Fee and Expense Disclosures to Participants in Individual Account
Plans
[04/25/2007]
Volume 72, Number 79, Page 20457-20460
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB07
Fee and Expense Disclosures to Participants in Individual Account
Plans
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Request for information.
-----------------------------------------------------------------------
SUMMARY: The Department of Labor is currently reviewing the rules under
the Employee Retirement Income Security Act (ERISA) applicable to the
disclosure of plan administrative and investment-related fee and
expense information to participants and beneficiaries in participant-
directed individual account plans (e.g., 401(k) plans). The purpose of
this review is to determine to what extent rules should be adopted or
modified, or other actions should be taken, to ensure that participants
and beneficiaries have the information they need to make informed
decisions about the management of their individual accounts and the
investment of their retirement savings. The purpose of this notice is
to solicit views, suggestions and comments from plan participants, plan
sponsors, plan service providers and members of the financial
community, as well as the general public, on this important issue.
DATES: Written or electronic responses should be submitted to the
Department of Labor on or before July 24, 2007.
ADDRESSES: Responses: To facilitate the receipt and processing of
responses, EBSA encourages interested persons to submit their responses
electronically by e-mail to e-ORI@dol.gov, or by using the Federal
eRulemaking portal at http://www.regulations.gov (follow instructions
for submission of comments). Persons submitting responses
electronically are encouraged not to submit paper copies. Persons
interested in submitting written responses on paper should send or
deliver their responses (preferably, at least three copies) to the
Office of Regulations and Interpretations, Employee Benefits Security
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution
Avenue, N.W., Washington, DC 20210, Attention: Fee Disclosure RFI. All
written responses will be available to the public, without charge,
online at http://www.regulations.gov and http://www.dol.gov/ebsa, and
at the Public Disclosure Room, N-1513, Employee Benefits Security
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Katherine D. Lewis, Office of
Regulations and Interpretations, Employee Benefits Security
Administration, Room N-5669, U.S. Department of Labor, Washington, DC
20210, telephone (202) 693-8510. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
According to the Department's most recent data, an estimated 41
million participants in 401(k) plans are permitted to direct the
investment of all or a portion of their plan accounts. While
contributions and earnings increase retirement savings in 401(k) and
other participant-directed plans, fees and expenses charged to
participant accounts can substantially reduce that growth. For this
reason, it is important that plan participants, particularly those
responsible for making their own investment decisions, consider what
and how fees and expenses are charged to their individual accounts.
In general, the purpose of this Request for Information (RFI) is to
obtain, from the perspective of plan participants, plan sponsors and
plan service providers, information concerning: (1) What administrative
and investment-related fee and expense information participants should
consider; (2) the manner in which that information should be provided
or made available to participants; and, (3) who should be responsible
for providing the information. Responses to this RFI will be used to
assist the Department in determining to what extent rules should be
developed or modified, or other courses of action pursued, to improve
the information currently available to participants and beneficiaries
relating to administrative and investment-related fees and expenses,
recognizing that in many instances participants may have to bear the
cost of disclosing such information.
In considering the questions set forth in the RFI, commenters are
encouraged to take into consideration the following initiatives.
Section 404(c) Regulation
In 1992, the Department adopted a final regulation under section
404(c) of ERISA.\1\ In general, the regulation sets forth the
conditions under which participants are considered to be exercising
control over the assets in their accounts, thereby relieving
fiduciaries from liability for the results of participants' investment
decisions. Among other matters, the regulation, at Sec. 2550.404c-
1(b)(2)(i)(B), conditions relief upon participants and beneficiaries
being provided and having access to specific information concerning
their plan and the investment options offered thereunder. In framing
the disclosure requirements, the Department attempted to strike a
balance between what it believed participants needed to make informed
investment decisions and the burdens
[[Page 20458]]
and costs to participants and plan sponsors resulting from a broader
disclosure mandate. There have been a number of changes since 1992 in
what and how information is communicated to plan participants and
investors generally. For this reason, this RFI seeks information on
what changes, if any, should be made to the section 404(c) regulation.
An example of one such change is the use of summary or profile
prospectuses by mutual funds as a means by which to communicate basic
information to investors. The use of profile prospectuses as a
permissible means by which to communicate to participant-investors for
purposes of compliance with the section 404(c) requirements was
addressed in Advisory Opinion 2003-11A.\2\
---------------------------------------------------------------------------
\1\ See Final Regulation Regarding Participant Directed
Individual Account Plans (ERISA Section 404(c) Plans), 57 FR 46,906
(Oct.13, 1992) (codified at 29 CFR Sec. 2550.404c-1). This
regulation may be accessed at http://www.dol.gov/dol/allcfr/title_29/Part_2550/29CFR2550.404c-1.htm
.
\2\ This advisory opinion may be accessed at http://www.dol.gov/ebsa/regs/aos/ao2003-11a.html
(September 8, 2003).
---------------------------------------------------------------------------
To facilitate consideration of the section 404(c) disclosure
requirements, the applicable provisions of section 2550.404c-1(b)(2)(i)
are set forth below in relevant part:
(B) The participant or beneficiary is provided or has the
opportunity to obtain sufficient information to make informed
decisions with regard to investment alternatives available under the
plan, and incidents of ownership appurtenant to such investments.
For purposes of this subparagraph, a participant or beneficiary will
not be considered to have sufficient investment information unless--
(1) The participant or beneficiary is provided by an identified
plan fiduciary (or a person or persons designated by the plan
fiduciary to act on his behalf):
* * * * *
(ii) A description of the investment alternatives available
under the plan and, with respect to each designated investment
alternative, a general description of the investment objectives and
risk and return characteristics of each such alternative, including
information relating to the type and diversification of assets
comprising the portfolio of the designed investment alternative;
* * * * *
(v) A description of any transaction fees and expenses which
affect the participant's or beneficiary's account balance in
connection with purchases or sales of interests in investment
alternatives (e.g., commissions, sales load, deferred sales charges,
redemption or exchange fees);
(vi) The name, address, and phone number of the plan fiduciary
(and, if applicable, the person or persons designated by the plan
fiduciary to act on his behalf) responsible for providing the
information described in paragraph (b)(2)(i)(B)(2) upon request of a
participant or beneficiary and a description of the information
described in paragraph (b)(2)(i)(B)(2) which may be obtained on
request;
* * * * *
(viii) In the case of an investment alternative which is subject
to the Securities Act of 1933, and in which the participant or
beneficiary has no assets invested, immediately following the
participant's or beneficiary's initial investment, a copy of the
most recent prospectus provided to the plan. This condition will be
deemed satisfied if the participant or beneficiary has been provided
with a copy of such most recent prospectus immediately prior to the
participant's or beneficiary's initial investment in such
alternative;
(ix) Subsequent to an investment in a investment alternative,
any materials provided to the plan relating to the exercise of
voting, tender or similar rights which are incidental to the holding
in the account of the participant or beneficiary of an ownership
interest in such alternative to the extent that such rights are
passed through to participants and beneficiaries under the terms of
the plan, as well as a description of or reference to plan
provisions relating to the exercise of voting, tender or similar
rights.
(2) The participant or beneficiary is provided by the identified
plan fiduciary (or a person or persons designated by the plan
fiduciary to act on his behalf), either directly or upon request,
the following information, which shall be based on the latest
information available to the plan:
(i) A description of the annual operating expenses of each
designated investment alternative (e.g., investment management fees,
administrative fees, transaction costs) which reduce the rate of
return to participants and beneficiaries, and the aggregate amount
of such expenses expressed as a percentage of average net assets of
the designated investment alternative;
(ii) Copies of any prospectuses, financial statements and
reports, and of any other materials relating to the investment
alternatives available under the plan, to the extent such
information is provided to the plan;
(iii) A list of the assets comprising the portfolio of each
designated investment alternative which constitute plan assets
within the meaning of 29 CFR 2510.3-101, the value of each such
asset (or the proportion of the investment alternative which it
comprises), and, with respect to each such asset which is a fixed
rate investment contract issued by a bank, savings and loan
association or insurance company, the name of the issuer of the
contract, the term of the contract and the rate of return on the
contract;
(iv) Information concerning the value of shares or units in
designated investment alternatives available to participants and
beneficiaries under the plan, as well as the past and current
investment performance of such alternatives, determined, net of
expenses, on a reasonable and consistent basis; and
(v) Information concerning the value of shares or units in
designated investment alternatives held in the account of the
participant or beneficiary.
Advisory Council Report
In 2004, the Advisory Council on Employee Welfare and Pension
Benefit Plans' Working Group on Fee and Related Disclosures to
Participants reviewed the current disclosure requirements applicable to
participant-directed individual account plans. Their review sought to
assess the adequacy and usefulness of such requirements and to
determine whether changes to the requirements would help participants
more effectively manage their retirement savings. Focusing on the
requirements applicable to section 404(c) plans, the working group
issued a report containing a consensus recommendation, which is
summarized below:
The working group recognizes that providing actual fee
information for a particular participant's account over a stated
period of time is not justified at this time by the cost of
providing that information. Given the current state of technology
and recordkeeping practices, it is a complex and costly procedure to
sum the total costs to a particular participant's account because of
investment changes over time. Nonetheless, the working group saw
examples of investment statements showing the expense of each
investment option expressed as a ratio for each fund in which a
participant was invested as of the date of the statement. The
working group believes that this is pertinent information that is
helpful in making the investment decision. This information can also
be presented in an understandable format.
With regard to the section 404(c) regulation, the consensus of the
working group, recognizing that different considerations apply to open
platform (also known as open brokerage) options in plans, made the
following recommendations:
The profile prospectus of each investment option should be
delivered to each employee upon eligibility to participate. For
those options not subject to the prospectus requirements, the
working group recommended that the Department should require a
disclosure with information substantially similar to the information
on the profile prospectus. Providing this information prior to the
initial investment decision should eliminate the need to
automatically provide a full prospectus or other information
concerning the particular investment options elected immediately
after the investment options are elected. A participant would still
be able to request such materials.
Participants must be given materials (like a glossary) that
explain the meaning of the terms used in the profile prospectus (or
other like document) coincident with the delivery of the profile
prospectus. This explanation would include a description of an
expense ratio and what it means to have the investment expenses of
an investment option expressed as a ratio. Included in this would be
a mathematical example demonstrating the calculation necessary to
approximately determine the expenses that apply to a
[[Page 20459]]
particular participant's account investments as of a particular
date.
Account and investment recordkeepers should be encouraged to
develop internet Web sites where participants can research
information about plan investment options and review information
about their own investment choices. Additionally, these
recordkeepers should be encouraged to develop web-based tools for
participants to calculate alternative investment scenarios that
incorporate assumptions about investment expenses as well as rates
of return. Nonetheless, it is not intended that the suggestions in
this paragraph be made into requirements.
To the extent that an annual statement is provided by the
recordkeeper, the statement must provide the expenses of each
investment option expressed as a ratio along with other information
provided about the investment options. There must also be an
identification of the investment expenses that are paid entirely or
in part by the plan sponsor. The investment expenses do not include
other expenses for general plan maintenance paid by the plan
sponsor, including, but not limited to, legal expenses, consulting
expenses and accounting expenses. If such investment expenses were
paid in part by the plan sponsor, the portion so paid would be
identified.
Any new requirement implemented under this item 3 [annual
statement recommendation] should have a delayed effective date as
applied to small and medium sized plans, based on the number of
participants. New requirements like those described in this item
[annual statement recommendation] could be more costly to implement
for such plans than for large plans. Defining what a small to medium
size plan is for these purposes should err on the high side. Perhaps
plans covering fewer than 500 participants would come within this
classification. Delaying the application would likely allow service
providers time to design necessary systems to provide the
contemplated disclosures in a cost effective manner for such
sponsors.
The Department should provide a sample model disclosure format
that is available on its Web site. This would be a helpful addition
to existing tools already provided on its Web site for understanding
expenses both from the perspective of a participant and a plan
sponsor.
Commenters are encouraged to consider the report and
recommendations of the working group in reviewing the issues identified
in this RFI. This report may be accessed at http://www.dol.gov/ebsa/publications/AC_111704_report.html
.
GAO Report
In November 2006, the Government Accountability Office (GAO)
published Report GAO-07-21 entitled ``Private Pensions: Changes Needed
to Provide 401(k) Plan Participants and the Department of Labor Better
Information on Fees.'' This report recommends that, in order to better
enable the Department to effectively oversee 401(k) plan fees, the
Secretary of Labor should require plan sponsors to report a summary of
all fees that are paid out of plan assets or by participants. The
summary should list fees by type, particularly investment fees
indirectly incurred by participants.
Commenters are encouraged to consider the report and
recommendations of the GAO in reviewing the issues identified in this
RFI, including the GAO's specific recommendation relating to fee
disclosure. The GAO report referenced above may be accessed at
http://www.gao.gov/htext/d0721.html.
B. Issues Under Consideration
The purpose of this notice is to solicit views, suggestions and
comments from plan participants, plan sponsors, plan service providers
and members of the financial community, as well as the general public,
as to what extent rules should be adopted or modified, or other action
taken, to ensure that participants and beneficiaries have the
information they need to make informed decisions about the management
of their individual accounts and the investment of their retirement
savings. To facilitate consideration of the issues, the Department has
set forth below a number of matters with respect to which views,
suggestions, comments and information are requested. Interested
persons, however, are encouraged to address any other matters they
believe to be germane to the Department's consideration of fee and
expense disclosure issues.
Request for Information
Disclosure of Information Relating to Plan Investment Options
1. What basic information do participants need to evaluate
investment options under their plans? If that information varies
depending on the nature or type of investment option (options offered
by a registered investment company, options offered under a group
annuity contract, life cycle fund, stable value product, etc.), please
include an explanation.
2. What specific information do participants need to evaluate the
fees and expenses (such as investment management and 12b-1 fees,
surrender charges, market value adjustments, etc.) attendant to
investment options under their plans? If that information varies
depending on the nature or type of option, or the particular fee
arrangement relating to options (e.g., bundled service arrangements),
please include an explanation.
3. To what extent is the information participants need to evaluate
investment options and the attendant fees and expenses not currently
being furnished or made available to them? Should such information be
required to be furnished or made available by regulation or otherwise?
Who should be responsible for furnishing or making available such
information? What, if any, additional burdens and/or costs would be
imposed on plan sponsors or plans (plan participants) for such
disclosures?
4. Should there be a requirement that information relating to
investment options under a plan (including the attendant fees and
expenses) be provided to participants in a summary and/or uniform
fashion? Such a requirement might provide that: A) all investment
options available under a participant-directed individual account plan
must disclose information to participants in a form similar to the
profile prospectus utilized by registered investment companies; or B)
plan fiduciaries must prepare a summary of all fees paid out of plan
assets directly or indirectly by participants and/or prepare annually a
single document setting forth the expense ratios of all investment
options under the plan.\3\ Who should be responsible for preparing such
documents? Who should bear the cost of preparing such documents? What
are the burden/cost implications for plans of making any recommended
changes?
---------------------------------------------------------------------------
\3\ See recommendations of the GAO as set forth Report GAO-07-21
(November, 2006), http://www.gao.gov/htext/d0721.html.
---------------------------------------------------------------------------
5. How is information concerning investment options, including
information relating to investment fees and expenses, communicated to
plan participants, and how often? Does the information or the frequency
with which the information is furnished depend on whether the plan is
intended to be a section 404(c) plan?
6. How does the availability of information on the internet
pertaining to specific plan investment options, including information
relating to investment fees and expenses, affect the need to furnish
information to participants in paper form or electronically?
7. What changes, if any, should be made to the section 404(c)
regulation, to improve the information required to be furnished or made
available to plan participants and beneficiaries, and/or to improve
likelihood of compliance with the disclosure or other requirements of
the section 404(c) regulation? What are the burden/cost implications
for plans of making any recommended changes?
[[Page 20460]]
8. To what extent should participant-directed individual account
plans be required to provide or promote investment education for
participants? For example, should plans be required or encouraged to
provide a primer or glossary of investment-related terms relevant to a
plan's investment options (e.g., basis point, expense ratio, benchmark,
redemption fee, deferred sales charge); a copy of the Department's
booklet entitled ``A Look at 401(k) Fees'' (http://www.dol.gov/ebsa/publications/401k_employee.html
) or similar publication; or investment
research services? Should such a publication include an explanation of
other investment concepts such as risk and return characteristics of
available investment options? Please explain views, addressing costs
and other issues relevant to adopting such a requirement.
Disclosure of Information Relating to Plan and Individual Account
Administrative Fees and Expenses
9. What information is currently furnished to participants about
the plan and/or individual administrative expenses charged to their
individual account? Such expenses may include, for example: audit fees,
legal fees, trustee fees, recordkeeping expenses, individual
participant transaction fees, participant loan fees or expenses.
10. What information about administrative expenses would help plan
participants, but is not currently disclosed? Please explain the nature
and usefulness of such information.
11. How are charges against an individual account for
administrative expenses typically communicated to participants? Is such
information included as part of a participant's individual account
statement or furnished separately? If separately, is the information
communicated via paper statements, electronically, or via website
access?
12. How frequently is information concerning administrative
expenses charged to a participant's account communicated?
13. What, if any, requirements should the Department impose to
improve the disclosure of administrative expenses to plan participants?
Please be specific as to any recommendation and include estimates of
any new compliance costs that may be imposed on plans or plan sponsors.
14. Should charges for administrative expenses be disclosed as part
of the periodic benefit statement required under ERISA section 105?
General Questions
15. What, if any, distinctions should be considered in assessing
the informational needs of participants in plans that intend to meet
the requirements of section 404(c) as contrasted with those of
participants in plans that do not intend to meet the requirements of
section 404(c)?
16. What (and what portion of) plan administrative and investment-
related fees and expenses typically are paid by sponsors of
participant-directed individual account plans? How and when is such
information typically communicated to participants?
17. How would providing additional fee and expense information to
participants affect the choices or conduct of plan sponsors and
administrators, and/or that of vendors of plan products and services?
Please explain any such effects.
18. How would providing additional fee and expense information to
participants affect their plan investment choices, plan savings conduct
or other plan related behavior? Please explain any such effects and
provide specific examples, if available.
19. Please identify any particularly cost-efficient (high-value but
inexpensive) fee and expense disclosures to participants, and to the
contrary any particularly cost-inefficient ones. Please provide any
available estimates of the dollar costs or benefits of such
disclosures.
Signed at Washington, DC, this 20th day of April 2007.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. E7-7884 Filed 4-24-07; 8:45 am]
BILLING CODE 4510-29-P
|