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October 24, 2007
Good morning Chairman Kohl, Ranking Member Smith, and Members of the
Committee. Thank you for inviting me to discuss 401(k) plan fee
disclosure, the Department of Labor’s role in overseeing plan fees, and
initiatives to increase transparency and disclosure of plan fee and
expense information. I am Bradford Campbell, the Assistant Secretary of
Labor for the Employee Benefits Security Administration (EBSA). I am proud
to be here today representing the Department of Labor and EBSA. Our
mission is to protect the security of retirement, health and other
employee benefits for America’s workers, retirees and their families,
and to support the growth of our private benefits system.
Ensuring the security of retirement benefits is a core mission of EBSA,
and one of this Administration’s highest priorities. Excessive fees can
undermine retirement security by reducing the accumulation of assets. It
is therefore critical that plan participants directing the investment of
their contributions, and plan fiduciaries charged with the responsibility
of prudently selecting service providers and paying only reasonable fees
and expenses, have the information they need to make appropriate
decisions.
That is why the Department began a series of regulatory initiatives
last year to expand disclosure requirements in three distinct areas:
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Disclosures by plans to participants to assist in
making investment decisions;
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Disclosures by service providers to plan fiduciaries
to assist in assessing the reasonableness of provider compensation and
potential conflicts of interest; and
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More efficient, expanded fee and compensation
disclosures to the government and the public through a substantially
revised, electronically filed Form 5500 Annual Report.
Each of these projects addresses different disclosure needs, and our
regulations will be tailored to ensure that appropriate disclosures are
made in a cost effective manner. For example, participants are unlikely to
find useful extensive disclosure documents written in “legalese”—instead,
it appears from comments we received thus far that participants want
concise and readily understandable comparative information about plan
costs and their investment options. By contrast, plan fiduciaries want
detailed disclosures in order to properly carry out their duties under the
law, enabling them to understand the nature of the services being
provided, all fees and expenses received for the services, any conflicts
of interest on the part of the service provider, and any indirect
compensation providers may receive in connection with the plan’s
business.
We have made significant progress on these projects. We will be issuing
a final regulation requiring additional public disclosure of fee and
expense information on the Form 5500 within the next few weeks. This year,
we also expect to publish a proposed regulation requiring specific and
comprehensive disclosures to plan fiduciaries by service providers. We
also concluded a Request for Information seeking the views of the
interested public on issues surrounding disclosures to participants. We
are currently evaluating the comments received from consumer groups, plan
sponsors, service providers and others as we develop a proposed
regulation. These projects will be explained in detail later in my
testimony.
The Employee Retirement Income Security Act of 1974 (ERISA) provides
the Secretary of Labor with broad regulatory authority, enabling the
Department to pursue these comprehensive disclosure initiatives without
need for a statutory amendment. The regulatory process currently underway
ensures that all voices and points of view will be heard and provides an
effective means of resolving the many complex and technical issues
presented. I hope that as Congress considers this issue, it recognizes the
Department’s existing statutory authority and takes no action that could
disrupt our current efforts to provide these important disclosures to
workers. My testimony today will discuss in more detail the Department’s
activities related to plan fees. Also, I will describe the Department’s
regulatory and enforcement initiatives focused on improving the
transparency of fee and expense information for both plan fiduciaries and
participants.
EBSA is responsible for administering and enforcing the fiduciary,
reporting, and disclosure provisions of Title I of ERISA. EBSA oversees
approximately 683,000 private pension plans, including 419,000
participant-directed individual account plans such as 401(k) plans, and
millions of private health and welfare plans that are subject to ERISA.(1)
Participant-directed individual account plans under our jurisdiction hold
over $2.2 trillion in assets and cover more than 44.4 million active
participants. Since 401(k)-type plans began to proliferate in the early
1980s, the number of employees investing through these types of plans has
grown dramatically. The number of active participants has risen almost 500
percent since 1984 and has increased by 11.4 percent since 2000. EBSA
employs a comprehensive, integrated approach encompassing programs for
enforcement, compliance assistance, interpretive guidance, legislation,
and research to protect and advance the retirement security of our nation’s
workers and retirees.
Title I of ERISA establishes standards of fiduciary conduct for persons
who are responsible for the administration and management of benefit
plans. It also establishes standards for the reporting of plan related
financial and benefit information to the Department, the IRS and the PBGC,
and the disclosure of essential plan related information to participants
and beneficiaries.
ERISA requires plan fiduciaries to discharge their duties solely in the
interest of plan participants and beneficiaries, and for the exclusive
purpose of providing benefits and defraying reasonable expenses of plan
administration. In discharging their duties, fiduciaries must act
prudently and in accordance with the documents governing the plan. If a
fiduciary’s conduct fails to meet ERISA’s standards, the fiduciary is
personally liable for plan losses attributable to such failure.
ERISA protects participants and beneficiaries, as well as plan
sponsors, by holding plan fiduciaries accountable for prudently selecting
plan investments and service providers. In carrying out this
responsibility, plan fiduciaries must take into account relevant
information relating to the plan, the investment, and the service
provider, and are specifically obligated to consider fees and expenses.
ERISA prohibits the payment of fees to service providers unless the
services are necessary and provided pursuant to a reasonable contract, and
the plan pays no more than reasonable compensation. Thus, plan fiduciaries
must ensure that fees paid to service providers and other expenses of the
plan are reasonable in light of the level and quality of services
provided. Plan fiduciaries must also be able to assess whether revenue
sharing or other indirect compensation arrangements create conflicts of
interest on the part of the service provider that might affect the quality
of the services to be performed. These responsibilities are ongoing. After
initially selecting service providers and investments for their plans,
fiduciaries are required to monitor plan fees and expenses to determine
whether they continue to be reasonable and whether there are conflicts of
interest.
EBSA assists plan fiduciaries and others in understanding their
obligations under ERISA, including the importance of understanding service
provider fees and relationships, by providing interpretive guidance(2) and
making related materials available on its Web site. One such publication
developed by EBSA is Understanding Retirement Plan Fees and Expenses,
which provides general information about plan fees and expenses. In
conjunction with the Securities and Exchange Commission, we also developed
a fact sheet, “Selecting and Monitoring Pension Consultants – Tips for
Plan Fiduciaries.” This fact sheet contains a set of questions to assist
plan fiduciaries in evaluating the objectivity of pension consultant
recommendations.
EBSA also has made available on its Web site a model “401(k) Plan Fee
Disclosure Form” to assist fiduciaries of individual account pension
plans when analyzing and comparing the costs associated with selecting
service providers and investment products. This form is the product of a
coordinated effort of the American Bankers Association, Investment Company
Institute, and the American Council of Life Insurers.
To help educate plan sponsors and fiduciaries about their obligations
under ERISA, EBSA conducts numerous educational and outreach activities.
Our campaign, “Getting It Right – Know Your Fiduciary
Responsibilities,” includes nationwide educational seminars to help plan
sponsors understand the law. The program focuses on fiduciary obligations,
especially related to the importance of selecting plan service providers
and the role of fee and compensation considerations in that selection
process. EBSA has conducted 21 fiduciary education programs since May 2004
in different cities throughout the United States. EBSA also has conducted
49 health benefits education seminars, covering nearly every state, since
2001. Beginning in February 2005, these seminars added a focus on
fiduciary responsibilities. EBSA will continue to provide seminars in
additional locations under each program.
ERISA currently provides for a number of disclosures aimed at providing
participants and beneficiaries information about their plans’
investments. For example, information is provided to participants through
summary plan descriptions and summary annual reports. Under the Pension
Protection Act of 2006, plan administrators are required to automatically
furnish pension benefit statements to plan participants and beneficiaries.
The Department issued Field Assistance Bulletins in December 2006 and in
October 2007 to provide initial guidance on complying with the new
statutory requirements. Statements must be furnished at least once each
quarter, in the case of individual account plans that permit participants
to direct their investments, and at least once each year, in the case of
individual account plans that do not permit participants to direct their
investments. Other disclosures, such as copies of the plan documents, are
available to participants on request.
Additional disclosures may be required by the Department’s rules
concerning whether a participant has “exercised control” over his or
her account. ERISA section 404(c) provides that plan fiduciaries are not
liable for investment losses which result from the participant’s
exercise of control. A number of conditions must be satisfied, including
that specified information concerning plan investments must be provided to
plan participants. Information fundamental to participants’ investment
decisions must be furnished automatically. Additional information must be
provided on request.
EBSA is committed to assisting plan participants and beneficiaries in
understanding the importance of plan fees and expenses and the effect of
those fees and expenses on retirement savings. EBSA has developed
educational brochures and materials available for distribution and through
our Web site. EBSA’s brochure entitled A Look at 401(k) Plan Fees for
Employees is targeted to participants and beneficiaries of 401(k) plans
who are responsible for directing their own investments. The brochure
answers frequently asked questions about fees and highlights the most
common fees, and is designed to encourage participants to make informed
investment decisions and to consider fees as a factor in decision making.
Last fiscal year, EBSA distributed over 5,400 copies of this brochure, and
over 46,000 visitors viewed the brochure on our Web site.
More general information is provided in the publications,
What You
Should Know about Your Retirement Plan and Taking the Mystery out of
Retirement Planning. In the same period, EBSA distributed over 86,000
copies of these two brochures, and almost 102,000 visitors viewed these
materials on our Web site. EBSA’s Study of 401(k) Plan Fees and
Expenses, which describes differences in fee structures faced by plan
sponsors when they purchase services from outside providers, is also
available.
EBSA currently is pursuing three initiatives to improve the
transparency of fee and expense information to participants, plan sponsors
and fiduciaries, government agencies and the public. We began these
initiatives, in part, to address concerns that participants are not
receiving information in a format useful to them in making investment
decisions, and that plan fiduciaries are having difficulty getting needed
fee and compensation arrangement information from service providers to
fully satisfy their fiduciary duties. The needs of participants and plan
fiduciaries are changing as the financial services industry evolves,
offering an increasingly complex array of products and services.
Disclosures to Participants
EBSA currently is developing a proposed regulation addressing required
disclosures to participants in participant-directed individual account
plans. This regulation will ensure that participants have concise, readily
understandable information they can use to make informed decisions about
the investment and management of their retirement accounts. Special care
must be taken to ensure that the benefits to participants and
beneficiaries of any new requirement outweigh the compliance costs, given
that any such costs are likely to be charged against the individual
accounts of participants.
On April 25, 2007, the Department published a Request for Information
to gather data to develop the proposed regulation. The Request for
Information invited suggestions from plan participants, plan sponsors,
plan service providers, consumer advocates and others for improving the
current disclosures applicable to participant-directed individual account
plans and requested analyses of the benefits and costs of implementing
such suggestions. The Department specifically invited comment on the
recommendation of the Government Accountability Office that plans be
required to provide a summary of all fees that are paid out of plan assets
or directly by participants, as well as other possible approaches to
improving the disclosure of plan fee and expense information.
In response to our Request for Information, the Department received
many comments highlighting the importance of brevity and relevance in fee
disclosures to participants. Commenters suggested that one or more methods
of aggregating fee information would provide participants with meaningful
and useful disclosure. The information we received also makes it clear
that excessively detailed disclosures are likely to confuse participants
or to be ignored. Disclosures intended for participants should illuminate,
not confuse, especially when it is those participants that must bear the
potentially significant cost of the preparation and distribution.
In connection with this initiative, EBSA is also working with the
Securities and Exchange Commission (SEC) to develop a framework for
disclosure of information about fees charged by financial service
providers, such as mutual funds, that would be more easily understood by
participants and beneficiaries. Improved mutual fund disclosure would
assist plan participants and beneficiaries because a large proportion of
401(k) plan assets are invested in mutual fund shares. We are working
closely with the SEC to ensure that the disclosure requirements under our
respective laws are complementary.
We are hopeful that improved fee disclosure will assist plan
participants and beneficiaries in making more informed decisions about
their investments. Better disclosure could also lead to enhanced
competition between financial service providers which could lead to lower
fees and enhanced services.
Disclosures to Plan Fiduciaries
EBSA will soon be issuing a proposed regulation amending its current
regulation under ERISA section 408(b)(2) to clarify the information
fiduciaries must receive and service providers must disclose for purposes
of determining whether a contract or arrangement is “reasonable,” as
required by ERISA’s statutory exemption for service arrangements. Our
intent is to ensure that service providers entering into or renewing
contracts with plans disclose to plan fiduciaries comprehensive and
accurate information concerning the providers’ receipt of direct and
indirect compensation or fees and the potential for conflicts of interest
that may affect the provider’s performance of services. The information
provided must be sufficient for fiduciaries to make informed decisions
about the services that will be provided, the costs of those services, and
potential conflicts of interest. The Department believes that such
disclosures are critical to ensuring that contracts and arrangements are
“reasonable” within the meaning of the statute. This proposed
regulation currently is under review within the Administration.
Disclosures to the Public
EBSA will soon promulgate a final regulation revising the Form 5500
Annual Report filed with the Department to complement the information
obtained by plan fiduciaries as part of the service provider selection or
renewal process. The Form 5500 is a joint report for the Department of
Labor, Internal Revenue Service (IRS) and Pension Benefit Guaranty
Corporation (PBGC) that includes information about the plan’s operation,
funding, assets, and investments. The Department collects information on
service provider fees through the Form 5500 Schedule C.
Consistent with recommendations of the ERISA Advisory Council Working
Group, the Department published, for public comment, a number of changes
to the Form 5500, including changes that would expand the service provider
information required to be reported on the Schedule C. The proposed
changes more specifically define the information that must be reported
concerning the “indirect” compensation service providers received from
parties other than the plan or plan sponsor, including revenue sharing
arrangements among service providers to plans. The proposed changes to the
Schedule C were designed to assist plan fiduciaries in monitoring the
reasonableness of compensation service providers receive for services and
potential conflicts of interest that might affect the quality of those
services. EBSA has completed its review of public comments on the proposed
Schedule C and other changes to the Form 5500 and expects to have a final
regulation and a notice of form revisions published within the next few
weeks.
We intend that the changes to the Schedule C will work in tandem with
our 408(b)(2) initiative. The amendment to our 408(b)(2) regulation will
provide up front disclosures to plan fiduciaries, and the Schedule C
revisions will reinforce the plan fiduciary’s obligation to understand
and monitor these fee disclosures. The Schedule C will remain a
requirement for plans with 100 or more participants, which is consistent
with long-standing Congressional direction to simplify reporting
requirements for small plans.
EBSA has devoted enforcement resources to this area, seeking to detect,
correct and deter violations such as excessive fees and expenses, and
failure by fiduciaries to monitor ongoing fee structure arrangements.
Over the past nine years, we closed 354 401(k) investigations involving
these issues, with monetary results of over $64 million.
In carrying out its enforcement responsibilities, EBSA conducts civil
and criminal investigations to determine whether the provisions of ERISA
or other federal laws related to employee benefit plans have been
violated. EBSA regularly works in coordination with other federal and
state enforcement agencies, including the Department’s Office of the
Inspector General, the IRS, the Department of Justice (including the
Federal Bureau of Investigation), the SEC, the PBGC, the federal banking
agencies, state insurance commissioners, and state attorneys general.
EBSA is continuing to focus enforcement efforts on compensation
arrangements between pension plan sponsors and service providers hired to
assist in the investment of plan assets. EBSA’s Consultant/Adviser
Project (CAP), created in October 2006, addresses conflicts of interest
and the receipt of indirect, undisclosed compensation by pension
consultants and other investment advisers. Our investigations seek to
determine whether the receipt of such compensation violates ERISA because
the adviser or consultant used its status with respect to a benefit plan
to generate additional fees for itself or its affiliates. The primary
focus of CAP is on the potential civil and criminal violations arising
from the receipt of indirect, undisclosed compensation. A related
objective is to determine whether plan sponsors and fiduciaries understand
the compensation and fee arrangements they enter into in order to
prudently select, retain, and monitor pension consultants and investment
advisers. CAP will also seek to identify potential criminal violations,
such as kickbacks or fraud.
Mr. Chairman and Members of the Committee, thank you
for the opportunity to testify before you today. The Department is
committed to ensuring that plans and participants pay fair, competitive
and transparent prices for services that benefit them – and to
combating instances where fees are excessive or hidden. We are moving as
quickly as possible consistent with the requirements of the regulatory
process to complete our disclosure initiatives, and we believe they will
improve the retirement security of America’s workers, retirees and
their families. I will be pleased to answer any questions you may have.
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Based on 2004 filings of the Form
5500.
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See, e.g., Field Assistance
Bulletin 2002-3 (November 5, 2002) and Advisory Opinions 2003-09A
(June 25, 2003), 97-16A (May 22, 1997), and 97-15A (May 22, 1997).
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