<nobr>Oct 9, 2007</nobr>

ERIC Testifies Before House Education and Labor Committee on Fee Disclosure

Lew Minsky, Senior Attorney for the Florida Power and Light Company, testified before the House Education and Labor Committee on the 401(k) Fair Disclosure for Retirement Security Act of 2007 (H.R. 3185) on behalf of ERIC and the Profit Sharing/401k Council of America. Also joining in the testimony were the Society for Human Resource Management, National Association of Manufacturers, and the U.S. Chamber of Commerce.

Introduced in July by Education and Labor Chairman George Miller (D-CA), H.R. 3185 would, among other things, require full disclosure of 401(k) plan fees by plan sponsors and require the plan sponsors to obtain through contractual arrangements with service providers a panoply of information relating to plan costs.

The testimony sharply criticized many of the bill's provisions as creating new fiduciary liabilities, being overly complex, burdensome, and costly to participants without providing substantial benefits to plan participants. ERIC is concerned that this bill, along with other legislative and regulatory efforts, would greatly expand the scope of plan sponsor fiduciary liability.

Specifically, Minsky testified that:

• The bill's enhanced disclosure requirements create additional fiduciary liabilities borne by the plan sponsors based on the actions of service providers, making them vulnerable to increased litigation.


• Congress should defer to the Department of Labor (DOL) which is completing three ongoing regulatory projects related to fee disclosure before determining whether new legislation is needed.


• The complicated disclosure regime would unnecessarily complicate the relationship between plan sponsors and service providers.


• The legislation would create numerous opportunities for plaintiff's lawyers to allege fiduciary breaches for failure to meet the requirements of the bill.


• Fees charged to participants and plan sponsors would be dramatically increased to cover the cost of the additional required disclosures.


• Much of the required disclosure would be of little value to plan participants and plan sponsors resulting in unnecessary confusion and overwhelming disclosure documents.

EBSA's Bradford Campbell Testifies

Also testifying was Bradford Campbell, Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA). Campbell said that, while he shares the Chairman's concern, he is concerned about certain aspects of H.R. 3185, and that it could disrupt EBSAs ongoing efforts on disclosure. Campbell also provided an update on the three ongoing fee disclosure projects at the DOL.

Public Disclosures by Plan Sponsors

Campbell said that the final Form 5500 regulations are expected to be released in mid-October, and that the new form would:

• Expand service provider information required to be reported on Schedule C


• More specifically define 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)


• 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

Service Provider Disclosures to Fiduciaries

EBSA will release before the end of the year new proposed regulations governing disclosures from service providers to plan sponsors under section 408(b)(2). The regulations are intended to clarify the information fiduciaries must receive and service providers must disclose for purposes of determining whether a contract or arrangement is "reasonable."

Some of the information expected to be included in the regulation is:

• Comprehensive and accurate information concerning the providers' receipt of direct and indirect compensation or fees


• The potential for conflicts of interest that may affect the provider's performance of services
  Disclosure to Plan Participants

Secretary Campbell also testified that EBSA has started developing fee disclosure regulations in response to the April 2007 Request for Information (RFI). He indicated DOL understands that fee disclosure to participants must be concise, easy to understand, and geared toward helping them decide whether to participate in the plan, and which investment options to select.

His testimony also indicated sensitivity to the reality that the costs of compliance with any new disclosure regime will ultimately be borne by plan participants. EBSA plans to issue proposed regulations later this winter.

Congressman Neal Introduces Disclosure Fee Legislation

Meanwhile, House Ways and Means Committee Member Richard Neal (D-MA) last Thursday introduced legislation that would amend the Internal Revenue Code to require new 401(k) fee disclosures. The bill would require that employers provide employees with two separate disclosures regarding plan investments and fees (at enrollment and annually), and that service providers provide fee information to plan administrators in advance of a contract for plan services.

The Defined Contribution Plan Fee Transparency Act of 2007 would apply to all tax-preferred, participant-directed defined contribution plans, including 401(k) plans, 403(b) plans, and governmental 457(b) plans.

Enrollment Disclosure

The enrollment disclosure would require a description of the key features of each investment alternative, along with fee information that includes:

• Asset-based fees for each investment alternative


• Whether asset-based fees pay for services beyond investment management (such as plan administration)


• Whether there are additional charges for buying or selling the particular alternative (such as redemption fees)


• Information about separate fees that may be charged for plan administration as well as a notice that certain plan services may have separate charges (e.g., investment advice programs, brokerage windows, plan loans)

Annual Notice

The annual notice would require the same information for the investment alternatives in which the participant is currently invested, along with the participants' current investment allocations. A notice would also be required that indicated where information on other investment alternatives was available for those seeking to adjust their investment choices.

The bill fails to define fee or expense, which ERIC is concerned would likely lead to litigation by plan participants. While the bill itself does not modify the requirements of the ERISA 404(c) safe harbor, it is possible that the plaintiff's bar would use the required disclosure to define the scope of the employer's fiduciary duty in litigation. The bill also includes a tax penalty of $100 a day per failure with annual exposure capped at $500,000.

Disclosure Requirements for Service Providers

With respect to disclosure requirements for service providers in advance of a contract for plan services, providers would be required to supply a detailed disclosure statement to employers every year the contract is in place and following any material modification of the contract. Employers must make such statements available to plan participants via web posting and upon written request.

Specifically, services providers would be required to:

• Give the employer an estimate of total fees, and a detailed and itemized list of all services to be provided under the contract


• Separate the fees charged under a bundled services contract into fees for:
  o Investment management
  o Fees for administration and recordkeeping
  o Fees paid to intermediaries or other third-parties


• Disclose whether they expect to receive payments from third-parties in connection with providing services to the plan, and if so, must name those parties and amount expected to be received

Service providers that fail to provide the notices to plan administrators will face a tax of $1,000 a day per failure, with annual exposure capped at $1,000,000.

Jurisdictional Battles

Ways and Means Chairman Charles Rangel (D-NY) said recently that he also intends to hold hearings on fee disclosures, but nothing has been scheduled yet. We also understand the Senate Committee on Aging has begun to examine the issue. Senators Herb Kohl (D-WI) and Tom Harkin (D-IA) are expected to introduce a bill in the next few weeks. ERIC is working to determine the direction that bill will take.

Employers should note that the fee disclosure bills largely have been drafted to conform to the jurisdictional limitations of the two committees and their historical jurisdictional rivalries. Thus, the Education and Labor Committee contends that it has no jurisdiction over service providers, and therefore, limits its sanctions to plan sponsors with regulatory jurisdiction. The Ways and Means Committee bill is limited to its tax authority and sanctions are levied through the tax system with regulatory jurisdiction placed within the Treasury Department and IRS. Jurisdiction in the House over mutual funds and similar service providers lies with the Financial Services Committee, which has yet to move on the issue. Meanwhile, employers and other plan sponsors are caught in the middle.

For recent coverage on fee disclosure, refer to the July 31 and July 23 ERIC Executive Reports.

If you have any questions or comments on this issue, please contact Rosemary Becchi (rbecchi@eric.org) or Mike Chittenden (mchittenden@eric.org).

Lew Minsky's Testimony

Representative Neal's Bill

Representative Neal's Bill Summary
Websites:

Other Witness Testimony

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