerned with roll-overs out of government sponsored plans and into higher 

priced option sat the recommendation of outside financial advisers who were not 

affiliated with existing plans. The majority of all Government entities responded 

that they are ‘‘very’’ or ‘‘somewhat’’ concerned about this. • Over the past several years, with greater plan sponsor education on fees, all 

government market segments agreed that fees have generally decreased(assuming similar assets and services). The public market is different 

from the private market, in that bids for services and investment products are 

generally mandated to be reviewed or competitively bid within a normal cycle 

of time (typically every three to five years). There is also a greater degree of 

public access for review of fees and disclosure of plan related information. Finally, there is a greater degree of accountability in the public market as consensus is reached and elected bodies publicly agree to contracts and their terms. 

While some issues regarding fee disclosure were identified as being in need of improvement or further discussion, there were also positive findings from the survey 

that showed most defined contribution plan sponsors are aware of and understand 

plan costs. The survey also showed that industry partners are informing participants about fees associated with their account in a variety of formats including periodic account statements and customized plan Web-sites and newsletters. 

Regarding ‘‘Reasonableness’’ of Fees: 

What plans sponsors, acting as fiduciaries, consider ‘‘reasonable’’ is very subjective. The fiduciary has to consider many variables in determining what he/she believes is reasonable. Some of the factors may include federal, state, and local laws. 

Labor contracts and plan design may also impact what the fiduciary considers ‘‘reasonable.’’ These are just a few of the factors. In governmental plans, what is considered ‘‘reasonable’’ is commonly a collective decision by the board members after an 

overall evaluation of many factors, including plan services and investment performance. Often, when making the decision, fiduciaries listen to the advice of consultants 

that have been hired because of their expertise and knowledge of the industry 

standards then prevailing. The public sector has the advantage of open disclosure 

of fees during the public procurement process, which may have a positive impact 

on the amounts of fees that are charged in our plans. 

Additionally, there is a ‘‘Prudent Man’’ standard. This is the standard under 

which the fiduciary must act. The fiduciary is required to act ‘‘with the care, skill, 

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prudence, and diligence under the circumstances then prevailing that a prudent 

man acting in a like capacity and familiar with such matters would use, in the conduct of an enterprise of a like character and with like aims.’’ 

NAGDCA, in surveying our membership found the following from direct questions 

regarding ‘‘reasonableness’’ of fees: 

• Sixty-six percent of total respondents have a standard they rely on to determine 

whether fees are reasonable. 

• Seventy-six percent of total respondents have compared the fees in their plan 

against fees charged to individual investors for similar investment products. 

• Seventy-eight percent of total respondents rated their administrative fees at 

least a 4 out of 5 with 5 being ‘‘very reasonable’’. 

• Sixty-eight percent of total respondents rated their investment fees at least a 

4 out of 5 with 5 being ‘‘very reasonable’’. 

Regarding Board Structure: 

NAGDCA, through surveying our membership, has found the following thirty-five 

percent response rate 

• Respondents have an average of 8 members on their defined contribution (DC) 

Board of Directors. Very few respondents have indicated that they do not have 

a Board of Directors. 

• For those with a Board of Directors, we found the following results. 

• Thirty-five percent of respondents require Board members to be participants 

in their plan. 

• Forty-one percent have at least 50% of their Board members who are considered employee representatives. 

• Sixty-four percent of respondents have Board members that are not employees. Those board members represent retirees, taxpayers, elected officials, and 

financial planners. 

• Seventy-one percent indicated their board members are appointed by the Governor, Executive Director, or by plan participants. Twenty-two percent indicated their board members are both appointed and elected. Seven percent indicated are all elected. 

In the end, trying to define what ‘‘reasonable’’ fees are may ultimately be a plan 

by plan and a ‘‘local’’ decision. 

In summary, I would like to emphasize the ongoing importance of education so 

that individuals and families understand what their needs for retirement will be. 

That is why NAGDCA is so pleased that this Committee and this Congress passed 

a resolution calling for a National Save for Retirement Week, which many NAGDCA 

plan sponsors celebrated just last week. Your leadership on this issue has enabled 

us to plan retirement fairs and events, to ensure significant advertising regarding 

saving for retirement, and has encouraged the involvement of both the public and 

private sectors in educating our participants about this important issue. 

NAGDCA looks forward to continuing to work with you as you review all of these 

issues, and I would be pleased to answer any questions you may have today. 

Thank you. 

f 

Mr. MCDERMOTT. The Committee will stand in recess for two 

votes. We will be back somewhere around two o’clock. Thank you. 

[Recess.] 

Mr. MCDERMOTT. Mr. Wray? 

STATEMENT OF DAVID L. WRAY, PRESIDENT, PROFIT 

SHARING/401(k) COUNCIL OF AMERICA, CHICAGO, ILLINOIS 

Mr. WRAY. Chairman McDermott, Ranking Member McCrery 

and Members of the Committee, I appreciate the opportunity to appear today and discuss retirement plan fees and expenses. The employer defined contribution system is a great success story. The 

automatic enrollment provisions and the pension permanency provisions included in the Pension Protection Act of 2006 have positioned the DC system to move to a new level, a level that will help 

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expand the system and reach out to major groups that lack other 

workers in the system, low-income workers and small employers. 

The amount of money in the system is expanding rapidly, and that 

is why paying attention to these fee disclosures is so important. We 

strongly support improving disclosure at all levels. 

As you have heard today, the Department of Labor is undertaking 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 this is the best approach to enhance fee transparency in a 

measured and balanced manner. We urge Congress to delay taking 

legislative action until the DOL has completed its work. Legislation 

at this time would re-start the regulatory process and significantly 

delay the implementation of the changes that we all seek in disclosure for participants and fiduciaries. 

To comply with ERISA, plan administrators must ensure that 

the aggregate price of the services in a bundled arrangement is 

reasonable at the time the plan contracts or the services and 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 cost, such as plan administration and 

participant recordkeeping. The plan administrator should be fully 

informed of all the services included in bundled arrangements to 

make that assessment. 

Many plan administrators, especially small companies, however, 

prefer reviewing costs in an aggregate manner. 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. For example, if a 

person buys a car, they do not need to know the price of the engine 

if it were sold separately. They do need to know the horsepower 

and warranty. Small businesses in particular prefer the simplicity 

in many cases of the bundled fee arrangement. Congress should 

consider the need to increase plan sponsorship by small companies 

if it considers legislating changes to bundled fee disclosure arrangements. 

The defined contribution plan system is very successful. As an 

example, I refer to Martin Tractor Company, a small company in 

Topeka, Kansas, that fixes farm equipment. In 2006, they had five 

non-management workers retire from their plant. These people had 

worked their entire career at this company. The average pay for 

these people was $45,000 and the average lump sum was $485,000. 

These people had almost 11 times final pay to supplement—to use 

to supplement their Social Security wages. These people are going 

to have higher levels of income in retirement when they were working. The defined contribution plan system has incredible potential 

for American workers. We very much appreciate the fact that the 

legislative process is paying attention to the system because it is 

going to be so important to America’s workers. At the same time, 

we prefer to work through the regulatory process when we are actually implementing the changes that are needed. Certainly, if the 

Department of Labor does not come out with appropriate direction, 

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1The U.S. Retirement Market, First Quarter 2007, Investment Company Institute, October 

2007. 2Tapping Human Assets to Sustain Growth: Global Wealth 2007, Victor Aerni, Christian de 

Juniac, Bruce M. Holley, Tjun Tang, October 12, 2007. 

we would envision that the legislative process would immediately 

take hold and kick in. 

Thank you very much. I would be delighted to answer any questions that you have. 

[The prepared statement of Mr. Wray follows:] 

Statement of David L. Wray, President, Profit Sharing/401(k) Council of 

America, Chicago, Illinois 

Established in 1947, the Profit Sharing / 401k Council of America (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. 

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 ERISA Industry Committee (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 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. 

We strongly support concise, effective, and efficient fee disclosure to participants. 

We also support increased fee transparency between service providers and plan 

sponsors. We commend Chairman Rangel for conducting this hearing to gain further 

insight into the employer-provided defined contribution retirement plan system and 

the critical role that plan fees play in retirement asset accumulation. 

DEFINED CONTRIBUTION PLANS WORK FOR EMPLOYEES, EMPLOYERS, AND AMERICA 

Employers offer either a defined benefit or defined contribution, and sometimes 

both types, of retirement plan to their workers, depending on their own business 

needs. According to the Investment Company Institute, Americans held $16.6 trillion in retirement assets as of March 30, 2007.1 This is nearly 17% of the $97.9 trillion in investible assets worldwide.2 Government plans held $4.2 trillion. Private 

sector defined benefit plans held $2.3 trillion. Defined contribution plans held $4.2 

trillion in employment based defined contribution plans and $4.4 trillion in IRAs. 

Employer-based savings are the source of half of IRA assets. Ninety-five percent of 

new IRA contributions are rollovers, overwhelmingly from employer plans. 

There are questions about the ability of the defined contribution system to 

produce adequate savings as it becomes the dominant form of employer provided retirement plan. Some claim America is facing a retirement savings crisis. To answer 

this question, a baseline for comparison is required. The Congressional Research 

Service reports that in 2006, 23.6% of individuals age 65 and older received any income from a private sector retirement plan. The median annual income from this 

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3 Income and Poverty Among Older Americans in 2006, Congressional Research Service, September 24, 2007. 4The U.S. Retirement Market, First Quarter 2007, Investment Company Institute, October 

2007. 5 How Much are Workers Saving?, Alicia Munnell, Francesca Golub-Sass, and Andrew Varani, 

Center for Retirement Research at Boston College, October 2005. 6 Retirement Savings: How Much Will Workers Have When They Retire?, CRS Report For Congress, January 29, 2007. 7 Rise of 401(k) Plans, Lifetime Earnings and Wealth at Retirement, James Poterba, Steven 

F. Venti, and David A. Wise, NBER Working Paper 13091, May 2007. 8 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2006, Investment Company Institute, August, 2007. 9 Retirement Savings: How Much Will Workers Have When They Retire?, CRS Report For Congress, January 29, 2007. 

source was $7,200.3 This income stream represents a lump-sum value of $90,000, 

assuming the purchase of a single-life annuity at an 8% discount rate. Individuals 

age 65–69 had higher median annual income from a private sector retirement plan, 

$9,600 ($120,000 lump sum value), but only 19.9% of those age 65 or older received 

any income from this source. Overall, however, the elderly are not impoverished. In 

2006, 9.4% of Americans 65 and older had family incomes below the federal poverty 

rate, the lowest rate for any population group. How will the next generation of retirees fare compared to current retirees? 

We hear about a negative savings rate in America, with some noting that Americans are saving less now than during the Great Depression. Intuitively, something 

must be wrong with this statistic as the total amount set aside for retirement has 

almost tripled in 12 years.4 A 2005 analysis by the Center for Retirement Research 

sheds considerable light on the matter. They discovered that the NIPA (National Income and Products Account) personal savings rate for the working-age population 

was significantly higher than the overall rate, which was then 1.8%. Working-age 

Americans were saving 4.4% of income, consisting almost exclusively of savings in 

employment-based plans. This does not include business savings, which, of course, 

are owned by individuals. Those 65 and older were ‘‘dissaving’’ at negative 12% because they were spending their retirement assets, which are not considered income. 

The report accurately predicted that, as baby-boomers begin to retire, they will consume more than their income and the savings rate as currently defined would go 

even lower.5

The Congressional Research Service reports that married households in which the 

head or spouse was employed and the head was age 45–54 held median retirement 

account assets of $103,200 in 2004. Similar unmarried households held $32,000. An 

identical married household headed by an individual age 55 and older held median 

retirement account assets of $119,500 in 2004.6

While some workers have enjoyed a full working career under a defined contribution plan such a as profit sharing plan, 401(k)-type plans in which the employee decides how much to save have existed for only slightly over twenty years, and most 

participants have participated in them for a much shorter period of time. The typical participant in 2000 had only participated in the plan for a little over seven 

years.7 Policymakers must be wary of statistics citing average 401(k) balances and 

balances of those approaching retirement because they have not saved over their 

full working career and some balances belong to brand new participants. For example, a recent Investment Company Institute report stated that at the end of 2006, 

the average 401(k) balance was $61,346 and the median balance was $18,986.8 The 

median age of the participants in the study was 44 and the median tenure in their 

current 401(k) plan was eight years. But when the study looked at individuals who 

were active participants in a 401(k) plan from 1999 to 2006 (including one of the 

worst bear markets since the Depression) the average 401(k) balance at the end of 

2006 was $121,202 and the median balance was $66,650. Long-tenured (30 years 

with the same employer) individuals in their sixties who participated in a 401(k) 

plan during the 1999–2006 period had an average account balance of $193,701 at 

the end of 2006. The study does not reflect that many individuals and households 

have multiple 401(k)-type accounts or assets rolled over into an IRA. 

The lesson is clear—long term participation in a 401(k) plan will result in the accumulation of assets adequate to provide a secure retirement. The Congressional Research Service estimates that a married household that contributes ten percent of 

earnings to a retirement plan for 30 years will be able to replace fifty-three percent 

of pre-retirement income. If they save for forty years, they will replace ninety-two 

percent of income.9 A ten percent savings rate is realistic given average contribution 

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10 National Compensation Survey: Employee Benefits in Private Industry in the United States, 

March 2007, U.S. Department of Labor, August 2007. 11 Hewitt Study Reveals Impact of Automatic Enrollment on Employees’ Retirement Savings 

Habits, Hewitt Associates, October 25, 2006. 12The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement, EBRI Issue Brief no. 238, July 2005.. 13Survey Findings: Hot Topics in Retirement 2007, Hewitt Associates 14 How America Saves 2007, Vanguard 

rates of seven percent and average employer contributions of three percent. These 

estimates do not consider Social Security payments 

These statistics mean little if a worker is not saving for retirement. And one fact 

is abundantly clear—whether or not a worker saves for retirement is overwhelmingly determined by whether or not a worker is offered a retirement plan at work. 

In March of 2007, sixty-one percent of private sector workers had access to a retirement plan at work and fifty-one percent participated. Seventy percent of full-time 

workers had access and sixty percent participated. Seventy-eight percent of workers 

in establishments employing 100 or more workers had access and sixty-six percent 

participated. Only forty-five percent of workers in establishments of less than 100 

workers had access to a plan and thirty-seven percent participated. Three-quarters 

of workers earning at least fifteen dollars per hour had access and sixty-nine percent participated. Only forty-seven percent of workers making less than fifteen dollars per hour had access and only thirty-six percent participated. Seventy-seven percent of all workers chose to participate when offered a defined contribution plan at 

work, with seventy percent of those making less than fifteen dollars per hour opting 

to participate.10 Policymakers should consider that these participation rates are at 

a single point in time. They are not indicative of whether or not a individual or 

household will choose to participate in a 401(k) plan for a substantial period of a 

working career. 

Opportunities for improvement 

What do all these data tell us? First, the employer provided defined contribution 

system has demonstrated that it can provide asset accumulation adequate for a secure retirement for workers at all income levels as long as individuals participate. 

The participation rate when offered a plan is encouraging, but can be improved. 

There are two areas in which to concentrate our efforts on improvement; lower-paid 

workers and small business plan coverage. We also need to increase participation 

by African-Americans and some ethnic groups, as revealed by some very recent 

studies. Small business owners need simplicity and meaningful benefits for themselves to compensate for the costs of providing a plan to their workers. Congress 

should keep this in mind as they examine plan fees. 

We believe that making the 2001 EGTRRA pension provisions permanent in the 

Pension Protection Act of 2006 will help convince small business owners to offer a 

plan. Permanency removed a cloud of uncertainty that likely would have frozen 

small business plan growth in its tracks. We commend Congress for enacting this 

very important provision. 

We also believe that the growth of automatic enrollment plans will substantially 

increase retirement plan participation by lower and middle income workers that are 

most likely to be induced to save by this type of plan design. Ninety percent of workers that are automatically enrolled chose not to opt out of the plan.11 A 2005 ICI/ 

EBRI study projects that that a lowest quartile worker reaching age 65 between 

2030 and 2039 who participates in an automatic enrollment program with a 6% salary deferral (with no regard for an employer match) and investment in a life-cycle 

fund will have 401(k) assets adequate for 52% income replacement at retirement, 

not including social security that provides another 52% income replacement under 

today’s structure.12

The important automatic enrollment provisions in the Pension Protection Act are 

already producing results. In the latest PSCA survey of 2006 plan year experience, 

23.6% of plans have automatic enrollment, compared to 16.9% in 2005, 10.5% in 

2004, and 8.4% in 2003. 41% of plans with more 5,000 or more participants reported 

utilizing automatic enrollment in our survey. A recent Hewitt survey indicated that 

36% of respondents offered automatic enrollment in 2007, up from 24% in 2006. 55% 

of the other respondents are ‘‘very likely or somewhat likely’’ to offer automatic enrollment in 2007.13 Vanguard reports that 80% percent of plans that implemented 

automatic enrollment in 2007 elected a ‘‘full autopilot design’’ that includes automatic deferral increases, a marked departure from earlier automatic enrollment 

plans.14

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DOL REGULATORY FEE AGENDA 

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 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 

DOL has completed its work. We believe that the regulatory scheme of soliciting input and issuing proposed 

and final rules based on comments from all affected parties will result in carefullystructured rules that will avoid unintended consequences. Moreover, regulatory 

guidance is dynamic. It can be more readily 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 totally unrelated to core issues 

when pension issues are consolidated into larger bills. 

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, in the very near future. The modifications will significantly 

expand fee disclosure to plan sponsors, including all asset-based fees and service 

provider revenue-sharing. The final regulations implementing the new Form 5500 

are expected to first be applicable to the 2009 plan year. The DOL will also require 

that the Form 5500 be filed electronically for plan years beginning in 2009. This 

change will make it possible for extensive ‘‘data-mining’’ of the expanded fee information in the revised Form in a short period of time. We expect that this new information will be very useful for fee benchmarking that it will help reduce some plan 

fees. 

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. We filed individual comments and 

also all issued a joint response with seven other trade associations. The 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. 

THE ERISA FRAMEWORK 

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. 

To comply with ERISA, plan administrators must ensure that the aggregate price 

of 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 arrangement 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. For example, if a person buys a 

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15The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2006, Investment 

Company Institute, September 2007. 

car, they don’t need to know the price of the engine if it were sold separately. They 

do need to know the horsepower and warranty. Small business in particular may 

prefer the simplicity of a bundled fee arrangement. Congress should consider the 

need to increase plan sponsorship by small business if it considers legislating 

changes to bundled fee disclosure arrangements. 

It is important that as it considers new legislation, Congress fully understand the 

realities of fees in 401(k) plans. There are significant recordkeeping, administrative, 

and compliance costs related to an employer provided plan, which do not exist for 

individual retail investors. And net performance compared to an appropriate benchmark is more important than a fund’s investment management fees. Nevertheless, 

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 Investment Company Institute reports that the average overall investment 

fee for stock mutual funds is 1.5% and that 401(k) investors pay half that amount.15

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. Larger, older plans typically experience the lowest cost. Congress should also realize that employer provided plans are often the 

only avenue of mutual fund investment available to lower-paid individuals who have 

great difficulty accumulating the minimum amounts necessary to begin investing in 

a mutual fund or to make subsequent investments. Finally, to the degree an employer provides a matching contribution, and most plans do, the plan participant is 

receiving an extraordinarily higher rate of return on their investment that a retail 

product cannot provide. 

A study by CEM Benchmarking Inc. of 88 U.S. 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 considers any legislation to enhance disclosure of these fees, that they fully understand the lower-than-retail fees many employees are already enjoying in their 401(k) plans. 

PRINCIPLES OF REFORM 

As we stated earlier, we do not oppose effective and efficient disclosure efforts. 

We believe that the following principles should be embodied in any effort to enhance 

fee disclosure in employer-provided retirement plans. 

• 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 

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of providing a material benefit to plan participants’ participation and investment decisions. 

• New Disclosure Requirements Should Not Require the Disclosure of 

Component Costs That Are Costly to Determine, Largely Arbitrary, and 

Unnecessary to Determine Overall Fee Reasonableness. 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. These costs will ultimately be passed on to plan participants through higher administrative fees. The increased burden for small businesses could inhibit new plan growth. 

• 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 any new 401(k) fee-related legislation 

be measured against these principles. 

CONCLUSION 

We support effective fee disclosure. However, 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 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. 

We appreciate the opportunity to present our views on this very important matter. 

f 

Mr. MCDERMOTT. Ms. Tavares? 

STATEMENT OF LISA A. TAVARES, ESQ., PARTNER, VENABLE, 

LLP 

Ms. TAVARES. Good afternoon to the Members of the Committee. Thank you for inviting me to testify today. My name is Lisa 

Tavares, and I am a Partner in the Employee Benefits and Executive Compensation Group at the law firm of Venable, LLP, here in 

Washington, D.C. I have practiced employee benefits law for 12 

years in both the public sector and in private practice. In private 

practice, I regularly advise retirement plan sponsors and administrators of all sizes about their obligations under ERISA and the Internal Revenue Code. 

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Today, I was asked to provide my perspective on the real and 

practical day to day issues facing small- and medium-sized plan 

sponsors in two respects: First, in obtaining fee information from 

service providers; and, second, in providing fee information to participants. 

My comments are not focused on the plan sponsors that I represent that can afford legal counsel, but are focused on those plan 

sponsors that have limited resources and tools to satisfy the multitude of requirements of ERISA. I am testifying on my own behalf 

and not on behalf of any particular client or clients. 

The key points that I want to express are that many small- and 

medium-size plan sponsors currently do not have the tools to, one, 

effectively evaluate and compare plan fees in deciding between 

service providers or, two, to pass fee information along to plan participants. 

Plan sponsors need investment and fee arrangement education, 

as well as cooperation from service providers in order to evaluate 

costs when choosing between service providers and to provide effective disclosure to plan participants regarding fees. 

My testimony will cover four areas: First, the burden of the existing compliance requirements on plan sponsors; second, the difficulty in plan sponsors obtaining fee information; third, the necessity of uniform disclosure; and, fourth, the need to provide simplified disclosure to plan participants. 

With respect to the existing burden of complying with ERISA 

and the Internal Revenue Code, many plan sponsors have become 

overburdened while trying to run their businesses. While plan 

sponsors do not have any excuse for failing to fulfill their fiduciary 

responsibility, in reality some plan sponsors simply do not know 

what the rules are. As a result of limited time, expertise and resources, some plan sponsors must rely solely upon the service providers to provide necessary plan compliance information. They turn 

to experienced legal counsel only when a big problem arises. 

The second point is that it is also very difficult for the average 

plan sponsor to obtain fee information without the assistance of a 

professional investment consultant who can evaluate and identify 

what is behind the numbers. The most typical example that I can 

give is that of a plan sponsor who commonly receives a zero fee 

proposal. What this really means is that other administrative costs 

are being financed by investment fees charged on plan assets. However, some plans’ sponsors do not realize that the plan is not in fact 

‘‘free’’. Without assistance from an investment consultant, the plan 

sponsor may not be able to decipher fee proposals. 

My third point is that I believe that uniform service provider disclosure might be the most useful way to assist the plan sponsor 

who cannot afford to hire an investment consultant to analyze this 

information. Any service provider disclosure provided to plan sponsors must be simple enough to be understood, but it must be sufficiently complete in order to enable the plan sponsor to evaluate 

whether to retain the service provider. 

Finally, a fourth point about disclosure to participants: The Committee should consider the proper disclosure to plan participants 

given the fact that workforces are made up of employees with varying education levels who ultimately will all receive the same fee 

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1 I will refer only to 401(k) plans in my testimony. However, similar considerations apply with 

respect to 403(b) plans and 457 plans. 

disclosure statement. To the extent this plan sponsor has to disclose fees to participants, the participant level notice must be simple enough to be understood by the average participant. Any legislative or regulatory action related to disclosure of fees must consider the existing burdens and obligations with respect to smalland medium-sized plan sponsors and must be coordinated with existing ERISA notice requirements in order to minimize new burdens. 

In closing, the goal of any legislative or regulatory action should 

be to control cost for both participants and plan sponsors while balancing the need to provide necessary information to plan participants in an understandable format. 

I am happy to take questions. Thank you. 

[The prepared statement of Ms. Tavares follows:] 

Statement of Lisa A. Tavares, Esq., Partner, Venable Law Firm, LLP 

Good morning, Chairman Rangel and Committee members. Thank you for inviting 

me to testify today. My name is Lisa Tavares and I am a partner in the Employee 

Benefits and Executive Compensation Group at the law firm of Venable LLP in 

Washington, D.C. I have practiced employee benefits law for 12 years in both the 

public sector as an Attorney in the Office of Chief Counsel of the Internal Revenue 

Service, Tax Exempt and Government Entities, and now in private practice for 7 

years. In private practice, I regularly advise retirement plan sponsors and administrators about their obligations under the Employee Retirement Income Security Act 

of 1974, as amended (‘‘ERISA’’), and the Internal Revenue Code (the ‘‘Code’’). 

The Employee Benefits and Executive Compensation Group of Venable represents 

employers of all sizes. The firm is the primary ERISA counsel for a number of small, 

medium and large public and private sector plan sponsors. And, of course, we represent numerous clients with respect to one-time issues. 

I was asked to provide a perspective of a practitioner who works with small and 

medium size plan sponsors and to discuss the unique practical issues that small and 

medium size plan sponsors face in both obtaining fee disclosure from service providers and providing disclosure of fees to participants. My perspective on small and 

medium size employers is not predicated on surveys or commissioned analysis but 

is based upon a perspective of the real and practical day-to-day issues facing plan 

sponsors. My comments are not focused on my clients that can afford legal counsel, 

but are focused on those plan sponsors that have limited resources and tools to satisfy the multitude of ERISA and Code requirements. I am testifying on my own behalf, and not on behalf of any particular client or clients. 

My testimony addresses the fact that plan sponsors need investment and fee arrangement education, as well as cooperation from service providers in order to 

evaluate costs when choosing service providers and to provide effective disclosure 

to plan participants regarding fees. My testimony will cover four areas: first, the 

burden of the existing compliance requirements on plan sponsors; second, the difficulty in plan sponsors obtaining fee information; third, the necessity for uniform 

disclosure; and fourth, the need to provide simplified disclosure to plan participants. 

The key point that I want to express is that small and medium size plan sponsors 

currently do not have the tools to effectively evaluate and compare plan fees or the 

service provider marketplace. As a result, small and medium size plan sponsors cannot pass along plan fee information to participants. 

Plan Sponsor Compliance Burden 

Many have testified in various hearings that additional disclosure will ultimately 

mean greater cost to plan participants. However, it will also add to the costs of plan 

sponsors. The goal should be to control costs for both participants and plan sponsors 

while balancing the need to provide necessary information to plan participants in 

an understandable format. 

Employers sponsor 401(k) plans 1 to help their employees save for retirement and 

to attract and retain employees. 401(k) plans are heavily regulated and impose significant fiduciary responsibilities on employers. As a result of the complexity of comsmartinez on PROD1PC70 with HEARING

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plying with ERISA and the Code, some plan sponsors have become overburdened 

while trying to focus on running their businesses. 

Plan sponsors are already feeling the burden of various disclosure and reporting 

requirements, to name the most common—summary plan descriptions, summary 

material modifications, summary annual reports, Form 5500 filings, safe harbor notices, and blackout notices. 

As more employers sponsor plans, the 401(k) world has morphed into a ‘‘do-ityourself’’ environment where plan sponsors have been encouraged to essentially purchase ‘‘off-the-shelf’’ prototype plans from service providers and operate them on 

auto-pilot. Overall, this serves the greater good because more employers can afford 

to sponsor plans for their employees. However, a natural by-product of this environment is the fact that a large number of plan sponsors turn to experienced employee 

benefits legal counsel only when a big problem arises. 

As a result of limited time, expertise, and resources, some plan sponsors must rely 

solely upon service providers to provide necessary plan information. Of course, most 

of the service provider material clearly advises employers to consult with legal counsel; however, many plan sponsors simply do not have the budgets to obtain regular 

legal assistance with their 401(k) plans nor an appreciation for the special rules 

that apply to retirement plans. 

Not surprisingly, the quality of service providers varies. Most do a good job of 

helping employers comply and enable employers to provide a 401(k) plan on a costeffective basis, which otherwise would not be possible. Too often, however, with respect to fees, some service providers fail to give employers the full picture upfront. 

I have worked extensively with 401(k) plans acquired through mergers and acquisitions, and through this experience I have seen for myself that many inexperienced 

plan sponsors simply do not have knowledge of the ERISA fiduciary requirements. 

Often times, plans with significant amounts of assets in a fast growing company will 

grow and thrive at a pace that exceeds the resources to handle the existing ERISA 

and Code requirements. During acquisitions, we find that plan documents are not 

in order and service contracts with fee information are not available. Based upon 

my experience with small plans picked up in acquisitions, it is obvious that some 

small unrepresented plan sponsors operating on a ‘‘do-it-yourself’’ basis are missing 

important legal requirements, including the responsibility to review and monitor 

plan fees. These well-meaning plan sponsors simply want to provide their valued 

employees with a mechanism for retirement savings. 

While plan sponsors do not have any excuse for failing to fulfill their fiduciary 

responsibility, in reality, some plan sponsors simply do not know what the rules are. 

I acknowledge that additional fee disclosure is necessary, but it must be simple and 

have limited costs to be useful to both participants and plan sponsors. 

In short, small plan sponsors would have to devote significant resources to comply 

with enhanced fee disclosures. This may have unintended and undesirable consequences of discouraging some small plan sponsors from sponsoring 401(k) plans. 

Difficulty in Obtaining Fee Information 

Many small or medium size plan sponsors will have great difficulty in preparing 

and providing 401(k) fee disclosure to participants without professional assistance, 

which is another cost for the plan sponsor. First, smaller plan sponsors may not be 

able to use asset size or number of participants to leverage the best fee arrangement. 

It is also very difficult for the average plan sponsor to assess the structure of fees 

without the assistance of a professional investment consultant or adviser who can 

evaluate and identify what is behind the numbers, assuming complete numbers are 

provided. It is equally difficult for legal practitioners to assist their clients because 

the responses to Requests for Proposals or contract bids do not always include a 

complete analysis of all of the fees. Efforts to dig deeper and to obtain more detail 

as to fees may be met with resistance and, ultimately, the plan sponsor has to make 

a decision based on what information has been provided. 

The most typical example that I can give is that of clients who commonly receive 

‘‘zero fee’’ proposals. The only costs that may be listed are participant transaction 

fees such as plan loans, distributions or qualified domestic relations orders. What 

this means is that other administrative costs are being financed by investment fees 

charged on plan assets. However, many plan sponsors do not realize that. Even if 

they do, plan sponsors would have to ask specific questions in order to obtain information about the ‘‘hidden’’ fees. Similarly, if ‘‘bundled’’ services are involved, which 

is often the case, plans sponsors need to request a breakout of fees, which may be 

difficult to obtain. 

The Department of Labor (‘‘DOL’’) has done a good job of providing plan sponsors 

with publications regarding plan fees, including the 401(k) Plan Fee Disclosure Tool. 

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However, this is only useful for the plan sponsors who know that it exists and have 

the time, knowledge and skills to go through the process of doing a fee analysis. 

And even DOL publications can be too technical and complicated for an unsophisticated plan sponsor. 

Plan sponsors also need education about the questions to ask to service providers. 

For example, the plan sponsor needs to ask service providers to compare per participant versus asset-based costs. The plan sponsor will need to ask the service provider 

about fees annually or negotiate a multi-year agreement. In my experience, a smaller plan sponsor also has to negotiate one-time fees such as setup fees and termination fees when switching providers or terminating plans. With respect to investment options, plan sponsors need to evaluate whether redemption fees or sales 

charges are assessed to specific investment options. It would also be useful for plan 

sponsors to request fee benchmarking comparisons for similar employers based upon 

plan asset size and number of participants. Most plan sponsors need an investment 

adviser to assist in fully obtaining this information and understanding it. 

Uniform Disclosure 

One of the current legislative proposals is to require service providers to provide 

fee information to plan administrators (i.e., the employer) in advance of a new contract. This would reduce the burden of deciphering the sales contract for the plan 

administrator who does not have the benefit of a professional investment adviser 

who understands fees and the pricing proposal in the current market. This proposed 

legislation also requires service providers to provide additional disclosure of the 

same types of information to plan sponsors each year of the contract. 

The service provider disclosure provided to plan sponsors must be simple enough 

to be understood, but it must be sufficiently complete in order to enable the plan 

sponsor to evaluate whether to retain the service provider. 

With an eye toward the ‘‘do-it-yourself’’ plan sponsor, a uniform disclosure format 

might be the most effective solution. Otherwise, some plan sponsors will still be 

forced to decipher the information themselves and provide disclosure on their own. 

This clearly would be more difficult for the plan sponsor who cannot afford to hire 

an investment consultant to analyze this information. A general notice prepared by 

the service provider would assist plan sponsors in understanding the service provider’s fees. In addition, to the extent the plan sponsor in turn has to disclose fees 

to participants, a similar notice prepared by the service provider could be used. 

Simplified Disclosure Needed for Participants 

The required disclosure statement for participants must be in a generic format 

and suitable to allow the average person responsible for day-to-day plan administration to be able to communicate to participants. 

Effective participant communication drafting is a critical part of my practice and 

more importantly of a well-run and effective 401(k) plan. A communication with too 

much irrelevant information or unfamiliar terms will not serve participants well. I 

have learned that communications generally have to be limited to one or two pages 

in order to be effective. It would seem that a reasonable compromise would be to 

make more comprehensive information available upon request. Any disclosure must 

be brief and easy to understand. 

One factor for consideration in determining the scope of the appropriate disclosure 

is the fact that employer workforces are made up of employees with varying education levels who ultimately will all receive the same fee disclosure statements. Outside of per participant fees for administrative costs and expense ratios for investment funds, it would generally be very difficult for a plan sponsor to provide fee 

information in an understandable format for the average participant. 

It would also be very costly for small or medium size plan sponsors who want to 

provide adequate fee disclosure that could be understood by the entire workforce. 

Without a simplified disclosure document that is prepared by the service provider, 

the plan sponsor would need to hire outside assistance in order to comply with any 

participant level disclosure requirements. 

Without a simplified format for disclosure, many participants may just receive additional information that they can not accurately interpret or effectively use to make 

decisions about the investment of their retirement benefits. 

The Committee also should consider the need to coordinate any proposed fee disclosures with existing notice requirements, including benefits statements required 

by the Pension Protection Act of 2006. Without coordination, plan participants will 

be overwhelmed by various notices with different types of information. 

Any legislative or regulatory action related to disclosure of fees must consider the 

existing burdens and obligations with respect to small and medium size plan sponsors. Such action must focus on the effective delivery of fee disclosure by service prosmartinez on PROD1PC70 with HEARING

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viders to plan sponsors who have the responsibility for providing simplified disclosure to plan participants. 

Thank you for inviting me to testify. I am happy to take questions. 

f 

Mr. MCDERMOTT. Thank you very much. 

Dr. Stein, how did you get to be a professor? 

STATEMENT OF NORMAN P. STEIN, PROFESSOR, UNIVERSITY 

OF ALABAMA LAW SCHOOL, ON BEHALF OF THE PENSION 

RIGHTS CENTER 

Mr. STEIN. We lawyers are fake professors. 

Mr. MCDERMOTT. Okay. 

Mr. STEIN. Mr. Chairman, Mr. McCrery, Mr. Johnson, I am 

Norman Stein, a Professor at the University of Alabama School of 

Law and this year I am a visiting professor at Catholic University 

here in Washington, D.C., which actually has been very nice for me 

because I have a son who just started at the Naval Academy, which 

is only 30 miles down the road. 

I am appearing today on behalf of the Pension Rights Center, the 

Nation’s only consumer organization dedicated solely to promoting 

and protecting the security of workers, retirees and their families. 

We thank you for the opportunity to testify today. 

Our testimony today will focus on three issues: the effectiveness 

of fees on retirement savings and 401(k) plans, disclosure of fees 

to participants, and disclosure of fees to fiduciaries. Our written 

testimony covers three other issues, which we think are equally important, but not equally important enough to be included in our 

oral testimony. 

In recent years, think tanks, commentators, consumer organizations, the government Accountability Office, ‘and the Department 

of Labor have developed models and simple illustrations of the dramatic effect of fees on retirement savings. From the standpoint of 

entities that provide various services to 401(k), a small additional 

fee can result in substantial profits because that fee is typically 

multiplied by the number of participant accounts served and the 

total amount of assets managed. In many markets, a small percentage difference in the cost of a product or service is not particularly 

meaningful because it is a one time cost and is not compounded 

over time. But in the area of 401(k) plans, fees are charged periodically over an employee’s working life, and the time value of money 

can turn a nominally insignificant fee into a significant loss in retirement savings. So, fees matter. Although fees matter for all investments, they matter even more for 401(k) plans. That is because 

the very nature of these plans, where employee contributions flow 

into the plan each period, can conceal the impact of fees. Participants, unaware of how much they were paying in fees, see their accounts grow and assume that they are earning significant returns. 

Disclosure of fees is keenly important to participants. Participants need fee information to determine whether they are getting 

their money’s worth for their 401(k) investments and to plan realistically for retirement. In addition, participants cannot adequately 

choose among investment options without relevant fee information. 

Finally, there is the fact that financially sophisticated participants 

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may be in a position to influence plan decisionmakers’ choice of investment options and, in some cases, the employees, the sophisticated employees, may be more focused on high fees than the decisionmakers themselves. 

In our view, automatic participant disclosure should be simple, 

direct and uniform across investment options. We agree with the 

many people this morning who have said that too much information can overwhelm an unsophisticated participant and give even 

a financially literate participant more information than they need. 

We suggest that the 401(k) participants be provided automatic 

fee disclosure statements that provide the following: A statement 

of why fees are important, and that they should be considered 

along with return and risk characteristics in selecting among investment options. For each investment option offered by the 401(k) 

plan, the rate of return net of fees during the preceding year, and 

an individual statement of the total dollar amount of fees charged 

to a participant’s 401(k) account the preceding year, including all 

record keeping, investment load, marketing and other fees, perhaps 

broken down into two or three broad categories, as Mr. Neal’s legislation suggests. 

Participants need information to help them shape a portfolio 

from the investment options available under the plan. Plan decisionmakers, however, have to choose from the entire universe of 

available investment vehicles those options that will be made available to plan participants. Moreover, they need periodic information 

about the investments they have chosen in order to monitor their 

continuing appropriateness to the plan’s participants. Thus, plan 

decisionmakers require detailed information about all fees that are 

charged to the plan so that they can compare one investment option to another, particularly within classes of investments and 

similarly to choose service providers. 

In order for them to compare fees across various investment 

items and service providers, the presentation of fees should be uniform from vendor to vendor with fees divided into separate fees for 

each broad type of service provided by the vendor. This would require that fees for bundled services be unbundled. 

We also note that we believe participants should be able to request, affirmatively request, any information on fees that is available to the plan. 

Thank you for the opportunity to testify, and I of course am willing to take any questions. 

[The prepared statement of Mr. Stein follows:] 

Statement of Norman P. Stein, Professor, University of Alabama School of 

Law, on behalf of the Pension Rights Center 

Mr. Chairman, Members of the Committee, I am Norman Stein, a professor at the 

University of Alabama School of Law, where I am privileged to hold the Douglas 

Arant Professorship. This semester, I am a visiting professor at Catholic University’s Columbus School of Law here in Washington, D.C. I am appearing today on 

behalf of the Pension Rights Center, the nation’s only consumer organization dedicated solely to promoting and protecting the retirement security of workers, retirees 

and their families. 

If someone were to look at the discussion of 401(k) plan fees over the past decade, 

they may well compare it to the weather: It is something that everyone talks about 

but about which no one has done all that much. It is our hope that this hearing 

today will put us on the road to improvement of both the disclosure and appropriateness of 401(k) fees. Indeed, we were heartened to see that the topic of this 

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1Pension Rights Center Comments in response to U.S. Department of Labor Request for Information dated July 24, 2007 http://www.pensionrights.org/policy/regulations/401k_fees_RFI/ 

PRC_comments_on_fee_disclosure_RFI.pdf 2This could be similar to the format of the ‘‘Rates of Return’’ chart published by the Federal 

Thrift Savings Plan in its Highlights newsletter http://www.tsp.gov/forms/highlights/high07d.pdf 3This type of total dollar disclosure has recently been implemented in Australia. See Corporations Amendment Regulations 2005 (No.1), March 10, 2005 (Australia), Amendment under Corporations Act of 2001, Schedule 1, Part 3, Division 2(302), at p. 25, found at http:// 

www.frli.gov.au/ComLaw/Legislation/LegislativeInstrument1.nsf/0/ 

5148FBFAB97F8829CA256FC00022EC72/$file/0304600I-050307EV.pdf 

hearing was not merely the disclosure of 401(k) fees, an issue on which the Center 

has commented before,1 but also on the appropriateness of some of those fees. Mere 

disclosure is often not enough: If fees are too high or otherwise inappropriate, the 

proper remedy is not disclosure but prohibition or regulation. 

Our testimony today will focus on six issues: (1) the effect of fees on retirement 

savings in 401(k) plans; (2) disclosure of fees to participants; (3) disclosure of fees 

to fiduciaries; (4) the inappropriateness of charging plan administration fees to participant accounts; (5) the inappropriateness of a Department of Labor field assistance bulletin that allows a plan to charge extraordinary fees to the accounts of individual participants; and (6) the desirability of a government-sponsored, low-fee 

401(k)-type service provider, which could provide an alternative to smaller businesses that often lack sufficient bargaining power to negotiate low-fee arrangements 

with third-party administrators. 

1. The Effect of Fees on Retirement Savings 

In recent years, think-tanks, commentators, the Government Accountability Office 

(GAO), and the Department of Labor have developed models and simple illustrations of the dramatic effect of fees on retirement savings. From the standpoint of 

entities that provide various services to 401(k) plans in the market, a small additional fee can result in substantial profits, because that fee is typically multiplied 

by the number of participant accounts served. In many cases, a small percentage 

difference in the cost of a product or service is not particularly meaningful to the 

consumer, because it is a one-time cost and is not compounded over time. But in 

the area of 401(k) plans, the fee is charged periodically, and sometimes as often as 

monthly, over an employee’s working life, and the time value of money can turn a 

nominally insignificant fee into a significant loss in retirement savings. The GAO, 

for example, has shown how a one percentage point in fees for an investment with 

a seven percent before-fee rate of return can reduce retirement savings by 17 percent over a 20-year period of participation. Fees matter. 

Although fees matter for all investments, they matter even more for 401(k) plans. 

That is because the very nature of these plans, where employee contributions flow 

into the plan each pay period, can conceal the impact of fees. Participants, unaware 

of how much they are paying in fees, see their accounts grow and assume they are 

earning significant returns. 

2. Participant Disclosure 

Disclosure of fees is keenly important to participants. They need this information 

to determine whether they are getting their money’s worth for their 401(k) investments, and to plan realistically for retirement. In addition,participants cannot adequately choose among investment options without relevant fee information. Finally, 

there is the fact that financially sophisticated participants may be in a position to 

influence plan decision-makers choice of investment options when the plan’s current 

investment options have high fees. 

In our view, automatic participant disclosure should be simple and direct. Too 

much information can overwhelm an unsophisticated participant and can give even 

a financially literate participant more information than they need. We suggest that 

401(k) participants be provided automatic annual fee disclosure statements that at 

a minimum include the following: 

1. A statement of why fees are important, and that they should reconsidered with 

return and risk characteristics in selecting among investment options; 

2. A listing for each investment option offered by the 401(k) plan, the rate of return, net of fees, during for the preceding year;2

3. An individualized statement of the total dollar amount of fees charged to a participant’s 401(k) account the preceding year, including all recordkeeping, investment, load, marketing and other fees.3

In addition, it would be helpful for the annual statement to also include 

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1. Expense ratios for (i) aggregate investment management fees and (ii) for administrative and advisory costs (to the extent paid by the participant); 2. Dollar amounts per $1,000 for (i) aggregate investment management fees and 

(ii) for administrative and advisory costs (to the extent paid by the participant). 

3. Transaction-oriented fees that are paid when initially purchasing or later disposing of an investment option, with an indication of how high these fees 

would be if ratably charged on annual basis for investments held for 1, 5, 10, 

and 15 years. 

Finally, participants should be able to request more comprehensive information 

about fees for particular investment options, with fees disaggregated into uniform 

categories. 

3. Disclosure to Fiduciaries 

Participants need fee information to help them shape a portfolio from the investment options available under the plan. Plan decision-makers, however, have to 

choose from the entire universe of available investment vehicles those options that 

will be made available to plan participants. Moreover, they need periodic information about the investment they have chosen in order to monitor their continuing appropriateness for the plan’s participants. Thus, plan decision-makers require detailed information about all fees that are charged to the plan, so that they compare 

one investment option to another, particularly within classes of investments. In 

order for them to compare fees across various investment vehicles, the presentation 

of fees should be uniform from vendor to vendor, with fees divided into separate fees 

for each type of service provided by the vendor. This would require that fees for bundled services be unbundled. Moreover, it may be appropriate for there to be regulation that requires that each service be available on a bundled or unbundled basis. 

Discounts for bundled services should be clearly identified. 

We also note that participants should be able to request any information on fees 

that is submitted to the plan. 

4. Costs for Administrative Services Should Be Borne by the Plan Sponsor 

It may be time to re-evaluate whether a plan sponsor should be able to pass administrative costs on to individual participants or whether these costs should be 

considered a cost of plan sponsorship. There are four reasons for our views: 

1. The employer is the purchaser of plan administrative services without being 

the actual payor for those services (in plans that pass those costs on to the participants). This is a recipe for market failure, since the employer does not have 

the maximum incentive to bargain for the lowest possible fees and/or the most 

appropriate services for the plan. 

2. In some cases, particularly with smaller plans, fees can make the cost of investing inside a plan more expensive than investing outside a plan. 

3. In defined benefit plans, the employer bears the administrative costs of plan 

management, either directly if the administrative fees are paid directly, or indirectly if the fees are charged to the plan, since the employer bears the burden of funding the plan. The ability to charge back fees to the participant in 

a defined contribution plan creates an uneven playing field between defined 

benefit and defined contribution plans. In our view, the administrative costs 

of plan sponsorship should be a cost of doing business. 

4. When employees decide among employment opportunities, they will generally 

compare section 401(k) plans based on the employer match and not on whether 

the employer bears the administrative costs of plan sponsorship, something 

that even sophisticated job seekers are unlikely to consider (or have the information to consider). Requiring employers to bear the administrative costs as 

a normal cost of doing business will increase the accuracy of employee evaluation of 401(k) plans offered by different employers. 

5. Field Assistance Bulletin 2003–3 

In 2003, the Department of Labor issued a Field Assistance Bulletin that reversed 

long-standing rules on what types of individual costs could be charged as fees to individual participants. That Field Assistance Bulletin, which did not go through the 

normal regulatory process in which a change of position is first published in the 

Federal Register and comments from all stakeholders solicited and considered, 

adopted positions that in our view were ill-considered and that can have unfair and, 

in some cases, devastating impact on the retirement security of some plan participants. 

The most objectionable of the holdings in this Bulletin was that the plan’s cost 

of a qualified domestic relations order could be charged directly to the account of 

the participant. These fees can be substantial and in some cases could reduce the 

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value of a modest retirement account to zero. We urge the Committee to review this 

Bulletin and consider recommending that the Department of Labor withdraw it and 

return to its prior interpretation of when fees can be charged solely to the individual 

accounts of particular participants. 

6. Low-Cost Provider 

The economist Christian Weller, and others, have proposed that legislation make 

available to small firms that provide 401(k)s an option to access large, governmental 

third-party service providers. This would make available the economies of scale realized by large employers. For example, the Federal Thrift Savings Plan or the defined contribution plans of state retirement systems might allow participation by the 

employees of private employers. The availability of such an alternative might also 

have ripple effects in the market, as service providers lower fees to make their products more competitive to smaller employers. 

f 

Mr. MCDERMOTT. Thank you for your testimony, and we will 

go now to David Certner. 

STATEMENT OF DAVID CERTNER, LEGISLATIVE COUNSEL AND 

LEGISLATIVE POLICY DIRECTOR, AARP 

Mr. CERTNER. Mr. Chairman, Mr. McCrery, other Members of 

the Committee, thank you for convening this hearing today. AARP 

appreciates the opportunity to testify on this important retirement 

income issue. 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, now 

the dominant employer-based pension vehicle. Those participating 

in these plans shoulder the risk and responsibility for their investment choices and ultimately their retirement security. As a result, 

better plan information is essential. We all have a stake in ensuring that participants receive accurate and informative disclosure 

from the 401(k) plans, including expenses. However, plan expense 

and fee information is often scattered, difficult to access or non-existent. 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 earlier noted, GAO estimated that $20,000 left in a 401(k) account that had a one percentage point higher fee for 20 years 

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

account balance. But a more realistic period is a 30-year period, 

and we estimate that over a 30-year period, the account would be 

about 25 percent less. In other words, one out of every four plan 

dollars would go to fees. Even a difference of only half a percent 

or 50 basis points would reduce the value of the account by 13 percent over 30 years. In short, fees and expenses can have a huge impact on retirement income security levels. 

AARP recently surveyed 401(k) participants to gauge their understanding of plan fees and investment choices. Our survey indicates that participants do not have a clear understanding of their 

investments. When asked if they know the names of all of the 

funds in which they have money invested, almost 65 percent of survey respondents said no. Twenty-7 percent did not know whether 

they had a stock fund, 29 percent did not know whether they even 

had a bond fund. 

In addition, 401(k) participants lack basic knowledge of plan fees. 

When asked whether they pay any fees for their plans, less than 

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one-fifth said they do, almost two thirds responded that they do not 

pay fees and 18 percent said they did not know. Respondents were 

questioned in detail about the fees they may be charged in mutual 

funds and other types of investments. The answers indicate that 

401(k) participants do not fully understanding what types of fees 

their plans charge. For example, when asked whether their 401(k) 

plan charges an administrative fee, 24 percent said yes, 21 percent 

said no, 55 percent said they did not know. 

Finally, Mr. Chairman, as you noted earlier, when told that 

plans often charge fees, 83 percent said they did not know how 

much they paid in fees. It is clear that better information is needed, and we applaud the Committee for taking a harder look at the 

need for acquiring greater transparency of fee and expense information for both participants and plan sponsors. To start, comprehensive information on plan fees and expenses will enable the 

plan sponsors to fulfill their fiduciary responsibility to ensure that 

fees and expenses are reasonable. Employers doing due diligence 

need to have access to costs associated with various components, 

not just total costs, and greater itemization of fee arrangements 

would provide a clearer presentation of cost. I agree with the comments of Mr. McCrery earlier today, that employers do have a key 

role to play, requiring that service providers give comprehensive information to plan sponsors, because is in turn important to the participants since the costs are often passed directly on to them. 

Clear information is also necessary for the participants to better 

manage their own accounts. Participants face a range of fees, and 

while these fees vary in size and scope, they have one thing in common, they all reduce the level of assets available for retirement. 

We support greater transparency to participants of plan investment choices, including the risks and fees, and believe all individual account plan participants need to have access to this information. Lack of participant knowledge and survey data suggests 

that fee information should be distributed on a regular basis and 

in plain language. We also recommend that information on an investment is demonstrated how they will affect the participant’s account balance over time. 

We commend the Committee for examining the need to strengthen 401(k) disclosure. The significant impact of fees on retirement 

security highlights the need for clear investment and fee information. Greater disclosure will help drive down fees, will 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 the Committee to ensure that 

employers and participants have the information they need. Thank 

you for the opportunity to testify. I will be happy to answer any 

questions. 

[The prepared statement of Mr. Certner follows:] 

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Mr. MCDERMOTT. Thank you very much. We will begin with 

Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. Ms. Tavares, you testified 

in support of limited and simple disclosure to plan sponsors so that 

they might evaluate costs and pass along the best deal to their employees. As you may be aware, I filed legislation to require all providers, including those that bundled services to disclose fees in 

broad categories, emphasis on the word ‘‘broad.’’ Can you explain 

why you believe this disclosure is helpful and why it needs to be 

simple and low cost? 

Ms. TAVARES. Well, first, I think ‘‘broad’’ and ‘‘simple’’ may 

work together. That was my intent. 

Mr. NEAL. Mine too. 

Ms. TAVARES. Okay. I think it would be helpful to the overall 

retirement system, in the voluntary system that exists, for employees to obtain information, but the cost could frustrate the system 

if a plan sponsor has to spend a lot of time deciphering detailed 

information that is not provided in the broad manner that you describe, in order to pass that information on the plan sponsor is 

going to have to hire someone to do that. 

Mr. NEAL. Ms. Harris, you explained that some governmental 

plans already use independent consultants to assist in understanding plan fees; how can greater fee disclosure, even in the simple and broad manner that my bill outlines, assist those who manage 403(b) and 457 retirement plans? 

Ms. HARRIS. Thank you. Can you repeat your question, please? 

Mr. NEAL. I would be happy to. How can greater fee disclosure, 

even in simple and in the broad manner that my bill outlines, assist those who manage 403(b) and 457 retirement plans? 

Ms. HARRIS. Speaking primarily on behalf of the 457 retirement 

plans, we found that some of the plans in our survey did use consultants and that was prevalent in the smaller State and local retirement plans. Our plans use the consultants to assist them in understanding the fee structures that the providers are presenting to 

them, and as part of our overall due diligence process. We take our 

fiduciary responsibilities so seriously, and we rely on the consultants because they have a better and broader knowledge of the fee 

industry than typically the smaller plans have. So, I think that if 

you require broader and simpler disclosure, then the plan administrators, such as myself and my colleagues, will perhaps not need 

to rely as much on the use of consultants, although it is part of our 

due diligence process, and we do include fee review as part of our 

fiduciary responsibility exercises. 

Mr. NEAL. Thank you. Mr. Stein, I was interested in your recommendations regarding disclosure to workers. You recommend 

simple, direct disclosures, including annual personalized statements. This is similar, as you know, to the approach I have taken 

in my bill, and can you tell the Committee why you believe that 

while allowing access to more comprehensive information is necessary, for most workers hitting the highlights will be sufficient? 

This is very important? 

Mr. STEIN. Yes, well, I want to make clear also that I think 

whatever information the plan has should be available to employees who request it, in part because I think part of the framework 

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of ERISA is to essentially deputize employees to keep track of what 

is going on their employees and a few employees who do that job 

well can often have an impact on how the plan is administered. 

But generally, I agree that too much information can overwhelm an 

employee and basically what the employee needs is enough information, I think one of the earlier witnesses said, and I agree with 

this, whether to participate in the plan and presumably the fees 

will not be so high to discourage participation and, second, how to 

choose among various investment options. I do not think you need 

the same information that the plan sponsor needs to make the 

kinds of decisions the plan sponsor has to make. 

Mr. MCDERMOTT. Mr. Johnson, would you like to inquire? 

Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Scott, TIAA has 

been successful in providing income, guaranteed income for life 

participants and great at getting people to participate in those 

plans. I know the defined contribution plans for teachers in Texas 

in particular have been very successful and popular. How do you 

help your customers make those crucial decisions? 

Mr. SCOTT. I think there are several things that work in our 

favor here to make these plans successful, one is the fact that they 

are retirement focused, so people go into them with the understanding that this is about their retirement, so they tend to have 

a higher degree of interest based upon that. We do a significant 

amount of education through the employer and through our noncommission staff in addition to that. It is the employer and employee and the TIAA–CREF relationship that really makes that 

work, so they work. The employer works cooperatively with us to 

allow us access to the employees to help them educate them about 

their selection and the importance of selection. 

The other thing is the employer contribution. There is a significant level of contribution in the 403(b) space, we think that is consistent with having a real retirement plan and that is what makes 

those programs work well, and objective advice, we believe we 

should be giving objective advice about fund selection so people can 

make the right choices about their retirement. 

Mr. JOHNSON. Without government telling you to do it, right, 

you do it? 

Mr. SCOTT. Well, so far that is the case. 

Mr. JOHNSON. I know. I think that is good. Ms. Harris, when 

I was Chairman of the Subcommittee with jurisdiction over ERISA, 

I maintained that 403(b) plans and 457 plans are well regulated by 

State constitutions. If this Congress decides to legislate on top of 

all the State level regulation, could you review for us what special 

factors Congress ought to be careful to consider? 

Ms. HARRIS. Well, I think that while we have not previously 

been subject to ERISA, we are subject to many layers of other laws, 

such as trust laws, open meetings laws, and public procurement 

laws. I said in my testimony, our contracts are most often reviewed 

in the open forum setting, so we have already an extremely high 

level of accountability to our participants. I can say that from 

where I come from, and I think my plan is very typical, we treat 

our participants as we as a governmental organization treat our 

taxpaying public. So, we do see that we have a very, very high level 

of accountability. We also look to ERISA for guidance and use that 

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to develop our best practices and govern our plans by fairness and 

due process for the benefit of our participants. So, your question 

was what parts of ERISA should we—— 

Mr. JOHNSON. Do you think you ought to have any government 

interference in what you are doing right now or is the State oversight good enough? 

Ms. HARRIS. Well, I think we already look to ERISA for guidance and then we have several more layers of oversight today. So, 

just like Mr. Scott, I think that we are already meeting most of the 

ERISA requirements that are imposed on a plan that is governed 

by ERISA. 

Mr. JOHNSON. Okay, in the teacher venue, do most states require teachers to be participants of your plan? 

Mr. SCOTT. That varies, a number of States have optional retirement programs that they allow teachers to participate in. Most 

of our participants are in universities and faculties and may or 

may not be in State-run programs. 

Mr. JOHNSON. Okay, thank you. Mr. Wray, one question, do investors in a 401(k) plan generally pay more or less in investment 

fees than investors in the retail market when investing for their 

own discretionary saving? 

Mr. WRAY. They actually pay less. In the current composition of 

401(k) participation, about two thirds of the people work at companies with 1,000 or more employees. Those companies are able to negotiate the most favorable fee arrangements, so if you are looking 

at the system overall, they have very favorable fee outcomes as a 

general group. 

Mr. JOHNSON. So, you would say that you do not think additional legislation or disclosure is necessary at this time? 

Mr. WRAY. No, I think that we need to change the disclosure requirements, and we are very much in favor of that, and we are 

very supportive of the DOL efforts in this area. I was chair of the 

ERISA Advisory Council when the recommendations were made for 

the DOL to make changes in this area. We feel that the credibility 

of the system requires that all the players see what the fees are 

even though I think overall the system is providing a very favorable fee outcome in the system, that does not mean that we do not 

want disclosure because the credibility of the system really requires this I think. 

Mr. JOHNSON. Okay. 

Mr. WRAY. But not legislation at this point. 

Mr. JOHNSON. Okay, thank you, sir. Thank you, Mr. Neal. 

Mr. NEAL [presiding]. You were doing well until the last sentence. 

[Laughter.] 

Mr. JOHNSON. I kind of liked it. 

Mr. NEAL. Let me thank the witnesses today for their testimony. There may be some written follow-up questions for panelists, 

and we appreciate your prompt response. This was most helpful to 

me, and I do appreciate the talent that you have demonstrated 

here today. If there are no further comments, the hearing stands 

adjourned. 

[Whereupon, at 2:45 p.m., the hearing was adjourned.] 

[Submissions for the Record follow:] 

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Statement of the American Council of Life Insurers 

The American Council of Life Insurers (ACLI) appreciates the opportunity to provide our views to the Committee on Ways & Means in connection with the Committee’s hearing on ‘‘The Appropriateness of Retirement Plan Fees.’’ We welcome the 

interest of Chairman Rangel, Ranking Member McCrery and the Committee on this 

important topic. In addition, we also want to thank Congressman Neal and Larson 

for their interest in this issue by having introduced legislation which addresses disclosure in the defined contribution market. ACLI supports efforts to ensure meaningful disclosure on retirement plan fees. Employers who sponsor defined contribution plans need to be fully informed of the fees for the services and investment products selected for their plans. Employee-participants need information on the investment products and related fees that are made available in their plans in order to 

decide how to invest their retirement savings. 

ACLI is a national trade association of 373 member companies that account for 

93 percent of the life insurance industry’s total assets in the United States, 91 percent of life insurance premiums, and 95 percent of annuity considerations. In addition to life insurance and annuities, ACLI member companies offer pensions, including 401(k)s, long-term care insurance, disability income insurance and other retirement and financial protection products, as well as reinsurance. 

Life insurers are among the nation’s leaders in providing retirement security to 

American workers. Life insurers provide a wide variety of investment products to 

retirement plans that are designed to achieve competitive returns while retirement 

savings are accumulating and to provide guaranteed income once employees enter 

retirement. More than one-quarter of the assets in employer-based retirement plans 

are managed by life insurers. Life insurance companies, like mutual funds and other 

financial institutions, provide investment options and administrative services to retirement plans, including 401(k) plans and similar participant-directed plans. In addition to managing the plan’s investments, the insurer may offer other services to 

assist with plan administration, such as recordkeeping, participant communication, 

legal compliance and plan testing. 

ACLI is committed to working with policy-makers to improve disclosure of plan 

information. In 2006, ACLI worked in conjunction with a group of trade associations 

to provide the Department of Labor (the ‘‘Department’’) with data on the types of 

fees charged in connection with retirement plan investment products and services. 

ACLI again recently joined with a broad group of trade associations in developing 

joint principles on fee disclosure in response to the Department’s request for information. We look forward to continuing to work with the Department on its regulatory initiatives for participant disclosure. While ACLI may not agree with the Department on every point, we believe that the Department is addressing important 

issues with respect to plan fees. We hope the Congress will coordinate any legislative reforms with those regulatory initiatives that the Department has underway. 

It would be extremely disruptive to plan sponsors, service providers and participants 

if changes were made in response to new regulatory requirements only to be replaced by legislation imposing a different approach. 

ACLI supports the following principles with respect to disclosure of plan information to plan sponsors and participants: 

• Fee disclosure to plan sponsors and to participants serve different 

needs. The purposes behind fee disclosure to plan sponsors and to participants 

differ, and any reforms to the current-law rules should be consistent with those 

underlying differences. The selection and monitoring of service providers to the 

plan is a fiduciary act subject to ERISA-imposed obligations, including the obligation to ensure that fees paid from plan assets constitute reasonable compensation for services. By definition, a fiduciary needs full information about 

the services and products under the plan and the fees charged and compensation earned by plan service providers. Participants, on the other hand, are not 

selecting among service providers and setting provider compensation. Rather, 

participants are making a basic choice among a fixed menu of plan investment 

options, in which fees charged are only one of a number of important criteria 

for making sound investment decisions. Providing voluminous and granular information about plan fees to participants would add undue complexity and is 

not necessary to ensure that participants have the level of information they 

need to make decisions about their investment options. The distinct and different purposes between plan sponsor and plan participant fee disclosure must 

be kept squarely in mind in considering any new disclosure rules. 

• Disclosure to plan sponsors should focus on the information that plan 

sponsors need to fulfill their fiduciary responsibilities. Fiduciaries need 

information as to the full menu of services and investment products that are 

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being provided to the plan and the aggregate fee for those services in order to 

fulfill their responsibilities under ERISA. Some plan sponsors may choose to 

purchase investment products and services in a ‘‘bundled’’ package under which 

a single fee may be charged for both investment products and other plan services. A 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. ACLI does not 

favor a so-called ‘‘unbundled’’ approach, which would require disclosure to plan 

sponsors that artificially divides a single ‘‘bundled’’ fee into specified components that the service provider may not make available commercially on a separate component basis. Requiring component disclosure is not necessary for the 

fiduciary to fulfill its obligations under ERISA and ensure that fees are reasonable. Moreover, requiring a ‘‘bundled’’ fee to be artificially divided among component services likely will lead to arbitrary results that will not provide useful 

information to plan sponsors. 

• Disclosure to plan participants should be designed to help focus participant decisions on how to invest their retirement assets. Information that 

is irrelevant to participants’ investment decisions may be confusing and increase costs, and therefore, should not be mandated. Fee and expense information is only part of the key information participants need in order to make investment decisions. Fee disclosure should not overshadow other critical information—such as investment objectives and product characteristics, historical performance and risks, and the identity of the investment advisor or product provider. Prior to enrollment, participants should be informed of their investment 

choices in simple, straightforward language. In addition to a description of the 

investment, participants should have access to a summary of expenses that 

could affect their account balances—including asset-based fees associated with 

the plan and its investment options, additional per-participant charges associated with the investment, and other administration fees and transaction 

charges. After enrollment, participants should be informed where to find or how 

to request updated information on fees and other characteristics of plan investment options. 

• Any new disclosure should be cost-effective. Additional disclosure requirements come with added costs. Any new disclosure requirements will impose new 

expenses and burdens that are likely to be reflected in higher prices for plan 

administrative services, which would ultimately be borne by the plan participants. For some employers, new disclosure costs and related potential liabilities 

could even contribute to a reluctance to sponsor a qualified retirement plan for 

employees. It is therefore imperative that new disclosure requirements be costeffective and focused squarely on providing information that is necessary for the 

decisions that need to be made under the plan. In that regard, plan sponsors 

should have the flexibility to determine the format in which the plan’s investment options and fee structures are explained to participants, which should 

help minimize increased costs associated with any new disclosure requirements. 

Delivery of information to plan participants should be coordinated with currentlaw participant notice requirements and should to the greatest extent possible 

allow the use of electronic media. 

* * * * 

Life insurers are committed to meaningful disclosure, which is critical to ensuring 

secure retirements for the millions of Americans that participate in defined contribution plans. We thank the Committee for the opportunity to submit this statement and look forward to continued dialogue with the Committee and its staff on 

these important issues. 

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Statement of Daniel Wintz, Omaha, Nebraska 

To the Committee: 

Thank you for this opportunity to make a statement for the record regarding the 

appropriateness and disclosure of fees charged in connection with investments offered to participants in 401(k) plans. 

My name is Daniel J. Wintz. I am an attorney with the Fraser Stryker PC LLO 

Law Firm, 409 South 17th Street, Omaha, Nebraska. I have been actively involved 

in the design and administration of qualified retirement plans since early 1975, 

shortly after the enactment of the Employee Retirement Income Security Act of 

1974 (ERISA). My practice area has been and is primarily focused on advising employers maintaining, and fiduciaries serving, qualified retirement plans including 

401(k), 403(b) and other defined contribution retirement plans providing for individual account investment direction. 

I believe that, under ERISA, fiduciaries to and participants in 401(k) and other 

plans providing for investment direction need to be apprised of not only the total 

fees (as a percent of assets or otherwise) that will be incurred within a particular 

investment option, they also need to be apprised of four key elements that comprise 

that total fee; namely, investment adviser/management fees, plan administration 

fees (e.g., sub-Transfer Agent fees), sales/marketing fees (e.g., front-end, back-end, 

12b-1, etc.), and investment overhead (i.e., other costs). Employers maintaining 

plans and fiduciaries serving plans need to know these respective fees in deciding 

whether particular investments are appropriate to be offered and whether the plan 

is paying no more than reasonable fees for services provided. Participants need to 

know these respective fees in order to determine the fees that they are paying 

versus possible returns, and to determine whether and how much they are willing 

to subsidize the cost of the administration of the plan and plan service providers. 

For representatives of the investment industry to say that this information is difficult (or impossible) to provide or that it is information overload is simply ridiculous. If the information is difficult to obtain; whose fault is that? It is the investment industry’s. If employers and fiduciaries are to evaluate this information in 

order to fulfill their duties under ERISA, isn’t it appropriate that the investment 

industry be required to provide it? If a participant wants to make an informed decision about a particular investment versus another, shouldn’t the participant know 

what (s)he is paying for in terms of investment management, plan administration, 

sales and overhead fess for respective investment alternatives? The obvious answer 

is, Of course. 

I urge the Committee to report out a Bill that will mandate these minimum disclosures so that employers, fiduciaries and participants can make informed decisions 

with respect to investment alternatives offered through participant investment directed account plans. 

If members or staff have any questions for me or would like additional information, please feel free to contact me. Thank you for this opportunity to make this 

statement. 

f 

Gerald C. Schneider and Judith M. Schneider, Letter 

Bainbridge Island, Washington 98110 

October 30, 2007 

Ways and Means Committee 

U.S. House of Representatives 

Washington, DC 

Members of the Committee: 

Thank you for the opportunity to speak to the issue of hidden fees in retirement 

savings. For us, this has been as issue for many years since we hold a 401(k) with 

an insurance company and 403(b) products. 

It took 20 years of working in schools and saving for retirement to become aware 

that hidden expenses torpedoed any chance at real growth in money saved through 

a 403(b). Once that became known, our staff had a chance to request better options 

through no-load funds. In our school district, it was a prolonged battle, because insurance and brokerage companies discouraged administrators and business office 

staff, who did not understand the issues around expenses. 

When the 401(k) came into our life, we asked again and again about expenses and 

fees. The arrogance of the insurance company staff was evident when the representsmartinez on PROD1PC70 with HEARING

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ative said, ‘‘What do you care what the expenses are? Isn’t the value of the account 

going up?’’ Of course the value was increasing—due to a generally bullish market 

and continued contributions. They never, ever answered the questions about expenses and perhaps because few people asked, they felt they didn’t need to. 

We regular working families must pass up travel, nicer housing, private schools, 

tutors for children, decent cars and other privileges and products in order to save 

for retirement. Having our returns stultified by excessive (and often hidden and unknown) expenses is an insult and a gross injustice. In our case, our retirement must 

come later and we believe it will be less secure as a result. 

We hope you pass HR 3185 and EXPAND it to 403(b)s and 457s. We working 

folks need to know and deserve to know what the expenses and fees are—all of 

them. And we should have the opportunity to make the decisions about which services we need or how much is a fair price. We make those decisions in regard to our 

homes, our automobiles, our after-tax savings, and all the other services and products we use; we need and deserve the chance to make those decisions in regard to 

our retirement savings. 

Thank you. 

f 

Gerald C. Schneider and Judith M. Schneider 

Statement of Kevin Powell, Irvine, California 

Members of the Committee, 

It is a great honor to be afforded this opportunity. My name is Kevin Powell. I 

am a CFP (Certified Financial Planner) and a RIA (Registered Investment Advisor). 

I have worked in the financial services field since 1986. I feel that my testimony 

will be representative the ‘‘little guy’’ in America, since I talk to my clients (hardworking Americans) about retirement on a daily basis. 

I strongly urge this committee not to limit its scope to just 401(k) plans. There 

are many other types of retirement plans in the American workplace today and 

there should be similar ground rules for all those plans. Addressing a problem for 

401(k) plans and the larger corporations that normally offer them, while ignoring 

all the other retirement plans would be a terrible disservice to smaller employers 

& employees who many times will use another retirement plan such as a SIMPLE 

IRA, a SEP IRA, a 457, a 401(a) plan, a 403(b) plan, etc. 

The majority of retirement plan savings is invested in mutual funds. Mutual 

funds have layers upon layers of fees, some disclosed and some that are hidden inside the fund. This makes it very difficult for investors when trying to approximate 

the actual amount of expenses that are being assessed inside a particular mutual 

fund. Without this information retirement plan participants are not able to make 

an educated decision as to where to place their hard-earned savings. 

My primary concern about retirement plans and the fees that are assessed is that 

high fees inside the investment vehicles made available to plan participants, rob individual investors of hundreds of thousands if not millions of dollars over an average American’s lifetime. 

It is likely that the Committee is going to see a variety of expense ratio charts 

and figures from other speakers who come forward to testify. However, please keep 

a couple of very important points in mind. 

Disclosed mutual fund expense ratios averaged roughly 1.5% in 2006. That expense ratio does not include any sales loads or mortality and expense ratios (inside 

variable annuities) that investors may have had to pay. Yes, there are some retirement plans where investors have to pay these types of fees. Most importantly, it 

does not include the trading costs of the mutual fund that all investors pay. Recent 

estimates on trading cost expenses inside mutual funds were projected to be somewhere in the neighborhood of 0.5% to 1% or more annually. 

The Investment Company Institute is a highly respected organization and their 

research is well recognized throughout our industry. Recent figures from their web 

site show 401(k) or retirement plan expenses averaged about 0.8% in 2006. If you 

add to this the undisclosed 0.5% trading cost expense (use the lowest projected cost 

to be conservative), you now have a truer expense ratio of about 1.3%. 

Consider a simple scenario. 

Assume that an investor is able to accumulate $500,000 in his or her retirement 

plan. If that investor averages an 8% return on those assets for 20 years, the account would grow to $2,330,478. For simplicity’s sake, assume no new additions or 

withdrawals from this fund for the illustrated time frame. 

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However, if that same investor could have earned a 9% return (by paying 1% less 

in expenses), he or she would have $2,802,205 or roughly 20% more in assets! 

A simple 1% savings produces a difference of nearly one half of a million dollars. 

That’s an extra half-million dollars for those retirement plan participants to use to 

fund their retirement, retire debt, and make purchases at local vendors that will 

support the regional and national economy, and so on. 

That’s also an extra $500,000 that will generate tax revenues for the U.S. government. 

The following chart shows the differences in ending values of a $500,000 account 

invested at various growth rates for 20 years. You can easily see the differences in 

the ending values of the investments. 

The purpose of the chart is to illustrate the difference in the ending values if retirement plan participants could save 1% in annual expenses. For example, compare 

the ending value from a 7% return to a 1% higher return of 8% that investors could 

realize through lower fees inside their retirement plan and so on. 

Title 

Starting value Growth rate Period of time Ending value 

$500,000 5% 20 years $1,326,648 

$500,000 6% 20 years $1,603,567 

$500,000 7% 20 years $1,934,842 

$500,000 8% 20 years $2,330.478 

$500,000 9% 20 years $2,802,205 

$500,000 10% 20 years $3,363,749 

What some of the greatest investment minds have said about investment fees? 

A couple of the most intelligent investors we’ve ever known have spoken out on 

this subject. William F. Sharpe, Nobel Laureate in Economics, when asked about 

keys to investing, in a recent interview said: ‘‘The first thing to look at is the expense ratio’’ (italics & bold added). 

This text was taken from Warren Buffett in the Berkshire-Hathaway Annual Report for 1996: 

‘‘Seriously, costs matter. For example, equity mutual funds incur corporate expenses—largely payments to the funds’ managers—that average about 100 basis 

points, a levy likely to cut the returns their investors earn by 10% or more over time.’’ 

Sadly, Mr. Buffett was too conservative in his calculations. The average equity 

fund now charges not 100, but 150 basis points, and also incurs portfolio transaction 

costs of at least another 50 basis points. Together, they comprise expenses of 200 

basis points or more in some cases. 

If I could amend Mr. Buffett’s comments to reflect that fact, then fund costs are 

a ‘‘levy likely to cut the returns their investors earn by 20% or more over time.’’ 

And if you have to pay a sales load or management fee to buy or sell or manage 

your mutual fund, then your total returns will suffer even more. 

Sadly—and unbelievably—bond fund expenses also average more than 1%, a 

grossly unjustified levy on any gross interest yield, especially with recent nominal 

yields in the 4.6% neighborhood on the long U.S. Treasury bond. When adding in 

all fees, returns would be cut by almost 30%. I believe investors should regard such 

costs as unacceptable and the government should step in to regulate this abuse. 

If you want more evidence, consider this quote from the Securities and Exchange 

Commission’s website: 

‘‘Higher expense funds do not, on average, perform better than lower expense 

funds.’’ 

Albert Einstein was once asked, ‘‘What is the most powerful force in the universe?’’ He replied, ‘‘Compound interest.’’ Investors benefit from the power of that 

force when they invest for the long-term. But remember that when it comes to investment costs, the force can be equally powerful in the opposite direction. 

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Second area of focus beside investment fees 

Retirement plan fees are a great starting point but should not be the only area 

of focus for the Committee. Further information from the Investment Company Institute’s web site showed that retirement nest eggs reached a record $16.4 trillion 

in 2006, an 11% increase over the prior year and a 55% increase since 2002 when 

the equity bear market bottomed. 

That is great news but also a bit disheartening. Since account values only grew 

by 11%, it means that most participants in retirement plans woefully underperformed the stock market in 2006 when compared to the overall stock market (S&P 

500) return of 15.8%. 

Considering new money added by employees and employers plus Americans who 

opened up a retirement plan for the first time and the earnings of all that new 

money, the real rate of return on retirement plans most likely was in the low to 

mid single digits. That could be roughly one-half of the nearly 16% return of the 

S&P 500. This is not a one-time anomaly either. This trend can be observed for a 

significant period of time. 

So instead of earning an extra 1% as was illustrated above, some retirement plan 

participants could realize returns that were 4%-6% higher than what they have 

typically been earning! Using the investment growth chart from page 2, if you compare a 5% return to a 9% return (a difference of 4%), the result is $1.5 million more 

dollars for that retiree! 

Possible solutions 

1. Consistent rules and pricing guidelines 

Part of this difference can come from establishing consistent pricing guidelines for 

mutual funds or other investment vehicles. Any investment company that offers 

services to any type of a retirement plan would have to offer a special set of funds 

that had pricing specifically for retirement plans. 

I am not affiliated with any brokerage company but American Funds is a financial 

institution that I have a great deal of respect for. They have classified their funds 

into different levels. The fee differences on their ‘‘R’’ funds are striking. R5 funds 

are generally available to only retirement plans. For example, the American Fund 

Investment Company of America R1 mutual fund had a disclosed expense ratio of 

1.42% compared to the R5 fund that had a 0.36% gross expense ratio. (Morningstar 

data July 2007) 

That is the 1% difference that was illustrated in the original example and results 

in 20% more money for the plan participant. 

However, the Committee has room to even improve on that this operational structure. 

The R5 funds are only open to 401(k) plans. That means a large number of plan 

participants have to pay quite a bit more for the R4 funds or the R3 funds. For example, the internal expense ratio for the American Funds Investment Company of 

America R4 fund was roughly 80% higher than the R5 fund (0.65%). The R3 fund’s 

gross expense ratio was disclosed as 0.95% or nearly 1.6 times higher than that of 

the R5 fund. And none of these expense ratios include any trading costs. 

I believe you would see broad-based support for a mandate from the government 

for any company working with retirement plans that they have a class of retirement 

fund options for investors to consider that would be characterized by significantly 

lower fees inside the funds made available to all retirement plans. An expense ceiling formula should be included with this mandate. In other words, if the average 

expense ratio for the previous year was 1.5%, than all investment vehicles made 

available to retirement plans must have expense ratios that were 1% less than that 

ratio. Or whatever amount or percentage the Committee deems appropriate. 

A flexible fee ceiling would allow for normal inflationary price increases or adjustments so financial companies would not suffer if costs increase in future years. 

If investment companies wanted to offer their investment vehicles to the American public inside a retirement plan, they would have to have this class of lower 

cost funds available. The argument that financial institutions will go bankrupt or 

lose money is not valid since many companies besides American Funds are doing 

this very thing today and thriving in the market place. 

If that type of argument is made, the Committee needs to remember that some 

of the largest costs mutual funds incur come from advertising, distribution and commission expenses. Advertising expenses are much less expensive with retirement 

plan participants when compared to investors in general because retirement plan 

participants normally have a set ‘‘menu’’ of funds to choose from. If a particular 

fund is not available inside a retirement plan, participants cannot go outside the 

plan and add funds of their own choosing. 

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Distribution and commission expenses are much less with retirement plans since 

all investment companies compensate their sales people significantly less on retirement plans than they do when compared to a regular sale of their funds. Distribution expenses are held in check because of the defined set of plan participants are 

limited to one enterprise or institution. 

There are other investment alternatives that are significantly less expensive than 

traditional mutual funds. So there is the potential for an even greater savings to 

retirement plan participants. 

Investment companies should be required to disclose all fees and a total, all-inclusive fee ratio for each fund they offer. That is the only way that investors will ever 

be able to do an ‘‘apples to apples’’ comparison of fund performance, expense ratios, 

etc. Since trading costs are not included in the current management expense ratio, 

investors who see an expense ratio of 0.8% are being terribly misled when in fact 

their total fee expense could easily be double that amount. 

I am certain you are going to hear large institutions scream at this idea but it’s 

the fair and right thing to do. I know those two words do not always make it to 

the final version of some laws but in this case, the Committee and our elected officials owe it to the American public to do all they can to see that they are included 

in any changes this Committee brings to the floor. 

2. Education 

The SEC and NASD do an exceptional job of investor education. While these are 

primarily governmental watchdog agencies responsible for policing agents and companies working with the public, they have done a very good job of promoting investor education. 

The SEC has an awesome tool on their web site today that addresses expense ratios in funds and allows investors to compare two different investments based purely on a difference in fees. I strongly recommend members of the committee have 

staff go to this site and generate a couple of scenarios for themselves. (http:// 

www.sec.gov/investor/tools/mfcc/mfcc-intsec.htm) The differences are shocking. So 

there are already some great educational tools in place. Plan participants just need 

to be made aware of this information. 

The Committee should request that the SEC to expand their mutual fund cost tool 

to include other types of investments such as ETF’s (exchange traded funds) and 

a wider array of mutual funds in the market place today. 

I strongly encourage your committee to assign the SEC and/or NASD to devise 

a 401-k guide that must be distributed to all 401-k plan participants annually. Have 

a paper and electronic version available. Inside this guide, basic investment advice 

could be provided to plan participants to help them make them make an educated 

decision on the management of their plan dollars. It would have to be written in 

simple, everyday language. ‘‘Legal-ease ’’ must not be included in the booklet. Fees, 

investment allocation, dollar cost averaging, investment risk, etc. can all easily be 

discussed in a non-threatening manner. 

Every financial decision has consequences. There are good decisions and bad decisions, there are good and bad consequences to good decisions. There are also good 

and bad consequences with bad decisions. But usually the ratio of bad decisions producing a good consequence is very poor and if it does happen, it is called ‘‘luck.’’ 

If the Committee, through its actions, can in some way inform the American public 

about these consequences and that solutions cannot be unto themselves, your work 

would have a profound impact on our society. 

We are all concerned about the future of our country. What if through some very 

simple steps, your Committee could help increase retirement fund balances by two 

or three times what is currently in those plans? If you can reduce costs by 1% and 

increase returns by 3% or so annually through investor education and create a 

greater fiscal responsibility by all members of the financial services industry, these 

are some logical, possible results: 

• The economy would surge with the new surplus of money in retirement plans. 

More assets to purchase more goods and services. • GDP would soar to unbelievable levels from additional consumer spending. • Consumer confidence would increase as a result of having so much more money 

in savings. Tax coffers would swell to record levels as Americans pulled additional funds from their retirement plans generating additional taxable income. 

• Annual deficits would shrink or disappear entirely from the higher stream of 

tax revenues. 

• The looming national debt crisis could have a realistic solution. Americans 

would have more funds with which to retire their ever-growing indebtedness. 

• Trillions upon trillions of additional wealth would be created without anyone 

doing anything differently but operating on a more efficient level. 

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• Looming crisis’ in Social Security and Medicare could be better addressed with 

this new pool of capital. 

• Instead of debating tax increases to fund the many critical needs of our country, 

governmental leaders could have serious discussions about tax reductions or 

needed social reforms. 

Most importantly, retirement plan participants would come closer to realizing the 

American dream of financial independence for themselves and their children. I challenge the Committee to make that your goal and legacy. 

Thank you for this opportunity. 

Respectfully submitted, 

J. Kevin Powell, CFP 

Certified Financial Planner 

My Strategic Mentor, Inc. 

Registered Investment Advisor 

PS I would welcome the opportunity of testifying in person before the Committee 

as it considers these very important matters. 

f 

Statement of MassMutual, Springfield, Massachusetts 

Massachusetts Mutual Life Insurance Company (‘‘MassMutual’’) is pleased to submit this statement for the record in connection with the October 30, 2007 hearing 

of the House Committee on Ways & Means on the appropriateness of retirement 

plan fees. We believe this an important topic and we appreciate the commitment 

of Chairman Rangel and Ranking Member McCrery to address it in a thorough and 

considered way. We also very much appreciate the specific interest in this issue 

shown by Select Revenue Measures Subcommittee Chairman Neal as demonstrated 

by his recent introduction of the Defined Contribution Plan Fee Transparency Act 

of 2007 (H.R. 3765). 

MassMutual is a mutually owned financial protection, accumulation and income 

management company with total assets under management in excess of $450 billion. 

We are a premier provider of life insurance, annuities, disability income insurance, 

long term care insurance, retirement planning products, income management and 

other products and services for individuals, business owners, and corporate and institutional markets. Specifically within the retirement services market, MassMutual 

Retirement Plan Services administers over 4,300 defined contribution plans covering 

more than 890,000 participants and representing $32.6 billion in assets. Our 

OppenheimerFunds subsidiary likewise has a very significant presence in the retirement plan marketplace, managing $52 billion in 401(k), 403(b), small business retirement plan and individual retirement product assets. 

MassMutual believes that improvements in existing retirement plan fee disclosure 

standards can and should be made. Such reforms must be pursued, however, in a 

balanced and practical manner to ensure that we do not deter employees from plan 

participation or employers from plan sponsorship and to ensure that we do not, ironically, raise costs for the very employees we are seeking to safeguard. 

MassMutual’s History of Engagement and Business Improvement Regarding Fee Disclosure 

MassMutual has a long history of advocacy in favor of comprehensive disclosure 

of fees to plan sponsors and participants. For more than a decade we have publicly 

recommended expanded fee disclosure. Specifically, we testified on behalf of expanded fee disclosure standards in 1996 before the Department of Labor’s ERISA 

Advisory Council and again more recently in September 2004 before the same body. 

We likewise, in our own business practices, have sought to exceed legal requirements and to continually improve the fee disclosures we provide to our plan sponsor 

customers and to their plan participants. For example, we have continued to expand 

our disclosures to 401(k) sponsors regarding plan expenses, including of the payments made to compensate intermediaries (such as brokers and consultants) and 

the revenue sharing payments we receive from third parties. These detailed disclosures enable plan fiduciaries to more effectively fulfill their fiduciary duties and 

avoid the potential for conflicts of interest. We also just completed implementation 

of improvements to the benefit statements we provide to plan participants to make 

the fee and other information about plan investment options even clearer and more 

comprehensible. 

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Recommended Approach for Fee Disclosures to Plan Sponsors and Participants 

Building on this history of policy engagement and continuous business practice 

improvement, MassMutual continues to support improved fee disclosure to both plan 

sponsors and plan participants and we welcome the attention to these issues by both 

legislators and regulators. We believe that reforms to current law should provide 

disclosures that are relevant, meaningful and cost-effective. As fiduciaries making 

the decisions on which plan providers to hire and what plan investment options and 

services to offer, plan sponsors need clear information on the fees charged for plan 

services, the specific services encompassed within a given provider contract and any 

revenues received by providers from outside parties. 

We are concerned, however, that some may be seeking a particular provider disclosure regime as a way to tilt the marketplace toward a specific 401(k) service 

model. Many employers today prefer to work with a single ‘‘bundled’’ 401(k) plan 

service provider that offers all needed plan services for an easily reviewed aggregate 

fee. Under this arrangement, employers have only one entity to monitor and the responsibility of that service provider for the plan is clear. As bundled providers, 

MassMutual and OppenheimerFunds can assure the Committee that price competition among bundled service providers is fierce. Employers typically get multiple bids 

from such providers for the package of services they seek, a technique that assists 

employers in determining the reasonableness of the bundled fee, and regularly revisit the pricing of the bundled package of services. Yet certain providers seek to 

legally mandate the ‘‘unbundling’’ of both the services provided to plans and the 

prices associated with such services (even, ironically, when providers do not sell 

such services separately). We believe forcing bundled providers to unbundle their 

services and prices will be costly, will result in unhelpful artificiality of price information and will push all employers toward a single unbundled service model that 

many have not preferred. 

Turning to the question of participant disclosure, it is clear that the disclosure 

needs of plan participants are substantially different from those of plan fiduciaries. 

Participants use fee information (along with other relevant factors) to make several 

discrete judgments—whether to participate in a plan and what options to select 

from among a plan’s investment menu. Unlike fiduciaries, participants are not selecting among service providers or overseeing these providers’ compensation levels. 

Participant fee information that is too voluminous or too detailed could lead to inertia, deterring employees from participating in the plan, or to investment decisions 

driven solely by fee considerations (which could result in undue investment in such 

low-cost but undiversified options as money market or company stock funds). At its 

most basic, we strongly believe the benefits of specific new provider and participant 

disclosure requirements must be weighed against their costs. It would be unfortunate and ironic if in the effort to improve and streamline fee disclosures we added 

significant new costs that would reduce the dollars available for retirement benefits. 

Commentary on Current Fee Disclosure Reform Initiatives 

MassMutual is supportive of the Department of Labor’s (DOL) current efforts to 

address retirement plan fee transparency through three distinct regulatory projects. 

These projects involve (1) expanded disclosure by plan sponsors to the federal government of the fees paid by the plan and its participants to service providers, (2) 

expanded disclosure by service providers to plan sponsor fiduciaries of the direct 

and indirect fees such providers receive, and (3) expanded disclosure to participants 

regarding the investment and administrative fees charged to them under the plan. 

We also recognize that Members of Congress have shown interest in addressing 

some of these same topics through legislation. In this regard, it will be important 

that any legislative efforts be closely coordinated with the existing regulatory activity. It would be extremely counterproductive if one set of disclosure reforms were 

implemented only to be supplanted shortly thereafter by another set of reforms. The 

result would be significant cost and confusion for both plan sponsors and participants, undercutting the benefits of the reforms themselves and heightening the risk 

that plan participation and sponsorship could be deterred. 

With regard to the specific legislation that has been introduced to date, we believe 

the legislation introduced by Representative Neal and cosponsored by Representative Larson (H.R. 3765), makes significant improvements to current law while avoiding many of the pitfalls of other recent legislative proposals. We are pleased, for example, that the Neal bill steers clear of mandating that certain investments be included in every 401(k) plan. Such a congressional directive would usurp the role of 

the plan fiduciary to select investments best suited to its particular workforce and 

would mark a radical shift in our pension law, which has historically focused on 

holding fiduciaries to high standards and a prudent process rather than forcing 

them to reach particular substantive outcomes. 

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1 An excellent tool for Fiduciaries; produced by the EBSA, called ‘‘eLaws—ERISA Fiduciary 

Advisor’’ http://www.dol.gov/elaws/ebsa/fiduciary/introduction.htm 2Fiduciary Standards of Care promulgated by the Foundation for Fiduciary Studies. http:// 

www.fi360.com/main/pdf/handbook_steward.pdf 3 AARP study on awareness of 401(k) fees. http://www.aarp.org/research/financial/investing/ 

401k_fees.html 4 Under ERISA, ‘‘a pure heart and an empty head are not enough’’ to avoid responsibility for 

fiduciary breaches. Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983) 

Participants under the Neal bill would be provided with information about the 

fees associated with plan participation and plan investments prior to enrollment and 

would also receive an annual statement that provides information on their specific 

investments, their asset allocation and the fees applicable to their accounts. The bill 

avoids inundating participants with voluminous, complex and disaggregated fee information that does not assist with participation and investment decisions but runs 

the real risk of bewildering participants, prompting unwise investment decisions 

and deterring plan participation. The Neal bill would require plan service providers 

to disclose to plan fiduciaries the total fees charged under a contract, an itemized 

list of the services provided for such fees, payments made by the provider from plan 

revenues to third-party intermediaries and compensation received from unaffiliated 

service providers (known as revenue sharing). While the Neal bill would also require 

service providers to make pricing estimates as to several broad categories of included services, it would not force the extensive unbundling of services and fees that 

marks other recent legislative proposals. We have detailed above why we think such 

extensive unbundling interferes with the marketplace and would be counterproductive. 

Conclusion 

MassMutual very much looks forward to continuing to work closely with Chairman Rangel, Ranking Member McCrery, Representative Neal and all interested 

members of the Committee—as well as the regulators at the Department of Labor— 

in the effort to enhance retirement plan fee disclosure standards. If handled appropriately, this effort can serve as an opportunity to further strengthen a defined contribution system that is already performing admirably in assisting tens of millions 

of American families in building retirement security. But we must be deliberate and 

practical in this effort. Disclosure regimes could easily become inordinately complex 

and costly in which case they would only serve to undermine these families’ retirement security. We surely must not take any steps that would deter American workers from what we all know is the prudent course: participating in employer defined 

contribution plans from as early an age as possible in order to benefit from the truly 

powerful combination of compound interest, tax incentives, fiduciary oversight and 

frequent employer contributions. 

We appreciate the Committee’s consideration of our views. 

f 

Statement of Matthew D. Hutcheson, Independent Pension Fiduciary 

BACKGROUND 

Retirement plans subject to the provisions of the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’), carry with them special obligations, which are commonly referred to in the retirement industry as ‘‘Fiduciary Standards of Care.’’ Both 

regulators 1 and private organizations 2 have produced helpful tools and resources to 

assist fiduciaries fulfill their important obligations. 

Those fiduciary standards are in place to protect participants and beneficiaries 

from economic slippage caused by the casual, careless, or even imprudent actions 

of others. The concept of a fiduciary acting on behalf of those who do not possess 

the knowledge or ability to act for themselves is not new, and the importance of 

knowledgeable and fully informed fiduciaries has never been clearer than it is today. 

Participants do not generally understand the fees and costs associated with the 

operation of their 401(k) (or similar plan),3 but fiduciaries cannot use ignorance as 

an excuse.4 However, no matter who is ultimately making the investment decisions, 

whether participants or fiduciaries, fees and costs must be both known and understood for the reasons that follow. 

FUNDAMENTAL KNOWLEDGE FIDUCIARIES NEED 

ERISA requires that fiduciaries possess an understanding of many fundamental 

elements of plan operation. For those fiduciaries charged with managing the costs 

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5PRUDENTLY DEFINED TIME HORIZONS AS DETERMINED BY FIDUCIARIES: ERISA 

§ 404(a)(1)(B); 29 CFR § 2550.404a–1(b)(1)(A); 29 CFR § 2550.404a–1(b)(2)(A); Metzler v Graham, 

112 F.3d 207, 20 EBC 2857 (5th Cir. 1997); Interpretive Bulletin 96–1, 29 CFR § 2509.96–1; HR 

Report No 1280, 93d Congress, 2d Session (1974) 6DEFINED MODELED/EXPECTED RETURN AS DETERMINED BY FIDUCIARIES: ERISA 

§ 404(a)(1)(A) and (B). Regulations—29 CFR § 2550.404a–1(b)(1)(A); 29 CFR § 2550.404a– 

1(b)(2)(A); Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591, 64 S.Ct. 

281, 88 L.Ed. 333 (1944); Communications Satellite Corporation v. Federal Communications 

Commission, 611 F.2d 883 (D.C. Cir. 1977) 7 APPROPRIATE LEVEL OF RISK AS DETERMINED BY FIDUCIARIES: ERISA 

§ 404(a)(1)(B). Regulations—29 CFR § 2550.404a–1(b)(1)(A); 29 CFR § 2550.404a–1(b)(2)(B)(iiii); 

Laborers National Pension Fund v. Northern Trust Quantitative Advisors, Inc., 173 F.3d 313, 

23 EBC. 1001 (5th Cir. 1999) 8FEES AND COSTS ARE KNOWN, ACCOUNTED FOR, AND MONITORED BY FIDUCIARIES: ERISA § 404(a)(1)(A)(i and ii); § 406(a)(1)(C); § 408(b)(2); Liss v. Smith, 991 F. Supp. 

278 (SDNY 1998); Interpretive Bulletin 94–2, 29 CFR § 2509.94–2. § 2(a); § 7; OCC Interpretive 

Letter No 722 (March 12, 1996), citing the Restatement of Trusts 3d: Prudent Investor Rule 

§ 227, comment m at 58 (1992). ERISA § 3(14)(B); § 404(a)(1)(A), (B) and (D); § 406(a); 29 CFR 

§ 2550.408(b)(2); Booklet, A look at 401(k) Plan Fees, U.S. Dept. of Labor, Pension and Welfare 

Benefits Administration; DOL Advisory Opinion Letter 89 28A (9/25/89); Interpretive Bulletin 

75–8, 29 CFR § 2509.75–8. ERISA § 404(a)(1)(A) and (B); § 406(a)(1); § 406(b)(1); § 406(b)(3); 

Brock v. Robbins, 830 F.2d 640, 8 EBC 2489 (7th Cir. 1987); DOL Advisory Opinion Letter 97– 

15A; DOL Advisory Opinion Letter 97–16A (5/22/97) 9 Chairman Christopher Cox, Securities and Exchange Commission. ‘‘Our financial services industries are able to skim off much more of the assets they handle than would be the case in 

a well-functioning market. The difference materially burdens an investor’s annual expected return. And compounded over the retirement time horizon of even someone in his or her 50’s, this 

can result in truly astronomical shortfalls.’’ SEC Speech. Address to Mutual Fund Directors 

http://www.sec.gov/news/speech/2007/spch041207cc.htm 

and investments of a plan, four of those basic elements bear particular importance 

because they directly impact how much retirement income a participant may ultimately receive. 

1. The first is an appropriate investment time horizon for the portfolio, which 

will assist the fiduciary in determining how much risk can be taken over an identified period of time.5

2. The second is the identification of a modeled rate of return (i.e. the investment return goal) the fiduciary deems necessary to fulfill the objectives of the Plan, 

and the incorporation of that identified modeled rate of return into an actual portfolio.6

3. The third is combining the appropriate time horizon with the investment return 

goal (modeled return) to identify an appropriate level of risk into the investment 

portfolio necessary to generate that rate of return.7

4. The fourth requires fiduciaries to know and understand the related fees 

and costs associated with the individual elements of a portfolio and the portfolio 

as a whole because there is an inverse relationship between fees/costs and net investment returns.8

Those four variables are equally important and interrelated elements of portfolio 

construction. An expectation of favorable long-term results is otherwise not possible. 

Any other approach is random guesswork. 

Further, in the context of this discussion, those four prerequisites must exist in 

harmony with each other before a fiduciary can confidently assert they have met 

the high standard of care to which they are obligated to adhere. And those prerequisites are inextricably connected. Deficiencies in that prerequisite knowledge 

will likely alter the outcomes of the others, and their collective impact upon the 

portfolio as a whole. 

Time horizons, risk tolerance levels, and required returns may change from time 

to time due to forces fiduciaries or participants cannot control. Participants can only 

control the time horizons by working longer or retiring earlier unless illness or other 

unforeseen events occur. The economy can experience unforeseen turbulence. Other 

influences can make it challenging to maintain a steady course with prerequisites 

one through three. That leaves one variable that can be known ahead of time and 

can be controlled; variable number four—fees and costs. 

FEES—THE PRIMARY PREDICTOR OF LONG-TERM RESULTS 

Fees and costs, being the only possible currently controllable of the four prerequisite variables, therefore become the primary indicator of long-term results, all 

other variables taken into proper consideration. 

In other words, when fees and costs are not known and understood, the long-term 

rate of return will be less than expected.9 To increase the return to the expected 

level, additional risks must then be taken—risks about which fiduciaries and parsmartinez on PROD1PC70 with HEARING

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10 Unnecessary and excessive services are those being rendered that are not ‘‘helpful to the 

plan.’’ 29 CFR § 2550.408(b)(2) 11 AARP study on awareness of 401(k) fees. http://www.aarp.org/research/financial/investing/ 

401k_fees.html 

ticipants may be unaware, but which they must be aware to properly manage their 

portfolios. Those additional risks may require a longer time horizon to accomplish 

the objective. Riskier portfolios generally cost more due to the frequency of transactions and rebalancing. Thus, one variable influences the other, and around and 

around things go, creating the potential for a imbalance within this delicate system 

that is already subject to many other uncontrollable variables. How can a fiduciary 

fulfill their basic duties described in prerequisites one through four when there are 

so many moving targets and unknowns? 

For example, if a fiduciary constructs what they believe to be a portfolio that will 

deliver a long-term rate of return of 10%, but they are unaware that there are hidden costs of an additional 1%, the actual net fee adjusted return will be 9%. Thus, 

to actually earn the 10% return, higher risks must be taken—possibly higher than 

what the fiduciary deems prudent. 

Therefore, fees that are obscure, hidden, or to which fiduciaries and participants 

are simply ignorant, create new and unexpected risks that may not be appropriate 

for the plan. Those risks create an imbalance between other fiduciary obligations, 

and make those obligations virtually impossible to satisfy, as the identified returns, 

risks, time horizons, etc. are based upon partial relevant information, thereby distorting expected future outcomes. 

An additional challenge created by fee opacity (unknown fees) creates is an environment where participants pay for services they do not receive. For example, in 

a conventional bundled plan, the incremental cost of providing a particular service 

may be 0.10% of each participant account balance per year. In conventionally priced 

bundled plans, all participants pay for the service whether they utilize that particular provision of the plan or not. This speaks directly to the issue of considering 

the appropriateness of retirement plan fees. 

Expenses from the plan must pay for services that benefit the participants and 

beneficiaries. Expenses that are for services that do not benefit participants and 

beneficiaries are excessive, and may in fact be prohibited transactions.10

In other words, a fiduciary’s failure to satisfy obligation four, at a minimum, undermines a fiduciary’s obligation pursuant to obligations one through three and potentially other fundamental plan requirements. 

BENEFITS HONORABLE DISCLOSURE 

The benefits of full disclosure are therefore as follows: 

1. The widespread lack of understanding 11 by retirement plan participants and 

fiduciaries alike will be brought under control. 

2. Fiduciaries will be able to properly discharge their duties, unimpeded, as they 

will know what all fees and costs are in advance, where costs can be fully evaluated 

and decisions can be made responsibly to properly manage costs and increase returns when possible; 

3. Participants, to the extent they construct their own portfolios, will have relevant knowledge of all four variables in their possession. They too will be empowered to participate meaningfully in the system as it is currently designed. In other 

words, they will be in possession of all of the knowledge necessary to build a secure 

retirement, not just part of it as they have previously had; 

4. Fiduciaries and participants will have the information necessary to discern the 

difference between ‘‘reasonable’’ expenses, and ‘‘excessive’’ expenses. Many think in 

terms that fees must be either reasonable or excessive. In practice however, fees can 

be both reasonable and excessive at the same time. In other words, the concept that 

fees and expenses must be ‘‘reasonable’’ is too subjective and relative to be meaningful. Therefore, fees and expenses must be reasonable, and must also not be excessive, simultaneously. Fiduciaries and participants can determine the reasonableness 

of fees only if they know what the fees are during the decision process. Participants 

will therefore be enabled to choose to pay a reasonable fee for only those services 

they both need and want; 

5. Confidence in the system will greatly improve, increasing employee participation; and, 

6. The private retirement system will be embraced by those who do not have a 

plan due to concerns about opacity and fair business practices by the financial services industry. 

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12Sum of fund expense ratio, cost of clearing trades—i.e. brokerage commissions, other contract charges, commissions, shareholder servicing per head fees, early redemption fees, transfer/ 

exchange/settlement costs, wrap fees, annuity fees and charges, investment advisor fees, and 

anything else related to the cost of delivering investment services, etc. Administration fees embedded in expense ratio or wrap investment fee must be extracted out and reported under the 

administrative fee category. 13 Administrative fees charged to plan assets in addition to what the funds or investment 

products may charge. Per head charges, third party record keeper charges, custodial fees, professional fees passed through to plan assets. For example, a CPA or an attorney may submit an 

invoice to a plan sponsor for services rendered to a plan. If the plan sponsor passes such a bill 

on to plan participants, then it must be captured and reported. Other pass-throughs, such educational/advice fees, enrollment meeting fees/costs, travel, certain office and support staff fees, 

etc., and any miscellaneous fees or charges. 

FORM DISCLOSURE 

There has been much debate over the form full disclosure should take. The most 

obvious element of disclosure is that it must be comprehensive for all of the reasons 

stated above. Second, the fees should be, at a minimum, combined into two basic 

categories for reporting to participants. Investment related fees,12 and administrative fees.13 Third, a measuring stick against a standard that has met the test of 

time should be provided so participants can understand the difference between their 

actual returns and the returns they could have received had they met the standard. 

The third element is particularly valuable to the participants who do not have advanced financial training. All of this should be easily understood by fiduciaries and 

participants at a glance. Participants must also be protected from paying for services they do not receive or benefit from, such as services that require underwriting 

from the whole plan, irrespective of the number of participants who actually utilize 

those services. This is an example of why bundled service providers must not, under 

any circumstance, be treated differently than their un-bundled service provider colleagues. There must be standardization in disclosure. 

There are other aspects of disclosure that are critically important, such as whether conflicts of interest exist within plans, and the relationships service providers 

have with each other. If those relationships improve performance, increase efficiency, and facilitate operations, then the participants may greatly benefit. Then 

service providers can be proud of their mechanisms and relationships, and such disclosure will reveal the value added they purport to deliver. 

Those service providers who have no conflicts of interests or special revenue sharing relationships with other service providers, including subsidiary or sister organizations, will simply have nothing to disclose. Such firms will not be affected by that 

element of the legislation. 

SUPPORT HR 3185 

I support HR 3185 and believe that it is sound legislation that addresses all of 

the relevant aspects of disclosure. It is comprehensive, it requires disclosure of other 

necessary aspects of plan operation such as the existence of conflicts of interest, and 

it places the interests of participants and beneficiaries first. 

HR 3185 is sound legislation, and in its fundamentally unaltered form will right 

the ship in the 401(k) industry. While I am not opposed to a prohibited transaction 

tax as contemplated in HR 3765 per se, I believe ERISA as now written has adequate powers to assess monetary fines and penalties for failure to comply with the 

disclosure requirements of HR 3185. 

I encourage the Committee to embrace HR 3185 in its fundamentally unaltered 

form. I believe that we will look back on this legislation in 10 or 20 years as a significant turning point toward protecting the retirement of America’s middle class. 

f 

South Carolina Retirement Systems, Letter 

South Carolina Retirement Systems 

Columbia, South Carolina 29223 

October 24, 2007 

The Honorable Charles Rangel 

Chairman, Committee on Ways and Means 

U.S. House of Representatives 

Washington, DC 20515 

Dear Mr. Chairman: 

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I am writing to you as director of the South Carolina Retirement Systems (Retirement Systems), which administers five defined benefit pension plans for public employees, to offer comments on H.R. 3361, a bill to make technical corrections to the 

‘‘Pension Protection Act of 2006’’ (PPA). The Retirement Systems services more than 

200,000 active members and in excess of 100,000 annuitants. Our members are from 

state government, public schools, institutions of higher education, and local governments. 

I am submitting this letter on behalf of the Retirement Systems; however, South 

Carolina is not alone in facing these issues. As a member of the National Association of State Retirement Administrators (NASRA) and the National Council on 

Teacher Retirement (NCTR), where I also serve on the NCTR executive committee, 

I can assure you that many other pension plans throughout the nation are affected 

by the provisions of the PPA discussed below, and are confronted with the same 

issues. 

My comments relate to Section 845 of the PPA, which allows eligible retired pub- lic safety officers to elect to exclude from gross income up to $3,000 of certain distributions made from an eligible retirement plan to pay qualified health insurance 

premiums. 

First, I want to commend you for correcting the guidance issued by the Internal 

Revenue Service (IRS) in its Notice 2007–7, Q&A 23, which stated that this exclusion did not apply to self-insured plans. This interpretation could have precluded 

otherwise eligible South Carolina public safety retirees from being able to participate in this new benefit, and I therefore support Section 9(i) of H.R. 3361 as introduced, which provides that the exclusion applies to coverage under an accident or 

health plan (rather than accident or health insurance), thereby permitting the exclusion to apply to self-insured plans as well as to insurance issued by an insurance 

company. 

However, I would like to devote the bulk of my comments to a provision that I 

believe should be included in H.R. 3361, but does not appear there. Specifically, as 

explained further herein, I strongly urge you to add a provision to H.R. 3361 that 

would delete from Section 845 of the PPA the requirement that the exclusion shall 

only be available if payment of health plan premiums is made directly to the provider of the accident or health plan by deduction from a distribution from the public 

safety officer’s retirement plan. 

This requirement that premiums be paid directly to the insurance company has 

placed an undue administrative burden on the South Carolina Retirement Systems 

as well as many other retirement plans across the country. As background, the Retirement Systems provides benefits to a diverse employee base, covers many employee groups other than public safety officers, and does not currently identify employees as ‘‘public safety officers.’’ 

Therefore, in order to implement this benefit, the Retirement Systems has had to 

first develop a certification process to identify eligible members. Given that there 

are nearly 800 employers in the Retirement Systems’ plans, identifying public safety 

officers accurately is difficult, particularly since many of these plan members have 

been retired for years, and employers have therefore often had difficulty in determining whether or not the member’s last position was a public safety officer position. This has been further complicated by other portions of the PPA which provide 

a different definition of a public safety officer (PPA Section 828). The overall process, which has required direct individual communication with retirees and employers, is cumbersome and time consuming. It requires the expenditure of assets of the 

trust fund for the benefit of only a small sub-set of members, which also raises some 

fiduciary concerns for retirement systems administrators. 

Next, the Retirement Systems must identify insurance companies with whom retirees have policies and must develop reporting and reconciliation requirements with 

them. However, as is the case with most public pension systems across the country, 

we do not administer retiree healthcare for South Carolina public employees. Retirement plans therefore may often have no control over the relationship between the 

retiree and the insurance provider. However, in order to offer this new benefit, retirement plans must become a conduit between them, caught in the middle of complex, often sensitive dealings between the insurance company and the retiree, such 

as cancelled policies, modified policies, refunded premiums, and increased premiums. It is no wonder that explaining the necessity of this arrangement to insurance carriers has been a challenge, and getting them to agree often difficult. I understand that in other states, some insurance companies have actually refused to 

agree to such an arrangement. 

In short, tremendous time, effort, and resources are required to reconcile all of 

these events and properly track the health care benefit taken by our eligible members. As a consequence, the Retirement Systems has had to expend significant time 

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and resources to gather membership data and modify existing information systems. 

In addition, we have hired additional personnel for the ongoing administration of 

these requirements. (Even though the IRS has recently indicated that reporting 

such amounts on retirees’ Form 1099–Rs will not be required of us, the fact that 

payments must still be made from retirement systems directly to providers will require pension systems to continue to be middlemen in a complicated administrative 

process that is far removed from our primary responsibility, which is the provision 

of retirement benefits.) 

Finally, adoption of the new benefit by a plan is optional and is also subject to 

being limited in scope. For example, I understand that in some cases, retirement 

plans can only deduct premiums for insurance provided by an employer or administered by the plan. However, there may be instances in which an employer provides 

a healthcare plan that is not administered by its retirement system, or where public 

safety members may be enrolled in a union-sponsored plan (if not for health benefits 

coverage, then perhaps for long-term care). Therefore, the continued mandatory involvement of retirement systems in this process can potentially delay and/or limit 

the use of the benefit by retirees who would otherwise be eligible to claim the exclusion but for the fact that the payment of health plan premiums is not made directly 

to the provider of the accident or health plan by deduction from a distribution from 

the public safety officer’s retirement plan. 

As I noted earlier, the IRS has now determined that retirement plans are not the 

entity that should properly make the decision that medical premium payments 

should be excluded from an individual’s taxable income. Instead, the instructions regarding 1099–Rs and this new benefit make it clear that this is an election that 

should be made by the individual taxpayer. Therefore, given the undue administrative burden on pension plans, the added costs for taxpayers that could result, and 

the potential for limited and non-uniform application of the benefit for public safety 

retirees, there appears to be no good reason for the ongoing involvement of retirement systems in the administration of this benefit. 

Thank you for this opportunity to express the views of the South Carolina Retirement Systems concerning H.R. 3361. While I appreciate the fact that the modification to Section 845 of the PPA that I am recommending may not be a purely technical matter, I believe that it is nonetheless a critically important correction that 

will preserve and enhance this important benefit for all involved. 

Sincerely, 

Peggy G. Boykin, CPA 

f 

Director 

Statement of Wayne H. Miller, Denali Fiduciary Management, Vashon, 

Washington 

Summary 

ERISA is the federal law that governs the management of retirement plans. When 

a company that sponsors a retirement plan appoints a group of executives to manage the plan, those individuals are known as fiduciaries. The role of fiduciaries, first 

and foremost is to see that no one doing business with the retirement plan does 

harm to the plan’s participants. The fiduciaries are supposed to serve as guardians 

on behalf of those people who have money in the retirement Trust. 

In the overwhelming majority of cases fiduciaries work only a few hours every calendar quarter, receive little if any on-going training in the disciplines involved in 

their work, have no metrics with which to measure the success or failure of their 

plan management activities and are granted no compensation for their work regardless of its effectiveness. In the world of retirement plan fiduciaries there is virtually 

no personal accountability, no substantive oversight and no incentive to do a good 

job. 

If this sounds like a recipe for a dysfunctional retirement plan system—it is. The 

last time we saw an economic system run like this we called it communism. 

The Problem Isn’t Technical 

There are a myriad of technical issues ERISA retirement plan fiduciaries must 

know and understand to carry out their plan management responsibilities. Given 

the changes in the regulatory and capital markets over the past few years, the 

depth and breath to which technical issues must be examined has increased dramatically. For example, the concept of risk and its application to operations, investsmartinez on PROD1PC70 with HEARING

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ment management and plan governance is not the same in 2007 as it was in the 

year 2000. 

These types of intellectual challenges notwithstanding, after 24 years of industry 

experience (having offered fiduciary advice and consulting on $100+ billion of retirement assets) it is very clear that the greatest obstacles fiduciaries face are not matters of technical competence. Though daunting in scope, such things can readily be 

learned. The greatest obstacles reflect the individual fiduciary’s state of emotional 

intelligence (EI) and the dysfunctional behavior generated by the ‘‘group think’’ dynamics with which many fiduciary Committees operate. 

Background: Incentives Count 

Like it or not, in America’s business culture, ‘‘honor’’ is not a highly prized incentive for influencing behavior. Any market based economist will tell you that other 

than by sheer luck the goals of any commercial activity are unlikely to be reached 

without properly structured incentives. In fact, without properly aligned incentives, 

all manner of extraneous actions will be adopted that are counter-productive to the 

intended purpose of the activity. For America’s retirement system this is a big problem because other than for the ‘‘honor’’ of it, the American retirement system contains no incentives to encourage fiduciary excellence on the part of those people responsible for plan management. Worse yet, while the legal framework in which fiduciaries work imposes significant responsibility upon them, as a practical matter, 

they are not held to account for the quality of their work. 

In any commercial endeavor where responsibility exists without individual accountability the result is a governance nightmare. 

With no incentives or accountability embedded in the system to assure purposeful 

plan management practices, counter-productive behavior has become epidemic. This 

behavior impacts everything from plan operations and investment management to 

governance. There are many factors that have created this condition. For example, 

the bull market in the 1980’s and 1990’s created an environment in which everyone 

made money. From this success a culture developed in which little outside scrutiny 

was applied to those organizations that delivered services to retirement Plan Sponsors and their participants. During this period poor fiduciary habits became ingrained in common business practices. 

Another influence that has fostered and promoted dysfunction in the retirement 

industry has come from the very vendor community whose conflicts of interest Congress intended to protect working Americans from. Despite such Congressional intent, plan management practices that explicitly or implicitly promote a vendor’s economic interests have been commonplace. They have heavily influenced fiduciaries to 

the point that the spirit of fiduciary duty is commonly violated and no consequences 

are incurred by the violators or by those allowing such violations to occur. 

If a retirement plan’s fiduciaries are unfamiliar with or inattentive to the 

retirement plan’s purpose had have no strategic plan in place by which all 

plan management practices are measured for their effectiveness at promoting that purpose, then ANY activity they engage in creates the ILLUSION of making progress in managing the plan. 

This illusion is the natural consequence of a Plan Sponsor’s fiduciary culture that 

lacks the intellectual rigor of establishing well-reasoned metrics to assess the efficiency or effectiveness of plan management practices. This illusion is the clinical 

manifestation of a dysfunctional fiduciary governance system. Such dysfunctional 

business practices would never be tolerated in the Plan Sponsor’s core business. Any 

manager holding on to such delusional thinking rather than focused on project 

metrics that quantify progress toward goals would pay a price with their reputation 

and eventually their job. 

The same principle that applies in core finance applications—if you 

aren’t measuring it, it doesn’t count—is applicable to fiduciary management as well. 

Fiduciary Illusions and Emotional Intelligence 

Emotional Intelligence was well recognized long before the term was coined. 

Emotional Intelligence (EI) has been well documented and researched in the most 

elite of business publications such as the Harvard Business Review. A simple explanation of EI is ‘‘the self-awareness and acceptance which individuals have about the 

underlying motivation that drives their behavior’’. The state of each individual’s EI 

is substantially derived from the emotional framework that shaped the formation 

of their personality. 

An individual’s EI, sometimes called EQ (like IQ), is not a purely static phenomenon, like height or eye color. It is dynamic within each of us and responsive 

to many types of stimuli. Each of us has the experience of witnessing a high level 

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of EI in someone else even if we aren’t used to calling it by that name. For example, 

we witness it when someone is willing to tell one on themselves—especially when 

those self deprecating comments are offered in a public forum. Such comments seem 

to have two components to them. First, the speaker recognizes that how they have 

dealt with that particular issue reflected a shortcoming in their character. Secondly, 

having self-acceptance that they have the shortcoming, the speaker can address the 

issue comfortably with others. They do not try to hide, mask or spin a story about 

it. There is no reason to do so as their shortcomings are not a source of emotional 

turmoil. This is what self acceptance brings—a release from shame, regret, sadness 

or angst. 

To speak comfortably about one’s shortcoming a speaker must emotionally reconcile the impact the shortcoming has had in their life. An audience listening to 

such a speaker will admire the sincerity of that individual. Those listening feel and 

respect the candor and authenticity of the person speaking. Listening to such commentary is inspiring and makes us want to be better. 

By contrast, the absence of highly developed EI is also very familiar to all of us 

although it too is known by other names. 

For example, take my friend Jim (not his real name). Jim is in his late 40’s and 

lives in California with his 5th wife and two children. One day Jim called in a highly excited state. He had finally figured out ‘‘what it was with women’’. From the 

animation in his voice I could tell that Jim’s revelation was profound for him. Having elaborated upon his discovery, I asked him if he recognized that HE was the 

only common ingredient in all of his five marriages. He was startled by the question 

and irritated by my interruption of his enthusiasm. Without hesitation, he dismissed the question, renewed his excitement and told me again of his A–HA moment. 

Jim claimed to have discovered some principle regarding a pattern of behavior 

common to all of his wives. What he didn’t realize was that the conclusion he 

reached deeply discounted his responsibility in understanding the dynamics of HIS 

relationships with women. In short, he ignored the contribution his personality 

made in the construction of his own life. He thought his discovery was all about 

THEM. He couldn’t see that it really said more about HIM. He was blind to the 

vagaries of his emotional make up and the thought process derived from it—even 

though I’d bet big money that his four ex-wives weren’t. 

Had Jim been willing to reflect on the question, rather than deflect it, a powerful self-discovery might have been available to him. It might have changed his life. 

Alas, it would have to wait for another day. Jim had no idea of the gem he passed 

over. Emotional blind spots are like that. 

Though very successful in business, Jim has a poorly developed EI when it comes 

to women. That’s what having an emotional blind spot is; some aspect of your life 

for which you do not gather and process information that is otherwise visible to an 

independent and unattached observer. By definition, an emotional blind spot causes 

you to gather and interpret information in a manner that distorts the reality that 

an emotionally neutral person would have. Furthermore, the blind spot itself sustains the distortion until some other influence comes along with significant power 

to break up the illusion. 

Emotional Blind Spots and Retirement and Plan Management 

With no metrics to guide a self assessment regarding the quality of their own fiduciary conduct, ‘‘plan management’’ is more often a euphemism for benign neglect 

(or sometimes ignorance) than a conscious process engineered to produce a specific 

long-term result. This euphemism is sustained by a commonplace fiduciary culture 

that has as its fundamental premise ‘‘WE ARE GOOD PEOPLE HERE’’. 

WE ARE GOOD PEOPLE HERE is a statement of identity. All too often, it is how 

fiduciaries think of themselves. The sentiment is used as a kind of emotional shield 

by fiduciaries to protect themselves individually and collectively from feeling badly 

about their conduct—regardless of the quality of their fiduciary conduct. Its 

unspoken acceptance as the cultural premise by a fiduciary committee limits the capacity of the fiduciaries to absorb any information that runs counter to the premise. 

The author, never having met a malicious fiduciary, does not disagree with the 

statement that most fiduciaries are in fact well-meaning. However, being well-meaning is not a cause for celebration as to the quality of one’s work. No experienced 

business person tells their boss that they are a well-meaning person and therefore, 

by virtue of that, they have done well at their job. However, this is exactly the emotional foundation with which most retirement plan fiduciaries operate. 

Unless metrics are used to assess the effectiveness of plan management 

practices, WE ARE GOOD PEOPLE HERE is nothing short of a linguistic 

substitute for arrogance and neglect. It is an obstacle that reflects a pausmartinez on PROD1PC70 with HEARING

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city of sincerity relative to the solemn duty of watching after someone 

else’s financial interests. 

Though fiduciaries are morally and legally bound to serve in a guardianship capacity this group identity is the real (albeit unconscious) driver of their behavior. 

Its presence discourages an authentic self-examination or rigorous independent ex- amination of the group’s efficiency or effectiveness in the exercise of its duties. 

Though the goal of serving in a fiduciary capacity is to be of service to others and 

to apply the highest level of responsibility to acting in a guardianship capacity, a 

WE ARE GOOD PEOPLE HERE culture is all about the fiduciaries. It is NOT 

about the quality of the job done on behalf of the plan participants they serve. 

Organizational psychologists have a term for the behavior of smalls groups fueled 

by such a culture. It is ‘‘group think’’. In an ERISA fiduciary context WE ARE 

GOOD PEOPLE HERE is the clinical manifestation of group think. Such a culture 

thrives by deflecting any emotional challenge to the identity of the group. It operates as a kind of irresponsible creed: WE ARE GOOD PEOPLE HERE, that’s how 

we know we do such a good job. If things don’t work out—at least we meant well 

and that’s what counts. 

There are other emotional influences that also distort the purposefulness of a fiduciary’s conduct in their individual capacities. Some of these influences are; 

• the avoidance of blame, • promoting the illusion of competency, • the need for approval, • the lack of self acceptance of making mistakes, • the desire to look good, • the willingness to acquiesce to the status quo rather than live out one’s own 

values and last but not least . . . • the lack of personal courage to speak out. 

There are a multitude of plan management details impacted by these emotional 

biases that distort plan management priorities away from fiduciary excellence. Here 

are a few examples: 

• Fiduciaries often work with brokers or advisors but do not intimately 

understand the nature of the broker or advisor’s relationship to the 

Trust’s assets. Process improvement is a credible goal of any long-term business endeavor. However, sustaining a reputation free of tarnished image or 

blame has a higher emotional priority in fiduciary management than conducting 

a rigorous examination of service vendors. 

This is the primary reason why individual fiduciaries are not held to account for 

the fulfillment of various statutory duties. A fiduciary doesn’t ‘‘own’’ the duty if they 

aren’t accountable to someone for it. The implications for plan participants regarding investment costs, inappropriate investment vehicles and tainted investment advice are substantial. 

• The industry’s major vendors are trusted without that trust being 

verified. Because most fiduciaries serve in a part-time capacity, the vendors 

are relied upon to provide perspective and counsel on many mission critical plan 

management functions. Historically, that reliance was often mis-placed. Indeed, 

relative to the guardianship role, the duty of loyalty and the explicit duty to 

‘‘monitor’’ parties in interest, the continuation of this reliance is inappropriate. 

In the real world, the economic best interests of vendors have often supplanted 

the economic best interests of the plan participants. 

This is especially true in the new world of providing investment advice to plan 

participants. Few vendors can demonstrate that the advice they offer creates value. 

Very few can demonstrate that the advice they offer is valuable enough to pay for 

itself. If the service offers participant’s comfort—fine—charge a hand holding fee instead of a percentage of the participant’s account. 

• The vendor’s interest in life-style and life-cycle funds that ‘‘automate’’ the asset 

allocation decision based on a plan participant’s age has embedded within it the 

self-interest the vendor has in maintaining the dominance of its investment 

management services in the 401(k) plan’s menu. This is counter productive relative to a Best-of-Breed approach and has technical flaws relative to managing 

investment risks that are mission critical for older workers. 

Regardless of the lofty principles embedded in ERISA, the de facto operating condition of the fiduciary landscape is not a pretty sight. With $10+ trillion of assets 

under ERISA’s umbrella, such a dysfunctional culture is clearly inconsistent with 

the spirit if not the letter of fiduciary principles. Another description of such a culsmartinez on PROD1PC70 with HEARING

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ture is to say that it fosters and maintains a very low level of emotional intelligence. 

Candidly, it is self centered, inauthentic (relative to purpose), delusional (like Jim), 

self-assured and unfortunately in the American retirement plan industry—common 

practice. 

This isn’t to say everyone involved in the retirement plan industry is some kind 

of crook. Rather, this EI lens simply magnifies what everyone already knows. We 

all think in a manner that supports and validates our sense of Self and our economic interests—even when we have no metrics as to what value our activity has 

actually created. 

Given the truth and gravity of this statement how can a retirement system, intended to represent the highest aspirations of trust and guardianship in law, recover a vision of its purpose and integrate the vision into the real world? Let’s start 

with something radical; how about being authentic. 

Systematic Fiduciary Governance: When Structure Supports Purpose 

Responsibility without accountability has been the unspoken rule in ERISA. It is 

time that this change. The only credible solution to dysfunctional fiduciary conduct 

and the supporting cast of characters that promote it is to amend the current fiduciary governance practices of a retirement plan and install accountability that is 

visible to stakeholders at every segment of the plan management process. 

There is no need to throw the entire system out. Rather, the efficiency of the entire system would be dramatically enhanced if a systematic and transparent approach to fiduciary governance were implemented and all industry players were 

held accountable for their piece of it. The average American worker would be the 

winner. 

Limiting the Impact of Low Fiduciary EQ and Incentivizing High EQ 

Let’s go back to my friend Jim for a moment. He operated with an understanding 

of what was ‘‘wrong’’ with women and believed in the correctness of his perspective. 

He made his assessment and held it as truth because in his experience it was true. 

However, he reached his conclusion without including a self assessment as to how 

the vagaries of his own personality influenced his thought process and thus his conclusion. He just couldn’t see it at the time and he didn’t ask for an emotionally neutral (i.e., independent) pair of eyes to validate his hypothesis. 

In similar fashion, most retirement fiduciaries and the support personnel around 

them do not engage in a critical self examination of their own conduct. Lacking a 

specific regulatory imperative to do so, initiating such an examination takes extraordinary courage. Investment managers, brokers, human resource fiduciaries, fiduciaries with a finance background, the attorneys and investment advisors who counsel fiduciaries, the Board members who serve as Appointing Fiduciaries and even 

the insurers who insure the above, all discount the contribution they make to supporting and sustaining dysfunctional fiduciary conduct within the industry. Everyone bears some amount of responsibility in the matter of this dysfunction. 

All of these industry players have their reasons for doing what they do. Most of 

those reasons are related to their cash flow and market share. When all internal 

and external industry players are allowed to organize themselves in a manner such 

that no one is at the table speaking with a singular voice defending the interests 

of plan participants—the design of how the retirement security game gets played 

is fundamentally flawed. 

When the maintenance of the status quo has a higher priority within the Plan 

Sponsor’s fiduciary culture than does engineering more efficient or effective processes, something is wrong. The spirit of the fiduciary’s duty has been subjugated. 

When fiduciaries give latitude to accommodate the self interest of service vendors 

a process has been initiated in which the incremental degradation of the duty becomes increasingly acceptable. Only Rube Goldberg could be proud of such a 

convoluted architecture. 

So, What Is An Answer? 

In creating an answer to the dilemma posed by a low fiduciary EQ, there are two 

realities one must address. First, the regulatory burden upon business is already 

substantial. Additional regulatory burden will be resisted and any backlash will diminish the opportunity for real change. Secondly, the effectiveness of the retirement 

system has been compromised for many years. Therefore, a solution that is years 

in the making runs the risk of being an ineffective band aid or a smoke screen, neither of which are useful relative to engineering an effective and efficient solution 

that promotes retirement security. 

The author is suggesting that a genuine safe harbor against fiduciary liability be 

offered to the Plan Sponsor of a retirement plan IF and only IF the Sponsor adopts 

and can demonstrate the operational effectiveness of a governance process that assmartinez on PROD1PC70 with HEARING

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signs individual accountability for the fulfillment of all statutory fiduciary duties, 

establishes metrics which provide a credible assessment of the effectiveness of plan 

management practices and visibly incorporates the following components of governance transparency. 

1. The Sponsor must collect separate written disclosures of the economic 

self-interest of each and every party upon whose advice, counsel or services they depend in executing plan management activities. These disclosures must be made available to Trust beneficiaries in their entirety and 

plan participants must be made aware that such disclosures are available. 

2. The Sponsor must create, implement and make visible to all Trust beneficiaries written disclosures regarding the process of self examination 

and/or independent examination of the Sponsor’s fiduciary conduct relative to the statutory fiduciary duties already existing in law. A self examination must make use of a thorough documentation system that has 

embedded within it a very high standard of fiduciary care. 

If these components of a fiduciary governance system were visible to all stakeholders (the plan participant, the Sponsor’s shareholders and the federal regulatory 

agencies that oversee retirement plans) the transparency of such information would 

have the natural effect of improving the quality of plan management. Only when 

such information is collected, disclosed and published will the dysfunctional behavior that has influenced the industry be mitigated. 

If such a mandate was not contaminated by the self interests of the investment 

management community it would warrant the granting of a genuine, complete and 

comprehensive safe harbor from fiduciary liability by the regulatory authorities. 

That’s right. Other than stealing money or explicit fraud, fiduciary liability would 

be a thing of the past. The notion of having multiple conditional safe harbors for 

Plan Sponsors as were offered in the Pension Protection Act of 2006 is of marginal 

utility relative to a blanket safe harbor which provides real protection based on 

meeting the requirements of a rigorous governance documentation process. 

The safe harbor from fiduciary liability would be offered specifically to the appointing fiduciaries of the Board of Directors. By doing so, it would generate interest 

at a level of corporate leadership for which the fiduciary governance processes can 

receive the internal support to allow these plan management practices to flourish. 

By requiring that the self assessment be reviewed and approved by the Plan Sponsor’s Board of Director’s, an additional incentive would be incorporated into promoting checks and balances in fiduciary governance. 

A missing link of the fiduciary system would be in place, operational and 

incentivized. 

The adoption of these changes would create a system that is more authentic relative to its purpose than what we have now. Such a system would impose few if 

any costs on the Sponsor or plan participants because a template can be promoted 

that would serve as the foundation of the system. Various plan costs would be examined in a new light—one that exposes the economic self interest of all vendor support personnel and organizations. The impact of such sunshine cast upon plan management practices will make it easier for fiduciaries to carry the guardianship shield 

on behalf of those who trust them to do so. 

With all of the really important information on the table rather than under the 

table, the marketplace will naturally reward the provider of high quality services 

that actually make a difference. 

To remove communist-like ideology from the retirement plan business, to simplify 

the process by which a Plan Sponsor knows they are fulfilling their duty and to offer 

a genuine safe harbor that relieves liability are all worthy goals. 

Implement this solution and plaintiff’s counsel, service vendors who obfuscate 

value and Rube Goldberg will all have to find something else to smile about. 

Æ 

smartinez on PROD1PC70 with HEARING