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[Federal Register: July 23, 2008 (Volume 73, Number 142)]
[Proposed Rules]
[Page 43013-43044]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy08-24]
[[Page 43013]]
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Part IV
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Fiduciary Requirements for Disclosure in Participant[dash]Directed
Individual Account Plans; Proposed Rule
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB07
Fiduciary Requirements for Disclosure in Participant-Directed
Individual Account Plans
AGENCY: Employee Benefits Security Administration.
ACTION: Proposed regulation.
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SUMMARY: This document contains a proposed regulation under the
Employee Retirement Income Security Act of 1974 (ERISA) that, upon
adoption, would require the disclosure of certain plan and investment-
related information, including fee and expense information, to
participants and beneficiaries in participant-directed individual
account plans (e.g., 401(k) plans). This proposal is intended to ensure
that all participants and beneficiaries in participant-directed
individual account plans have the information they need to make
informed decisions about the management of their individual accounts
and the investment of their retirement savings. This document also
contains proposed conforming changes to the regulations applicable to
ERISA section 404(c) plans (29 CFR 2550.404c-1). Upon adoption, these
proposals will affect plan sponsors, fiduciaries, participants and
beneficiaries of participant-directed individual account plans, as well
as providers of services to such plans.
DATES: Written comments on the proposed regulation should be received
by the Department of Labor on or before September 8, 2008.
ADDRESSES: To facilitate the receipt and processing of comment letters,
the Employee Benefits Security Administration (EBSA) encourages
interested persons to submit their comments electronically by e-mail to
e-ORI@dol.gov (enter into subject line: Participant Fee Disclosure
Project) or by using the Federal eRulemaking portal at http://
www.regulations.gov. Persons submitting comments electronically are
encouraged not to submit paper copies. Persons interested in submitting
paper copies should send or deliver their comments to the Office of
Regulations and Interpretations, Employee Benefits Security
Administration, Attn: Participant Fee Disclosure Project, Room N-5655,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. All comments 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: Susan M. Halliday or Kristen L.
Zarenko, Office of Regulations and Interpretations, Employee Benefits
Security Administration, (202) 693-8510. This is not a toll-free
number.
SUPPLEMENTARY INFORMATION:
A. Background
According to the Department's most recent data, there are an
estimated 437,000 participant-directed individual account plans,
covering an estimated 65 million participants, and holding almost $2.3
trillion in assets.\1\ With the proliferation of these plans, which
afford participants and beneficiaries the opportunity to direct the
investment of all or a portion of the assets held in their individual
plan accounts, participants and beneficiaries are increasingly
responsible for making their own retirement savings decisions. This
increased responsibility has led to a growing concern that participants
and beneficiaries may not have access to, or if accessible, may not be
considering information critical to making informed decisions about the
management of their accounts, particularly information on investment
choices, including attendant fees and expenses.
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\1\ 2005 Form 5500 Data, U.S. Department of Labor. The estimated
437,000 plans include plans that permit participants to direct the
investment of all or a portion of their individual accounts.
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Under ERISA, the investment of plan assets is a fiduciary act
governed by the fiduciary standards in ERISA section 404(a)(1)(A) and
(B), which require fiduciaries to act prudently and solely in the
interest of the plan's participants and beneficiaries. Where a plan
assigns investment responsibilities to the plan's participants and
beneficiaries, it is the view of the Department that plan fiduciaries
must take steps to ensure that participants and beneficiaries are made
aware of their rights and responsibilities with respect to managing
their individual plan accounts and are provided sufficient information
regarding the plan, including its fees and expenses, and designated
investment alternatives, including fees and expenses attendant thereto,
to make informed decisions about the management of their individual
accounts. To some extent, such disclosures are already required by
plans that elect to comply with the requirements of section 404(c) (see
Sec. 2550.404c-1(b)(2)(i)(B)). However, compliance with section
404(c)'s disclosure requirements is voluntary and does not extend to
participants and beneficiaries in all participant-directed individual
account plans.
The Department believes that all participants and beneficiaries
with the right to direct the investment of assets held in their
individual plan accounts should have access to basic plan and
investment information. For this reason, the Department is issuing this
proposed regulation under section 404(a), with conforming amendments to
the regulations under section 404(c). These proposals would establish
uniform, basic disclosures for such participants and beneficiaries,
without regard to whether the plan in which they participate is a
section 404(c) plan. In addition, the proposal would require
participants and beneficiaries to be provided investment-related
information in a form that encourages and facilitates a comparative
review among investment options.
To facilitate the development of a proposed regulation, the
Department published, on April 25, 2007, a Request for Information
(RFI) in the Federal Register \2\ requesting suggestions, comments and
views from interested persons on a variety of issues relating to the
disclosure of plan and investment-related fee and expense and other
information to participants and beneficiaries in participant-directed
individual account plans. The Department received and reviewed 106
comment letters on these important issues. Copies of these letters are
posted on the Department's Web site at http://www.dol.gov/ebsa/regs/
cmt-feedisclosures.html.
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\2\ 72 FR 20457 (April 25, 2007).
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The RFI encouraged persons preparing comments to consider a 2004
report and recommendations of a working group of the ERISA Advisory
Council. The Employee Welfare and Pension Benefit Plans' Working Group
on Fee and Related Disclosures to Participants reviewed the disclosure
requirements applicable to participant-directed individual account
plans. The Working Group assessed the adequacy and usefulness of such
requirements and recommended changes to the requirements to help
participants more effectively manage their retirement savings.\3\
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\3\ This report may be accessed at http://www.dol.gov/ebsa/
publications/AC_111704_report.html.
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[[Page 43015]]
Additionally, the RFI encouraged commenters to consider the
Government Accountability Office's (GAO) 2006 report and
recommendations contained in ``Private Pensions: Changes Needed to
Provide 401(k) Plan Participants and the Department of Labor Better
Information on Fees.'' \4\ Also relevant to the Department's
consideration was the work of the Securities and Exchange Commission
(Commission). The Commission has proposed, among other matters, the use
of a summary prospectus with additional information provided on an
Internet Web site. The proposal is intended to improve mutual fund
disclosure by providing investors with key information in plain English
in a clear and concise format, while enhancing the means of delivering
more detailed information to investors.\5\ Following consultation with
the Commission, the Department's proposal is coordinated with the
Commission's summary prospectus approach where feasible. As ERISA plan
investment options include many products not subject to the
Commission's disclosure requirements, the Department seeks comments
addressing the application of this proposed regulation to funds and
investment products not subject to the securities laws.
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\4\ The GAO report, GAO-07-21, referenced above may be accessed
at http://www.gao.gov/htext/d0721.html.
\5\ 72 FR 67790 (November 30, 2007).
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B. Overview of Proposal Sec. 2550.404a-5
1. General
Paragraph (a) of proposed Sec. 2550.404a-5 sets forth the general
principle that, where documents and instruments governing an individual
account plan provide for the allocation of investment responsibilities
to participants and beneficiaries, plan fiduciaries, consistent with
ERISA section 404(a)(1)(A) and (B), must take steps to ensure that such
participants and beneficiaries, on a regular and periodic basis, are
made aware of their rights and responsibilities with respect to the
investment of assets held in, or contributed to, their accounts and are
provided sufficient information regarding the plan, including plan fees
and expenses, and regarding designated investment alternatives
available under the plan, including fees and expenses attendant
thereto, to make informed decisions with regard to the management of
their individual accounts. As discussed below, the proposal addresses
the information that must be provided participants and beneficiaries,
as well as timeframes for providing that information.
Paragraph (b) of the proposal addresses the disclosure requirements
that must be met by plan fiduciaries for plan years beginning on or
after January 1, 2009. Under this paragraph, plan fiduciaries must
comply with the requirements of paragraph (c), dealing with plan-
related information, and paragraph (d), dealing with investment-related
information. Paragraph (e) describes the form in which the required
information may be disclosed, such as via the plan's summary plan
description, a quarterly benefit statement, or the use of the provided
model, depending on the specific information. Paragraph (e) merely
recognizes various acceptable means of disclosure; it does not preclude
other means for satisfying disclosure duties under the proposed
regulation. Fiduciaries that meet the requirements of paragraphs (c)
and (d) will have satisfied the duty to make the regular and periodic
disclosures described in paragraph (a) of this section.
The Department believes, as an interpretive matter, that ERISA
section 404(a)(1)(A) and (B) impose on fiduciaries of all participant-
directed individual account plans a duty to furnish participants and
beneficiaries information necessary to carry out their account
management and investment responsibilities in an informed manner. In
the case of plans that elected to comply with section 404(c) before
finalization of this proposal, the requirements of section 404(a)(1)(A)
and (B) typically would have been satisfied by compliance with the
disclosure requirements set forth at 29 CFR Sec. 2550.404c-
1(b)(2)(i)(B). However, the Department expresses no view with respect
to plans that did not comply with section 404(c) and the regulations
thereunder as to the specific information that should have been
furnished to participants and beneficiaries in any time period before
this regulation is finalized.
2. Plan-Related Information
In general, paragraph (c) of the proposal sets forth what is
characterized as ``plan-related'' information. This information falls
into three categories--general plan information, administrative expense
information and individual expense information. Paragraph (c) also
describes when this information must be provided to participants and
beneficiaries and requires that it be based on the latest information
available to the plan.
First, paragraph (c)(1) of the proposal provides for the disclosure
of general plan information regarding: How participants and
beneficiaries may give investment instructions; any specified
limitations on such instructions, including any restrictions on
transfer to or from a designated investment alternative; the exercise
of voting, tender and similar rights appurtenant to an investment in a
designated investment alternative as well as any restrictions on such
rights; the specific designated investment alternatives offered under
the plan; and any designated investment managers to whom participants
and beneficiaries may give investment directions. Under the proposal,
this information is required to be furnished to an individual on or
before the date he or she becomes eligible to be a participant or
beneficiary under the plan and at least annually thereafter. In
addition, the proposal requires that participants and beneficiaries be
furnished a description of any material changes to the required
information not later than 30 days after the date of adoption of such
changes. The Department believes that, by referencing the ``date of
adoption,'' the regulation will increase the likelihood that
participants and beneficiaries will be provided notification of
material changes in advance of the changes becoming effective, thereby
putting them in a better position to consider such changes (e.g.,
changes in designated investment alternatives) in managing their
accounts. Paragraph (e)(1) of the proposal provides that the
disclosures required by this paragraph (c)(1) may be made as part of
the plan's summary plan description, provided that the applicable
timing requirements are satisfied.
Second, paragraph (c)(2)(i) sets out the required disclosures for
administrative expenses. Specifically, it provides that, on or before
the date of an individual's eligibility to become a participant or
beneficiary under the plan, and at least annually thereafter,
participants and beneficiaries must be furnished an explanation of any
fees and expenses for plan administrative services (e.g., legal,
accounting, recordkeeping) that, to the extent not included in
investment-related fees and expenses, may be charged against the
individual accounts of participants or beneficiaries and the basis on
which such charges will be allocated to, or affect the balance of, each
individual account (e.g., pro rata, per capita). This requirement is
intended to ensure that the plan fiduciary informs all participants and
beneficiaries about the plan's day-to-day operational expenses that
will be charged against their accounts. Because of its general nature,
[[Page 43016]]
the information described in paragraph (c)(2)(i) may, pursuant to
paragraph (e)(1) of the proposal, be disclosed as part of the plan's
summary plan description, provided that the applicable timing
requirements are met.
In addition to the general disclosures concerning plan
administrative expenses, paragraph (c)(2)(ii) of the proposal requires
that, at least quarterly, participants and beneficiaries be furnished
statements of the dollar amounts actually charged during the preceding
quarter to the participants' or beneficiaries' accounts for
administrative services, and general descriptions of the services to
which the charges relate. The statements should be sufficiently
specific to inform the participants or beneficiaries of the actual
charge(s) to their accounts and enable them to distinguish the
administrative services from other charges and services that may be
assessed against their accounts. An identification of the total
administrative fees and expenses assessed during the quarter, with, for
example, an indication that the charges for plan administrative
expenses include legal, accounting, and recordkeeping costs to the
plan, would be sufficient. The Department does not believe that it is
necessary, or particularly useful, for participants to have
administrative charges broken out and listed on a service-by-service
basis. Commenters on the Department's RFI argued that an overly
detailed breakdown of administrative fees may overwhelm participants
and that meaningful information would not be conveyed by such a
breakdown. Many commenters explicitly supported the disclosure of
``aggregate'' or summary fees. The requirement to furnish the
information described in paragraph (c)(2)(ii) of the proposal may be
satisfied by including the information as part of a quarterly benefit
statement furnished pursuant to ERISA section 105(a)(1)(A)(i). See
paragraph (e)(2) of the proposal.
Third, paragraph (c)(3) describes the required disclosures for
individual expenses. This is identical to paragraph (c)(2) except that
it focuses on the disclosure of information relating to individual
expenses, i.e., expenses that are assessed on an individual-by-
individual, rather than plan-wide, basis. Such expenses might be
attendant to a qualified domestic relations order, a participant loan,
or investment advice services. Paragraph (c)(3)(i) requires the
disclosure of information concerning what expenses might be assessed
and paragraph (c)(3)(ii) requires the disclosure of amounts actually
assessed and identification of the service to which an expense relates.
Also, like paragraph (c)(2), information described in paragraph
(c)(3)(i) may be disclosed in the plan's summary plan description and
the information described in paragraph (c)(3)(ii) may be included in a
quarterly benefit statement.
The Department invites comments on the type of information required
to be disclosed, the timing of the information required to be disclosed
and the form in which the information may be disclosed.
3. Investment-Related Information
Paragraph (d) of the proposal sets forth the investment-related
information required to be furnished or made accessible to participants
and beneficiaries in participant-directed individual account plans.
Paragraph (d)(1) sets forth the investment-related information required
to be automatically furnished to each participant and beneficiary.
Paragraph (d)(2) addresses the format of the required information.
Paragraph (d)(3) addresses the furnishing of post-investment
information. And paragraph (d)(4) sets forth information required to be
furnished only upon the request of a participant or beneficiary.
Paragraph (d)(1) provides that, on or before the date of
eligibility and at least annually thereafter, participants and
beneficiaries must be furnished certain basic information with respect
to each designated investment alternative offered under the plan. For
purposes of the proposal, paragraph (h)(1) defines the term
``designated investment alternative'' to mean any investment
alternative designated by the plan into which participants and
beneficiaries may direct the investment of assets held in, or
contributed to, their individual accounts. The term ``designated
investment alternative'' does not include ``brokerage windows,''
``self-directed brokerage accounts,'' or similar plan arrangements that
enable participants and beneficiaries to select investments beyond
those designated by the plan.
For purposes of identifying the information essential for
participants and beneficiaries to consider in evaluating their
investment choices under the plan, the Department carefully reviewed
the many comments received in response to the RFI, as well as the
Commission's proposal for a summary prospectus. The majority of RFI
commenters believe that, in addition to basic fee and expense
information, participants and beneficiaries need additional disclosure
to put fee-related information into context and to educate them about a
plan's investment alternatives. On the basis of its review, the
Department concluded that fee and expense information, although
important, is only one of the factors to be considered in making
informed investment decisions along with investment performance and
other information relating to a designated investment alternative.
Also, the Department is persuaded by RFI commenters that most
participants and beneficiaries will probably not review large amounts
of detailed investment information. Information that is too detailed
may overwhelm participants, and commenters are concerned that the costs
associated with providing overly detailed information, which ultimately
will be borne by participants, significantly outweigh any possible
benefits. However, the Department also is persuaded that the form in
which information is required to be presented should serve to encourage
and facilitate its review by participants and beneficiaries. Many
commenters on the RFI, for example, supported the disclosure of fee
information in a format that would facilitate comparison across a
plan's investment alternatives. For this reason, paragraph (d)(2) of
the proposal, as discussed later, requires the investment-related
information set forth in paragraph (d)(1) to be presented in a
comparative format.
Specifically, paragraph (d)(1) requires the following disclosures
with respect to each designated investment alternative under the plan:
Paragraph (d)(1)(i) requires, among other items, the name and
category (e.g., money market mutual fund, balanced fund, index fund,
and whether the investment alternative is actively or passively
managed) of the designated investment alternative and an Internet Web
site address that is sufficiently specific to lead participants and
beneficiaries to supplemental information regarding the investment
alternative, including its principal strategies, risks, performance and
costs. For example, such information may be contained in a Commission-
required prospectus (or other document) made available at a Web site
address. The Department believes that ready access to such information
via the Internet alleviates the need to automatically furnish otherwise
important, detailed investment-related information directly to every
participant and beneficiary. This accommodates different levels of
participant interest in such information. The Department recognizes
that, while many investment fund providers do maintain Web sites to
inform interested investors concerning specific investment funds, other
providers of
[[Page 43017]]
investment funds and products may not. The Department specifically
invites comments on what, if any, challenges this proposed requirement
may present for service providers and employers, such as in the case of
in-house managed funds that might be offered as a designated investment
alternative under a plan. The Department also is interested in comments
on whether this proposed requirement raises any issues under the
Department's rules on the use of electronic media (29 CFR 2520.104b-
1(c)), given that plan fiduciaries may, in some cases, have to provide
paper copies of the supplemental information listed in this requirement
(i.e., information that would otherwise be accessible through the
Internet Web site address) to participants who fail to affirmatively
consent to receiving such information electronically.
Paragraph (d)(1)(ii) of the proposal requires the disclosure of
specified performance data for each of the plan's designated investment
alternatives. For designated investment alternatives with respect to
which the return is not fixed, e.g., an equity index fund, the
fiduciary (or designee) must provide the average annual total return
(expressed as a percentage) of the investment for the following
periods, if available: 1-year, 5-year, and 10-year, measured as of the
end of the applicable calendar year; as well as a statement indicating
that an investment's past performance is not necessarily an indication
of how the investment will perform in the future. For this purpose, the
term ``if available'' is intended merely to reflect that some plan
investments may not have been in existence for 1, 5, or 10 years. In
such cases, plans are expected to explain that the data is not
available for this reason (e.g., ``not applicable'' or ``not
available''). In the case of designated investment alternatives for
which the return is fixed for the term of the investment, e.g., a
guaranteed investment contract, the fiduciary (or designee) must
provide both the fixed rate of return and the term of the investment.
For purposes of paragraph (d)(1)(ii), the term ``average annual total
return'' is defined in section (h)(2) of the proposal by reference to
standards applicable to open-end management investment companies
registered under the Investment Company Act of 1940 (the 1940 Act). The
Department specifically invites comments on what, if any, problems the
proposed definition presents for investment funds and products that are
not subject to the 1940 Act and, if problematic, suggestions for
alternative definitions or approaches.
As a corollary to the disclosure of performance data, paragraph
(d)(1)(iii) requires disclosure of performance data for an appropriate
broad-based benchmark over time periods that are comparable to the
performance data periods required under paragraph (d)(1)(ii). As
structured, the proposal provides flexibility in identifying an
appropriate benchmark. In general, the Department expects that most
plans will simply identify the performance benchmark already being used
for the investment option pursuant to the Commission's prospectus
requirements, if applicable. The Department seeks comments on whether
and how the proposed requirement may need to be modified to include a
more narrowly based index that reflects the financial market sector for
ERISA plan investment options that are not subject to the securities
laws.
Paragraph (d)(1)(iv) specifically addresses the disclosure of fees
and expenses attendant to the purchase, holding and sale of each of the
plan's designated investment alternatives. For designated investment
alternatives with respect to which the return is not fixed, the
fiduciary (or designee) must provide: (A) The amount and a description
of each shareholder-type fee (i.e., fees charged directly against a
participant's or beneficiary's investment), such as sales loads, sales
charges, deferred sales charges, redemption fees, surrender charges,
exchange fees, account fees, purchase fees, and mortality and expense
fees; (B) the total annual operating expenses of the investment
expressed as a percentage (e.g., expense ratio); and (C) a statement
indicating that fees and expenses are only one of several factors that
participants and beneficiaries should consider when making investment
decisions. In the case of designated investment alternatives with
respect to which the return is fixed for the term of the investment,
the fiduciary (or designee) must provide the amount and a description
of any shareholder-type fees that may be applicable to a purchase,
transfer or withdrawal of the investment in whole or in part. The
description of each shareholder-type fee must include the amount on
which the charge is applied, e.g., 4% of amount invested. For purposes
of paragraph (d)(1)(iv), the term ``total annual operating expenses''
is defined in paragraph (h)(3) of the proposal by reference to
standards applicable to open-end management investment companies
registered under the 1940 Act. The Department specifically invites
comments on what, if any, problems the proposed definition presents for
investment funds and products that are not subject to the 1940 Act and,
any suggestions for alternative definitions or approaches.
The Department has differentiated the fee and expense disclosures
required for designated investment alternatives with returns that vary
over time from alternatives with fixed returns based on the financial
nature of each of these investment types. While the disclosure
requirements for investments with respect to which the return is not
fixed are more comprehensive, the Department decided that the most
essential information for participants who choose to invest in fixed
investment alternatives is the contractual interest rate paid to their
accounts and the term of the investment during which their monies are
shielded from market price fluctuations and reinvestment risks. Any
fees assessed, of course, are factored into determining the contractual
interest rate and RFI commentary suggested that there would be little
benefit to participants to disclosing such fees for investments with
fixed returns.
Paragraph (d)(1)(v) provides that, for purposes of the requirement
that participants be provided information on or before the date they
are eligible to be covered under the plan, plan fiduciaries may provide
such participants the most recent annual disclosure furnished to
participants and beneficiaries pursuant to paragraph (d)(1), in
addition to any material changes to the information described in
paragraph (c)(1)(i). This provision ensures that new participants
receive at least the same information that has been furnished to other
plan participants and beneficiaries with respect to the designated
investment alternatives under the plan. It also avoids the possible
burdens and costs of a requirement that fiduciaries update the required
disclosures for each new plan participant, which could result in a
daily updating requirement for many plans.
Paragraph (d)(2) of the proposal requires the fiduciary to furnish
the information required by paragraph (d)(1) in a chart or similar
format that will permit straightforward comparison of the plan's
designated investment alternatives by participants and beneficiaries.
Many commenters on the RFI supported this requirement and agreed that
any required disclosure should enable participants and beneficiaries to
easily compare data across a plan's menu of designated investment
alternatives. Further, GAO indicated in its 2006 report that plan
sponsors should be required to disclose fee information on each 401(k)
investment option in a way that
[[Page 43018]]
facilitates comparison among the options.\6\ The fiduciary's name and
contact information must also be provided so that participants and
beneficiaries may request the additional information listed in
paragraph (d)(4). The chart or similar document also must include a
statement informing participants and beneficiaries that more current
information about a designated investment alternative, including
performance and cost updates, may be available on the Web site for the
investment alternative.
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\6\ See supra note 4.
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In response to commenters on the RFI, the Department has developed
a model disclosure form that can be used for purposes of satisfying the
disclosure requirements of paragraph (d)(2) of the proposal. The model
appears in the Appendix to this regulation. Paragraph (e)(3) of the
proposal specifically provides that a fiduciary that uses and
accurately completes the model format set forth in the Appendix will be
deemed to have satisfied the requirements of paragraph (d)(2) relating
to the disclosure of the information in paragraph (d)(1) in a
comparative form.\7\ The Department notes that the proposal would not
mandate use of the model as the exclusive means for satisfying the
requirement to provide a chart or similar format that facilitates
comparison. This proposal provides fiduciaries with the flexibility to
create a chart or comparative format of their own design, provided the
required information is displayed in a manner facilitating comparisons.
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\7\ The Department notes that the model set forth in the
Appendix includes information and statements that are merely
illustrative of the type of information that might appear in the
required disclosure. It is the responsibility of each plan fiduciary
to assure itself that the information contained in its disclosure
statement is complete and accurate. However, such fiduciaries shall
not be liable for their reasonable and good faith reliance on
information furnished by their service providers with respect to
those disclosures required by paragraph (d)(1).
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Paragraph (d)(3) of the proposal requires that when a plan provides
for the pass-through of voting, tender and similar rights, the
fiduciary must furnish participants and beneficiaries who have invested
in a designated investment alternative with these features any
materials about such rights that have been provided to the plan. This
requirement is similar to the requirement currently applicable to
section 404(c) plans. See Sec. 2550.404c-1(b)(2)(i)(B)(1)(ix).
Paragraph (d)(4) of the proposal requires a fiduciary to furnish
certain identified information either automatically or upon request by
participants and beneficiaries, based on the latest information
available to the plan. This provision is modeled on the requirements
currently applicable to section 404(c) plans with respect to
information to be furnished upon request of a participant or
beneficiary. See Sec. 2550.404c-1(b)(2)(i)(B)(2).
4. Timing of Disclosures
As discussed above, each of the various disclosures must be made
within specific timeframes. The plan-related information concerning
certain administrative procedures and expenses required by
subparagraphs (c)(1)(i), (c)(2)(i), (c)(3)(i), and the investment-
related information required by subparagraph (d)(1) must be provided to
each participant or beneficiary ``on or before the date of plan
eligibility'' and ``at least annually thereafter.'' The proposal
defines ``at least annually thereafter'' in paragraph (h)(4) to mean at
least once in any 12-month period, without regard to whether the plan
operates on a calendar or fiscal year basis.
The proposal also requires that certain information be provided to
participants and beneficiaries on a more frequent basis. Specifically,
the actual dollar amounts charged to an individual's account during the
preceding quarter for administrative and individual services must be
disclosed in a statement to participants and beneficiaries ``at least
quarterly'' pursuant to subparagraphs (c)(2)(ii) and (c)(3)(ii) of the
proposal. The proposal defines ``at least quarterly'' in paragraph
(h)(5) to mean at least once in any 3-month period.
5. Other Fiduciary Duties
Paragraph (f) makes clear that nothing in the regulation would
relieve a fiduciary of its responsibilities to prudently select and
monitor service providers to the plan and the investments made
available under the plan (i.e., designated investment alternatives).\8\
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\8\ Also, with regard to ERISA's general fiduciary standards, it
should be noted that there may be extraordinary situations when
fiduciaries will have a disclosure obligation beyond those addressed
by this regulation. For example, if a plan fiduciary knew that, due
to a fraud, information contained in a public financial report would
mislead investors concerning the value of a designated investment
alternative, the fiduciary would have an obligation to take
appropriate steps to protect the plan's participants, such as
disclosing the information or preventing additional investments in
that alternative by plan participants until the relevant information
is made public. See also Varity Corp. v. Howe, 516 U.S. 489 (1996)
(plan fiduciary has a duty not to misrepresent to participants and
beneficiaries material information relating to a plan).
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C. Proposed Amendments to Sec. 2550.404c-1
Also included in this notice are proposed amendments to the
regulation under section 404(c) of ERISA, 29 CFR Sec. 2550.404c-1. The
proposed amendments to section 2550.404c-1(b), (c) and (f) would
integrate the disclosure requirements in the section 404(c) regulation
with the new proposed section 2550.404a-5 disclosure requirements and
thereby avoid having different disclosure rules for plans intending to
comply with the section 404(c) requirements. In brief, the proposed
amendments to the section 404(c) regulation eliminate references to
disclosures encompassed in the new Sec. 2550.404a-5 proposal and
incorporate cross-references to the new proposal, thereby establishing
a uniform disclosure framework for all participant-directed individual
account plans. The Department also is taking this opportunity to
reiterate its long held position that the relief afforded by section
404(c) and the regulation thereunder does not extend to a fiduciary's
duty to prudently select and monitor designated investment managers and
designated investment alternatives under the plan. Accordingly, it is
the Department's view that a fiduciary breach or an investment loss in
connection with the plan's selection of a designated investment
alternative is not afforded relief under section 404(c) because it is
not the result of a participant's or beneficiary's exercise of
control.\9\ The Department is proposing to amend paragraph (d)(2)
(entitled ``Limitation on liability of plan fiduciaries'') of Sec.
2550.404c-1 to add a new subparagraph (iv) providing that,
``[P]aragraph (d)(2)(i) does not relieve a fiduciary from the duty to
prudently select and monitor any designated investment manager or
designated investment alternative offered under the plan.''
---------------------------------------------------------------------------
\9\ See 57 FR 46906, 46924, n.27 (preamble to Sec. 2550.404c-1)
(October 13, 1992).
---------------------------------------------------------------------------
D. Effective Date
The Department proposes that the regulations and amendments
contained in this notice be effective for plan years beginning on or
after January 1, 2009. The Department specifically invites comments on
the earliest date on which the proposed regulation and amendments can
or should be effective, addressing any administrative or programming
costs or other issues that should be considered in establishing an
effective date.
[[Page 43019]]
E. Regulatory Impact Analysis
As discussed in the preceding sections, the proposed regulation
would establish a uniform basic disclosure regime for participant-
directed plans. Many of the disclosures contained in the proposed
regulation are similar to those required for participant-directed
individual account plans that currently comply with section 404(c) and
the Department's regulations issued thereunder. For other participant-
directed plans which choose not to be section 404(c) compliant there is
some uncertainty as to what information is provided to participants;
accordingly, the Department is assuming for purposes of this analysis
that for some of the plans that choose not to be 404(c) compliant the
proposal's disclosure requirements are new.
Given the foregoing assumptions, the average incremental costs and
benefits for participants in plans that provide section 404(c)
compliant or similar disclosures will be smaller than for those in
plans that do not provide this information. Participants in section
404(c) compliant plans or in plans that provide similar information
will not receive as large an added benefit from the proposal's new
disclosure requirements because they are already receiving some of the
information that would be required under the proposed regulation.
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) of the Executive
Order, a ``significant regulatory action'' is an action that is likely
to result in a rule (1) having an effect on the economy of $100 million
or more in any one year, 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. The
Department has determined that this action is ``significant'' under
section 3(f)(1) because it is likely to have an effect on the economy
of more than $100 million in any one year.
Accordingly, the Department has undertaken, as described below, an
analysis of the costs and benefits of the proposed regulation in
satisfaction of the requirements of the Executive Order and OMB
Circular A-4. The Department believes that the proposed regulation's
benefits justify its costs. The present value of the benefits over the
ten year period is expected to be about $6.9 billion. The present value
of the costs over the same time period is expected to be $759 million.
Overall, the Department estimates that the proposed regulation will
generate a net present value (or net present benefit) of almost $6.1
billion over the time period 2009-2018, as is shown in Table 1.
Table 1.--Summary of Discounted Benefits and Costs
------------------------------------------------------------------------
Benefits ($millions/ Costs ($millions/
Year year) year)
------------------------------------------------------------------------
1 2009....................... 914.9 127.3
2 2010....................... 855.0 90.7
3 2011....................... 799.1 84.7
4 2012....................... 746.8 79.2
5 2013....................... 698.0 74.0
6 2014....................... 652.3 69.2
7 2015....................... 609.6 64.7
8 2016....................... 569.8 60.4
9 2017....................... 532.5 56.5
10 2018...................... 497.6 52.8
-----------------------------------------
Total with 7% Discounting. 6875.6 759.4
Net Present Value 7% ................... 6,116
Discounting..............
Net Present Value 3% ................... 7,158
Discounting..............
------------------------------------------------------------------------
Need for Regulatory Action
A growing number of workers are preparing for retirement by
participating in ERISA governed retirement plans that allow for
participant direction of investments. How well plan participants are
prepared for retirement is partly determined by how well they have
invested their retirement savings. Among the key determinants of the
return on an investment are fees and expenses. A one percentage point
difference in fees can result in an 18 percent difference in
savings.\10\
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\10\ The Commission reported that a $10,000 investment with an
expense ratio of 1.5% invested for 20 years and having an annual
return of 10% before fees will return roughly $49,725, while a
similar investment with lower fees of 0.5% will return $60,858--an
18% difference. Invest Wisely: An Introduction to Mutual Funds,
http://www.sec.gov/investor/pubs/inwsmf.htm.
---------------------------------------------------------------------------
In developing this proposed regulation, the Department considered
why the market alone does not provide transparent fee disclosure to
participants comparable to that prescribed by this regulation. In
general, the market delivers products that are deemed valuable by
consumers. The lack of transparent fee disclosure in this market
suggests to the Department that individuals may underestimate the
impact that fees and expenses can have on their account balances, and
thus undervalue transparent fee disclosure. The Department believes
that this causes individuals to make uninformed investment decisions
that result in inferior outcomes to those that would result from making
investment decisions based on full information. Retirement plan
characteristics, including disclosure practices, are shaped in
significant measure by labor market forces. Employers want to attract
and retain productive employees and minimize cost. If employees
undervalue disclosure, plans sponsors might under-provide it. Sub-
optimal levels of disclosure translate into inefficiencies in
participant's choices of investment products and services. Evidence for
this
[[Page 43020]]
undervaluation includes a wide dispersion of fees paid in 401(k) plans.
As supported by a report of the Investment Company Institute,\11\ the
fees that plans pay vary over a wide range. According to their study,
23% of 401(k) stock mutual fund assets are in funds with an expense
ratio of less than 50 basis points, while an equal amount of assets are
in funds with an expense ratio of over 100 basis points. Some of this
variation could be explained by the varying amount of assets in plans
and their accompanying economies of scale. In addition, some plans
might offer more, or more expensive, plan features. The Department
believes, however, that a significant portion of the variation in plan
fees is due to market inefficiencies.
---------------------------------------------------------------------------
\11\ Investment Company Institute, ``The Economics of Providing
401(k) Plans: Services, Fees, and Expenses, 2006,'' http://
www.ici.org/pdf/fm-v16n4.pdf.
---------------------------------------------------------------------------
Understanding and comparing investment options available in a
401(k) plan can be complicated and confusing for many participants. The
magnitude of complexity and confusion may be defined by reference to
the number of available investment options and the materials utilized
for communicating investment-related information. For example, in plans
that offer a large number of investment options, for which the primary
communication is a full prospectus-like disclosure, understanding and
comparing investment options may be challenging for the less
financially savvy or less interested plan participants.\12\ Moreover,
the process of gathering and comparing information may itself be time
consuming.
---------------------------------------------------------------------------
\12\ For example, the ERISA Advisory Council Working group
reported that ``The Working Group questions the utility of the
prospectus as a source of investment information. While its delivery
is required under SEC rules for investment, it lacks any marginal
utility to a plan participant in terms of making an investment
decision,'' Report of the Working Group on Prudent Investment
Process, 2006, http://www.dol.gov/ebsa/publications/AC_1106A_
report.html. The Department also received similar comments in
response to its Request of Information regarding Fee Disclosures to
401(k) Plan Participants from service providers and trade
organizations. These comments can be accessed at http://www.dol.gov/
ebsa/regs/cmt-feedisclosures.html.
---------------------------------------------------------------------------
The proposed regulation will help a large number of plan
participants by placing investment-related information in a format that
facilitates comparison of investment alternatives. This simplified
format will make it easier and less time consuming for participants to
find and compare the needed information. As a result, plan participants
may make better investment decisions and may be better financially
prepared for retirement.
Benefits
The proposed regulation's disclosure requirements will provide
important benefits to society. The provision of investment-related
information in a comparative format is a new requirement for all
participant directed individual account plans, including section 404(c)
compliant plans, and is anticipated to be especially beneficial to plan
participants. The Department believes that such information will enable
participants to make better decisions on how to structure their
investments on a prospective basis. These benefits with respect to the
provision of investment-related information are quantified in more
detail below.
(a) Reduction in Fees
A review of the relevant literature suggests that plan participants
on average pay fees that are higher than necessary by 11.3 basis points
per year.\13\ The proposal's required disclosure of fees and expenses
is expected to result in the payment of lower fees for many
participants, assuming that participants will more consistently pick
the lower cost comparable investment alternatives under their
plans.\14\ Selection of the lower cost comparable investment
alternatives will, in turn, result in increased plan participant
account investment returns. In addition, the required disclosure could
lead to reduced fees \15\ in the investment alternatives market as more
fee transparency fosters more price competition in the market.
Furthermore, the fee disclosure requirements may lead plan fiduciaries
to give additional scrutiny to fees, and consequently to select less
expensive comparable investment alternatives.
---------------------------------------------------------------------------
\13\ ``Higher than necessary'' here means that the participant
could have obtained equal value without incurring the expense. This
calculation, based on fees paid in 401(k) plans, assumes that
participants on average pay 11 or more basis points in unnecessary
fees and expenses, in the form of expense ratios or loads. This
assumption is conservative in light of evidence on the distribution
of investor expense levels presented in: Brad M. Barber, Terrance
Odean and Lu Zheng, ``Out of Sight, Out of Mind, The Effects of
Expenses on Mutual Fund Flows,'' Journal of Business Vol. 79, No. 6
p. 2095-2119 (2005); James J. Choi, David I. Laibson, and Brigitte
C. Madrian, ``Why Does the Law of One Price Fail? An Experiment on
Index Mutual Funds,'' NBER Working Paper No. W12261 (May 2006);
Report, Deloitte Financial Advisory Services LLP. ``Fees and Revenue
Sharing in Defined Contribution Retirement Plans,'' (December 6,
2007) (on file with the Department); Edwin J. Elton, Martin J.
Gruber, and Jeffrey A. Busse, ``Are Investors Rational? Choices
Among Index Funds,'' NYU Working Paper, Social Science Research
Network Abstract 340482 (June 2002); Sarah Holden and Michael
Hadley, Investment Company Institute, ``The Economics of Providing
401(k) Plans: Services, Fees and Expenses 2006,'' 16 Research
Fundamentals, No. 4. (September 2007). This estimate of excess
expense does not take into account less visible expenses such as
mutual funds' internal transaction costs (including explicit
brokerage commissions and implicit trading costs), which are
sometimes larger than funds' expense ratios. Deloitte, supra; Jason
Karceski, Miles Livingston, and Edward O'Neal, ``Portfolio
Transactions Costs at U.S. Equity Mutual Funds,'' University of
Florida Working Paper (2004) at http://thefloat.typepad.com/the_
float/files/2004_zag_study_on_mutual_fund_trading_costs.pdf.
\14\ While increased disclosure to plan participants is expected
to reduce fees, it is not clear by how much. Some participants may
not make optimal use of the disclosed information to reduce fees
when making investment decisions. Also, the proposal's disclosures
are limited to plan's designated investment alternatives chosen by
plan fiduciaries rather than by plan participants.
\15\ In their mutual fund experiment, Choi et al. found that
presenting the participants with a comparison fee chart, and not
just a prospectus, reduced the fees paid by 12% to 49% depending on
the group studied.
James J. Choi, David I. Laibson, and Brigitte C. Madrian. May
2006. ``Why Does the Law of One Price Fail? An Experiment on Index
Mutual Funds.'' NBER Working Paper No. W12261.
---------------------------------------------------------------------------
Although participants in section 404(c) compliant plans already
receive much of the information that would be required under the
proposed regulation, they are expected to receive a substantial
incremental benefit. Participants in section 404(c) compliant plans, as
well as many participants in plans that are not choosing to be section
404(c) compliant, who invest in mutual funds that are designated
investment alternatives under the plan already receive the fee
information in the related funds' prospectuses. The proposal's required
disclosure of a summary of fee and performance information in a
comparable format may nevertheless be beneficial in assisting plan
participants to make better investment decisions. Thus, the Department
assumes that participants in plans that are not providing disclosures
similar to that required under section 404(c) receive a larger added
benefit from the proposal's disclosures than plan participants that
receive section 404(c) compliant or similar disclosures.\16\
---------------------------------------------------------------------------
\16\ The Department assumes that plan participants that already
receive the section 404(c) required information will receive a
benefit from the proposal that is two-thirds of that received by
participants that do not already receive this information. In
addition, the Department assumes that at least 80% of participants
in plans that choose not to be 404(c) compliant, nevertheless,
receive similar disclosures to participants in section 404(c)
compliant plans. The Department specifically requests comments on
the percentage of participants that already receive this information
and the additional benefits that plan participants will receive due
to the proposed regulation.
---------------------------------------------------------------------------
The Department estimates that there will be assets of about $2.6
trillion in participant-directed individual account
[[Page 43021]]
plans in 2009 \17\ and that about $3.0 billion in higher than necessary
fees are being paid by plan participants. Assuming the proposal's fee
disclosures will reduce the amount of higher than necessary fees paid
on average (a) by 10% (11.3 basis points*10%=1.13 basis points) \18\
for participants in section 404(c) compliant plans or plans that
provide similar information, and (b) by 15% (11.3 basis points*15%=1.70
basis points) for participants in plans that do not receive section
404(c) compliant or similar information, the Department believes that
the proposal's fee disclosures will result in $307 million in fee
savings for plan participants in 2009 as shown in Table 2.
---------------------------------------------------------------------------
\17\ The Department estimates, using 2005 Form 5500 data, that
in 2005 $2.3 trillion in assets were held in participant directed
accounts. To arrive at a 2009 dollar estimate, this number is then
adjusted for inflation. This estimate does not include growth due to
new participants or contributions and it also ignores increases or
decreases due to the returns on the assets. Overall, the Department
believes it under estimates the total amount of assets in 2009.
\18\ Choi et al. (2006) found that providing comparative fee
information to the treatment groups reduced fees by 12% to 49%.
While this estimate originated from an experiment using young
educated subjects, the Department believes that the assumptions made
here are reasonable as they were selected from the lower range of
values.
Table 2.--Benefits Due to Reduction in Fees (2009)
----------------------------------------------------------------------------------------------------------------
Total amount
of assets in Basis points Percent Benefits from
Type of plan plans (in of higher than correction due reduction in
millions of necessary fees to disclosure fees (percent)
2009 dollars)
(A) (B) (C) (A * B * C)
----------------------------------------------------------------------------------------------------------------
404(c) Plans and Plans with Similar Information. 2,500,000 0.11 10 $282,754,000
Non-404(c) Plans without Similar Information.... 144,000 0.11 15 24,487,000
---------------------------------------------------------------
Total Undiscounted Benefits................. .............. .............. .............. 307,241,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
There is some question as to whether some reductions in fees might
represent transfers (such as consumer surpluses being recaptured by
participants from investment managers) rather than efficiency gains.
The Department believes that fee reductions attributable to this
proposed regulation will mostly reflect efficiency gains, especially in
the longer run. Downward pressure on fees will favor more efficient
means of producing investment and other plan services. It will also
reflect a diminution of the market for services whose costs exceeds
their benefits (such as movement from more active to more passive
investment management in cases where the latter is more efficient).
However, it is possible that some fraction of reduced fees could
reflect a transfer.\19\ The Department invites comments on this
possibility. Since a purpose of the proposed regulation is to help plan
participants increase their retirement savings, and because the
expected fee reduction furthers this goal, the Department's motivation
is the same irrespective of whether fee savings reflect transfers or
efficiency gains. In the absence of information of what portion of fee
savings might reflect transfers, for purposes of this assessment all
such savings is counted as benefits.
---------------------------------------------------------------------------
\19\ Fees vary due to the number and type of investment
alternatives selected by the plan fiduciary. Nevertheless, plan
participants can still influence the amount of fees they pay.
Participants can choose among, on average almost 19 alternatives
(Vanguard. ``How America Saves 2006.'') in the plan and select lower
cost investment options or change their allocation percentages.
Participants can also ask the plan fiduciaries to offer lower cost
alternatives.
---------------------------------------------------------------------------
(b) Reduction in Participant Search Time
The proposed regulation will benefit plan participants by reducing
the time they spend searching for and compiling fee and expense
information. Although it is possible that all of these 65 million
participants in participant directed individual account plans could
benefit from increased disclosure, only a subset will choose to act on
the disclosed information. The Department estimates that about at least
29 percent of plan participants will spend time researching their
plans' designated investment alternatives fee and expense information
and are, therefore, likely to benefit from reduced search time and
corresponding reduced costs. This estimate is based on an EBRI survey
\20\ which found that 29 percent of the respondents that received
educational materials from their plans read the materials and made a
change in their retirement plan investments. This assumption results in
nearly 19 million plan participants that could benefit from reduced
search costs. The Department seeks comments on the extent to which this
proposal may increase the percentage of plan participants who will
spend time researching their plans.
---------------------------------------------------------------------------
\20\ Employee Benefit Research Institute Issue Brief
292, April, 2006.
---------------------------------------------------------------------------
The same EBRI study found that respondents spent 19 hours per year
on average planning for retirement. Of these 19 hours, the Department
assumes that one-and-a-half hours could be saved on average for
participants that are not receiving information like that required in
section 404(c) and one hour for participants that are receiving section
404(c) compliant or similar disclosures based on the proposal's
increased fee disclosure information. This assumption results in
approximately 19 million hours being saved by affected plan
participants as a result of the proposed regulation. The Department
seeks comments on this assumption.
In order to convert the time-savings into a dollar estimate, the
Department estimated how much the average participants would value the
time saved. Since the search time is assumed to be spent during leisure
time and in order to adjust for the difference that plan participants
attribute to leisure time versus work time, an average total wage rate
for private sector workers participating in a pension plan with
individual accounts was reduced by 10 percent to derive at an average
value rate of leisure time.\21\ Using a wage rate of a little less than
$35 \22\ for private
[[Page 43022]]
sector workers participating in a pension plan with individual accounts
results in an average value of an hour of leisure time of $31 for 2009.
Thus, the benefits from reduced search time for plan participants are
estimated at $608 million for 2009 as shown in Table 3 below.
---------------------------------------------------------------------------
\21\ Feather and Shaw (1999), using an econometric model, found
that the opportunity cost of leisure time is 10 percent less than
observed wages for employed workers. See Feather, P. and Shaw, W.D.,
``Estimating the Cost of Leisure Time for Recreation Demand
Models,'' Journal of Environmental Economics and Management, Volume
38, Issue 1, July 1999, Pages 49-65.
\22\ This wage rate estimate is based on hourly wages from Panel
7 of the 2001 wave from the Survey of Income Program Participation
(SIPP) and on wage growth data for private-sector workers that
participate in a pension plan with individual accounts from the
Bureau of Labor Statistics (BLS).
Table 3.--Benefits from Reduced Participant Search Time (2009)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percentage of
Number of participants Average hourly
(affected) predicted to Number of value of Total benefits
Type of plan participants in make a change search hours participants' from reduced
participant- in allocation saved by leisure time participant
directed to lower fee participant (in 2009 search time
Accounts investments Dollars)
(A) (B) (C) (D) (A * B * C * D)
--------------------------------------------------------------------------------------------------------------------------------------------------------
404(c) Plans and Plans with Similar Information.................... 62,058,000 29 1.0 $31.33 $563,884,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-404(c) Plans without Similar Information....................... 3,211,000 29 1.5 $31.33 43,770,000
----------------
Total Undiscounted Benefits.................................... ............... ............... ............... ............... 607,654,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
(c) Summary of Benefits
The quantified benefits of the proposed regulation consist of
benefits from the reduction in fees and from the reductions in search
time for participants seeking information on fees, which will occur
primarily as a result of the comparative disclosure of investment-
related information, and secondarily due to the disclosure of non-
investment-related fee and expense disclosures. Estimates of these
total benefits due to prospective fee disclosure are presented in Table
4 and amount to a total net present value of $6.9 billion over the 10-
year period.
Table 4.--Total Discounted Benefits of the Proposal
----------------------------------------------------------------------------------------------------------------
Benefits from
Benefits from reduced
Year reduction in participant Total benefits
fees search time
(A) (B) (A + B)
----------------------------------------------------------------------------------------------------------------
2009...................................................... $307,241,000 $607,654,000 $914,895,000
2010...................................................... 287,141,000 567,901,000 855,042,000
2011...................................................... 268,356,000 530,748,000 799,105,000
2012...................................................... 250,800,000 496,027,000 746,827,000
2013...................................................... 234,393,000 463,576,000 697,969,000
2014...................................................... 219,059,000 433,249,000 652,308,000
2015...................................................... 204,728,000 404,905,000 609,633,000
2016...................................................... 191,334,000 378,416,000 569,751,000
2017...................................................... 178,817,000 353,660,000 532,477,000
2018...................................................... 167,119,000 330,523,000 497,642,000
-----------------
Total with 7% Discounting............................. ................ ................ 6,875,649,000
-----------------
Total with 3% Discounting............................. ................ ................ 8,038,368,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
In addition to the benefits that will derive from the disclosure of
investment-related information in a comparative format, which are
quantified above, participants also will benefit from a retrospective
disclosure of plan administrative fees actually charged to their
accounts in the prior quarter. The Department believes that
participants who are trying to plan for retirement are entitled to a
comprehensive disclosure that includes not only information about fees
and expenses that may occur depending on investment options selected,
but also information on other fees that were actually assessed against
their accounts in the previous quarter. RFI commentary indicates that
participant advocates, plan sponsors and service providers, support
such a disclosure requirement.\23\ Information about actual charges to
participants' accounts may, among other things, help participants
understand their current reported account balance, help detect errors
in prior charges by the plan, help them in relation to their general
household budgeting and retirement planning, and help insure the
reasonableness of the charges. The Department seeks comments that would
help quantify the benefits of the retrospective disclosure.
---------------------------------------------------------------------------
\23\ These comments can be found under http://www.dol.gov/ebsa/
regs/cmt-feedisclosures.html.
---------------------------------------------------------------------------
Costs
The regulation may result in increased administrative burdens and
costs for plans (or plan sponsors).
(a) Increased Administrative Burden
[[Page 43023]]
Costs Due to Upfront Review and Updating of Plan Documents
Plans are likely to incur administrative burdens and costs in order
to comply with the requirements of the regulation. The proposed
regulation will require each plan to incur an upfront cost to have the
regulation reviewed by professionals, such as lawyers. This cost will
be incurred by all participant-directed individual account plans. The
Department assumes it will require a professional to spend one half
hour to perform the review.\24\ Using in-house labor rates for a legal
professional of nearly $113,\25\ the up-front legal review cost is
estimated at $24.6 million. In addition, the Department estimates that
each plan will spend one-half hour of clerical time at an (in-house)
hourly rate of $26 preparing the disclosures. This would result in a
cost of $5.7 million for 2009. The costs of reviewing and preparing
plan related information are summarized in Table 5. The Department
seeks comments on its assumptions regarding hourly rates and number of
hours in the table below.
---------------------------------------------------------------------------
\24\ This estimate reflects that plans may employ service
providers for making disclosures and that these service providers
are likely to spread fixed and start-up costs across many plan
clients.
\25\ EBSA wage estimates are based on the National Occupational
Employment Survey (May 2006, Bureau of Labor Statistics) and the
Employment Cost Index (March, 2007, Bureau of Labor Statistics),
unless otherwise noted.
Table 5.--Review and Prepare Plan Related Information, (2009)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hourly labor
Legal Hourly labor Clerical cost for
Number of professional cost for legal professional clerical
Year participant- hours required professional hours required professional Review cost
directed plans to review each (in 2009 to prepare (in 2009
plan dollars) plan documents dollars)
(A) (B) (C) (D) (E) (A*B*C)
+ (A*D*E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2009.................................................... 436,862 0.5 $113 0.5 $26 $30,322,591
---------------
Total Undiscounted Costs............................ .............. .............. .............. .............. .............. 30,322,591
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Based on the 2005 Form 5500 data, the Department estimates that
approximately 59,000 new participant-directed individual account plans
would be required to disclose general plan information each year. The
Department assumes that writing a new disclosure notice for these plans
would require, on average, one-half hour of legal professional time and
one-half hour of clerical time per plan leading to a cost estimate of
$4 million annually. The Department estimates that about 378,000
existing plans will require one-quarter hour of legal professional time
and one-quarter hour of clerical staff time to update plan documents to
take into account plan changes, such as new investment alternatives, in
subsequent years. This results in a cost of approximately $13 million
as summarized in Table 6. The Department seeks comments on the
assumptions used to develop this figure.
Table 6.--Review and Update Plan Related Information, (Subsequent Years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hourly labor
Legal Hourly labor Clerical cost for
Number of professional cost for legal professional clerical
Type of plan participant- hours required professional hours required professional Review cost
directed plans to review each (in 2009 to prepare (in 2009
plan dollars) plan documents dollars)
(A) (B) (C) (D) (E) (A*B*C)
+ (A*D*E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Existing Plans......................................... 378,000 0.25 $113 0.25 $26 $13,107,000
New Plans.............................................. 59,000 0.50 113 0.50 26 4,109,000
---------------
Total undiscounted costs........................... ............... .............. .............. .............. .............. 17,216,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Costs Due to Production of Quarterly Dollar Amount Disclosures
The proposed regulation will require plan administrators to send
out disclosures about administrative charges--on a plan-wide as well as
a participant-specific basis--to participants' accounts and engage in
record keeping. The increase in administrative costs resulting from
disclosing actual dollar fee and expense disclosure is derived from a
GAO report that measures the cost of the disclosures of the actual
dollar amount of mutual fund investment expenses on a participant
level.\26\ The GAO report estimates the initial cost to generate these
disclosures in 2001 at $1 per account,\27\ and the annual cost of
continued compliance at $0.35 per account.\28\ The cost to plans to
calculate
[[Page 43024]]
administrative fees for purposes of this proposed regulation is
expected to be less, because most of the expense information to be
disclosed under the regulation is already tracked. The Department
assumes it will cost both section 404(c) compliant and non-section
404(c) compliant plans one-third of the costs of disclosure of
investment costs by mutual funds to disclose actual dollars charged,
leading to cost estimates of about $0.41 per plan participant in the
first year and $0.14 thereafter.\29\ Thus, the cost to produce the
actual dollar disclosure is estimated at $26.5 million for 2009 as
shown in Table 7.\30\ The Department invites comments on the cost to
plans to produce actual dollar disclosures of the required fees,
including the extent to which the costs differ for plans that are
already making actual dollar disclosures and plans that are not.
---------------------------------------------------------------------------
\26\ GAO-03-551T, ``Mutual Funds: Information on Trends in Fees
and Their Related Disclosure,'' March 12, 2003, p. 14.
\27\ As a reference, Investment Management Consultants (IMC) has
indicated that the cost to plan sponsors of producing an Internet
report to comply with PPA ranges from $0.50 per participant per year
for the largest plans to $3.00 per participant per year for the
smallest plans. This cost, representing what IMC charges plan
sponsors for industry-wide information on fees, is based on their
data set containing 15,000 plans through September 2007, but does
not include costs associated with printing reports, such as postage,
stationary, and envelopes.
\28\ The GAO report estimates that implementing specific dollar
disclosures of fees would cost $1.00 per participant in the initial
year (in 2001 dollars). In subsequent years this would annually cost
about $0.35 (in 2001 dollars). This cost estimate includes the cost
to enhance the current data processing systems, modify investor
communication systems and media, develop new policies and procedures
and implement employee training and customer support programs. This
estimate does not include the reportedly significant costs that
would be borne by third party financial institutions that maintain
accounts on behalf of individual mutual fund shareholders.
\29\ The Department used (a) historical CPI data to inflate the
$1.00 estimate to $1.19 (in 2007 dollars) and the $0.35 estimate to
$0.42 (in 2007 dollars) and (b) the projected inflation rate from
the November 2007 President's Economic Forecast for 2008 (2.1
percent) to inflate the $1.19 value to $1.22 and the $0.42 value to
$0.43 (in 2009 dollars). The President's Economic Forecast can be
found at: http://www.whitehouse.gov/cea/econ-outlook20071129.html.
\30\ The Department did not account for additional paper costs,
given that no additional pages need be added as long as this
information is included as part of the quarterly benefit statement.
Table 7.--Cost of Additional Record Keeping and of Producing Actual Dollar Disclosures
----------------------------------------------------------------------------------------------------------------
Number of
(affected) Percent of cost Cost of record
participants in Per participant for calculating keeping and of
Year participant- cost from GAO administrative producing actual
directed report fees dollar
accounts disclosures
(A) (B) (C) (A * B * C)
----------------------------------------------------------------------------------------------------------------
2009.................................... 65,269,000 $1.22 33 $26,543,000
Subsequent year......................... 65,269,000 0.43 33 9,355,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Costs Due to Consolidation of Fee Information
Additional administrative burdens and costs are likely to arise
because of the need for plans to consolidate information from more than
one source to prepare the required comparative chart. The Department
estimates that it takes a staff person with some financial background
about one hour per plan to consolidate the information from multiple
sources for the comparative chart. Using a wage rate of about $60 for
such an employee, results in estimated costs for the consolidation of
fee information from multiple sources of approximately $26 million for
2009 as shown in Table 8.
Table 8.--Cost of Consolidation of Fee Information
----------------------------------------------------------------------------------------------------------------
Average plan
staff time
(hours) required Cost of
Number of to consolidate Accountant consolidation of
Year participant- fee information hourly labor fee information
directed plans from multiple cost (in 2009 for comparative
sources for dollars) format
comparative
format
(A) (B) (C) (A * B * C)
----------------------------------------------------------------------------------------------------------------
2009.................................... 437,000 1 $60 $26,290,000
-----------------
Total Undiscounted Costs............ ................ ................ ................ 26,290,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Costs of Distribution and Materials Due to the Disclosure of Plan and
Fee Information
These disclosures must be sent to plan participants on an annual or
quarterly basis.\31\ The Department assumes that it takes clerical
staff two additional minutes to assemble and send out disclosures. The
Department also assumes that 38% of disclosures will be sent
electronically and therefore require only a de minimis amount of time
to prepare. With wage rates of about $26 for clerical personnel, these
dissemination labor costs are estimated at $35.1 million in 2009, as
shown in Table 9.
---------------------------------------------------------------------------
\31\ This section does not include distribution or material
costs for the disclosures of administrative fees charged to
participants' accounts as the Department assumes that this
information can be included as part of the quarterly benefit
statement.
---------------------------------------------------------------------------
Following a participant's investment in an investment alternative,
the plan must provide any materials it receives regarding voting,
tender or similar rights in the alternative (``pass-through
materials'') (29 CFR 2550.404a-5(d)(3)). This information is already
required for 404(c) compliant plans and by the Department's Qualified
Default Investment Alternative regulation. In addition, a large
majority of plans voluntarily provide this information to its
participants. As a result only an estimated number of 699,000
participants will be receiving this
[[Page 43025]]
information for the first time because of the proposed regulation.
The Department assumes that clerical staff will prepare and send
the required materials. It may take the clerical staff on average one
and one-half minutes to prepare and mail the post-investment materials.
The Department assumes that this information will be sent annually
resulting in nearly 699,000 disclosures. The Department expects that 38
percent of the disclosures will be sent electronically. Table 9 reports
the cost of $283,000 to prepare and send the required post-investment
information.
Table 9.--Cost of Distributing Disclosures
----------------------------------------------------------------------------------------------------------------
Percentage of
Number of disclosures Hourly labor Materials
Type of disclosure disclosures to not cost (in 2009 Hours per costs for
be sent transmitted dollars) disclosure distribution
via e-mail of disclosures
(A) (B) (C) (D) (A * B * C *
D)
----------------------------------------------------------------------------------------------------------------
Annual Disclosures 65,269,000 62 $26.07 0.033 $35,166,000
Pass-Though Materials........... 699,000 62 26.07 0.025 283,000
---------------
Total Undiscounted Costs.... .............. .............. .............. .............. 35,448,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
In addition to labor costs associated with the disclosure, plans
will also bear materials and postage costs. The annual disclosure is
assumed to include 13 pages for plans that are not already providing
disclosures similar to section 404(c) disclosures. Plans already
providing section 404(c) compliant or similar disclosures are assumed
to already be making annual disclosure of information and are therefore
assumed to need to add only three pages of additional information to
what they are already disclosing to participants.\32\ The pass-through
information is assumed to be ten pages and sent on an annual basis to
plan participants as described above. Paper and printing costs are
assumed to be $0.05 a page and mailing costs to be $0.42.\33\ It is
further assumed that 38 percent of statements will be available
electronically. In total, this leads to an estimate for materials and
postage of $8.2 million in 2009 for the annual disclosures as shown in
Table 10 and $473,000 for the post-investment pass-through information
as shown in Table 11.
---------------------------------------------------------------------------
\32\ The proposed regulation would amend the regulation under
ERISA section 404(c), 29 CFR 2550.404c-1, to make the disclosure
requirements for section 404(c) compliant plans consistent with
those that would apply to participant directed individual account
plans generally. The Department assumes for purposes of the economic
and paperwork analysis that the disclosure costs of 404(c) compliant
plans under the amended regulation would be similar to those absent
the proposed regulation.
\33\ The postage rate for First-Class Mail is increasing to
$0.42 as of May 12, 2008 (http://pe.usps.com/2008_RateCase/
RateCharts/R08_Rate_Charts.htm).
Table 10.--Annual Disclosures Materials and Postage Costs (2009)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
(affected) Percentage of Number of Materials
participants in disclosures pages for Paper and costs for
Type of plan participant- not annual printing cost Mailing costs distribution
directed transmitted disclosure per page of disclosures
accounts via e-mail
(A) (B) (C) (D) (E) (A * B)
* (C * D + E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
404(c) Plans and Plans with Similar Information....... 62,058,000 62 3 $0.05 $0.00 $5,771,000
Non-404(c) Plans without Similar Information.......... 3,211,000 62 13 0.05 0.59 2,468,000
---------------
Total Undiscounted Costs.......................... ................ .............. .............. .............. .............. 8,240,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Table 11.--Pass-Through Materials and Postage Costs (2009)
----------------------------------------------------------------------------------------------------------------
Percentage of Number of Materials
Number of disclosures to be disclosures not pages for Paper and costs for
sent transmitted via annual printing cost Mailing costs distribution
e-mail disclosure per page of disclosures
(A) (B) (C) (D) (E) (A * B)
* (C * D + E)
----------------------------------------------------------------------------------------------------------------
699,000....................... 62 10 $0.05 $0.59 $473,000
---------------
Total Undiscounted Costs.. ................ .............. .............. .............. 473,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
[[Page 43026]]
In total, the Department estimates that in 2009 participant-
directed plans incur increased administrative costs of approximately
$127 million.
(b) Discouragement of Some Employers From Sponsoring a Retirement Plan
Increased administrative burdens may discourage some employers,
particularly small employers, from sponsoring a retirement plan. For
small plan sponsors, the administrative burden is felt
disproportionately because of their limited resources. Small business
owners who do not have the resources to analyze plan fees or to hire an
analyst may be discouraged from offering a plan at all.
Regulatory burden is one among many reasons for small businesses
not to sponsor a retirement plan. According to the 2000, 2001, and 2002
Employee Benefit Research Institute (EBRI)'s Small Employer Retirement
Surveys, about 2.7 percent of small employers cited ``too many
government regulations'' as the most important reason for not offering
a retirement plan.\34\ Due to very limited data in this area, the
Department is not able to quantitatively estimate this impact. The
Department seeks comments on the extent to which this proposal
discourages small employers from offering retirement plans.
---------------------------------------------------------------------------
\34\ The survey defines small employers as those having up to
100 full-time workers. Other reasons small employers do not offer a
retirement plan are that workers prefer wages or other benefits,
that a large portion of employees are seasonal, part-time, or high
turnover, and that revenue is too low or uncertain. See http://
www.ebri.org/surveys/sers for more detail.
---------------------------------------------------------------------------
(c) Summary of Costs
The quantified total costs of the proposed regulation include costs
due to the increased administrative burden. Columns (A) and (B) of
Table 12 below show the estimated costs of up-front review of the
regulation and updating of plan documents. Column (C) shows the costs
of producing quarterly Dollar amounts for administrative fees charged
to participant accounts. The largest cost of the regulation, though,
results from the disclosure of the administrative expenses and
investment-related fees that may be charged to participants' accounts--
the consolidation of fee information costs, and the distribution and
material costs as can be seen in columns (D), (E), and (F). Table 12
reports that the total present value of these costs is estimated at
$759 million over the ten-year period.
Table 12.--Total Discounted Costs of Proposal
--------------------------------------------------------------------------------------------------------------------------------------------------------
Production of
Up-front Update plan Consolidation quarterly Distribution Staff cost to
Year review cost documents of fee dollar amount materials distribute Total costs
information disclosures costs disclosures
--------------------------------------------------------------------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E) (F) (A + B + C
+ D + E + F)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2009.................................. $30,323,000 0 $26,290,000 $26,543,000 $8,713,000 $35,448,000 $127,317,000
2010.................................. 3,840,000 $12,250,000 24,570,000 8,743,000 8,143,000 33,129,000 90,675,000
2011.................................. 3,589,000 11,448,000 22,963,000 8,171,000 7,610,000 30,962,000 84,743,000
2012.................................. 3,353,000 10,699,000 21,461,000 7,637,000 7,112,000 28,936,000 79,199,000
2013.................................. 3,134,000 9,999,000 20,057,000 7,137,000 6,647,000 27,043,000 74,018,000
2014.................................. 2,929,000 9,345,000 18,745,000 6,670,000 6,212,000 25,274,000 69,176,000
2015.................................. 2,738,000 8,734,000 17,518,000 6,234,000 5,806,000 23,621,000 64,650,000
2016.................................. 2,559,000 8,162,000 16,372,000 5,826,000 5,426,000 22,075,000 60,421,000
2017.................................. 2,391,000 7,628,000 15,301,000 5,445,000 5,071,000 20,631,000 56,468,000
2018.................................. 2,234,000 7,129,000 14,300,000 5,089,000 4,739,000 19,281,000 52,774,000
===============
Total with 7% Discounting........................................................................................................... 759,440,000
-----------------
Total with 3% Discounting........................................................................................................... 880,339,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Summary
As shown in Table 1 above, the Department concludes that the
estimated benefits ($6.9 billion) of the proposed regulation outweigh
its estimated costs ($759 million) by almost $6.1 billion over the ten-
year period.
Uncertainty
Although the Department sought to anchor its analysis on empirical
evidence, there are a number of variables that are subject to
uncertainty. While the Department is confident that increased fee
disclosures can induce changes in participant behavior and reductions
in plan fees, it is uncertain about the exact magnitude of these
changes. The variables with the most uncertainty in the analysis are:
The percentage of plan fees that could be saved,
The percentage of participants that would save search time
for fee information,
The amount of search time saved per participant,
The time required for legal professionals, clerical
professionals \35\ and accountants to perform their tasks,
---------------------------------------------------------------------------
\35\ The clerical time to distribute disclosures remains
unchanged in this sensitivity analysis.
---------------------------------------------------------------------------
And the cost to obtain the actual dollar amounts of
participant's plan and administrative expenses.
To estimate the influence of these variables on the analysis, the
Department re-estimated the costs and benefits of the proposed
regulation under different assumptions for these uncertain variables.
Table 13 presents the effects of changing the variables of
interest. The first two variables on the list were decreased, while the
remaining variables were increased. Changing the variables of concern
by 25 percent still resulted in a net present value of $5.1 billion.
Changing the variables by 50 percent still resulted in a net present
value of $3.6 billion. Even after changing the key variables by 75
percent the net present value of the proposed regulation was $1.5
billion. The Department, however, does not believe that a change of 75%
in these variables is a very likely scenario.
[[Page 43027]]
Table 13.--Sensitivity of Benefits and Costs to Key Variables
----------------------------------------------------------------------------------------------------------------
Benefits Costs ($millions/ Net present value
Percent change in variables ($millions/year) year) ($millions/year)
----------------------------------------------------------------------------------------------------------------
25.................................................. 6,013 866 5,147
50.................................................. 4,579 973 3,606
75.................................................. 2,575 1,080 1,495
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest million.
Regulatory Alternatives
Executive Order 12866 directs Federal Agencies promulgating
regulations to evaluate regulatory alternatives. The Department
considered the following alternatives to the proposed regulation, and
will also briefly discuss the status quo baseline:
Extending the existing section 404(c) regulation
disclosure requirements to all participant-directed individual account
plans;
Establishing a general, nonspecific disclosure
requirement; or
Requiring more extensive and detailed disclosures.
These alternatives, and the status quo baseline, are described
further below:
Keeping the status quo
OMB Circular A-4 recommends that ``benefits and costs are defined
in comparison with a clearly stated alternative. This normally will be
a 'no action' baseline: what the world will be like if the proposed
rule is not adopted.'' The Department followed this recommendation, and
weighed the option of keeping the status quo and relying on the current
regulatory framework. By definition, as the regulatory baseline, this
``alternative'' would have zero costs and benefits; however, the
Department feels it is useful to briefly describe the status quo, and
the reasons for rejecting it in favor of a regulation, before we
discuss regulatory alternatives. As stated above, regulations already
exist specifying the information that must be provided to participants
of 404(c) compliant plans in order to relieve plan fiduciaries of
responsibility for participant investment decisions (see Sec.
2550.404c-1(b)(2)(i)(B)). Many of the proposal's disclosures are
identical or similar to the required disclosures of section 404(c) and
the regulations issued thereunder. However, compliance with section
404(c) is elective and according to 2005 Form 5500 data only about
275,000 plans covering 49 million participants and beneficiaries make
this election. About 16 million participants and beneficiaries are
participating in 49,000 participant-directed individual account plans
that are choosing not to be section 404(c) compliant and a significant
number of these individuals may not receive disclosures in compliance
with section 404(c), and, therefore, may not receive the information
the Department believes they need to make informed account management
and investment decisions.\36\ More importantly, the section 404(c)
disclosure of investment-related information is not required to be in a
comparative format that encourages and facilitates review by plan
participants and beneficiaries. Neither does such a requirement exist
for any other type of participant-directed individual account plan.
---------------------------------------------------------------------------
\36\ However, the Department recognizes that many plan
participants in participant-directed individual account plans that
choose not to comply with all of the section 404(c) requirements are
receiving similar information to what they would receive if the
plans had chosen to comply with all requirements of section 404(c).
---------------------------------------------------------------------------
Extending the existing 404(c) disclosure requirements to
all participant-directed individual account plans
The Department considered requiring all participant-directed
individual account plans to comply with section 404(c) and the
regulations issued thereunder. This would not have required any
additional disclosures to participants in existing section 404(c)
compliant plans, and, therefore, may have required less extensive
effort by such plans, such as review of the proposed regulation and
development of materials in order to come into compliance. Participants
and Beneficiaries, however, would also not have had the benefit of
receiving critical information in a comparative chart.\37\
---------------------------------------------------------------------------
\37\ Under the proposal, plans would be required to disclose
specified identifying information, past performance data, comparable
benchmark returns, and fee and expense information for each
investment alternative. Under the existing 404(c) rule, plans only
have to provide past performance data and operating expense
information directly or upon request and benchmark returns do not
have to be provided.
---------------------------------------------------------------------------
Compared to the status quo, only participants in participant-
directed individual account plans that do not receive similar
information to the required 404(c) disclosures would experience
additional benefits by extending the existing 404(c) disclosures. As
noted above, the Department assumes that only 20% of the participants
of plans that are presently not choosing to be section 404(c) compliant
are not receiving similar information. These participants would
experience benefits from a reduction in fees (5% of 0.113% of their
assets, as shown in Table 14 below) and from a reduction in their
search time (0.5 hour for 29% of the affected participants, as shown in
Table 15 below). This would lead to annual benefits of approximately
$8.1 million due to the reduction in fees and of about $14.6 million
for the reduction in participant search time. In total, benefits add up
to about $22.8 million, a much smaller amount than the expected
benefits of the proposal.
Table 14.--Annual Benefits Due to Mandatory 404(c) Compliance, Reduction in Fees
----------------------------------------------------------------------------------------------------------------
Total amount
of assets in Percent Benefits from
affected plans Basis points correction due reduction in
Type of plan (in millions of higher than to 404(c) fees due to
of 2009 necessary fees disclosure 404(c)
dollars) disclosures
(A) (B) (C) (A * B * C)
----------------------------------------------------------------------------------------------------------------
Non-404(c) Plans without Similar Information.... 144,000 0.11% 5% $8,162,000
---------------
[[Page 43028]]
Total Undiscounted Benefits................. .............. .............. .............. 8,162,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Table 15.--Annual Benefits Due to Mandatory 404(c) Compliance, Reduced Participant Search Time
----------------------------------------------------------------------------------------------------------------
Number of Percentage of Average
(affected) participants hourly value Total benefits
participants predicted to Number of of from reduced
Type of plan in make a change search hours participants' participant
participant- in allocation saved by leisure time search time
directed to lower fee participant (in 2009 due to 404(c)
accounts investments dollars) disclosures
(A) (B) (C) (D) (A * B * C *
D)
----------------------------------------------------------------------------------------------------------------
Non-404(c) Plans without Similar 3,211,000 29% 0.5 $31.33 $14,590,000
Information....................
---------------
Total Undiscounted Benefits. .............. .............. .............. .............. 14,590,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Additional costs for review, update and preparation of related
information, as compared to the status quo, would fall on all
participant-directed individual account plans that are presently not
choosing to comply with section 404(c).\38\ The Department estimates
that these costs would amount to about $11.3 million in the first year
and would fall to $9.0 million in subsequent years, as shown in Table
16 below.
---------------------------------------------------------------------------
\38\ In subsequent years, these costs fall on newly created
404(c) plans and reduced costs for updates are expected for existing
404(c) plans.
Table 16.--Annual Costs Due to Additional Review, Update, and Preparation of Plan Related Information
--------------------------------------------------------------------------------------------------------------------------------------------------------
Legal Clerical Hourly labor
Number of professional Hourly labor professional cost for
affected hours cost for legal hours required clerical
Type of plan participant- required to professional to prepare professional Review cost
directed plans review each (in 2009 plan (in 2009
plan dollars) documents dollars)
(A) (B) (C) (D) (E) (A * B * C) +
(A * D * E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
First Year (2009)
Existing and New Plans.............................. 162,000 0.5 $113 0.5 $26 $11,250,000
---------------
Total Undiscounted Costs First Year............. .............. .............. .............. .............. .............. 11,250,000
Subsequent Years, Annually
Existing Plans...................................... 140,000 0.25 $113 0.25 $26 $4,863,000
New Plans........................................... 59,000 0.5 113 0.5 26 4,109,000
---------------
Total Undiscounted Costs Subsequent Years....... .............. .............. .............. .............. .............. 8,971,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
In addition to costs for review, updating, and preparation of
information, plans would also incur material and postage costs and
labor costs for sending out the required disclosures to participants
that presently are not receiving similar information and would receive
the disclosures by mail, rather than via electronic means. As shown in
Table 17 and Table 18 below, the Department estimates postage and
material costs of about $2.6 million and labor costs of about $2
million.
[[Page 43029]]
Table 17.--Annual Costs for Annual Additional Disclosures Materials and Postage and Pass-Through Materials
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
(affected) Percentage of
participants disclosures Number of Paper and Materials
Type of plan in not pages for printing cost Mailing costs costs for
participant- transmitted annual per page distribution
directed via e-mail disclosure of disclosures
accounts (percent)
(A) (B) (C) (D) (E) (A * B) *
(C * D + E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Disclosures...................................... 3,211,000 62 10 $0.05 $0.59 $2,170,000
Pass Through Material................................... 699,000 62 10 0.05 0.59 473,000
---------------
Total Undiscounted Costs............................ .............. .............. .............. .............. .............. 2,643,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Table 18.--Annual Costs of Additional Distributing Disclosures
----------------------------------------------------------------------------------------------------------------
Percentage of
disclosures Materials
Number of not Hourly labor Hours per costs for
Type of disclosure disclosures to transmitted cost (in 2009 disclosure distribution
be sent via e-mail dollars) of disclosures
(percent)
(A) (B) (C) (D) (A * B * C *
D)
----------------------------------------------------------------------------------------------------------------
Annual Disclosures.............. 3,211,000 62 $26 0.033 $1,730,000
Pass-Though Materials........... 699,000 62 26 0.025 283,000
---------------
Total Undiscounted Costs .............. .............. .............. .............. 2,013,000
----------------------------------------------------------------------------------------------------------------
Note: The displayed numbers are rounded to the nearest thousand and therefore may not add up to the totals.
Table 19 below shows the annual costs and benefits and Table 20
below presents the net present benefit. The Department estimates that
extending the existing 404(c) requirements would have resulted in ten-
year costs of about $105 million and benefits of approximately $171
million. The ten-year net present value would h |
