62958 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

1See sections 101(b) and 103 of ERISA, and 29

CFR 2520.103–1.

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2520

RIN 1210–AA73

Small Pension Plan Security

Amendments

AGENCY: Pension and Welfare Benefits

Administration, Department of Labor.

ACTION: Final rule.

SUMMARY: This document contains a

final rule amending the regulations

governing the circumstances under

which small pension plans are exempt

from the requirements to engage an

independent qualified public

accountant (IQPA) and to include a

report of the accountant as part of the

plan’s annual report under Title I of the

Employee Retirement Income Security

Act of 1974, as amended (ERISA). These

regulatory amendments provide a

waiver of the IQPA annual examination

and report requirements for employee

benefit plans with fewer than 100

participants at the beginning of the plan

year. The amendments being made by

this final rule are designed to increase

the security of assets in small pension

plans by conditioning the waiver on

enhanced disclosure of information to

participants and beneficiaries and, in

certain instances, improved fidelity

bonding requirements. The amendments

do not affect the waiver for small

welfare plans (such as group health

plans) under 29 CFR 2520.104–46.

Conforming amendments are also being

made to the simplified annual reporting

requirements for small pension plans

specified in 29 CFR 2520.104–41. These

amendments affect participants and

beneficiaries covered by small pension

plans, sponsors and administrators of

small pension plans, and providers of

investment and administrative services

to small pension plans.

DATES: Effective Date: This rule is

effective December 18, 2000.

Applicability Date: The amendments

made by this rule are applicable as of

the first plan year beginning after April

17, 2001.

FOR FURTHER INFORMATION CONTACT: John

Keene, Office of Regulations and

Interpretations, Pension and Welfare

Benefits Administration, Room N–5669,

200 Constitution Avenue, N.W.,

Washington, DC 20210, (202) 219–8521.

This is not a toll-free number.

SUPPLEMENTARY INFORMATION: On

December 1, 1999, the Department

published in the Federal Register (64

FR 67436) proposed amendments to the

regulations governing the circumstances

under which small pension plans are

exempt from the requirements to engage

an independent qualified public

accountant and to include an opinion of

the accountant as part of the plan’s

annual report under Title I of ERISA.

The Department invited interested

persons to submit written comments on

the proposed amendments. The

Department received 19 written

comments from the public regarding the

proposal. The following discussion

summarizes the proposed regulation

and the major issues raised by the

commenters. It also explains the

Department’s reasons for the

modifications reflected in the final

regulation that is being published with

this notice.

A. Background

In general, the administrator of an

employee benefit plan required to file

an annual report under Title I of ERISA

must engage an IQPA and include the

IQPA’s opinion as part of the plan’s

annual report. These annual reporting

requirements can be satisfied by filing

the Form 5500 ‘‘Annual Return/Report

of Employee Benefit Plan’’ in

accordance with its instructions and

related regulations.1 The requirements

governing the content of the opinion

and report of the IQPA are set forth in

section 103(a)(3)(A) of ERISA and 29

CFR 2520.103–1(b). Section 104(a)(2)(A)

of ERISA permits the Department to

prescribe, by regulation, simplified

annual reports for pension plans with

fewer than 100 participants, and section

103(a)(3)(A) permits the Department to

waive the IQPA requirements for

pension plans for which such simplified

annual reporting has been prescribed.

Section 104(a)(3) of ERISA permits the

Department to prescribe exemptions and

simplified reporting and disclosure

requirements for welfare plans. In

accordance with the Department’s

authority under sections 104(a)(2)(A)

and 104(a)(3) of ERISA, the Department

adopted, at 29 CFR 2520.104–41,

simplified annual reporting

requirements for pension and welfare

benefit plans with fewer than 100

participants. In addition, the

Department, at 29 CFR 2520.104–46,

prescribed for such small plans a waiver

from the requirements of section

103(a)(3)(A) to engage an IQPA and to

include the opinion of the accountant as

part of the plan’s annual report.

Since the adoption of § 2520.104–46

in 1976, the amount of assets held in

small pension plans has risen

dramatically and small pension plans

have become increasingly important

retirement savings vehicles for a

growing number of American workers.

Media coverage of a particularly

egregious case involving

misappropriation of a small pension

plan’s assets over several years focused

national attention on the potential

vulnerability of small pension plans to

fraud and abuse. The Department has

had experience with other small

pension plan cases involving service

providers, administrators or other

fiduciaries attempting to conceal fraud

or misappropriations by falsifying

financial and other information

provided to plan sponsors, trustees, and

participants. Although such cases are

rare and legal remedies often can be

pursued in an effort to recover lost

assets, the Department concluded, given

the increasing extent to which workers

are depending on their employmentbased pension plans as a primary source

of retirement income, that it is

appropriate to take steps to improve the

security of assets in small pension

plans.

One approach the Department

considered to improve the security of

assets in small pension plans was to

require all such plans to comply with

the audit requirements of section

103(a)(3)(A) of ERISA. While subjecting

the assets of small pension plans to an

annual audit would, in the view of the

Department, provide a high degree of

certainty that the assets reported on a

plan’s annual report are actually

available to pay benefits, the

Department recognizes that the costs

attendant to such a requirement may be

significant for many plans and plan

sponsors. Consistent with the

Department’s goal of encouraging

pension plan establishment and

maintenance, particularly in the small

business community, the Department

concluded that engaging an accountant

should not be the only means by which

the security of small plan pension assets

can be improved. Rather, in developing

the proposed regulation, the Department

attempted to balance the interest in

providing secure retirement savings for

participants and beneficiaries with the

interest in minimizing costs and

burdens on small pension plans and the

sponsors of those plans.

In assessing alternatives to a

mandatory audit requirement, the

Department concluded that a threepronged approach—focusing on (1) who

holds the plan’s assets, (2) enhanced

disclosure to participants and

beneficiaries and, (3) in limited

situations, an improved bonding

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62959

2Section 412 of ERISA and the regulations issued

thereunder, 29 CFR 2550.412–1, 2580.412–1 et seq.,

set forth the bonding requirements generally

applicable to ERISA-covered plans.

3 In this regard, 29 CFR 2580.412–14 requires that

the amount of the section 412 bond be determined

by reference to the preceding reporting year. In the

case of new plans, with respect to which there is

no preceding report year, § 2580.412–15 provides

procedures for making estimates for the current

year.

4Under the ‘‘80 to 120 rule,’’ if the number of

participants covered under the plan as of the

beginning of the plan year is between 80 and 120,

and an annual report was filed as a small plan filer

for the prior year, the plan administrator may elect

to continue to file as a small plan filer and claim

the audit waiver even though the plan covered more

than 100 participants as of the beginning of the plan

year. Conversely, a plan with fewer than 100

participants as of the beginning of the plan year that

elects to continue to file a Form 5500 as a large plan

pursuant to the ‘‘80 to 120 rule’’ is not eligible to

claim the waiver afforded by this section to small

plan filers.

requirement—could enhance the level

of security and accountability while

keeping administrative burdens and

costs to a minimum by building on

current recordkeeping, disclosure and

bonding requirements and practices. In

general, the Department believes that

statements regarding plan assets

prepared by certain regulated financial

institutions (such as banks, insurance

companies, mutual funds, and

registered securities brokers), if made

available to participants and

beneficiaries, provide a reliable means

by which participants and beneficiaries

can independently confirm that the

assets reported by the plan as being

available to pay benefits as of the end

of the plan year are, in fact, available

according to the books and records of

the regulated financial institution. Such

disclosure, in the Department’s view,

reduces the likelihood of losses over

long periods due to acts of fraud or

dishonesty. The Department also

believes that supplemental bonding

requirements will serve to reduce the

risk of loss due to acts of fraud or

dishonestly where a substantial

percentage of a plan’s assets are held by

entities that may not be subject to state

or federal regulatory oversight. This

approach was set forth as proposed new

conditions for obtaining a waiver under

§ 2520.104–46 of the requirements to

engage an IQPA and include the IQPA’s

opinion as part of the plan’s annual

report.

B. Summary of the Proposal

The first part of the proposal focused

on the extent to which a plan’s assets

are held by regulated financial

institutions. See Proposed § 2520.104–

46(b)(1)(i)(A). The proposal used the

term ‘‘qualifying plan assets’’ in

applying the conditions of the waiver.

‘‘Qualifying plan assets’’ were defined

to include any assets held by: a bank or

similar financial institution as defined

in § 2550.408b-4(c); an insurance

company qualified to do business under

the laws of a state; an organization

registered as a broker-dealer under the

Securities Exchange Act of 1934; or any

other organization authorized to act as

a trustee for individual retirement

accounts under section 408 of the

Internal Revenue Code. The term

‘‘qualifying plan assets’’ also included

assets that the Department believes

present little risk of loss to participants

and beneficiaries as a result of acts of

fraud or dishonesty: participant loans

meeting the requirements of section

408(b)(1) of ERISA and qualifying

employer securities as defined in

section 407(d)(5) of ERISA. See

Proposed § 2520.104–46(b)(1)(ii).

The proposal provided, with respect

to each plan year for which the waiver

is claimed, that at least 95% of the

assets of the plan must constitute

‘‘qualifying plan assets’’ or that any

person who handles assets that do not

constitute ‘‘qualifying plan assets’’ is

covered by a bond meeting the

requirements of section 412 of ERISA,

except that the amount of the bond is

not less than the value of such assets.2

The 95% test was provided in

recognition of the fact that some small

plans may have assets (such as limited

partnership or real estate interests) held

by parties that are not regulated

financial institutions. Only where more

than 5% of a plan’s assets do not

constitute ‘‘qualifying plan assets’’

would the bonding component of the

proposal apply.

The proposal required that the

percentage of a plan’s assets that

constitute ‘‘qualifying plan assets’’ and,

as appropriate, the amount of

supplemental bond coverage necessary

to comply with the regulation must be

determined for each plan year for which

the waiver is claimed. Accordingly, the

administrator of a plan electing the

waiver must make the required

determinations as of the beginning of

the plan year. The proposal provided

that, for purposes of this requirement,

the required determinations are to be

made in a manner consistent with the

requirements of section 412. Inasmuch

as a determination that more than 5% of

a plan’s assets do not constitute

‘‘qualifying plan assets’’ may necessitate

an increase in the amount of the plan’s

section 412 bond, the Department

concluded that, assuming the

administrator does not elect to engage

an IQPA, the determination of

‘‘qualifying plan assets’’ should be made

on the same basis as the required bond.3

Under the second part of the proposal,

the waiver of the IQPA requirements

was further conditioned on the

disclosure of certain information to

participants and beneficiaries.

Specifically, § 2520.104–46(b)(1)(i)(B)

required that the summary annual

report (SAR) of a plan electing the

waiver include, in addition to the other

information required by § 2520.104b–10:

(1) The name of each institution holding

‘‘qualifying plan assets’’ and the amount

of such assets held by each institution

as of the end of the plan year; (2) the

name of the surety company issuing the

bond, if the plan has more than 5% of

its assets in non-qualifying plan assets;

(3) a notice indicating that participants

and beneficiaries may, upon request and

without charge, examine, or receive

copies of, evidence of the required bond

and statements received from each

institution holding qualifying assets that

describe the assets held by the

institution as of the end of the plan year;

and (4) a notice stating that participants

and beneficiaries should contact the

Regional Office of the U.S. Department

of Labor’s Pension and Welfare Benefits

Administration if they are unable to

examine or obtain copies of statements

received from each institution holding

qualifying assets or evidence of the

required bond, if applicable.

Nothing in the proposal affected the

obligation of a plan that would be

eligible for the audit waiver to file a

Form 5500 ‘‘Annual Return/Report of

Employee Benefit Plan,’’ including any

schedules or statements required by the

instructions to the form. On the other

hand, the proposal made it clear that a

plan electing to file a Form 5500 as a

small pension plan pursuant to the ‘‘80

to 120 rule’’ in § 2520.103–1(d) may

claim the audit waiver in the same

manner and under the same conditions

as a plan with fewer than 100

participants.4

Finally, conforming amendments to

the simplified annual reporting

provisions in § 2520.104–41 were

included in the proposal to clarify that,

although other simplified reporting

options would continue to be available,

if an employee benefit plan with fewer

than 100 participants does not meet the

criteria set forth in § 2520.104–46, it

would be required to engage an IQPA to

conduct an examination of the financial

statements of the plan, to include with

the plan’s annual report the financial

statements, notes and schedules

prescribed in section 103(b) of ERISA

and 29 CFR 2520.103–1, and to include

within the plan’s annual report a report

of an IQPA as prescribed in section

62960 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

5See the Department’s regulation at 29 CFR

2550.401c–1 regarding the definition of plan assets

as it relates to insurance company general accounts.

6According to the commenter, it is a common

practice for a mutual fund to employ ‘‘registered

transfer agents’’ to maintain records of shareholder

accounts, calculate and disburse dividends, and

prepare and mail shareholder account statements,

federal income tax information and other

shareholder notices. Some transfer agents prepare

and mail statements confirming shareholder

investment transactions and account balances and

maintain customer service departments to respond

to shareholder inquiries. Transfer agents are

regulated by and subject to periodic examination by

the Securities and Exchange Commission (SEC)

under the Securities Exchange Act of 1934. Among

other requirements, transfer agents must register

with the SEC using a Form TA–1 and must file

annually with the SEC a report prepared by an

independent accountant concerning the transfer

agent’s system of accounting controls and related

procedures for the transfer of record ownership and

the safeguarding of related securities and funds. For

purposes of the audit waiver, the Department would

consider statements from a registered transfer agent

employed by the mutual fund to be statements from

the mutual fund.

103(a)(3)(A) of ERISA and 29 CFR

2520.103–1(b)(5).

C. Summary of Public Comments

As noted above, the Department

received 19 written comments regarding

the proposal. The commenters generally

expressed the view that the

Department’s proposal, for the most

part, struck a reasonable balance

between enhancing the level of security

and accountability for small pension

plan assets and minimizing

administrative burdens and costs on

plans and plan sponsors. The

commenters also generally concluded

that, although the proposal will impose

new costs on some small employers, the

proposal was structured so that costs are

generally proportionate to the risk and

the additional burdens should be

modest. The following discussion

summarizes the major issues raised by

the commenters and explains the

Department’s reasons for the

modifications reflected in the final

regulation.

1. Definition of Qualifying Plan Assets

Several commenters asked the

Department to clarify the terms ‘‘held

by’’ and ‘‘hold’’ as used in describing

the requirements that assets must be

held by certain regulated financial

institutions and that year-end

statements regarding plan assets must be

from the financial institution holding

the plan’s assets. See § 2520.104–

46(b)(1)(i)(B)(1), (b)(1)(ii)(C), and

(b)(1)(ii)(F). The Department intended

that the ‘‘held’’ term as used in the

proposal would generally have the same

meaning as it has in section 103(a)(2) of

ERISA. Specifically, section 103(a)(2)

provides that certain entities which

‘‘holds’’ some or all of the assets of the

plan must transmit and certify to the

plan administrator information

regarding the assets that is needed by

the administrator to comply with any

requirement of Title I of ERISA.

Although section 103(a)(2) is limited to

insurance carriers and other

organizations that hold plan assets in a

separate account and to banks and

similar institutions that hold plan assets

in a common or collective trust, a

separate trust or a custodial account, the

concept of what constitutes ‘‘holding’’

of a plan’s assets under the proposal

was intended to be the same as under

section 103(a)(2).

In that regard, two commenters

requested confirmation that certain

arrangements involving use of ‘‘omnibus

accounts’’ by banks and registered

broker-dealers would satisfy the

‘‘holding’’ requirement. The

commenters stated that many banks and

registered broker-dealers provide

various investment related services to

small pension plans, often acting as

custodian, recordkeeper or investment

manager. The commenters indicated

that the bank or broker-dealer will keep

internal records tracking the specific

assets that belong to each of their small

pension plan customers. The plans’

assets may consist of individual

securities (including stocks, bonds and

mutual fund shares), real estate, limited

partnerships or other types of assets. In

the case of securities, according to the

commenters, banks and registered

broker dealers often make trades for the

plans in the bank’s or broker-dealer’s

name through omnibus accounts, with

most of these trades being made through

depositories, such as the Depository

Trust Company, or through the National

Securities Clearing Corporation in the

case of mutual fund shares. In all these

cases, the securities are held in the

name of the bank or broker-dealer on

behalf of the plans and the bank or

broker-dealer maintains internal records

that show what assets belong to what

plan. The Department agrees that such

omnibus account structures would

constitute the bank or registered brokerdealer ‘‘holding’’ the plan’s securities

for purposes of satisfying the audit

waiver requirements.

Other commenters asked for

clarification of whether the Department

intended to exclude from the definition

of ‘‘qualifying plan assets’’ certain types

of traditional plan investments, for

example, investments in mutual funds

and insurance company general account

contracts, which may not involve a

regulated financial institution ‘‘holding’’

plan assets.5 The commenters noted that

it is not uncommon for small pension

plans to have an individual employee of

the plan sponsor serve as the trustee of

the plan. In such cases, plan assets may

be invested in mutual fund shares or in

an insurance company general account

contract with the individual trustee

holding the shares or contract in his or

her name as trustee of the plan. The

commenter stated that the plan may be

unable to meet the conditions in the

proposal for two reasons: (1) Plan assets,

i.e., the mutual fund shares and the

insurance contract, will not be ‘‘held’’

by a regulated financial institution, and

(2) year-end statements regarding the

assets will not be from an institution

‘‘holding’’ the plan’s assets.

The Department stated in the

preamble to the proposal that ‘‘[i]n

general, the Department believes that

statements of plan assets prepared by

certain regulated financial institutions

(such as banks, insurance companies,

mutual funds, and securities brokerdealers), if made available to

participants and beneficiaries, provide a

means by which participants and

beneficiaries can independently confirm

that the assets reported by the plan to

be available to pay benefits as of the end

of the plan year were, in fact, available

according to the books and records of

the institution holding the assets.’’ The

Department agrees with the commenters

that plan investments in mutual fund

shares for which the registered

investment company maintains records

of shareholder accounts and prepares

and mails shareholder account

statements provides a commensurate

level of security and accountability to

that which would exist if the plan’s

assets were held by and disclosure

statements were produced by a bank,

insurance company, or registered

broker-dealer.6 The Department believes

that the same is true for general account

contracts of an insurance company

qualified to do business under the laws

of a state where the insurance company

prepares and mails statements to the

plan regarding the value of the contract

as of the end of the year and transaction

activity related to the contract during

the plan year. Accordingly, the final

rule includes a change to the definition

of qualifying plan assets that is intended

to include such mutual fund shares and

insurance company general account

contracts as ‘‘qualifying plan assets.’’

See § 2520.104–46(b)(1)(ii)(D) & (E). The

final rule also includes corresponding

changes to the Summary Annual Report

(SAR) and related disclosure provisions

to reflect the inclusion of mutual fund

shares issued by a registered investment

company and general account

investment contracts issued by

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62961

insurance companies in the definition of

‘‘qualifying plan assets.’’ See

§ 2520.104–46(b)(1)(i).

Another commenter suggested that

assets of individual account plans that

are invested at the direction of

participants or beneficiaries should be

included in the definition of ‘‘qualifying

plan assets.’’ The Department did not

include such a provision in the proposal

because information available to the

Department regarding those assets

indicated that they generally would

meet the conditions in the proposal. The

commenters stated, however, that the

SAR disclosures and the requirement to

make financial institution statements

available to participants and

beneficiaries in individual account

plans, like 401(k) plans, could involve

an extensive list of financial institutions

in cases where the plan provides a

broad range of investment options. Also,

the commenters noted that especially in

such individual account plans that

cover a very small number of

employees, the proposed SAR

disclosures could give all the plan’s

participants and beneficiaries access to

confidential financial information

regarding the type and performance of

individual account investments made

by other participants. The commenters

indicated that this result would

particularly impact small business

owners who often have the largest

accounts in the plan, and, accordingly,

could create a tension in the small

business market that would be

inconsistent with the Department’s goal

of encouraging pension plan

establishment and maintenance. The

commenters suggested that the

Department address this concern by

including such participant-directed

assets in the definition of qualifying

plan assets subject to the condition that

participants and beneficiaries are

furnished statements regarding the

assets allocated to their individual

accounts at least annually directly from

a qualified independent financial

institution, such as a bank, insurance

company, registered broker-dealer, or

mutual fund.

The Department believes that, in the

case of an individual account plan, the

security and accountability objectives of

the proposal can be met for assets

allocated to individual accounts if the

participant or beneficiary has the

opportunity to exercise control with

respect to those assets and the

participant or beneficiary is provided, at

least annually, a statement from a

regulated financial institution

describing the assets held (or issued) by

such institution and the value of such

assets. In such a case, each participant

can effectively monitor the assets in

their individual accounts, and the

regulated financial institution

statements provide a reliable assurance

that the assets reported to be in the

individual account are in fact there.

Accordingly, the definition of

‘‘qualifying plan assets’’ has been

modified in the final rule so that plan

administrators of individual account

plans can rely on this alternative

approach in determining whether

participant directed assets allocated to

individual accounts can be treated as

‘‘qualifying plan assets’’ for purposes of

applying the 95% test.

Another commenter suggested that

the Department exclude qualifying

employer securities from those assets

considered to be qualifying plan assets.

The commenter stated that qualifying

employer securities should not be

treated as qualifying plan assets because

they are ‘‘frequently mis-valued’’ and

are subject to special rules. It was the

intention of the Department in

proposing these amendments to

improve the security of plan assets

against losses due to fraud or dishonesty

by providing a means under which the

existence and amount of the plan’s

investments could be independently

verified by participants and

beneficiaries. The comment regarding

valuation practices raise issues that are

beyond the scope of the proposal, and,

accordingly, the Department did not

make any changes to the proposal in

response to this comment.

One commenter asked the Department

to clarify in two respects the definition

of qualifying plan assets as applied to

participant loans. The commenter asked

whether a loan that is treated as a

distribution under section 72(p) of the

Internal Revenue Code because it

exceeds the maximum dollar limit set

forth in Code 72(p)(2)(A)(1) will fail to

be a qualifying plan asset. Under the

proposal, qualifying plan assets

included ‘‘any loan meeting the

requirements of section 408(b)(1) of the

Act and the regulations issued

thereunder.’’ Neither section 408(b)(1)

of ERISA nor the Department’s

regulations at § 2550.408b–1 expressly

place a specific dollar limit on

participant loans; however,

§ 2550.408b–1(a)(1)(iii) requires that

loans must be made in accordance with

specific provisions regarding such loans

set forth in the plan. Accordingly, to the

extent that the plan terms regarding

participant loans include limits

intended to ensure that the plan’s loan

program complies with requirements

under Code 72(p)(2), those plan terms

would have to be complied with for the

loan to meet the requirements of section

408(b)(1) of ERISA.

The commenter also asked whether a

loan would be seen as continuing to

satisfy the requirements of section

408(b)(1) of ERISA, and therefore

continue to constitute a qualifying plan

asset, even after a participant was in

default under terms of the loan

agreement. The Department included

participant loans within the term

‘‘qualifying plan assets’’ because of the

belief that such loans are assets that

present little risk of loss to participants

and beneficiaries as a result of acts of

fraud or dishonesty. Even where a

participant defaults on a loan, that fact

generally should not put the plan at

greater risk of loss due to fraud or

dishonesty. Accordingly, the

Department does not believe that the

characterization of a participant loan as

‘‘in default’’ should disqualify the loan

from continuing to be treated as a

‘‘qualifying plan asset.’’

One commenter suggested that the

audit waiver be conditioned on all the

assets of the plan being held by

qualifying financial institutions that file

Form 5500 annual reports with the

Department regarding the assets they

hold. Several other commenters stated

that the 95% test was reasonable,

provided adequate flexibility, and was

consistent with the investment practices

of most small pension plans. It was not,

and continues not to be, the intent of the

Department to directly or indirectly

influence the type of investments held

by small pension plans through

application of the audit requirements.

Rather, the Department continues to

believe that all plan assets do not need

to be held by a regulated financial

institution to achieve the improved

level of security and accountability that

is the objective of this rulemaking.

Rather, the definition of ‘‘qualifying

plan assets,’’ the disclosure

requirements, and the bonding

components of the rule provide plans

with flexibility in structuring their

investment portfolios while also

ensuring an adequate level of security

and accountability. Accordingly, the

Department did not adopt this

suggestion.

2. Fidelity Bonding Requirements

A number of commenters requested

clarification of what constitutes

‘‘handling’’ for purposes of the

requirement that persons who handle

non-qualifying plan assets must be

covered by a fidelity bond in an amount

equal to the value of the assets they

handle. The term ‘‘handling’’ is defined

in 29 CFR 2580.412–6 for purposes of

the general fidelity bonding requirement

62962 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

under section 412 of ERISA. The

proposal expressly required that persons

handling non-qualifying plan assets

would have to be bonded ‘‘in

accordance with the requirements of

section 412 of the Act and the

regulations issued thereunder, except

that the amount of the bond shall not be

less than the value of such assets.’’ See

Proposed § 2520.104–46(b)(1)(i)(A)(2).

No change is being made in the final

rule to this aspect of the proposal.

Accordingly, the definition of handling

in § 2580.412–6 would apply for

purposes of meeting the fidelity bonding

conditions in § 2520.104–46 as amended

by the final rule.

The Department received several

comments that focused on the amount

of bonding coverage required under the

proposal. One commenter was critical of

the fidelity bonding provisions in the

proposal because such bonds do not

protect against losses resulting from

imprudent investments and because the

commenter believed that ‘‘no amount of

increased reporting or bonding will

prevent a crook from being a crook.’’ On

the other hand, a comment submitted

from the surety industry suggested as an

alternative to the conditions in the

proposal that the Department require

100% of the assets of a small pension

plan be covered by a fidelity bond as the

most effective way to increase the

protection of plans from losses due to

fraud or dishonesty. Another

commenter observed that under the

proposal some plans would be able to

use their general fidelity bond under

section 412 of ERISA to satisfy the

fidelity bonding requirement in the

proposal, and suggested that the amount

of the fidelity bonding coverage be

increased to condition the audit waiver

on the plan having a bond in an amount

equal to 10% of all plan assets plus

100% of all non-qualifying plan assets.

Although it may not be feasible to

develop a regulation that would make it

impossible for any plan to suffer any

losses due to fraud or dishonesty, the

Department does not consider that

circumstance to be a valid reason for not

adopting this regulation which will

provide meaningful enhancements in

security and accountability for

participants and beneficiaries in small

pension plans. The Department also is

not prepared to adopt the suggestion

that 100% of all small pension plans’

assets be required to be covered by a

fidelity bond because such a

requirement would, in the Department’s

view, impose more costs on plans and

plan sponsors without providing

substantially more security for

qualifying plan assets. The 100%

bonding approach suggested by the

commenter also would not provide

participants and beneficiaries the

improved disclosures set forth in the

proposal. Lastly, the Department

recognized in the proposal that

inasmuch as compliance with section

412 generally requires a bond in an

amount not less than 10% of all the

plan’s funds or other property handled,

the bond acquired for section 412

purposes may in some cases be adequate

to cover any non-qualifying assets under

the proposal. Even in those cases,

however, the bond would still equal

100% of the value of the non-qualifying

plan assets. Accordingly, the

Department did not adopt any of the

suggested changes regarding the amount

of fidelity bond coverage required to be

eligible for the audit waiver.

The Department included fidelity

bonding examples in the preamble to

the proposal in an effort to explain the

fidelity bonding requirements in the

proposal and the interaction between

those requirements and the general

fidelity bonding requirements under

section 412 of ERISA. To make those

examples easily accessible, the

Department inserted the examples in the

final rule as a new § 2520.104–

46(b)(1)(iii)(B).

3. Disclosure

As noted above, under the proposal,

the waiver of the requirement to engage

an accountant is further conditioned on

the disclosure of certain information to

participants and beneficiaries.

Specifically, § 2520.104–46(b)(1)(i)(B)

required that the SAR of a plan electing

the waiver include, in addition to the

other information required by

§ 2520.104b–10: (1) The name of the

institution holding ‘‘qualifying plan

assets’’ and the amount of such assets

held by each institution as of the end of

the plan year; (2) the name of the surety

company issuing the bond, if the plan

has more than 5% of its assets in nonqualifying plan assets; (3) a notice

indicating that participants and

beneficiaries may, upon request and

without charge, examine, or receive

copies of, evidence of the required bond

and statements received from each

institution holding qualifying assets

which describe the assets held by the

institution as of the end of the plan year;

and (4) a notice stating that participants

and beneficiaries should contact the

Regional Office of the U.S. Department

of Labor’s Pension and Welfare Benefits

Administration if they are unable to

examine or obtain copies of statements

received from each institution holding

qualifying assets or evidence of the

required bond, if applicable.

One commenter noted that in many

cases more than one regulated financial

institution may hold plan assets and

asked the Department to confirm that

multiple statements from separate

institutions could be used to satisfy the

conditions in the proposal. As the

Department explained when it

published the proposal, the rule does

not require the year-end statements to

be in any particular form, but the

statements, at a minimum, must identify

the institution holding the assets and

the amount of assets held as of the end

of the year. The Department did not

intend, and the language of the proposal

does not require, that the plan receive

a single statement from one financial

institution.

Another commenter suggested that

the SAR and other disclosure

requirements in the proposal should be

applied to all large plans required to

furnish SARs to participants, not just

small pension plans. The commenter’s

suggestion called for regulatory changes

that would be beyond the scope of this

rulemaking which did not include any

changes in the information disclosure or

audit requirements applicable to large

pension and welfare plans. Moreover,

the annual reporting and audit

requirements applicable to large plans

generally result in the availability of

more comprehensive and detailed

information about the plan’s

investments than the disclosure

requirements in the proposal. For

example, large plans with investment

portfolios are generally required to

include various financial schedules in

their annual report, including a detailed

listing of the assets of the plan, and,

pursuant to section 103(a)(3)(A) of

ERISA, the IQPA report attached to the

Form 5500 must include the

accountant’s opinion on whether those

schedules ‘‘present fairly, and in all

material respects the information

contained therein when considered in

conjunction with the financial

statements taken as a whole.’’

Participants and beneficiaries in such

large plans have a right, upon request,

to examine and obtain copies of the

Form 5500 and the IQPA report, and the

SAR required to be furnished to

participants must include a notification

of that right.

Several commenters indicated that the

disclosure requirements set forth in the

proposal would require adjustments to

the way SARs are currently prepared

and asked the Department to adopt less

detailed SAR disclosures. For example,

one commenter suggested that the SAR

be required to state only the percentage

of assets held by regulated institutions

and the amount of any fidelity bonds if

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62963

7Several commenters asked questions about and/

or suggested modifications of certain conclusions

regarding estimated costs and burdens associated

with complying with the SAR and related

disclosure requirements that were contained in the

Department’s regulatory impact analysis published

in the Federal Register along with the proposal.

Those comments are addressed in the regulatory

impact analysis section of this notice.

8The final rule also includes qualifying employer

securities and participant loans in this new

provision in paragraph (b)(1)(i)(B)(1) to make it

clear that the there are no special SAR disclosures

associated with the treatment of such assets as

qualifying plan assets.

plan does not meet the 95% test, along

with a statement that participants and

beneficiaries have a right to examine

and get copies, on request, of statements

from the institutions and evidence of

any required fidelity bond. Another

commenter stated that adding more

information to that already required to

be given in the SAR may be confusing

to many participants. The commenter

suggested that including a ‘‘boilerplate’’

notice in the SAR regarding the

financial institution statements and

fidelity bond would give participants

and beneficiaries interested in

reviewing the materials knowledge of

their availability at no cost. As noted

above, the Department believes that

furnishing statements from certain

regulated financial institutions

regarding the plan’s assets provides a

means by which participants and

beneficiaries can independently confirm

that the assets reported by the plan to

be available to pay benefits as of the end

of the plan year were, in fact, available.

Such disclosure, in the Department’s

view, reduces the likelihood of losses

over long periods due to acts of fraud or

dishonesty. The Department believes

that the security and accountability

objectives of the proposal are enhanced

by the disclosure of the names of

institutions holding (or issuing in the

case of mutual fund shares and general

account investment contracts with

insurance companies) qualifying plan

assets and the amount of such assets. A

general disclosure that information is

available upon request would not, in the

view of the Department, provide

participants with sufficient information

to make an informed decision on

whether to request the underlying

financial institution statements or

evidence of bonds.7

The Department is making one change

in the SAR disclosure requirements to

address the inclusion, discussed above,

of participant directed assets in the

definition of qualifying plan assets. As

noted above, the final rule provides in

§ 2520.104–46(b)(1)(ii)(F) that, in the

case of an individual account plan the

definition of ‘‘qualifying plan assets’’

would include any assets in the

individual account of a participant or

beneficiary over which the participant

or beneficiary has the opportunity to

exercise control and with respect to

which the participant or beneficiary is

furnished, at least annually, a statement

from one of the regulated financial

institutions referred to in § 2520.104–

46(b)(1)(ii)(C), (D) or (E) describing the

assets held (or issued) by the institution

and the amount of such assets. A new

provision was added to the final rule to

make it clear that the SAR disclosure

requirements would not apply to

individual account assets that meet the

definition of qualifying plan assets

pursuant to the alternative described in

paragraph (b)(1)(ii)(F). See § 2520.104–

46(b)(1)(i)(B)(1).8

A commenter suggested that the final

regulation state that the requirement to

provide these individual account

statements could be satisfied by giving

participants and beneficiaries access to

individual account information via

‘‘800’’ numbers, automated voice

response systems, website access, and

other similar technologies. The

Department does not believe that access

to information is comparable to

affirmatively providing participants and

beneficiaries with information about

their accounts. Accordingly, the final

rule requires that, as with SARs, the

individual account statements must be

‘‘furnished’’ to participants. See

§ 2520.10 4–46(b)(1)(ii)(F). In that

regard, the Department notes that it has

a separate regulation project pending

under § 2520.104b-1 that is focused on

the use of electronic communication

technologies by ERISA covered plans to

satisfy certain disclosure obligations

under Part 1 of Title I, including the

obligation to furnish SARs to

participants. In the Department’s view,

measures and methods acceptable for

furnishing SARs under the Department’s

regulation at § 2520.104b-1 would also

be acceptable for regulated financial

institutions to use in furnishing

individual account statements under

this final regulation.

4. Miscellaneous Issues

One commenter asked the Department

to exclude from the audit waiver

requirements plan assets in individual

account plans belonging to owneremployees. The commenter posited that

owner-employees generally would not

need the additional disclosures set forth

in the proposal. Another commenter in

a similar vein argued that ‘‘top heavy’’

plans should be exempt from the audit

requirement because ‘‘[b]y definition,

60% or more of the accrued benefits of

a top-heavy plan are those of ‘‘key

employees’’ as defined by IRC § 416(i)

* * * [and] these are the type of

participants who are most likely to be

able to police or monitor the

performance of their accrued benefits.’’

The Department does not believe that

such carve outs for owner-employee

assets or top heavy plans would be

appropriate. First, the Department

believes that inclusion of participant

directed assets in individual account

plans and the related adjustments to the

disclosure provisions in the proposal

adequately address the commenter’s

concerns regarding owner-employees.

Second, ‘‘top heavy’’ status may vary

from year to year which may result in

intermittent and potentially confusing

disclosures to plan participants.

Moreover, the rationale presented by the

commenter ignores the non-key

employee participants in the plan. The

Department, accordingly, did not adopt

the carve-outs suggested by these

commenters.

A commenter urged the Department to

improve the remedies available for

aggrieved participants in cases where

there have been losses due to fraud or

dishonesty. The commenter observed

that participants often do not have the

financial resources to retain experienced

ERISA counsel even in cases of clear

fiduciary violations, that fiduciaries in

cases involving interpretation of plan

documents may benefit from courts’

reviewing their interpretations under a

deferential ‘‘arbitrary and capricious’’

standard, that statutory remedies are

limited in fiduciary cases and do not

include compensatory and punitive

damages, and that courts may not award

full attorney’s fee awards even in cases

where the participant prevails. The

commenter concluded that enhancing

retirement security would be better

accomplished by improving the

remedies available to aggrieved plan

participants. Expanding the ERISA

remedies available to participants and

beneficiaries in cases involving plan

losses due to fraud or dishonesty would,

in the Department’s view, generally

require legislation and, accordingly, is

beyond the scope of this administrative

rulemaking.

5. Request for Public Comments on

Alternatives

To aid in its effort to develop a costeffective final regulation, the

Department solicited views and

comments from the benefit plan

community on whether there are

alternative approaches that would

provide significant enhancements in the

security of small pension plan assets

and the accountability of persons

62964 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

handling those assets and that would be

more effective or involve less cost and

burden than this proposal. In that

regard, the Department specifically

invited comments on requiring, as

conditions of being eligible for the audit

waiver, that small pension plans (1)

obtain a fidelity bond covering persons

who handle plan funds in an amount

equal to at least 80% of the value of the

plan’s assets and (2) make available to

participants and beneficiaries a

schedule of the plan’s assets held for

investment purposes as of the end of the

plan year similar to the schedule

currently required as part of the Form

5500 annual report filed by pension

plans with 100 or more participants. No

commenter supported this alternative

approach. The two commenters that

specifically addressed this alternative

concluded that it would be more

disruptive and more costly for most

employers and would be unlikely to

provide sufficient additional benefits to

plan participants and beneficiaries to

justify the extra administrative costs and

burden to small plan sponsors.

6. Effective Date

Finally, several commenters requested

a delayed effective date to give small

pension plans sufficient time to comply

with the new summary annual report

and bonding requirements provided for

in this rule. The proposal envisioned

that the final regulation would be

effective 60 days after publication in the

Federal Register. One commenter

suggested that the new requirements

should not be applicable until the later

of: (1) the first plan year beginning after

180 days after the final regulation is

published in the Federal Register, or (2)

the first plan year beginning after the

first surety bond policy expiration date

that is at least 60 days after the

regulation is finalized. Another

commenter asked that the effective date

be delayed for all plans until the first

plan year beginning on or after January

1, 2002.

The Department believes that it is

important to make this final rule

effective in a timely fashion so that

participants and beneficiaries get the

enhanced security and accountability

protections of the new audit waiver

conditions. The Department is also

sensitive to the need for plans and plan

sponsors to have sufficient time to make

adjustments to comply with the

disclosure and bonding provisions in

the regulation. In light of the fact that

fidelity bonds may be issued for multiyear periods, although the amount of the

coverage is required to be set annually,

an effective date based on the surety

bond policy expiration date could

provide for a overly long period before

some plans would be required to

comply with the new audit waiver

conditions. Similarly, making the

amendments effective for the first plan

year beginning on or after January 1,

2002, could provide a prolonged period

following publication of the final rule

for plans with non-calendar fiscal years

before they would have to comply with

the new SAR disclosure requirements

(as long as four years for some plans

with non-calendar fiscal years). The

Department believes that making the

amendments applicable as of the first

plan year beginning after 180 days after

the final regulation is published in the

Federal Register provides an adequate

period of time for plans and plan

sponsors to make any necessary

adjustments while not unduly delaying

the implementation of the new audit

waiver conditions. Accordingly, the

final rule will be effective 60 days after

publication in the Federal Register but

the amendments to the audit waiver

conditions will be applicable as of the

first plan year beginning after 180 days

after the final regulation is published in

the Federal Register.

Executive Order 12866 Statement

Under Executive Order 12866, the

Department must determine whether a

regulatory action is ‘‘significant’’ and

therefore subject to the requirements of

the Executive Order and subject to

review by the Office of Management and

Budget (OMB). Under section 3(f), the

order defines a ‘‘significant regulatory

action’’ as an action that is likely to

result in a rule: (1) having an annual

effect on the economy of $100 million

or more, or adversely and materially

affecting a sector of the economy,

productivity, competition, jobs, the

environment, public health or safety, or

State, local or tribal governments or

communities (also referred to as

‘‘economically significant’’); (2) creating

serious inconsistency or otherwise

interfering with an action taken or

planned by another agency; (3)

materially altering the budgetary

impacts of entitlement grants, user fees,

or loan programs or the rights and

obligations of recipients thereof; or (4)

raising novel legal or policy issues

arising out of legal mandates, the

President’s priorities, or the principles

set forth in the Executive Order.

Pursuant to the terms of the Executive

Order, it has been determined that this

action is ‘‘significant’’ and subject to

OMB review under Section 3(f)(4) of the

Executive Order. Consistent with the

Executive Order, the Department has

undertaken to assess the costs and

benefits of this regulatory action. The

Department’s assessment, and the

analysis underlying that assessment, is

detailed below.

Overview

This regulation is intended to

accomplish two purposes: to limit

pension plan fraud and to provide

participants and beneficiaries of small

pension plans with the information they

need to monitor their plan assets and to

hold plan fiduciaries accountable.

Recent cases involving embezzlement or

other misappropriations of pension

assets have focused national attention

on the potential vulnerability of small

pension plans to fraud and abuse. As a

result, the Department has determined

that modifications to the small plan

audit waiver (§ 2520.104–46) will

enhance pension plan security.

Imposing the additional conditions on

the audit waiver will help to reduce the

risk of loss due to acts of fraud or

dishonesty with small plan assets. It

will also provide participants with more

information about their pension plans,

thus better enabling them to help

provide the checks and balances needed

to ensure the integrity of the pension

plan.

The cost to small pension plans of the

provisions of this final rule will not be

large—it is estimated to be less than 1%

of total annual administrative costs for

all small pension plans. Estimates from

Form 5500 data indicate that most small

pension plans meet the requirement to

obtain a waiver that at least 95% of the

plan assets must be ‘‘qualifying plan

assets.’’ For the few plans not meeting

this requirement, the cost of obtaining a

fidelity bond to enable them to meet the

conditions for a waiver is low relative

to the increased security provided to

participants and beneficiaries. Likewise,

the cost of meeting disclosure

requirements is small because, after an

initial start up cost to include new

language in the SAR and allow for the

inclusion of additional detail

concerning qualifying plan assets, the

subsequent annual cost consists only of

updating the SAR with data already

provided at least annually by the

financial institutions in the normal

course of business. Other costs include

a small cost for the preparation and

distribution of documents to

participants and beneficiaries who

request copies of statements from

financial institutions and evidence of

fidelity bonding.

The costs imposed by the additional

conditions this regulation places on the

existing small plan audit waiver are

expected to total $24.1 million

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62965

9The cost estimates are derived from 1995 data

on pension plans and 1998 BLS data on

occupational wages as adjusted for non-wage

compensation and overhead.

annually.9 This total includes $714,000

for all 605,115 small pension plans to

determine whether they satisfy the

conditions for the audit waiver with

respect to the percentage of plan assets

held by regulated financial institutions,

$6.5 million to obtain additional fidelity

bonding coverage for the 29,414 plans

not expected to meet the condition that

at least 95% of the plan’s assets are held

by a regulated financial institution,

$16.3 million to satisfy additional

disclosure conditions of the audit

waiver, and $628,000 to respond to

requests by participants and

beneficiaries for copies of the statements

of financial institutions and evidence of

fidelity bonding. As explained further

below, the cost estimates of the final

rule are greater than the $15.6 million

estimate presented in the proposal, due

primarily to the adjustment of certain

assumptions used in estimating the

rule’s impact. The revised estimates also

take into account the substantive

modifications made to the proposal in

the development of the final rule.

In the Department’s view, the benefits

(although not quantified) of the final

rule’s requirements for the IQPA waiver

outweigh the costs. The enhanced

accountability and security of small

pension plans resulting from the

additional IQPA waiver conditions will

benefit plan participants who are

counting on these pensions for

retirement security. With minimum

government intervention, participants

and other parties to the plan will have

an improved ability to verify and

monitor plan assets. Given the more

than $300 billion in small pension plan

assets, any increase in security and

accountability is valuable. The

additional conditions will also

strengthen confidence in the pension

system as a whole. The following items

highlight other potential benefits of the

regulation in a qualitative, and when

possible, quantitative, way:

• Confidence in the private pension

system may be strengthened and may

result in increased participation among

the nearly 600,000 private wage and

salary workers who currently elect not

to participate in a small plan that is

offered;

• In 1998, more than $6 million in

pension plan assets were recovered as a

result of criminal investigations. If new

conditions are imposed on the small

plan audit exemption, fewer assets may

be missing from plans in the future

because of the checks and balances put

in place by improved information

disclosure;

• The investigations and litigation

associated with recovering assets of

small pension plans can be very costly

to private parties and to the

Government. In 1998, nearly 6,000 civil

investigations were initiated by the

Department. If new conditions are

imposed on the small plan audit

exemption, losses will likely decline

and fewer investigations of small

pension plans may be needed. This will

have the dual effect of lowering

investigation-related costs for small

plans and permitting Federal authorities

to enhance the security of other

participants by directing their efforts

elsewhere; and

• When workers discover that their

pension plan assets are missing or are

jeopardized, worker productivity

declines. Time at work may be spent

investigating what happened to plan

assets, whether they will be restored,

and whether retirement will be possible

without these pension assets. A more

secure system for monitoring pension

plan assets will reduce productivity loss

to employers.

Comments on Estimated Economic

Impact

The Department received 19 written

comments regarding the proposed

regulation. Of these, the majority

commended the Department for its

efforts to strike a reasonable balance

between improving the security of small

pension plan assets and allowing small

plans and small plan sponsors to

function efficiently without the

imposition of undue administrative

burdens and costs. The principal

concerns of those commenters who

focused on the economic impact of the

proposal related to the Department’s

estimates of the costs to comply with

the bonding and disclosure provisions,

as well as to the Department’s

methodology for estimating the number

of plans potentially impacted by the

proposed amendments to the waiver of

the requirement to engage an

independent qualified public

accountant. Specifically, commenters

questioned whether the cost burden for

the bond would be ‘‘nominal’’ as the

Department suggested in the proposal,

and whether the cost burden for

developing and modifying the SAR was

greater than the Department had

estimated. These issues are addressed in

more detail below.

Four commenters addressed the cost

of the surety bond. The proposed

regulation provided that, for each plan

year for which the waiver is claimed, if

at least 95% of the assets of the plan do

not constitute ‘‘qualifying plan assets’’

any person who handles assets that do

not constitute qualifying plan assets

must be covered by a bond meeting the

requirements of section 412 of ERISA,

except that the amount of the bond must

be not less than the amount of such

assets. Based on Department data and

consultation with industry

representatives, the original estimate for

the average additional premium cost of

an enhanced surety bond was $200 per

plan. One commenter questioned the

Department’s conclusion that the cost of

additional fidelity coverage would be

‘‘nominal,’’ and whether, in fact,

bonding under this regulation would be

as broadly available to plans as under

section 412. The comment was based on

the fact that the enhanced bond

requirement applies to only a small

portion of the pension plan

population—specifically, a population

which is not audited and which

maintains less than 95% of its assets in

a qualified financial institution. The

commenter further questioned whether,

even if a plan were able to obtain a

bond, it might be at a higher cost than

that estimated by the Department

because the requirement represented

adverse selection against the surety. In

any case, the eventual premium cost

and impact on the availability of surety

bonds under the proposal was viewed

by the commenter as having a

potentially high level of

unpredictability because surety bonds

meeting these requirements are not

currently offered. Finally, the

commenter proposed that a surety might

request an audit by an independent

accountant, or subject the plan to other

more stringent underwriting

requirements, in order to issue a bond

for unqualified plan assets, resulting in

additional attendant costs to the plan or

plan sponsor.

Before concluding that enhanced

bonding offered a cost effective way of

protecting small plan assets, the

Department had originally considered

eliminating the waiver of the audit

requirement for all small plans that did

not meet the 95% requirement

(approximately 37,000 plans). In

examining the cost, however, the

Department concluded that the audit

cost, $230 million dollars for the 5% of

plans not meeting the 95% requirement,

was too great in relation to other

alternatives. The Department therefore

explored alternatives available to

enhance pension plan security and the

burdens imposed by these various

alternatives. The regulation was crafted

by assessing the net benefits of these

alternatives and is intended to

62966 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

accomplish the goal of increased

security without imposing significant

costs on pension plans. Alternatives

considered included on-site inspection,

periodic reporting, additional

compliance penalties, and additional

bonding as a stand-alone requirement.

However, all of these options were

either (1) extremely expensive (ranging

in cost from $200 million to $4 billion

paid by plans or plan sponsors) and

thus conflicted with the Department’s

priority of creating a regulatory

environment that encourages pension

plan formation, (2) not feasible to

implement, or (3) would not have

sufficiently enhanced small pension

plan security.

Both before and after the comment

period, the Department consulted with

industry representatives about the

premium cost for a bond, including the

details of their formal comment, and the

potential risk to the surety associated

with accomplishing enhanced security

through bonding of non-qualified assets.

Representatives emphasized that the

cost for a bond covering plan assets not

held or issued by regulated financial

institutions can only be assessed after

some period of time in which loss

experience can accumulate and the

industry is able to evaluate the risk and

respond through pricing. It was

considered possible that, initially, due

to lack of actual experience, industry

costs would remain stable but would

require an upward or downward

adjustment at a future date. It is also

possible that sureties might respond to

a perceived additional exposure

associated with segmenting the risk of

assets that inherently represent a greater

risk of loss (i.e., the assets not held by

financial institutions) by applying more

stringent underwriting and rating this

risk accordingly. The Department will

monitor this situation in the future and,

if in the Department’s view serious

problems arise, would consider

amending this regulation. The

Department would welcome concerned

parties notifying it of any problems they

encounter.

The Department agrees that the

estimate of additional premium costs

and other impacts on the market for

fidelity bonds in near term and over

time bears a degree of uncertainty.

However, as discussed with industry

representatives, the Department does

not believe that non-qualifying assets

necessarily represent an inherently

greater risk of loss. Rather, the manner

in which they are held simply does not

afford a mechanism for an independent

confirmation of the existence of the

asset that is comparable to the

confirmation associated with statements

from regulated financial institutions, or

with an examination conducted by an

IQPA. Industry representatives also

agreed that the surety market as a whole

is very large, and that pricing is

generally very affordable. It is also

worth noting that, for some plans,

compliance with the bonding

requirements under section 412 of

ERISA will also cover the bonding

requirement under this regulation.

Section 412 generally requires any

person who handles plan funds or other

property to be bonded in an amount not

less than 10 percent of the amount of

funds handled. Unless the value of a

small plan’s non-qualifying plan assets

exceeds the value of 10 percent of total

plan funds or other property, there is

likely to be no additional risk to the

surety or increase in bonding cost to

plans because of this regulation.

Commenters and industry

representatives called attention to

potential uncertainty in future costs, but

did not suggest that the estimate of an

average of $200 in additional premium

would result in an unreasonable cost

estimate. Accordingly, the Department

has not changed its earlier estimate of

$200 as an average cost increase per

affected plan for an enhanced fidelity

bond. Our analysis shows, therefore,

that bonding continues to be the least

costly alternative for increasing the

security of small plan assets, lowering

aggregate costs by a factor of more than

20 compared to other alternatives while

still accomplishing the goal of

enhancing small pension plan security.

Four commenters suggested that the

Department’s cost estimate for the SAR

disclosure underestimated the costs that

would be imposed on plans. The

regulation requires that, for a plan to be

able to take advantage of the waiver of

an audit by an IQPA, a plan’s SAR must

include certain specific information

relating to: the financial institutions

which hold or issue plan assets;

bonding; the right of participants and

beneficiaries to year-end statements of

the financial institutions and bonding

information; and a notice that

participants and beneficiaries may

contact the Regional Office of the

Pension and Welfare Benefits

Administration, U.S. Department of

Labor, if they are unable to examine or

obtain copies of the statements received

by the plan from each institution

holding or issuing qualifying plan

assets, or evidence of the bond, if

applicable. Two commenters suggested

that most SARs are generated directly by

software packages that produce the

Form 5500 annual report; therefore, they

thought that inserting new language

might require a programming change

and a greater start up expense to the

plan than computed in the proposal. In

addition to the initial changes, plans are

also required to make annual

modifications to the SAR which will

reflect the current assets of the plan, the

amount of the assets held or issued, and

the bonding at the end of the plan year.

In its economic analysis of the proposed

regulation, the Department did not

include the cost of annual modification

of the SAR, because it was believed to

be nominal. Commenters questioned

this assumption as to the time it would

take to update the SAR, on an annual

basis, with the names of each regulated

financial institution holding or issuing

plan assets and the year end amount of

those assets. The commenters added

that preparing an annual disclosure

document, with multiple custodians,

would take more time than that

attributed to the usual preparation of an

SAR and, with the additional reporting

of specific account totals, the

Department should include a cost factor

in the economic analysis for this

obligation. The Department has

responded to these comments in three

ways.

First, we have increased the cost

estimates for the start up changes to the

SAR. Using the same basis used for

burden estimates of the Form 5500

annual report, the Department assumes

that 90% of SARs and 90% of the

changes required by the final rule will

be accomplished by service providers.

Because the information required to be

added to the SAR by this regulation is

not currently separately reported by

small pension plans as part of their

Form 5500 annual filing or currently

used by Form 5500 software packages,

it is likely, as commenters observed,

that system modifications will be

required. Accordingly, the Department

assumes that a systems analyst or

financial manager will complete the

work and has increased the hourly rate

of the professional performing this

activity from $39 to $57 per hour. In

response to comments indicating that

revising an SAR will take more time

than previously anticipated, the

Department has also increased its

assumption for the time required to

modify software and procedures to

produce an amended SAR disclosure

from 15 minutes to 30 minutes.

However, the Department believes the

time required to make these changes is

moderated by the economies of scale

resulting from those service providers

who have multiple client plans, and

whose efforts will result in a systematic

SAR modification for multiple plans,

usually as a part of a software package

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62967

integrated with Form 5500 preparation

software. Based on changes to cost

estimates for wage rates and time

requirements, the resulting cost estimate

for this SAR start up modification is

$12.1 million, compared with the $5.9

million originally estimated. Lastly,

individual account plans are not

included in this cost burden because an

alternative SAR disclosure for these

plans is now described in the final

regulation. This has the result of

lowering the original cost estimate for

small plans, although the net effect is

the $6.2 million increase.

Second, in response to comments, the

Department added new paragraph

(b)(1)(ii)(F) to § 2520.104.46 which

modifies the SAR reporting

requirements under paragraphs

(b)(1)(i)(B) in the case of individual

account plans holding qualified plan

assets. This new paragraph provides

that, in the case of an individual

account plan, the SAR disclosure

requirement may be satisfied as to any

assets in the individual account of a

participant or beneficiary over which

the participant or beneficiary has the

opportunity to exercise control by

having a regulated financial institution

referred to in paragraphs (b)(1)(ii)(C), (D)

or (E) of section 2520.104–46 furnish a

statement, at least annually, to

participants or beneficiaries describing

the assets held (or issued) by such

institution and the amount of such

assets. As described above, the change

to the regulation is warranted because of

the existing protective features of the at

least annual reporting procedures for

individually directed individual

accounts. The change in the regulation

will eliminate the need for annual

modification of SARs for many

individual account plans.

Third, the Department has included

in the final cost $4.2 million for annual

modification of the SAR to reflect

changes in the financial institutions

holding or issuing qualifying plan

assets, the amounts of assets, and/or

fidelity bonding information. Because

the information used to modify the SAR

is provided by the financial institutions

in the regular course of business and the

time needed to transfer the information

to the SAR was assumed to be minimal,

the Department did not originally

propose a cost for such annual

modification of the SAR. However, the

Department recognized that most SARs

are completed by service providers in a

systematic fashion, either through the

use of software packages interrelated

with the preparation of the Form 5500

or by means of extracting figures from

financial statements. The Department

recognizes that some plans may require

time to modify the SAR each year, but

the Department believes that this time

will be reduced to the extent that SAR

preparation software and processes are

modified to accept new information

over time. The Department also believes

that some of the concerns of the

commenters with respect to annual

modification costs have been addressed

through the alternative method to SAR

disclosure for individually directed

account plans.

Finally, the regulation requires that

plans furnish copies of year end

statements from financial institutions

and bonding information to those

participants and beneficiaries who

request them. For purposes of its cost

estimates, the Department assumes that

5% of participants and beneficiaries

who are not in individually directed

account plans will request this

information. The Department further

assumes that participants and

beneficiaries with individual account

plans taking advantage of the alternative

disclosure approach under the

regulation, i.e., those who receive

annual statements from a regulated

financial institution reporting on the

value of their assets, will not request

this general plan level information.

Because the documents required to be

disclosed by the plan have already been

provided by bonding companies and

financial institutions, the aggregate cost

for plans to produce the copies of

statements and bonding information is

estimated at $627,700, reflecting labor

costs of $15 per hour for assembling and

photocopying and distribution costs of

$.37 per request. The aggregate cost

represents a reduction from the

$995,000 estimated in the proposed

regulation. The cost savings is a result

of excluding individual account plans

eligible to take advantage of the

alternative disclosure approach under

the regulation.

Cost Analysis

The requirements contained in this

final regulation were developed to best

conform to the actual investment

patterns of small plans, rather than to

alter these patterns. To understand the

investment patterns of plans and the

typical percentage of plan assets that

would meet the ‘‘qualifying plan assets’’

requirement, we used Form 5500 data to

examine how pension plans report their

allocation of assets among various

investment categories. Plan asset

allocation information on the Form 5500

C/R formerly filed by small plans is

currently limited to very general

categories. Because of this lack of

detailed financial information, the Form

5500 filings of plans with more than 100

participants but less than $2 million in

assets (within two standard deviations

of the mean asset value of small plans)

were used as a proxy. We obtained a

distribution of these plans based upon

the proportion of each plan’s assets that

are ‘‘qualifying plan assets.’’ We then

applied this distribution to the actual

1995 count of small plans to

approximate the current distribution of

small plans based on the proportion of

assets that are ‘‘qualifying plan assets.’’

Form 5500 does not categorize

‘‘qualifying plan assets,’’ nor does it

identify the holder of assets. For

purposes of this analysis, we have

considered the nature of the asset to be

an indicator of the holder of the asset.

Accordingly, we assumed that assets

reported as cash, CD’s, U.S. Government

Securities, corporate debt and equity,

loans, employer securities, and the

value of interests in direct filing entities,

registered investment companies, and

insurance company general accounts are

typically held or issued by regulated

financial institutions, and as such

constitute ‘‘qualified plan assets.’’

Based on a total of 605,000 small

plans, 1995 data, and using the

assumptions outlined above, we

determined that the vast majority of the

assets of small plans are ‘‘qualifying

plan assets.’’ Specifically, for all but 5%

of small pension plans, at least 95% of

plan assets constitute ‘‘qualifying plan

assets.’’ The plans that will not meet the

95% threshold are atypical of the

industry standard and are sufficiently

few in number such that additional

conditions for an audit waiver to protect

participants and plan assets are both

warranted and cost effective.

The Department received a comment

that expressed the view that the proxy

group used for assessing the number of

small plans that will not have 95% of

assets held or issued by regulated

financial institutions resulted in a

significantly inaccurate estimate of the

number of plans impacted, and thus the

ultimate cost of the regulation. In the

commenter’s view, the distribution of

assets in plans with more than 100

participants but less than $2 million in

assets would be new plans, which

would be attempting to minimize

administrative costs. The commenter

further suggests that the Department

assumed a relationship between the

holder of qualifying plan assets and the

manner in which a plan is ‘‘trusteed’’

(i.e., uses a corporate trustee such as a

bank as opposed to an individual person

such as a representative of the plan

sponsor). Moreover, the commenter

suggests delaying any action amending

the audit waiver until an actual study of

62968 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

the potentially impacted small plan

universe is conducted.

The Department notes that while the

statute clearly envisions the Department

adopting rules intended to limit the

administrative burdens imposed on

small plans to comply with the annual

reporting provisions in ERISA, and

although the more limited reporting

requirements actually in place for small

plans results in the availability of more

limited detail concerning the assets of

small plans, the annual reports filed by

small plans do provide accurate data

with respect to the features of small

plans, their total income, expenses, and

assets, and the breakdown of those

assets in broad investment categories.

The Department’s methodology in

developing detailed estimates of small

plan assets by investment type involved

distributing the breakdown of assets in

a slightly larger proxy group across the

actual assets of the small plans

potentially affected by this regulation.

This larger group is still within two

standard deviations of the mean asset

value of the plans with fewer than 100

participants. The Department continues

to believe this approach offers a

reasonable basis for estimating detail

needed to accurately assess economic

impact, given that this level of detail is

not available under existing regulatory

requirements.

Furthermore, this methodology results

only in an estimate of the types of assets

held by small plans. The types of assets,

such as mutual funds, marketable

securities, or certificates of deposit, are

assumed to be an indicator of who holds

the assets and, thus, the extent to which

they will be qualifying plan assets for

purposes of this regulation. The

methodology is not intended to identify

the trustee of the plan, nor is it

necessary to do so to assess the

economic impact of the regulation. As

the Department has indicated, it does

not intend to alter the investment

choices of small plans, or their

arrangements for designating a trustee,

but rather to ensure that either a

mechanism is in place for regular

confirmation of the existence of small

plan assets by regulated financial

institutions holding those assets, or that

enhanced bonding is in place. The

Department continues to be of the view

that its approach to identifying the

plans and assets potentially impacted is

reasonable in light of the data available

to conduct this analysis.

Finally, as noted earlier, several

commenters requested clarification of

the definition of ‘‘qualifying plan

assets,’’ particularly with respect to

assets allocated to individual account

plans in which individuals direct their

investments. As discussed in the

Summary of Public Comments section,

the Department agrees with the

commenters that the security and

accountability objectives of the proposal

can be met, in the case of an individual

account plan, for assets over which the

participant or beneficiary has the

opportunity to exercise control if the

participant or beneficiary is furnished,

at least annually, a statement from a

regulated financial institution

describing the assets held (or issued) by

such institution and the amount of such

assets. The final rule includes such

assets within the definition of qualifying

plan assets. This has the effect of

reducing the number of plans otherwise

subject to the enhanced bonding

requirement from 37,000 to 29,400, and

reducing the number of plans impacted

by the new SAR disclosures from

605,115 to 425,709. In addition to

meeting the Department’s objectives

with respect to small plan asset security,

this modification from the proposal also

limits the potential for imposition of

disclosure requirements in this rule that

duplicate the disclosure requirement of

other regulatory provisions, such as

those set forth in ERISA section 404(c)

and related regulations, or disclosures

made as part of normal business

practice.

Regulatory Flexibility Act

The Regulatory Flexibility Act (5

U.S.C. 601 et seq.) (RFA) imposes

certain requirements with respect to

Federal rules that are subject to the

notice and comment requirements of

section 553(b) of the Administrative

Procedure Act (5 U.S.C. 551 et seq.) and

which are likely to have a significant

economic impact on a substantial

number of small entities. Unless an

agency certifies that a final rule will not

have a significant economic impact on

a substantial number of small entities,

section 603 of the RFA requires that the

agency present a final regulatory

flexibility analysis describing the

impact of the rule on small entities at

the time of publication of the notice of

final rulemaking. Small entities include

small businesses, organizations and

governmental jurisdictions.

For purposes of analysis under the

RFA, the Department continues to

consider a small entity to be an

employee benefit plan with fewer than

100 participants. The basis of this

definition is found in section 104(a)(2)

of ERISA, which permits the Secretary

of Labor to prescribe simplified annual

reports for pension plans which cover

fewer than 100 participants. Under

section 104(a)(3) of ERISA, the Secretary

may also provide for exemptions or

simplified annual reporting and

disclosure for welfare benefit plans.

Pursuant to the authority of section

104(a)(3) of ERISA, the Department has

previously issued at 29 CFR 2520.104–

20, 2520.104–21, 2520.104–41,

2520.104–46 and 2520.104b–10 certain

simplified reporting provisions and

limited exemptions from reporting and

disclosure requirements for small plans,

including unfunded or insured welfare

plans covering fewer than 100

participants and satisfying certain other

requirements.

Further, while some large employers

may have small plans, in general most

small plans are maintained by small

employers. Thus, the Department

believes that assessing the impact of this

rule on small plans is an appropriate

substitute for evaluating the effect on

small entities. The definition of small

entity considered appropriate for this

purpose differs, however, from a

definition of small business which is

based on size standards promulgated by

the Small Business Administration

(SBA) (13 CFR 121.201) pursuant to the

Small Business Act (15 U.S.C. 631 et

seq.). No comments were received with

respect to the standard. Therefore, a

summary of the final regulatory

flexibility analysis based on the 100

participant size standard is presented

below.

The amount of assets in small pension

plans has grown nearly tenfold since

1975, making small pension plans an

increasingly important retirement

savings vehicle for Americans. In light

of recent cases involving embezzlement

or other misappropriations of pension

assets that have focused national

attention on the potential vulnerability

of small pension plans to fraud and

abuse, this regulation has been written

to enhance the security and

accountability of small pension plans.

The rule amends the Department’s

existing waiver of examination and

report of IQPA for employee benefit

plans under ERISA with fewer than 100

participants. This rule impacts all

classes of small pension plans subject to

Title I of ERISA with fewer than 100

participants. As shown by the regulatory

analysis, the regulation accomplishes

the objective of enhancing pension plan

security without imposing significant

costs via additional reporting,

recordkeeping, or other compliance

requirements.

Under the regulation, for each year in

which a waiver is claimed, at least 95

per cent of the assets of the plan must

constitute ‘‘qualifying plan assets’’ or

any person who handles assets of the

plan that do not constitute qualifying

plan assets must be bonded in

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62969

accordance with the requirements of

section 412, except that the amount of

the bond shall not be less than the

amount of such assets. In 1995, there

were approximately 605,000 employee

pension plans with fewer than 100

participants that met the requirements

for the audit waiver. The Department

estimates that, under the regulation,

only 29,400 small plans will not meet

the 95 per cent limit for qualifying plan

assets and will be required to either

purchase a fidelity bond or undergo an

audit. We assume that plans will choose

the less costly alternative of bonding to

satisfy the regulation. All 605,000 small

pension plans, however, will be subject

to SAR disclosure requirements, which

include adding new language to the

SAR, providing copies of statements

from regulated financial institutions and

bonding information free of charge to

participants and beneficiaries who

request them and, for those plans which

are not individual account plans,

modifying the SAR on and annual basis.

The Department received 19

comments regarding the proposal. The

majority commended the Department

for striking a reasonable balance

between providing accountability and

protection for small pension plans and

minimizing administrative costs and

recordkeeping. Four commenters raised

the issue of bonding and its impact on

small plans, specifically questioning

whether the cost of the bond would be

nominal as described in the proposal.

Commenters expressed the view that a

surety might respond to a perceived

additional exposure associated with

segregating a particular group of plans

which have the potential of posing

greater risk to the surety because of

adverse selection by requesting an audit

by an independent accountant or

subjecting the plan to other more

stringent underwriting requirements.

The Department had estimated that cost

of a fidelity bond to be $200 per plan.

Before determining that bonding was

the best and most cost efficient way of

protecting small assets, the Department

considered several alternatives,

including imposing an audit on all

small plans that do not meet the 95%

requirement, on-site inspection,

periodic reporting, and eliminating the

existing small plan audit waiver for

examination and reporting by an IQPA.

All of these options, however, were

either extremely expensive (ranging in

cost from $200 million to $4 billion),

thereby conflicting with the

Department’s priority of creating a

regulatory environment that encourages

pension plan formation, not feasible to

implement, or would not have

sufficiently enhanced small pension

plan security. After the comment

period, the Department consulted with

representatives of the surety industry to

further assess the impact of bonding on

small plans. Taking into consideration

the information received from industry

representatives as well as other

comments received by the public, the

Department has decided not to change

its original estimate of $200 per plan for

a fidelity bond.

The actual cost of a bond, according

to representatives from the surety

industry, will best be determined after

some period of time in which the

industry will be able to evaluate the risk

involved. The cost of a premium may

not change initially, but could be

adjusted upward or downward at some

future date. On the other hand, the risk

for bonding small plans invested in

assets which are not held or issued by

regulated financial institutions will not

be any greater under the regulation than

it is now, and the industry risk factor for

ERISA plans is low. Industry

representatives did not believe that

audits would be required. Because

underwriting judgment is necessarily

applied on a case-by-case basis, actual

industry experience will be the best

predictor of premium cost. Our analysis

of available information shows,

therefore, that bonding is the least costly

alternative, lowering aggregate costs by

a factor of more than 20 while similarly

accomplishing the goal of enhancing

small pension plan security.

It is also worth pointing out that, for

some small plans, compliance with the

existing bonding requirements under

section 412 of ERISA will also cover the

bonding requirement under this

regulation. Section 412 requires that any

person who handles funds or other

property must be bonded in an amount

not less than 10 percent of the amount

of funds handled. Unless the value of a

small plan’s non-qualifying plan assets

exceeds the value of 10 percent of total

plan funds or other property handled,

there is no additional cost to small plans

because of this regulation.

For those plans that do not have 95%

qualifying plan assets (approximately

29,414 plans), the Department estimates

that the cost for obtaining a bond will

be $574,000 for labor for a professional’s

time at $39 per hour. This represents a

reduction in cost from the proposed

estimate of $713,600. The Department

has made this adjustment because small

pension plans that are individual

account plans, which are generally

invested in mutual funds or insurance

company investments, have been

provided under the final regulation with

an alternative disclosure approach that

should result in a fewer number of these

plans needing to purchase a bond. The

cost to small plans for bond premiums

is therefore lower by $1,436,000. The

aggregate cost for labor and for the

premiums is $6.5 million, which

represents a cost savings of $1.5 million

from the original proposal. The per plan

cost for meeting the bonding

requirement is $220.

Commenters also suggested various

changes to the proposed SAR disclosure

requirements. Under the regulation, the

SAR must disclose to participants and

beneficiaries the names of the regulated

financial institutions which hold or

issue qualified plan assets, the amount

of those assets, the fact that the plan

must furnish to participants and

beneficiaries on request statements from

the financial institutions and

information on bonding, and, finally,

that if they do not receive the statements

and bonding information from the plan,

they may contact the plan administrator

or the Pension and Welfare Benefits

Administration, U.S. Department of

Labor. A number of commenters

suggested that, as an alternative to

listing each financial institution and the

amount of assets held or issued by the

institution, the SAR could include a

model statement which explained that

the statements were available to

participants and beneficiaries on

request. The Department considered

changing the disclosure requirements to

reflect this alternative, but determined

that the protection offered by furnishing

statements and bonding information

about the plans assets to participants

and beneficiaries was of primary

consideration in guarding pension plan

assets. A general disclosure about

availability of information will not offer

the level of plan protection from fraud

and dishonesty to participants and

beneficiaries that they will receive from

a plan’s actually furnishing to them on

an annual basis statements from

financial institutions and bonding

information.

Certain commenters expressed the

view that SAR disclosure for individual

account plans should not include

statements concerning the amount of

assets held or issued by financial

institutions. Participants and

beneficiaries in these plans regularly

receive statements informing them of

their asset allocation and the value of

the assets in their individually directed

accounts. The commenters stated that

furnishing statements from financial

institutions which do not hold or issue

their investments would not be relevant

and would not offer additional

protection from fraud or dishonesty. In

addition, commenters were concerned

about the lack of privacy for individual

62970 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

10The data in the table was estimated in the same

way as that for pension plans with more than 100

participants (see Executive Order 12866 Statement).

participant investors if very small plans

were required to furnish the names of

the financial institutions and the

amount of assets they held to all

participants. As a result of these

comments, the Department has revised

the regulation for individual account

plan disclosure. The Department agreed

that it was unnecessary to require small

plans to furnish duplicative

information. This has the effect of

eliminating both start up and annual

modification costs for individual

account plans as well as protecting

individual investor privacy, without

compromising SAR disclosure.

As part of the disclosure requirement

under the regulation, plans must add

new language to the SAR. Because

service providers typically use software

programs to generate SARs, commenters

indicated that estimates for revising

existing programs which generate SARs

would cost more than the Department

had estimated and would require a

professional’s time. The Department

agreed with this assessment and

increased its estimate for start up costs

for the additional time needed to rewrite

existing software programs. Due to the

lack of data on the number of service

providers and the number of plans they

serve, the Department can not

specifically estimate a cost for a service

provider to make the required changes.

The Department is aware, however, that

some service providers serve very large

numbers of plans and believes that some

economies of scale will arise from the

repetition of processes. The Department

also increased labor costs for a

professional to $57 per hour from $39

per hour to more accurately reflect the

level of expertise required to

accomplish the revision. Therefore, for

the 425,709 non-individually directed

small plans, the start up cost is $12.1

million, based on a professional’s time

at $57 per hour. This represents an

increase of $6.5 million in start up costs.

The start up cost per plan is $29.

Annual modification of the SAR

requires updating the list of financial

institutions holding qualified plan

assets, including the amount of those

assets as expressed in the institutions’

financial statements, and bonding

information. Because plan

administrators should receive from

qualifying financial institutions

statements identifying plan assets held

or issued by that institution in order to

properly discharge their annual

reporting and other obligations under

ERISA, no cost is associated with

obtaining the statements. Originally, the

Department did not include an estimate

for annual modification because there is

no burden in obtaining the statements

from the financial institutions and little

time was involved in transferring the

information to the SAR. However,

commenters suggested that modifying

the SAR to include a list of financial

institutions holding or issuing

qualifying plan assets and reporting the

changing amount of those assets

annually would require a professional’s

time. The Department has considered

these comments and believes that the

costs should include an adjustment for

annual modification of the SAR. The

cost to plans, which are not individual

account plans, for annual modification

of the SAR is $4.2 million base on a

professional’s time at $39 per hour. As

explained above, individual account

plans eligible for the alternative

disclosure approach set forth in the final

rule are not required to annually modify

SAR information and are therefore not

included in the cost estimate. For those

plans meeting the 95% test, the

aggregate annual disclosure cost of $4.2

million translates to $6 per plan.

Finally, plans are required to furnish

participants and beneficiaries with

copies of the financial institution

statements and bonding information

upon request. Excluding participants

and beneficiaries in individual account

plans, the Department assumes that 5%

of all small plan participants and

beneficiaries will request this

information. The cost to provide the

information is $.6 million, which

includes assembling and photocopying

by a clerical worker at $15 per hour and

mailing costs of $.37 per mailing.

Participants and beneficiaries of

individual account plans are excluded

because they are generally invested in

mutual funds and receive statements, at

least annually, related to their personal

accounts.

When considering any regulatory

action, it is important to consider the

impact on businesses of various sizes.

Given that well over half of all small

pension plans (54%) have between 1

and 10 participants, it is important to

focus on these small plans in particular.

ESTIMATES OF THE NUMBER AND PERCENTAGE OF VERY SMALL PENSION PLANS (1–9 PARTICIPANTS) NOT MEETING THE

‘‘QUALIFYING PLAN ASSETS’’ TEST AT VARIOUS THRESHOLD LEVELS

Alternative threshold levels for qualifying plan assets

100% 95% 90% 85% 80% 75% <75%

Number of plans .................................................................. 186,142 20,377 10,771 9,402 8,737 8,100 49

Percentage of plans ............................................................. 54 6 3 3 3 2 .01

As the above table shows,10 the

percent of plans with 1–9 participants

that would meet the requirement that

95% of assets be ‘‘qualifying plan

assets’’ is the same as that for all small

plans with fewer than 100 participants

as indicated below. Therefore, the 95%

threshold is reasonable for all classes of

plans within the category of those with

fewer than 100 participants.

ESTIMATES OF THE NUMBER AND PERCENTAGE OF SMALL PENSION PLANS (1–99 PARTICIPANTS) NOT MEETING THE

‘‘QUALIFYING PLAN ASSETS’’ TEST AT VARIOUS THRESHOLD LEVELS

Alternative threshold levels for qualifying plan assets

100% 95% 90% 85% 80% 75% <75%

Number of plans .................................................................. 339,967 29,414 11,409 9,037 7,855 6,743 0

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62971

ESTIMATES OF THE NUMBER AND PERCENTAGE OF SMALL PENSION PLANS (1–99 PARTICIPANTS) NOT MEETING THE

‘‘QUALIFYING PLAN ASSETS’’ TEST AT VARIOUS THRESHOLD LEVELS—Continued

Alternative threshold levels for qualifying plan assets

100% 95% 90% 85% 80% 75% <75%

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

Paperwork Reduction Act

In accordance with the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501–

3520) (PRA 95), the Department

submitted the information collection

request (ICR) included in the proposed

Small Pension Plan Security

Amendments to OMB for review and

clearance at the time the Notice of

Proposed Rulemaking (NPRM) was

published in the Federal Register

(December 1, 1999, 64 FR 67436). OMB

approved the revisions to the existing

information collection, the ERISA

Summary Annual Report, under control

number 1210–0040 on February 2, 2000.

This approval will expire on February

28, 2003. Certain additional adjustments

have been made to the ICR and the

estimates of burden in response to

public comments. The information

collection provisions of this final rule,

as well as the adjustments made to the

information collection provisions and

the burden estimates originally

incorporated in the proposal, are

discussed below.

The revisions to the small plan audit

waiver implemented by this final rule

will increase the security and

accountability of small pension plans,

while minimizing the additional

paperwork burden imposed on small

plans. No additional paperwork burden

is associated with two of the three

provisions in the regulation—the

requirement that 95% of plan assets be

‘‘qualifying plan assets’’ and the more

protective bonding requirement for

those plans not meeting the 95% test.

For those plans which are not

individual account plans, additional

burden does arise from three other

provisions: including new language in

the SAR; modifying the SAR annually to

identify the institutions holding or

issuing qualifying plan assets and

amounts of the assets reported by the

institutions as of the end of the plan

year, and; furnishing copies of financial

institution statements and bonding

information upon request.

It is assumed that adding the

additional language to the SAR form

will be accomplished by service

providers for 90% of plans, and inhouse for the remaining plans. The start

up cost is estimated to be $10.9 million

for the 90% of small plans using service

providers for 30 minutes of a

professional’s time at $57 per hour. This

amounts to about $3.6 million when

annualized over a three-year period. The

hourly burden for plans that will be

required to add additional information

to their SAR themselves (assumed to be

10% of small plans) is 21,286 hours,

based on 30 minutes of a professional’s

time at $57 per hour. This estimate has

been adjusted from the one outlined in

the original proposal. The increase of

$6.2 million is the result of an

adjustment in the hourly rate for a

professional from $39 per hour to $57

per hour to reflect the fact that this work

may more likely be done by systems

analysts and financial managers rather

than the auditors and accountants

previously assumed to perform the task

of revising the SAR format. We have

also adjusted the estimated time

required to complete this work from 15

minutes per plan to 30 minutes per

plan.

These adjustments are the result of

comments received in response to the

NPRM that indicated that both the

hourly rate for a professional and the

time allotted for drafting new SAR

language and modifying existing

software and information management

procedures to produce a detailed listing

of qualifying assets by financial

institution at year end were too low.

The revised hourly rate is derived from

1998 BLS data on occupational wages

for financial managers, which is the

higher of the wage rates for financial

managers and systems analysts, the two

professional categories assumed most

likely to complete this work. The

change in the hourly burden reflects a

reevaluation by the Department in

response to comments of the time it will

take to make changes to a plan’s current

SAR, particularly where these changes

may involve rewriting an existing

software package. The Department also

recognized that most SARs are

completed by service providers in a

systematic fashion, either through the

use of existing software packages

interrelated with the preparation of the

Form 5500 (which the SAR

summarizes), or by means of extracting

figures from financial statements

supporting the Form 5500. In either

case, the service provider is expected to

have ready access to the year end

statements needed to set up an

appropriate format for listing

institutions and amounts, as well as

modifying the institutions and amounts

from year to year, because the

statements must be used in the

preparation of the annual report.

Commenters noted, and the

Department recognizes, that revising

software or procedures may in many

instances require more than 30 minutes.

However, the Department believes that

the time required to change the SAR

format and procedures used to produce

the detail figures will be moderated by

several factors. First, with the exception

of the institutions and amounts, and the

name of the surety issuing the plan’s

fidelity bond if the plan has more than

5% of its assets in non-qualifying assets,

the Department has supplied in

§ 2520.104–46(b)(1)(i)(B)(3) and (4) the

general format of the language to be

added.

In addition, where service providers

serve multiple client plans, it is

assumed that they will achieve certain

efficiencies in modifying systems and

procedures to generate the revised SAR

format, resulting in lower per plan costs.

The Department can not specifically

estimate this effect or develop an

estimate of burden per service provider

due to the lack of information,

especially with respect to small plans,

on the number of service providers and

number of providers servicing multiple

plans. However, the Department is

aware that some service providers

prepare annual reports and SARs for

very large numbers of plans, and

believes that economies of scale do arise

in those situations, generally lowering

estimates derived on a per plan basis.

Finally, the existing systems of

service providers to small plans may

more readily accommodate the required

format changes to the extent that these

service providers also have large plan

clients. As part of their annual reporting

obligations, large pension plans are

currently required to submit a listing of

assets held for investment that is similar

in certain respects to the listing of the

regulated financial institutions holding

qualifying assets and the amounts held

required under the final rule. Adjusting

62972 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

11See section 404(c) of ERISA and the regulations

issued thereunder, 29 CFR § 2550.404c–1 et seq.

12The burden of the disclosure provisions of the

Department’s regulation under section 404(c) of

ERISA is accounted for separately under the

currently approved OMB control number 1210–

0090.

a system already designed to produce

the listing of assets held for investment

may require a smaller commitment of

resources to meet the SAR disclosure

conditions of the final rule than revising

a system that does not include this

capability. For these reasons, the

Department considers 30 minutes per

plan to be a reasonable estimate of the

average time required for modification

of the SAR format.

The regulation also provides that a

plan administrator must, on an annual

basis, modify the SAR to include the

names of regulated financial institutions

holding or issuing qualifying plan

assets, the amount of those assets at the

end of the plan year, and certain

bonding information. Originally, the

Department did not include a cost

burden for the annual modification in

the proposal’s estimates because there is

no burden associated with obtaining the

statements from the financial

institutions and the amount of time

required to transfer the information to

the SAR was believed to be nominal.

Commenters, however, observed that

modifying the SAR to include a list of

financial institutions holding or issuing

qualified plan assets and reporting the

amount of those assets would require a

professional’s time each year to

accomplish because assets and amounts

will typically change from year to year.

The Department has taken these

comments into consideration, and

concludes that they support an

adjustment of the hour and cost burdens

originally estimated for annual

modification of the SAR. This

adjustment results in increases of 10,643

hours and $3.7 million from prior

estimates for the 425,709 plans required

to modify the SAR for changes in the

assets and amounts annually. This

estimate is based on an average of 15

minutes of a professional’s time at $39

per hour each year, and the assumption

that 90% of plans purchase services to

comply with SAR requirements. Again,

some plans may require more time to

modify the SAR listing each year, but

the Department notes that the time

required for annual modifications will

be reduced to the extent that plans and

service providers are in a position to

invest in the modification of systems

and SAR formatting to fully automate

the annual modification process.

It should be noted that the

adjustments to the assumptions

described above would have resulted in

more substantial increases in burden

estimates in the absence of the

modification of the requirements of the

proposal as they relate to those

individual account plans in which

investments are individually directed.

As described in detail above in the

Summary of Public Comments section

of this Notice, the Department has

modified both the definition of

qualifying plan assets to include

participant directed assets under

specific circumstances and the

disclosure provisions as they relate to

participant directed assets. These

changes have the effect of lowering the

number of plans impacted by the SAR

and system design modification and the

annual asset listing requirement from

605,115 to 425,709 (179,406 small plans

are reported on Form 5500 to have

individually directed assets) while

ensuring that the objectives of the

regulation are met without the

imposition of duplicative disclosure

obligations. The participants in those

179,406 plans represent 3,512,000 of the

9,373,000 participants in all small

pension plans.

It is possible that the estimate of

individual account plans that will be

excepted from the requirement to list

assets, amounts, and institutions in the

SAR because the investments are

individually directed, and account

statements for these assets are provided

by the financial institutions to

participants at least annually, will differ

to some degree from the actual number

that will be excepted. Because the Form

5500 data element used to estimate this

number is an indicator that some or all

of the assets of an individual account

plan filer are individually directed, no

data is available to support an estimate

of the number of such plans in which

all assets are individually directed.

However, the Department is aware that

the assets not subject to individual

direction in these plans often include

participant loans and employer

securities, which are also excepted from

the detailed SAR disclosure

requirement. Accordingly, the

Department believes that the actual

degree of variation from the number of

plans assumed to be excepted will be

small.

In addition to addressing the privacy

concerns raised by commenters with

respect to the disclosure in the SAR of

assets and amounts held in individually

directed accounts, the Department also

wished to address the coordination of

the requirements of this rule with other

statutory and regulatory requirements,11

as well as existing business practices

relevant to individually directed

account plans. While not all plans that

permit participants or beneficiaries to

exercise control over assets in their

individual accounts for purposes of this

final rule would intend to meet all of

the conditions of section 404(c) and

related regulations, the Department

believes that the majority of these plans

do customarily make the statements of

the financial institutions holding the

individual account assets available to

participants and beneficiaries at least

annually, either to satisfy the conditions

of section 404(c) 12 or as a result of the

business practice of advising

participants of their valued benefits.

Although the Department considered

alternatives in the development of the

final rule that would retain some

individual-level SAR disclosure features

for individually directed accounts while

addressing privacy concerns, it

ultimately concluded that providing an

exception from plan level disclosures

when statements from the regulated

financial institutions are in fact

provided annually to individually

directed account holders would

adequately protect the assets of these

small plans while ensuring that the

information collection is useful and

non-duplicative. As a result, the total

cost of system modification and annual

modifications to the SAR is

approximately $7 million lower than it

would have been had this exception not

been considered an appropriate

response in light of both public

comment and the principles of the

Paperwork Reduction Act.

Finally, plan administrators are

required under the regulation to make

available for examination or furnish

copies of the statements from the

regulated financial institutions and the

evidence of bonding when less than

95% of the assets of the plan are

qualifying plans assets, to participants

and beneficiaries who request them. The

3,512,000 participants in the 179,406

small individual account plans in which

assets are reported on Form 5500 to be

individually directed are assumed to be

receiving annual statements related to

their particular accounts and are

therefore not included in the burden

estimates for furnishing documents on

request. The Department assumes that

5% of the remaining 5,681,000

participants in small plans will request

this information annually. Because the

documents already have been provided

by bonding companies and financial

institutions, the cost of compliance

involves 5 minutes to ready the

appropriate documents for mailing and

2 minutes of photocopying by a clerical

worker, at $15 per hour, and mailing

Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations 62973

costs of $.37 per mailing. The hour

burden for the in house furnishing of

the documents is estimated at 3,419.

The cost burden for the 90% of plans

assumed to purchase services to comply

with the requirement to make this

additional information available upon

request is estimated at $576,479. This

estimate is lower than the $995,000

estimated in connection with the

proposal due to the modification of the

proposed requirements with respect to

assets in the individual account of a

participant or beneficiary over which

the participant or beneficiary has the

opportunity to exercise control, and

with respect to which the participant is

furnished a statement at least annually

describing the assets held or issued by

the financial institution issuing the

statement.

In summary, the estimated hour and

cost burdens of the information

collection provisions of this final rule

are as follows:

Agency: Pension and Welfare Benefits

Administration, Department of Labor.

Title: ERISA Summary Annual Report

Requirement.

OMB Number: 1210–0040.

Affected Public: Individuals or

households; Business or other for-profit;

Not-for-profit institutions.

Frequency of Response: Annually.

Total Respondents: 817,000.

Total Responses: 235,000,000.

Estimated Burden Hours: 1,404,924.

Estimated Annual Cost (Capital/

Startup): $3,639,817.

Estimated Annual Costs (Operating

and Maintenance): $115,687,000.

Total Annualized Costs:

$119,327,000.

Persons are not required to respond to

an information collection request unless

it displays a currently valid OMB

control number.

Unfunded Mandates Reform Act

For purposes of the Unfunded

Mandates Reform Act of 1995 (Pub. L.

104–4), as well as Executive Order

12875, this rule does not include any

Federal mandate that may result in

expenditures by State, local or tribal

governments, and does not impose an

annual burden exceeding $100 million

on the private sector.

Federalism Statement

Executive Order 13132 (August 4,

1999) outlines fundamental principles

of federalism and requires the

adherence to specific criteria by federal

agencies in the process of their

formulation and implementation of

policies that have substantial direct

effects on the States, the relationship

between the national government and

States, or on the distribution of power

and responsibilities among the various

levels of government. This final rule

does not have federalism implications

because it has no substantial direct

effect on the States, on the relationship

between the national government and

the States, or on the distribution of

power and responsibilities among the

various levels of government. Section

514 of ERISA provides, with certain

exceptions specifically enumerated, that

the provisions of Titles I and IV of

ERISA supercede any and all laws of the

States as they relate to any employee

benefit plan covered under ERISA.

Further, this final rule amends annual

reporting and disclosure regulations that

have been in effect in similar form for

many years pursuant to the

Department’s authority under section

104(a)(2)(A) of ERISA to prescribe, by

regulation, simplified annual reports for

pension plans with fewer than 100

participants. The amendments

incorporated in this final rule do not

alter the fundamental requirements of

the statute with respect to the reporting

and disclosure requirements for

employee benefit plans, and as such

have no implications for the States or

the relationship or distribution of power

between the national government and

the States.

Small Business Regulatory Enforcement

Fairness Act

The final rule being issued here is

subject to the provisions of the Small

Business Regulatory Enforcement

Fairness Act of 1996 (5 U.S.C. 801 et

seq.) (SBREFA) and has been

transmitted to Congress and the

Comptroller General for review.

Statutory Authority

These regulations are issued pursuant

to authority contained in section 505 of

ERISA (Pub. L. 93–406, 88 Stat. 894, 29

U.S.C. 1135) and sections 103(a) and

104(a) of ERISA, as amended, (Pub. L.

104–191, 110 Stat. 1936, 1951, 29 U.S.C.

1023 and 1024) and under Secretary of

Labor’s Order No. 1–87, 52 FR 13139,

April 21, 1987.

List of Subjects in 29 CFR Part 2520

Accountants, Disclosure

requirements, Employee benefit plans,

Employee Retirement Income Security

Act, Pension plans, and Reporting and

recordkeeping requirements.

For the reasons set out in the

preamble, Part 2520 of Chapter XXV of

Title 29 of the Code of Federal

Regulations is amended as follows:

PART 2520—RULES AND

REGULATIONS FOR REPORTING AND

DISCLOSURE

1. The authority for Part 2520

continues to read as follows:

Authority: Secs. 101, 102, 103, 104, 105,

109, 110, 111(b)(2), 111(c) and 505, Pub. L.

93–406, 88 Stat. 840–52 and 894 (29 U.S.C.

1021–1025, 1029–31, and 1135); Secretary of

Labor’s Order No. 27–74, 13–76, 1–87, and

Labor Management Services Administration

Order 2–6.

Sections 2520.102–3, 2520.104b–1

and 2520.104b–3 also are issued under

sec. 101(a), (c) and (g)(4) of Pub. L. 104–

191, 110 Stat. 1936, 1939, 1951 and

1955, and sec. 603 of Pub. L. 104–204,

110 Stat. 2935 (29 U.S.C. 1185 and

1191c).

2. Section 2520.104–41 is amended by

revising paragraph (c) as follows:

§ 2520.104–41 Simplified annual reporting

requirements for plans with fewer than 100

participants.

* * * * *

(c) Contents. The administrator of an

employee pension or welfare benefit

plan described in paragraph (b) of this

section shall file, in the manner

prescribed in § 2520.104a–5, a

completed Form 5500 ‘‘Annual Return/

Report of Employee Benefit Plan,’’

including any required schedules or

statements prescribed by the

instructions to the form, and, unless

waived by § 2520.104–46, a report of an

independent qualified public

accountant meeting the requirements of

§ 2520.103–1(b).

* * * * *

3. Section 2520.104–46 is amended by

revising paragraphs (b)(1) and (d) to

read as follows:

§ 2520.104–46 Waiver of examination and

report of an independent qualified public

accountant for employee benefit plans with

fewer than 100 participants.

* * * * *

(b) Application. (1)(i) The

administrator of an employee pension

benefit plan for which simplified annual

reporting has been prescribed in

accordance with section 104(a)(2)(A) of

the Act and § 2520.104–41 is not

required to comply with the annual

reporting requirements described in

paragraph (c) of this section, provided

that with respect to each plan year for

which the waiver is claimed —

(A)(1) At least 95 percent of the assets

of the plan constitute qualifying plan

assets within the meaning of paragraph

(b)(1)(ii) of this section, or

(2) Any person who handles assets of

the plan that do not constitute

qualifying plan assets is bonded in

62974 Federal Register / Vol. 65, No. 203 / Thursday, October 19, 2000 / Rules and Regulations

accordance with the requirements of

section 412 of the Act and the

regulations issued thereunder, except

that the amount of the bond shall not be

less than the value of such assets;

(B) The summary annual report,

described in § 2520.104b–10, includes,

in addition to any other required

information:

(1) Except for qualifying plan assets

described in paragraph (b)(1)(ii)(A), (B)

and (F) of this section, the name of each

regulated financial institution holding

(or issuing) qualifying plan assets and

the amount of such assets reported by

the institution as of the end of the plan

year;

(2) The name of the surety company

issuing the bond, if the plan has more

than 5% of its assets in non-qualifying

plan assets;

(3) A notice indicating that

participants and beneficiaries may,

upon request and without charge,

examine, or receive copies of, evidence

of the required bond and statements

received from the regulated financial

institutions describing the qualifying

plan assets; and

(4) A notice stating that participants

and beneficiaries should contact the

Regional Office of the U.S. Department

of Labor’s Pension and Welfare Benefits

Administration if they are unable to

examine or obtain copies of the

regulated financial institution

statements or evidence of the required

bond, if applicable; and

(C) in response to a request from any

participant or beneficiary, the

administrator, without charge to the

participant or beneficiary, makes

available for examination, or upon

request furnishes copies of, each

regulated financial institution statement

and evidence of any bond required by

paragraph (b)(1)(i)(A)(2).

(ii) For purposes of paragraph (b)(1),

the term ‘‘qualifying plan assets’’ means:

(A) Qualifying employer securities, as

defined in section 407(d)(5) of the Act

and the regulations issued thereunder;

(B) Any loan meeting the

requirements of section 408(b)(1) of the

Act and the regulations issued

thereunder;

(C) Any assets held by any of the

following institutions:

(1) A bank or similar financial

institution as defined in § 2550.408b–

4(c);

(2) An insurance company qualified

to do business under the laws of a state;

(3) An organization registered as a

broker-dealer under the Securities

Exchange Act of 1934; or

(4) Any other organization authorized

to act as a trustee for individual

retirement accounts under section 408

of the Internal Revenue Code.

(D) Shares issued by an investment

company registered under the

Investment Company Act of 1940;

(E) Investment and annuity contracts

issued by any insurance company

qualified to do business under the laws

of a state; and,

(F) In the case of an individual

account plan, any assets in the

individual account of a participant or

beneficiary over which the participant

or beneficiary has the opportunity to

exercise control and with respect to

which the participant or beneficiary is

furnished, at least annually, a statement

from a regulated financial institution

referred to in paragraphs (b)(1)(ii)(C), (D)

or (E) of this section describing the

assets held (or issued) by such

institution and the amount of such

assets.

(iii)(A) For purposes of this paragraph

(b)(1), the determination of the

percentage of all plan assets consisting

of qualifying plan assets with respect to

a given plan year shall be made in the

same manner as the amount of the bond

is determined pursuant to §§ 2580.412–

11, 2580.412–14, and 2580.412–15.

(B) Examples. Plan A, which reports

on a calendar year basis, has total assets

of $600,000 as of the end of the 1999

plan year. Plan A’s assets, as of the end

of year, include: investments in various

bank, insurance company and mutual

fund products of $520,000; investments

in qualifying employer securities of

$40,000; participant loans, meeting the

requirements of ERISA section

408(b)(1), totaling $20,000; and a

$20,000 investment in a real estate

limited partnership. Because the only

asset of the plan that does not constitute

a ‘‘qualifying plan asset’’ is the $20,000

real estate investment and that

investment represents less than 5% of

the plan’s total assets, no bond would be

required under the proposal as a

condition for the waiver for the 2000

plan year. By contrast, Plan B also has

total assets of $600,000 as of the end of

the 1999 plan year, of which $558,000

constitutes ‘‘qualifying plan assets’’ and

$42,000 constitutes non-qualifying plan

assets. Because 7%—more than 5%—of

Plan B’s assets do not constitute

‘‘qualifying plan assets,’’ Plan B, as a

condition to electing the waiver for the

2000 plan year, must ensure that it has

a fidelity bond in an amount equal to at

least $42,000 covering persons handling

non-qualifying plan assets. Inasmuch as

compliance with section 412 requires

the amount of bonds to be not less than

10% of the amount of all the plan’s

funds or other property handled, the

bond acquired for section 412 purposes

may be adequate to cover the nonqualifying plan assets without an

increase (i.e., if the amount of the bond

determined to be needed for the relevant

persons for section 412 purposes is at

least $42,000). As demonstrated by the

foregoing example, where a plan has

more than 5% of its assets in nonqualifying plan assets, the bond

required by the proposal is for the total

amount of the non-qualifying plan

assets, not just the amount in excess of

5%.

* * * * *

(d) Limitations. (1) The waiver

described in this section does not affect

the obligation of a plan described in

paragraph (b) (1) or (2) of this section to

file a Form 5500 ‘‘Annual Return/Report

of Employee Benefit Plan,’’ including

any required schedules or statements

prescribed by the instructions to the

form. See § 2520.104–41.

(2) For purposes of this section, an

employee pension benefit plan for

which simplified annual reporting has

been prescribed includes an employee

pension benefit plan which elects to file

a Form 5500 as a small plan pursuant

to § 2520.103–1(d) with respect to the

plan year for which the waiver is

claimed. See § 2520.104–41.

(3) For purposes of this section, an

employee welfare benefit plan that

covers fewer than 100 participants at the

beginning of the plan year includes an

employee welfare benefit plan which

elects to file a Form 5500 as a small plan

pursuant to § 2520.103–1(d) with

respect to the plan year for which the

waiver is claimed. See § 2520.104–41.

(4) A plan that elects to file a Form

5500 as a large plan pursuant to

§ 2520.103–1(d) may not claim a waiver

under this section.

Signed at Washington, D.C., this 16th day

of October, 2000.

Leslie B. Kramerich,

Acting Assistant Secretary, Pension and

Welfare Benefits Administration, U.S.

Department of Labor.

[FR Doc. 00–26880 Filed 10–18–00; 8:45 am]

BILLING CODE 4510–29–P