EBSA Final Rule
Small Pension Plan Security Amendments; Final Rule [10/19/2000]
[PDF Version]
Volume 65, Number 203, Page 62957-62974
[[Page 62957]]
-----------------------------------------------------------------------
Part IV
Department of Labor
-----------------------------------------------------------------------
Pension and Welfare Benefits Administration
-----------------------------------------------------------------------
29 CFR Part 2520
Small Pension Plan Security Amendments; Final Rule
[[Page 62958]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
29 CFR Part 2520
RIN 1210-AA73
Small Pension Plan Security Amendments
AGENCY: Pension and Welfare Benefits Administration, Department of
Labor.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This document contains a final rule amending the regulations
governing the circumstances under which small pension plans are exempt
from the requirements to engage an independent qualified public
accountant (IQPA) and to include a report of the accountant as part of
the plan's annual report under Title I of the Employee Retirement
Income Security Act of 1974, as amended (ERISA). These regulatory
amendments provide a waiver of the IQPA annual examination and report
requirements for employee benefit plans with fewer than 100
participants at the beginning of the plan year. The amendments being
made by this final rule are designed to increase the security of assets
in small pension plans by conditioning the waiver on enhanced
disclosure of information to participants and beneficiaries and, in
certain instances, improved fidelity bonding requirements. The
amendments do not affect the waiver for small welfare plans (such as
group health plans) under 29 CFR 2520.104-46. Conforming amendments are
also being made to the simplified annual reporting requirements for
small pension plans specified in 29 CFR 2520.104-41. These amendments
affect participants and beneficiaries covered by small pension plans,
sponsors and administrators of small pension plans, and providers of
investment and administrative services to small pension plans.
DATES: Effective Date: This rule is effective December 18, 2000.
Applicability Date: The amendments made by this rule are applicable as
of the first plan year beginning after April 17, 2001.
FOR FURTHER INFORMATION CONTACT: John Keene, Office of Regulations and
Interpretations, Pension and Welfare Benefits Administration, Room N-
5669, 200 Constitution Avenue, N.W., Washington, DC 20210, (202) 219-
8521. This is not a toll-free number.
SUPPLEMENTARY INFORMATION: On December 1, 1999, the Department
published in the Federal Register (64 FR 67436) proposed amendments to
the regulations governing the circumstances under which small pension
plans are exempt from the requirements to engage an independent
qualified public accountant and to include an opinion of the accountant
as part of the plan's annual report under Title I of ERISA. The
Department invited interested persons to submit written comments on the
proposed amendments. The Department received 19 written comments from
the public regarding the proposal. The following discussion summarizes
the proposed regulation and the major issues raised by the commenters.
It also explains the Department's reasons for the modifications
reflected in the final regulation that is being published with this
notice.
A. Background
In general, the administrator of an employee benefit plan required
to file an annual report under Title I of ERISA must engage an IQPA and
include the IQPA's opinion as part of the plan's annual report. These
annual reporting requirements can be satisfied by filing the Form 5500
``Annual Return/Report of Employee Benefit Plan'' in accordance with
its instructions and related regulations.\1\ The requirements governing
the content of the opinion and report of the IQPA are set forth in
section 103(a)(3)(A) of ERISA and 29 CFR 2520.103-1(b). Section
104(a)(2)(A) of ERISA permits the Department to prescribe, by
regulation, simplified annual reports for pension plans with fewer than
100 participants, and section 103(a)(3)(A) permits the Department to
waive the IQPA requirements for pension plans for which such simplified
annual reporting has been prescribed. Section 104(a)(3) of ERISA
permits the Department to prescribe exemptions and simplified reporting
and disclosure requirements for welfare plans. In accordance with the
Department's authority under sections 104(a)(2)(A) and 104(a)(3) of
ERISA, the Department adopted, at 29 CFR 2520.104-41, simplified annual
reporting requirements for pension and welfare benefit plans with fewer
than 100 participants. In addition, the Department, at 29 CFR 2520.104-
46, prescribed for such small plans a waiver from the requirements of
section 103(a)(3)(A) to engage an IQPA and to include the opinion of
the accountant as part of the plan's annual report.
---------------------------------------------------------------------------
\1\ See sections 101(b) and 103 of ERISA, and 29 CFR 2520.103-1.
---------------------------------------------------------------------------
Since the adoption of Sec. 2520.104-46 in 1976, the amount of
assets held in small pension plans has risen dramatically and small
pension plans have become increasingly important retirement savings
vehicles for a growing number of American workers. Media coverage of a
particularly egregious case involving misappropriation of a small
pension plan's assets over several years focused national attention on
the potential vulnerability of small pension plans to fraud and abuse.
The Department has had experience with other small pension plan cases
involving service providers, administrators or other fiduciaries
attempting to conceal fraud or misappropriations by falsifying
financial and other information provided to plan sponsors, trustees,
and participants. Although such cases are rare and legal remedies often
can be pursued in an effort to recover lost assets, the Department
concluded, given the increasing extent to which workers are depending
on their employment-based pension plans as a primary source of
retirement income, that it is appropriate to take steps to improve the
security of assets in small pension plans.
One approach the Department considered to improve the security of
assets in small pension plans was to require all such plans to comply
with the audit requirements of section 103(a)(3)(A) of ERISA. While
subjecting the assets of small pension plans to an annual audit would,
in the view of the Department, provide a high degree of certainty that
the assets reported on a plan's annual report are actually available to
pay benefits, the Department recognizes that the costs attendant to
such a requirement may be significant for many plans and plan sponsors.
Consistent with the Department's goal of encouraging pension plan
establishment and maintenance, particularly in the small business
community, the Department concluded that engaging an accountant should
not be the only means by which the security of small plan pension
assets can be improved. Rather, in developing the proposed regulation,
the Department attempted to balance the interest in providing secure
retirement savings for participants and beneficiaries with the interest
in minimizing costs and burdens on small pension plans and the sponsors
of those plans.
In assessing alternatives to a mandatory audit requirement, the
Department concluded that a three-pronged approach--focusing on (1) who
holds the plan's assets, (2) enhanced disclosure to participants and
beneficiaries and, (3) in limited situations, an improved bonding
[[Page 62959]]
requirement--could enhance the level of security and accountability
while keeping administrative burdens and costs to a minimum by building
on current recordkeeping, disclosure and bonding requirements and
practices. In general, the Department believes that statements
regarding plan assets prepared by certain regulated financial
institutions (such as banks, insurance companies, mutual funds, and
registered securities brokers), if made available to participants and
beneficiaries, provide a reliable means by which participants and
beneficiaries can independently confirm that the assets reported by the
plan as being available to pay benefits as of the end of the plan year
are, in fact, available according to the books and records of the
regulated financial institution. Such disclosure, in the Department's
view, reduces the likelihood of losses over long periods due to acts of
fraud or dishonesty. The Department also believes that supplemental
bonding requirements will serve to reduce the risk of loss due to acts
of fraud or dishonestly where a substantial percentage of a plan's
assets are held by entities that may not be subject to state or federal
regulatory oversight. This approach was set forth as proposed new
conditions for obtaining a waiver under Sec. 2520.104-46 of the
requirements to engage an IQPA and include the IQPA's opinion as part
of the plan's annual report.
B. Summary of the Proposal
The first part of the proposal focused on the extent to which a
plan's assets are held by regulated financial institutions. See
Proposed Sec. 2520.104-46(b)(1)(i)(A). The proposal used the term
``qualifying plan assets'' in applying the conditions of the waiver.
``Qualifying plan assets'' were defined to include any assets held by:
a bank or similar financial institution as defined in Sec. 2550.408b-
4(c); an insurance company qualified to do business under the laws of a
state; an organization registered as a broker-dealer under the
Securities Exchange Act of 1934; or any other organization authorized
to act as a trustee for individual retirement accounts under section
408 of the Internal Revenue Code. The term ``qualifying plan assets''
also included assets that the Department believes present little risk
of loss to participants and beneficiaries as a result of acts of fraud
or dishonesty: participant loans meeting the requirements of section
408(b)(1) of ERISA and qualifying employer securities as defined in
section 407(d)(5) of ERISA. See Proposed Sec. 2520.104-46(b)(1)(ii).
The proposal provided, with respect to each plan year for which the
waiver is claimed, that at least 95% of the assets of the plan must
constitute ``qualifying plan assets'' or that any person who handles
assets that do not constitute ``qualifying plan assets'' is covered by
a bond meeting the requirements of section 412 of ERISA, except that
the amount of the bond is not less than the value of such assets.\2\
The 95% test was provided in recognition of the fact that some small
plans may have assets (such as limited partnership or real estate
interests) held by parties that are not regulated financial
institutions. Only where more than 5% of a plan's assets do not
constitute ``qualifying plan assets'' would the bonding component of
the proposal apply.
---------------------------------------------------------------------------
\2\ Section 412 of ERISA and the regulations issued thereunder,
29 CFR 2550.412-1, 2580.412-1 et seq., set forth the bonding
requirements generally applicable to ERISA-covered plans.
---------------------------------------------------------------------------
The proposal required that the percentage of a plan's assets that
constitute ``qualifying plan assets'' and, as appropriate, the amount
of supplemental bond coverage necessary to comply with the regulation
must be determined for each plan year for which the waiver is claimed.
Accordingly, the administrator of a plan electing the waiver must make
the required determinations as of the beginning of the plan year. The
proposal provided that, for purposes of this requirement, the required
determinations are to be made in a manner consistent with the
requirements of section 412. Inasmuch as a determination that more than
5% of a plan's assets do not constitute ``qualifying plan assets'' may
necessitate an increase in the amount of the plan's section 412 bond,
the Department concluded that, assuming the administrator does not
elect to engage an IQPA, the determination of ``qualifying plan
assets'' should be made on the same basis as the required bond.\3\
---------------------------------------------------------------------------
\3\ In this regard, 29 CFR 2580.412-14 requires that the amount
of the section 412 bond be determined by reference to the preceding
reporting year. In the case of new plans, with respect to which
there is no preceding report year, Sec. 2580.412-15 provides
procedures for making estimates for the current year.
---------------------------------------------------------------------------
Under the second part of the proposal, the waiver of the IQPA
requirements was further conditioned on the disclosure of certain
information to participants and beneficiaries. Specifically,
Sec. 2520.104-46(b)(1)(i)(B) required that the summary annual report
(SAR) of a plan electing the waiver include, in addition to the other
information required by Sec. 2520.104b-10: (1) The name of each
institution holding ``qualifying plan assets'' and the amount of such
assets held by each institution as of the end of the plan year; (2) the
name of the surety company issuing the bond, if the plan has more than
5% of its assets in non-qualifying plan assets; (3) a notice indicating
that participants and beneficiaries may, upon request and without
charge, examine, or receive copies of, evidence of the required bond
and statements received from each institution holding qualifying assets
that describe the assets held by the institution as of the end of the
plan year; and (4) a notice stating that participants and beneficiaries
should contact the Regional Office of the U.S. Department of Labor's
Pension and Welfare Benefits Administration if they are unable to
examine or obtain copies of statements received from each institution
holding qualifying assets or evidence of the required bond, if
applicable.
Nothing in the proposal affected the obligation of a plan that
would be eligible for the audit waiver to file a Form 5500 ``Annual
Return/Report of Employee Benefit Plan,'' including any schedules or
statements required by the instructions to the form. On the other hand,
the proposal made it clear that a plan electing to file a Form 5500 as
a small pension plan pursuant to the ``80 to 120 rule'' in
Sec. 2520.103-1(d) may claim the audit waiver in the same manner and
under the same conditions as a plan with fewer than 100
participants.\4\
---------------------------------------------------------------------------
\4\ Under the ``80 to 120 rule,'' if the number of participants
covered under the plan as of the beginning of the plan year is
between 80 and 120, and an annual report was filed as a small plan
filer for the prior year, the plan administrator may elect to
continue to file as a small plan filer and claim the audit waiver
even though the plan covered more than 100 participants as of the
beginning of the plan year. Conversely, a plan with fewer than 100
participants as of the beginning of the plan year that elects to
continue to file a Form 5500 as a large plan pursuant to the ``80 to
120 rule'' is not eligible to claim the waiver afforded by this
section to small plan filers.
---------------------------------------------------------------------------
Finally, conforming amendments to the simplified annual reporting
provisions in Sec. 2520.104-41 were included in the proposal to clarify
that, although other simplified reporting options would continue to be
available, if an employee benefit plan with fewer than 100 participants
does not meet the criteria set forth in Sec. 2520.104-46, it would be
required to engage an IQPA to conduct an examination of the financial
statements of the plan, to include with the plan's annual report the
financial statements, notes and schedules prescribed in section 103(b)
of ERISA and 29 CFR 2520.103-1, and to include within the plan's annual
report a report of an IQPA as prescribed in section
[[Page 62960]]
103(a)(3)(A) of ERISA and 29 CFR 2520.103-1(b)(5).
C. Summary of Public Comments
As noted above, the Department received 19 written comments
regarding the proposal. The commenters generally expressed the view
that the Department's proposal, for the most part, struck a reasonable
balance between enhancing the level of security and accountability for
small pension plan assets and minimizing administrative burdens and
costs on plans and plan sponsors. The commenters also generally
concluded that, although the proposal will impose new costs on some
small employers, the proposal was structured so that costs are
generally proportionate to the risk and the additional burdens should
be modest. The following discussion summarizes the major issues raised
by the commenters and explains the Department's reasons for the
modifications reflected in the final regulation.
1. Definition of Qualifying Plan Assets
Several commenters asked the Department to clarify the terms ``held
by'' and ``hold'' as used in describing the requirements that assets
must be held by certain regulated financial institutions and that year-
end statements regarding plan assets must be from the financial
institution holding the plan's assets. See Sec. 2520.104-
46(b)(1)(i)(B)(1), (b)(1)(ii)(C), and (b)(1)(ii)(F). The Department
intended that the ``held'' term as used in the proposal would generally
have the same meaning as it has in section 103(a)(2) of ERISA.
Specifically, section 103(a)(2) provides that certain entities which
``holds'' some or all of the assets of the plan must transmit and
certify to the plan administrator information regarding the assets that
is needed by the administrator to comply with any requirement of Title
I of ERISA. Although section 103(a)(2) is limited to insurance carriers
and other organizations that hold plan assets in a separate account and
to banks and similar institutions that hold plan assets in a common or
collective trust, a separate trust or a custodial account, the concept
of what constitutes ``holding'' of a plan's assets under the proposal
was intended to be the same as under section 103(a)(2).
In that regard, two commenters requested confirmation that certain
arrangements involving use of ``omnibus accounts'' by banks and
registered broker-dealers would satisfy the ``holding'' requirement.
The commenters stated that many banks and registered broker-dealers
provide various investment related services to small pension plans,
often acting as custodian, recordkeeper or investment manager. The
commenters indicated that the bank or broker-dealer will keep internal
records tracking the specific assets that belong to each of their small
pension plan customers. The plans' assets may consist of individual
securities (including stocks, bonds and mutual fund shares), real
estate, limited partnerships or other types of assets. In the case of
securities, according to the commenters, banks and registered broker
dealers often make trades for the plans in the bank's or broker-
dealer's name through omnibus accounts, with most of these trades being
made through depositories, such as the Depository Trust Company, or
through the National Securities Clearing Corporation in the case of
mutual fund shares. In all these cases, the securities are held in the
name of the bank or broker-dealer on behalf of the plans and the bank
or broker-dealer maintains internal records that show what assets
belong to what plan. The Department agrees that such omnibus account
structures would constitute the bank or registered broker-dealer
``holding'' the plan's securities for purposes of satisfying the audit
waiver requirements.
Other commenters asked for clarification of whether the Department
intended to exclude from the definition of ``qualifying plan assets''
certain types of traditional plan investments, for example, investments
in mutual funds and insurance company general account contracts, which
may not involve a regulated financial institution ``holding'' plan
assets.\5\ The commenters noted that it is not uncommon for small
pension plans to have an individual employee of the plan sponsor serve
as the trustee of the plan. In such cases, plan assets may be invested
in mutual fund shares or in an insurance company general account
contract with the individual trustee holding the shares or contract in
his or her name as trustee of the plan. The commenter stated that the
plan may be unable to meet the conditions in the proposal for two
reasons: (1) Plan assets, i.e., the mutual fund shares and the
insurance contract, will not be ``held'' by a regulated financial
institution, and (2) year-end statements regarding the assets will not
be from an institution ``holding'' the plan's assets.
---------------------------------------------------------------------------
\5\ See the Department's regulation at 29 CFR 2550.401c-1
regarding the definition of plan assets as it relates to insurance
company general accounts.
---------------------------------------------------------------------------
The Department stated in the preamble to the proposal that ``[i]n
general, the Department believes that statements of plan assets
prepared by certain regulated financial institutions (such as banks,
insurance companies, mutual funds, and securities broker-dealers), if
made available to participants and beneficiaries, provide a means by
which participants and beneficiaries can independently confirm that the
assets reported by the plan to be available to pay benefits as of the
end of the plan year were, in fact, available according to the books
and records of the institution holding the assets.'' The Department
agrees with the commenters that plan investments in mutual fund shares
for which the registered investment company maintains records of
shareholder accounts and prepares and mails shareholder account
statements provides a commensurate level of security and accountability
to that which would exist if the plan's assets were held by and
disclosure statements were produced by a bank, insurance company, or
registered broker-dealer.\6\ The Department believes that the same is
true for general account contracts of an insurance company qualified to
do business under the laws of a state where the insurance company
prepares and mails statements to the plan regarding the value of the
contract as of the end of the year and transaction activity related to
the contract during the plan year. Accordingly, the final rule includes
a change to the definition of qualifying plan assets that is intended
to include such mutual fund shares and insurance company general
account contracts as ``qualifying plan assets.'' See Sec. 2520.104-
46(b)(1)(ii)(D) & (E). The final rule also includes corresponding
changes to the Summary Annual Report (SAR) and related disclosure
provisions to reflect the inclusion of mutual fund shares issued by a
registered investment company and general account investment contracts
issued by
[[Page 62961]]
insurance companies in the definition of ``qualifying plan assets.''
See Sec. 2520.104-46(b)(1)(i).
---------------------------------------------------------------------------
\6\ According to the commenter, it is a common practice for a
mutual fund to employ ``registered transfer agents'' to maintain
records of shareholder accounts, calculate and disburse dividends,
and prepare and mail shareholder account statements, federal income
tax information and other shareholder notices. Some transfer agents
prepare and mail statements confirming shareholder investment
transactions and account balances and maintain customer service
departments to respond to shareholder inquiries. Transfer agents are
regulated by and subject to periodic examination by the Securities
and Exchange Commission (SEC) under the Securities Exchange Act of
1934. Among other requirements, transfer agents must register with
the SEC using a Form TA-1 and must file annually with the SEC a
report prepared by an independent accountant concerning the transfer
agent's system of accounting controls and related procedures for the
transfer of record ownership and the safeguarding of related
securities and funds. For purposes of the audit waiver, the
Department would consider statements from a registered transfer
agent employed by the mutual fund to be statements from the mutual
fund.
---------------------------------------------------------------------------
Another commenter suggested that assets of individual account plans
that are invested at the direction of participants or beneficiaries
should be included in the definition of ``qualifying plan assets.'' The
Department did not include such a provision in the proposal because
information available to the Department regarding those assets
indicated that they generally would meet the conditions in the
proposal. The commenters stated, however, that the SAR disclosures and
the requirement to make financial institution statements available to
participants and beneficiaries in individual account plans, like 401(k)
plans, could involve an extensive list of financial institutions in
cases where the plan provides a broad range of investment options.
Also, the commenters noted that especially in such individual account
plans that cover a very small number of employees, the proposed SAR
disclosures could give all the plan's participants and beneficiaries
access to confidential financial information regarding the type and
performance of individual account investments made by other
participants. The commenters indicated that this result would
particularly impact small business owners who often have the largest
accounts in the plan, and, accordingly, could create a tension in the
small business market that would be inconsistent with the Department's
goal of encouraging pension plan establishment and maintenance. The
commenters suggested that the Department address this concern by
including such participant-directed assets in the definition of
qualifying plan assets subject to the condition that participants and
beneficiaries are furnished statements regarding the assets allocated
to their individual accounts at least annually directly from a
qualified independent financial institution, such as a bank, insurance
company, registered broker-dealer, or mutual fund.
The Department believes that, in the case of an individual account
plan, the security and accountability objectives of the proposal can be
met for assets allocated to individual accounts if the participant or
beneficiary has the opportunity to exercise control with respect to
those assets and the participant or beneficiary is provided, at least
annually, a statement from a regulated financial institution describing
the assets held (or issued) by such institution and the value of such
assets. In such a case, each participant can effectively monitor the
assets in their individual accounts, and the regulated financial
institution statements provide a reliable assurance that the assets
reported to be in the individual account are in fact there.
Accordingly, the definition of ``qualifying plan assets'' has been
modified in the final rule so that plan administrators of individual
account plans can rely on this alternative approach in determining
whether participant directed assets allocated to individual accounts
can be treated as ``qualifying plan assets'' for purposes of applying
the 95% test.
Another commenter suggested that the Department exclude qualifying
employer securities from those assets considered to be qualifying plan
assets. The commenter stated that qualifying employer securities should
not be treated as qualifying plan assets because they are ``frequently
mis-valued'' and are subject to special rules. It was the intention of
the Department in proposing these amendments to improve the security of
plan assets against losses due to fraud or dishonesty by providing a
means under which the existence and amount of the plan's investments
could be independently verified by participants and beneficiaries. The
comment regarding valuation practices raise issues that are beyond the
scope of the proposal, and, accordingly, the Department did not make
any changes to the proposal in response to this comment.
One commenter asked the Department to clarify in two respects the
definition of qualifying plan assets as applied to participant loans.
The commenter asked whether a loan that is treated as a distribution
under section 72(p) of the Internal Revenue Code because it exceeds the
maximum dollar limit set forth in Code 72(p)(2)(A)(1) will fail to be a
qualifying plan asset. Under the proposal, qualifying plan assets
included ``any loan meeting the requirements of section 408(b)(1) of
the Act and the regulations issued thereunder.'' Neither section
408(b)(1) of ERISA nor the Department's regulations at Sec. 2550.408b-1
expressly place a specific dollar limit on participant loans; however,
Sec. 2550.408b-1(a)(1)(iii) requires that loans must be made in
accordance with specific provisions regarding such loans set forth in
the plan. Accordingly, to the extent that the plan terms regarding
participant loans include limits intended to ensure that the plan's
loan program complies with requirements under Code 72(p)(2), those plan
terms would have to be complied with for the loan to meet the
requirements of section 408(b)(1) of ERISA.
The commenter also asked whether a loan would be seen as continuing
to satisfy the requirements of section 408(b)(1) of ERISA, and
therefore continue to constitute a qualifying plan asset, even after a
participant was in default under terms of the loan agreement. The
Department included participant loans within the term ``qualifying plan
assets'' because of the belief that such loans are assets that present
little risk of loss to participants and beneficiaries as a result of
acts of fraud or dishonesty. Even where a participant defaults on a
loan, that fact generally should not put the plan at greater risk of
loss due to fraud or dishonesty. Accordingly, the Department does not
believe that the characterization of a participant loan as ``in
default'' should disqualify the loan from continuing to be treated as a
``qualifying plan asset.''
One commenter suggested that the audit waiver be conditioned on all
the assets of the plan being held by qualifying financial institutions
that file Form 5500 annual reports with the Department regarding the
assets they hold. Several other commenters stated that the 95% test was
reasonable, provided adequate flexibility, and was consistent with the
investment practices of most small pension plans. It was not, and
continues not to be, the intent of the Department to directly or
indirectly influence the type of investments held by small pension
plans through application of the audit requirements. Rather, the
Department continues to believe that all plan assets do not need to be
held by a regulated financial institution to achieve the improved level
of security and accountability that is the objective of this
rulemaking. Rather, the definition of ``qualifying plan assets,'' the
disclosure requirements, and the bonding components of the rule provide
plans with flexibility in structuring their investment portfolios while
also ensuring an adequate level of security and accountability.
Accordingly, the Department did not adopt this suggestion.
2. Fidelity Bonding Requirements
A number of commenters requested clarification of what constitutes
``handling'' for purposes of the requirement that persons who handle
non-qualifying plan assets must be covered by a fidelity bond in an
amount equal to the value of the assets they handle. The term
``handling'' is defined in 29 CFR 2580.412-6 for purposes of the
general fidelity bonding requirement
[[Page 62962]]
under section 412 of ERISA. The proposal expressly required that
persons handling non-qualifying plan assets would have to be bonded
``in accordance with the requirements of section 412 of the Act and the
regulations issued thereunder, except that the amount of the bond shall
not be less than the value of such assets.'' See Proposed
Sec. 2520.104-46(b)(1)(i)(A)(2). No change is being made in the final
rule to this aspect of the proposal. Accordingly, the definition of
handling in Sec. 2580.412-6 would apply for purposes of meeting the
fidelity bonding conditions in Sec. 2520.104-46 as amended by the final
rule.
The Department received several comments that focused on the amount
of bonding coverage required under the proposal. One commenter was
critical of the fidelity bonding provisions in the proposal because
such bonds do not protect against losses resulting from imprudent
investments and because the commenter believed that ``no amount of
increased reporting or bonding will prevent a crook from being a
crook.'' On the other hand, a comment submitted from the surety
industry suggested as an alternative to the conditions in the proposal
that the Department require 100% of the assets of a small pension plan
be covered by a fidelity bond as the most effective way to increase the
protection of plans from losses due to fraud or dishonesty. Another
commenter observed that under the proposal some plans would be able to
use their general fidelity bond under section 412 of ERISA to satisfy
the fidelity bonding requirement in the proposal, and suggested that
the amount of the fidelity bonding coverage be increased to condition
the audit waiver on the plan having a bond in an amount equal to 10% of
all plan assets plus 100% of all non-qualifying plan assets.
Although it may not be feasible to develop a regulation that would
make it impossible for any plan to suffer any losses due to fraud or
dishonesty, the Department does not consider that circumstance to be a
valid reason for not adopting this regulation which will provide
meaningful enhancements in security and accountability for participants
and beneficiaries in small pension plans. The Department also is not
prepared to adopt the suggestion that 100% of all small pension plans'
assets be required to be covered by a fidelity bond because such a
requirement would, in the Department's view, impose more costs on plans
and plan sponsors without providing substantially more security for
qualifying plan assets. The 100% bonding approach suggested by the
commenter also would not provide participants and beneficiaries the
improved disclosures set forth in the proposal. Lastly, the Department
recognized in the proposal that inasmuch as compliance with section 412
generally requires a bond in an amount not less than 10% of all the
plan's funds or other property handled, the bond acquired for section
412 purposes may in some cases be adequate to cover any non-qualifying
assets under the proposal. Even in those cases, however, the bond would
still equal 100% of the value of the non-qualifying plan assets.
Accordingly, the Department did not adopt any of the suggested changes
regarding the amount of fidelity bond coverage required to be eligible
for the audit waiver.
The Department included fidelity bonding examples in the preamble
to the proposal in an effort to explain the fidelity bonding
requirements in the proposal and the interaction between those
requirements and the general fidelity bonding requirements under
section 412 of ERISA. To make those examples easily accessible, the
Department inserted the examples in the final rule as a new
Sec. 2520.104-46(b)(1)(iii)(B).
3. Disclosure
As noted above, under the proposal, the waiver of the requirement
to engage an accountant is further conditioned on the disclosure of
certain information to participants and beneficiaries. Specifically,
Sec. 2520.104-46(b)(1)(i)(B) required that the SAR of a plan electing
the waiver include, in addition to the other information required by
Sec. 2520.104b-10: (1) The name of the institution holding ``qualifying
plan assets'' and the amount of such assets held by each institution as
of the end of the plan year; (2) the name of the surety company issuing
the bond, if the plan has more than 5% of its assets in non-qualifying
plan assets; (3) a notice indicating that participants and
beneficiaries may, upon request and without charge, examine, or receive
copies of, evidence of the required bond and statements received from
each institution holding qualifying assets which describe the assets
held by the institution as of the end of the plan year; and (4) a
notice stating that participants and beneficiaries should contact the
Regional Office of the U.S. Department of Labor's Pension and Welfare
Benefits Administration if they are unable to examine or obtain copies
of statements received from each institution holding qualifying assets
or evidence of the required bond, if applicable.
One commenter noted that in many cases more than one regulated
financial institution may hold plan assets and asked the Department to
confirm that multiple statements from separate institutions could be
used to satisfy the conditions in the proposal. As the Department
explained when it published the proposal, the rule does not require the
year-end statements to be in any particular form, but the statements,
at a minimum, must identify the institution holding the assets and the
amount of assets held as of the end of the year. The Department did not
intend, and the language of the proposal does not require, that the
plan receive a single statement from one financial institution.
Another commenter suggested that the SAR and other disclosure
requirements in the proposal should be applied to all large plans
required to furnish SARs to participants, not just small pension plans.
The commenter's suggestion called for regulatory changes that would be
beyond the scope of this rulemaking which did not include any changes
in the information disclosure or audit requirements applicable to large
pension and welfare plans. Moreover, the annual reporting and audit
requirements applicable to large plans generally result in the
availability of more comprehensive and detailed information about the
plan's investments than the disclosure requirements in the proposal.
For example, large plans with investment portfolios are generally
required to include various financial schedules in their annual report,
including a detailed listing of the assets of the plan, and, pursuant
to section 103(a)(3)(A) of ERISA, the IQPA report attached to the Form
5500 must include the accountant's opinion on whether those schedules
``present fairly, and in all material respects the information
contained therein when considered in conjunction with the financial
statements taken as a whole.'' Participants and beneficiaries in such
large plans have a right, upon request, to examine and obtain copies of
the Form 5500 and the IQPA report, and the SAR required to be furnished
to participants must include a notification of that right.
Several commenters indicated that the disclosure requirements set
forth in the proposal would require adjustments to the way SARs are
currently prepared and asked the Department to adopt less detailed SAR
disclosures. For example, one commenter suggested that the SAR be
required to state only the percentage of assets held by regulated
institutions and the amount of any fidelity bonds if
[[Page 62963]]
plan does not meet the 95% test, along with a statement that
participants and beneficiaries have a right to examine and get copies,
on request, of statements from the institutions and evidence of any
required fidelity bond. Another commenter stated that adding more
information to that already required to be given in the SAR may be
confusing to many participants. The commenter suggested that including
a ``boilerplate'' notice in the SAR regarding the financial institution
statements and fidelity bond would give participants and beneficiaries
interested in reviewing the materials knowledge of their availability
at no cost. As noted above, the Department believes that furnishing
statements from certain regulated financial institutions regarding the
plan's assets provides a means by which participants and beneficiaries
can independently confirm that the assets reported by the plan to be
available to pay benefits as of the end of the plan year were, in fact,
available. Such disclosure, in the Department's view, reduces the
likelihood of losses over long periods due to acts of fraud or
dishonesty. The Department believes that the security and
accountability objectives of the proposal are enhanced by the
disclosure of the names of institutions holding (or issuing in the case
of mutual fund shares and general account investment contracts with
insurance companies) qualifying plan assets and the amount of such
assets. A general disclosure that information is available upon request
would not, in the view of the Department, provide participants with
sufficient information to make an informed decision on whether to
request the underlying financial institution statements or evidence of
bonds.\7\
---------------------------------------------------------------------------
\7\ Several commenters asked questions about and/or suggested
modifications of certain conclusions regarding estimated costs and
burdens associated with complying with the SAR and related
disclosure requirements that were contained in the Department's
regulatory impact analysis published in the Federal Register along
with the proposal. Those comments are addressed in the regulatory
impact analysis section of this notice.
---------------------------------------------------------------------------
The Department is making one change in the SAR disclosure
requirements to address the inclusion, discussed above, of participant
directed assets in the definition of qualifying plan assets. As noted
above, the final rule provides in Sec. 2520.104-46(b)(1)(ii)(F) that,
in the case of an individual account plan the definition of
``qualifying plan assets'' would include any assets in the individual
account of a participant or beneficiary over which the participant or
beneficiary has the opportunity to exercise control and with respect to
which the participant or beneficiary is furnished, at least annually, a
statement from one of the regulated financial institutions referred to
in Sec. 2520.104-46(b)(1)(ii)(C), (D) or (E) describing the assets held
(or issued) by the institution and the amount of such assets. A new
provision was added to the final rule to make it clear that the SAR
disclosure requirements would not apply to individual account assets
that meet the definition of qualifying plan assets pursuant to the
alternative described in paragraph (b)(1)(ii)(F). See Sec. 2520.104-
46(b)(1)(i)(B)(1).\8\
---------------------------------------------------------------------------
\8\ The final rule also includes qualifying employer securities
and participant loans in this new provision in paragraph
(b)(1)(i)(B)(1) to make it clear that the there are no special SAR
disclosures associated with the treatment of such assets as
qualifying plan assets.
---------------------------------------------------------------------------
A commenter suggested that the final regulation state that the
requirement to provide these individual account statements could be
satisfied by giving participants and beneficiaries access to individual
account information via ``800'' numbers, automated voice response
systems, website access, and other similar technologies. The Department
does not believe that access to information is comparable to
affirmatively providing participants and beneficiaries with information
about their accounts. Accordingly, the final rule requires that, as
with SARs, the individual account statements must be ``furnished'' to
participants. See Sec. 2520.10 4-46(b)(1)(ii)(F). In that regard, the
Department notes that it has a separate regulation project pending
under Sec. 2520.104b-1 that is focused on the use of electronic
communication technologies by ERISA covered plans to satisfy certain
disclosure obligations under Part 1 of Title I, including the
obligation to furnish SARs to participants. In the Department's view,
measures and methods acceptable for furnishing SARs under the
Department's regulation at Sec. 2520.104b-1 would also be acceptable
for regulated financial institutions to use in furnishing individual
account statements under this final regulation.
4. Miscellaneous Issues
One commenter asked the Department to exclude from the audit waiver
requirements plan assets in individual account plans belonging to
owner-employees. The commenter posited that owner-employees generally
would not need the additional disclosures set forth in the proposal.
Another commenter in a similar vein argued that ``top heavy'' plans
should be exempt from the audit requirement because ``[b]y definition,
60% or more of the accrued benefits of a top-heavy plan are those of
``key employees'' as defined by IRC Sec. 416(i) * * * [and] these are
the type of participants who are most likely to be able to police or
monitor the performance of their accrued benefits.'' The Department
does not believe that such carve outs for owner-employee assets or top
heavy plans would be appropriate. First, the Department believes that
inclusion of participant directed assets in individual account plans
and the related adjustments to the disclosure provisions in the
proposal adequately address the commenter's concerns regarding owner-
employees. Second, ``top heavy'' status may vary from year to year
which may result in intermittent and potentially confusing disclosures
to plan participants. Moreover, the rationale presented by the
commenter ignores the non-key employee participants in the plan. The
Department, accordingly, did not adopt the carve-outs suggested by
these commenters.
A commenter urged the Department to improve the remedies available
for aggrieved participants in cases where there have been losses due to
fraud or dishonesty. The commenter observed that participants often do
not have the financial resources to retain experienced ERISA counsel
even in cases of clear fiduciary violations, that fiduciaries in cases
involving interpretation of plan documents may benefit from courts'
reviewing their interpretations under a deferential ``arbitrary and
capricious'' standard, that statutory remedies are limited in fiduciary
cases and do not include compensatory and punitive damages, and that
courts may not award full attorney's fee awards even in cases where the
participant prevails. The commenter concluded that enhancing retirement
security would be better accomplished by improving the remedies
available to aggrieved plan participants. Expanding the ERISA remedies
available to participants and beneficiaries in cases involving plan
losses due to fraud or dishonesty would, in the Department's view,
generally require legislation and, accordingly, is beyond the scope of
this administrative rulemaking.
5. Request for Public Comments on Alternatives
To aid in its effort to develop a cost-effective final regulation,
the Department solicited views and comments from the benefit plan
community on whether there are alternative approaches that would
provide significant enhancements in the security of small pension plan
assets and the accountability of persons
[[Page 62964]]
handling those assets and that would be more effective or involve less
cost and burden than this proposal. In that regard, the Department
specifically invited comments on requiring, as conditions of being
eligible for the audit waiver, that small pension plans (1) obtain a
fidelity bond covering persons who handle plan funds in an amount equal
to at least 80% of the value of the plan's assets and (2) make
available to participants and beneficiaries a schedule of the plan's
assets held for investment purposes as of the end of the plan year
similar to the schedule currently required as part of the Form 5500
annual report filed by pension plans with 100 or more participants. No
commenter supported this alternative approach. The two commenters that
specifically addressed this alternative concluded that it would be more
disruptive and more costly for most employers and would be unlikely to
provide sufficient additional benefits to plan participants and
beneficiaries to justify the extra administrative costs and burden to
small plan sponsors.
6. Effective Date
Finally, several commenters requested a delayed effective date to
give small pension plans sufficient time to comply with the new summary
annual report and bonding requirements provided for in this rule. The
proposal envisioned that the final regulation would be effective 60
days after publication in the Federal Register. One commenter suggested
that the new requirements should not be applicable until the later of:
(1) the first plan year beginning after 180 days after the final
regulation is published in the Federal Register, or (2) the first plan
year beginning after the first surety bond policy expiration date that
is at least 60 days after the regulation is finalized. Another
commenter asked that the effective date be delayed for all plans until
the first plan year beginning on or after January 1, 2002.
The Department believes that it is important to make this final
rule effective in a timely fashion so that participants and
beneficiaries get the enhanced security and accountability protections
of the new audit waiver conditions. The Department is also sensitive to
the need for plans and plan sponsors to have sufficient time to make
adjustments to comply with the disclosure and bonding provisions in the
regulation. In light of the fact that fidelity bonds may be issued for
multi-year periods, although the amount of the coverage is required to
be set annually, an effective date based on the surety bond policy
expiration date could provide for a overly long period before some
plans would be required to comply with the new audit waiver conditions.
Similarly, making the amendments effective for the first plan year
beginning on or after January 1, 2002, could provide a prolonged period
following publication of the final rule for plans with non-calendar
fiscal years before they would have to comply with the new SAR
disclosure requirements (as long as four years for some plans with non-
calendar fiscal years). The Department believes that making the
amendments applicable as of the first plan year beginning after 180
days after the final regulation is published in the Federal Register
provides an adequate period of time for plans and plan sponsors to make
any necessary adjustments while not unduly delaying the implementation
of the new audit waiver conditions. Accordingly, the final rule will be
effective 60 days after publication in the Federal Register but the
amendments to the audit waiver conditions will be applicable as of the
first plan year beginning after 180 days after the final regulation is
published in the Federal Register.
Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule: (1) having an annual effect on the economy of $100 million
or more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
Pursuant to the terms of the Executive Order, it has been
determined that this action is ``significant'' and subject to OMB
review under Section 3(f)(4) of the Executive Order. Consistent with
the Executive Order, the Department has undertaken to assess the costs
and benefits of this regulatory action. The Department's assessment,
and the analysis underlying that assessment, is detailed below.
Overview
This regulation is intended to accomplish two purposes: to limit
pension plan fraud and to provide participants and beneficiaries of
small pension plans with the information they need to monitor their
plan assets and to hold plan fiduciaries accountable. Recent cases
involving embezzlement or other misappropriations of pension assets
have focused national attention on the potential vulnerability of small
pension plans to fraud and abuse. As a result, the Department has
determined that modifications to the small plan audit waiver
(Sec. 2520.104-46) will enhance pension plan security. Imposing the
additional conditions on the audit waiver will help to reduce the risk
of loss due to acts of fraud or dishonesty with small plan assets. It
will also provide participants with more information about their
pension plans, thus better enabling them to help provide the checks and
balances needed to ensure the integrity of the pension plan.
The cost to small pension plans of the provisions of this final
rule will not be large--it is estimated to be less than 1% of total
annual administrative costs for all small pension plans. Estimates from
Form 5500 data indicate that most small pension plans meet the
requirement to obtain a waiver that at least 95% of the plan assets
must be ``qualifying plan assets.'' For the few plans not meeting this
requirement, the cost of obtaining a fidelity bond to enable them to
meet the conditions for a waiver is low relative to the increased
security provided to participants and beneficiaries. Likewise, the cost
of meeting disclosure requirements is small because, after an initial
start up cost to include new language in the SAR and allow for the
inclusion of additional detail concerning qualifying plan assets, the
subsequent annual cost consists only of updating the SAR with data
already provided at least annually by the financial institutions in the
normal course of business. Other costs include a small cost for the
preparation and distribution of documents to participants and
beneficiaries who request copies of statements from financial
institutions and evidence of fidelity bonding.
The costs imposed by the additional conditions this regulation
places on the existing small plan audit waiver are expected to total
$24.1 million
[[Page 62965]]
annually.\9\ This total includes $714,000 for all 605,115 small pension
plans to determine whether they satisfy the conditions for the audit
waiver with respect to the percentage of plan assets held by regulated
financial institutions, $6.5 million to obtain additional fidelity
bonding coverage for the 29,414 plans not expected to meet the
condition that at least 95% of the plan's assets are held by a
regulated financial institution, $16.3 million to satisfy additional
disclosure conditions of the audit waiver, and $628,000 to respond to
requests by participants and beneficiaries for copies of the statements
of financial institutions and evidence of fidelity bonding. As
explained further below, the cost estimates of the final rule are
greater than the $15.6 million estimate presented in the proposal, due
primarily to the adjustment of certain assumptions used in estimating
the rule's impact. The revised estimates also take into account the
substantive modifications made to the proposal in the development of
the final rule.
---------------------------------------------------------------------------
\9\ The cost estimates are derived from 1995 data on pension
plans and 1998 BLS data on occupational wages as adjusted for non-
wage compensation and overhead.
---------------------------------------------------------------------------
In the Department's view, the benefits (although not quantified) of
the final rule's requirements for the IQPA waiver outweigh the costs.
The enhanced accountability and security of small pension plans
resulting from the additional IQPA waiver conditions will benefit plan
participants who are counting on these pensions for retirement
security. With minimum government intervention, participants and other
parties to the plan will have an improved ability to verify and monitor
plan assets. Given the more than $300 billion in small pension plan
assets, any increase in security and accountability is valuable. The
additional conditions will also strengthen confidence in the pension
system as a whole. The following items highlight other potential
benefits of the regulation in a qualitative, and when possible,
quantitative, way:
Confidence in the private pension system may be
strengthened and may result in increased participation among the nearly
600,000 private wage and salary workers who currently elect not to
participate in a small plan that is offered;
In 1998, more than $6 million in pension plan assets were
recovered as a result of criminal investigations. If new conditions are
imposed on the small plan audit exemption, fewer assets may be missing
from plans in the future because of the checks and balances put in
place by improved information disclosure;
The investigations and litigation associated with
recovering assets of small pension plans can be very costly to private
parties and to the Government. In 1998, nearly 6,000 civil
investigations were initiated by the Department. If new conditions are
imposed on the small plan audit exemption, losses will likely decline
and fewer investigations of small pension plans may be needed. This
will have the dual effect of lowering investigation-related costs for
small plans and permitting Federal authorities to enhance the security
of other participants by directing their efforts elsewhere; and
When workers discover that their pension plan assets are
missing or are jeopardized, worker productivity declines. Time at work
may be spent investigating what happened to plan assets, whether they
will be restored, and whether retirement will be possible without these
pension assets. A more secure system for monitoring pension plan assets
will reduce productivity loss to employers.
Comments on Estimated Economic Impact
The Department received 19 written comments regarding the proposed
regulation. Of these, the majority commended the Department for its
efforts to strike a reasonable balance between improving the security
of small pension plan assets and allowing small plans and small plan
sponsors to function efficiently without the imposition of undue
administrative burdens and costs. The principal concerns of those
commenters who focused on the economic impact of the proposal related
to the Department's estimates of the costs to comply with the bonding
and disclosure provisions, as well as to the Department's methodology
for estimating the number of plans potentially impacted by the proposed
amendments to the waiver of the requirement to engage an independent
qualified public accountant. Specifically, commenters questioned
whether the cost burden for the bond would be ``nominal'' as the
Department suggested in the proposal, and whether the cost burden for
developing and modifying the SAR was greater than the Department had
estimated. These issues are addressed in more detail below.
Four commenters addressed the cost of the surety bond. The proposed
regulation provided that, for each plan year for which the waiver is
claimed, if at least 95% of the assets of the plan do not constitute
``qualifying plan assets'' any person who handles assets that do not
constitute qualifying plan assets must be covered by a bond meeting the
requirements of section 412 of ERISA, except that the amount of the
bond must be not less than the amount of such assets. Based on
Department data and consultation with industry representatives, the
original estimate for the average additional premium cost of an
enhanced surety bond was $200 per plan. One commenter questioned the
Department's conclusion that the cost of additional fidelity coverage
would be ``nominal,'' and whether, in fact, bonding under this
regulation would be as broadly available to plans as under section 412.
The comment was based on the fact that the enhanced bond requirement
applies to only a small portion of the pension plan population--
specifically, a population which is not audited and which maintains
less than 95% of its assets in a qualified financial institution. The
commenter further questioned whether, even if a plan were able to
obtain a bond, it might be at a higher cost than that estimated by the
Department because the requirement represented adverse selection
against the surety. In any case, the eventual premium cost and impact
on the availability of surety bonds under the proposal was viewed by
the commenter as having a potentially high level of unpredictability
because surety bonds meeting these requirements are not currently
offered. Finally, the commenter proposed that a surety might request an
audit by an independent accountant, or subject the plan to other more
stringent underwriting requirements, in order to issue a bond for
unqualified plan assets, resulting in additional attendant costs to the
plan or plan sponsor.
Before concluding that enhanced bonding offered a cost effective
way of protecting small plan assets, the Department had originally
considered eliminating the waiver of the audit requirement for all
small plans that did not meet the 95% requirement (approximately 37,000
plans). In examining the cost, however, the Department concluded that
the audit cost, $230 million dollars for the 5% of plans not meeting
the 95% requirement, was too great in relation to other alternatives.
The Department therefore explored alternatives available to enhance
pension plan security and the burdens imposed by these various
alternatives. The regulation was crafted by assessing the net benefits
of these alternatives and is intended to
[[Page 62966]]
accomplish the goal of increased security without imposing significant
costs on pension plans. Alternatives considered included on-site
inspection, periodic reporting, additional compliance penalties, and
additional bonding as a stand-alone requirement. However, all of these
options were either (1) extremely expensive (ranging in cost from $200
million to $4 billion paid by plans or plan sponsors) and thus
conflicted with the Department's priority of creating a regulatory
environment that encourages pension plan formation, (2) not feasible to
implement, or (3) would not have sufficiently enhanced small pension
plan security.
Both before and after the comment period, the Department consulted
with industry representatives about the premium cost for a bond,
including the details of their formal comment, and the potential risk
to the surety associated with accomplishing enhanced security through
bonding of non-qualified assets. Representatives emphasized that the
cost for a bond covering plan assets not held or issued by regulated
financial institutions can only be assessed after some period of time
in which loss experience can accumulate and the industry is able to
evaluate the risk and respond through pricing. It was considered
possible that, initially, due to lack of actual experience, industry
costs would remain stable but would require an upward or downward
adjustment at a future date. It is also possible that sureties might
respond to a perceived additional exposure associated with segmenting
the risk of assets that inherently represent a greater risk of loss
(i.e., the assets not held by financial institutions) by applying more
stringent underwriting and rating this risk accordingly. The Department
will monitor this situation in the future and, if in the Department's
view serious problems arise, would consider amending this regulation.
The Department would welcome concerned parties notifying it of any
problems they encounter.
The Department agrees that the estimate of additional premium costs
and other impacts on the market for fidelity bonds in near term and
over time bears a degree of uncertainty. However, as discussed with
industry representatives, the Department does not believe that non-
qualifying assets necessarily represent an inherently greater risk of
loss. Rather, the manner in which they are held simply does not afford
a mechanism for an independent confirmation of the existence of the
asset that is comparable to the confirmation associated with statements
from regulated financial institutions, or with an examination conducted
by an IQPA. Industry representatives also agreed that the surety market
as a whole is very large, and that pricing is generally very
affordable. It is also worth noting that, for some plans, compliance
with the bonding requirements under section 412 of ERISA will also
cover the bonding requirement under this regulation. Section 412
generally requires any person who handles plan funds or other property
to be bonded in an amount not less than 10 percent of the amount of
funds handled. Unless the value of a small plan's non-qualifying plan
assets exceeds the value of 10 percent of total plan funds or other
property, there is likely to be no additional risk to the surety or
increase in bonding cost to plans because of this regulation.
Commenters and industry representatives called attention to
potential uncertainty in future costs, but did not suggest that the
estimate of an average of $200 in additional premium would result in an
unreasonable cost estimate. Accordingly, the Department has not changed
its earlier estimate of $200 as an average cost increase per affected
plan for an enhanced fidelity bond. Our analysis shows, therefore, that
bonding continues to be the least costly alternative for increasing the
security of small plan assets, lowering aggregate costs by a factor of
more than 20 compared to other alternatives while still accomplishing
the goal of enhancing small pension plan security.
Four commenters suggested that the Department's cost estimate for
the SAR disclosure underestimated the costs that would be imposed on
plans. The regulation requires that, for a plan to be able to take
advantage of the waiver of an audit by an IQPA, a plan's SAR must
include certain specific information relating to: the financial
institutions which hold or issue plan assets; bonding; the right of
participants and beneficiaries to year-end statements of the financial
institutions and bonding information; and a notice that participants
and beneficiaries may contact the Regional Office of the Pension and
Welfare Benefits Administration, U.S. Department of Labor, if they are
unable to examine or obtain copies of the statements received by the
plan from each institution holding or issuing qualifying plan assets,
or evidence of the bond, if applicable. Two commenters suggested that
most SARs are generated directly by software packages that produce the
Form 5500 annual report; therefore, they thought that inserting new
language might require a programming change and a greater start up
expense to the plan than computed in the proposal. In addition to the
initial changes, plans are also required to make annual modifications
to the SAR which will reflect the current assets of the plan, the
amount of the assets held or issued, and the bonding at the end of the
plan year. In its economic analysis of the proposed regulation, the
Department did not include the cost of annual modification of the SAR,
because it was believed to be nominal. Commenters questioned this
assumption as to the time it would take to update the SAR, on an annual
basis, with the names of each regulated financial institution holding
or issuing plan assets and the year end amount of those assets. The
commenters added that preparing an annual disclosure document, with
multiple custodians, would take more time than that attributed to the
usual preparation of an SAR and, with the additional reporting of
specific account totals, the Department should include a cost factor in
the economic analysis for this obligation. The Department has responded
to these comments in three ways.
First, we have increased the cost estimates for the start up
changes to the SAR. Using the same basis used for burden estimates of
the Form 5500 annual report, the Department assumes that 90% of SARs
and 90% of the changes required by the final rule will be accomplished
by service providers. Because the information required to be added to
the SAR by this regulation is not currently separately reported by
small pension plans as part of their Form 5500 annual filing or
currently used by Form 5500 software packages, it is likely, as
commenters observed, that system modifications will be required.
Accordingly, the Department assumes that a systems analyst or financial
manager will complete the work and has increased the hourly rate of the
professional performing this activity from $39 to $57 per hour. In
response to comments indicating that revising an SAR will take more
time than previously anticipated, the Department has also increased its
assumption for the time required to modify software and procedures to
produce an amended SAR disclosure from 15 minutes to 30 minutes.
However, the Department believes the time required to make these
changes is moderated by the economies of scale resulting from those
service providers who have multiple client plans, and whose efforts
will result in a systematic SAR modification for multiple plans,
usually as a part of a software package
[[Page 62967]]
integrated with Form 5500 preparation software. Based on changes to
cost estimates for wage rates and time requirements, the resulting cost
estimate for this SAR start up modification is $12.1 million, compared
with the $5.9 million originally estimated. Lastly, individual account
plans are not included in this cost burden because an alternative SAR
disclosure for these plans is now described in the final regulation.
This has the result of lowering the original cost estimate for small
plans, although the net effect is the $6.2 million increase.
Second, in response to comments, the Department added new paragraph
(b)(1)(ii)(F) to Sec. 2520.104.46 which modifies the SAR reporting
requirements under paragraphs (b)(1)(i)(B) in the case of individual
account plans holding qualified plan assets. This new paragraph
provides that, in the case of an individual account plan, the SAR
disclosure requirement may be satisfied as to any assets in the
individual account of a participant or beneficiary over which the
participant or beneficiary has the opportunity to exercise control by
having a regulated financial institution referred to in paragraphs
(b)(1)(ii)(C), (D) or (E) of section 2520.104-46 furnish a statement,
at least annually, to participants or beneficiaries describing the
assets held (or issued) by such institution and the amount of such
assets. As described above, the change to the regulation is warranted
because of the existing protective features of the at least annual
reporting procedures for individually directed individual accounts. The
change in the regulation will eliminate the need for annual
modification of SARs for many individual account plans.
Third, the Department has included in the final cost $4.2 million
for annual modification of the SAR to reflect changes in the financial
institutions holding or issuing qualifying plan assets, the amounts of
assets, and/or fidelity bonding information. Because the information
used to modify the SAR is provided by the financial institutions in the
regular course of business and the time needed to transfer the
information to the SAR was assumed to be minimal, the Department did
not originally propose a cost for such annual modification of the SAR.
However, the Department recognized that most SARs are completed by
service providers in a systematic fashion, either through the use of
software packages interrelated with the preparation of the Form 5500 or
by means of extracting figures from financial statements. The
Department recognizes that some plans may require time to modify the
SAR each year, but the Department believes that this time will be
reduced to the extent that SAR preparation software and processes are
modified to accept new information over time. The Department also
believes that some of the concerns of the commenters with respect to
annual modification costs have been addressed through the alternative
method to SAR disclosure for individually directed account plans.
Finally, the regulation requires that plans furnish copies of year
end statements from financial institutions and bonding information to
those participants and beneficiaries who request them. For purposes of
its cost estimates, the Department assumes that 5% of participants and
beneficiaries who are not in individually directed account plans will
request this information. The Department further assumes that
participants and beneficiaries with individual account plans taking
advantage of the alternative disclosure approach under the regulation,
i.e., those who receive annual statements from a regulated financial
institution reporting on the value of their assets, will not request
this general plan level information. Because the documents required to
be disclosed by the plan have already been provided by bonding
companies and financial institutions, the aggregate cost for plans to
produce the copies of statements and bonding information is estimated
at $627,700, reflecting labor costs of $15 per hour for assembling and
photocopying and distribution costs of $.37 per request. The aggregate
cost represents a reduction from the $995,000 estimated in the proposed
regulation. The cost savings is a result of excluding individual
account plans eligible to take advantage of the alternative disclosure
approach under the regulation.
Cost Analysis
The requirements contained in this final regulation were developed
to best conform to the actual investment patterns of small plans,
rather than to alter these patterns. To understand the investment
patterns of plans and the typical percentage of plan assets that would
meet the ``qualifying plan assets'' requirement, we used Form 5500 data
to examine how pension plans report their allocation of assets among
various investment categories. Plan asset allocation information on the
Form 5500 C/R formerly filed by small plans is currently limited to
very general categories. Because of this lack of detailed financial
information, the Form 5500 filings of plans with more than 100
participants but less than $2 million in assets (within two standard
deviations of the mean asset value of small plans) were used as a
proxy. We obtained a distribution of these plans based upon the
proportion of each plan's assets that are ``qualifying plan assets.''
We then applied this distribution to the actual 1995 count of small
plans to approximate the current distribution of small plans based on
the proportion of assets that are ``qualifying plan assets.'' Form 5500
does not categorize ``qualifying plan assets,'' nor does it identify
the holder of assets. For purposes of this analysis, we have considered
the nature of the asset to be an indicator of the holder of the asset.
Accordingly, we assumed that assets reported as cash, CD's, U.S.
Government Securities, corporate debt and equity, loans, employer
securities, and the value of interests in direct filing entities,
registered investment companies, and insurance company general accounts
are typically held or issued by regulated financial institutions, and
as such constitute ``qualified plan assets.''
Based on a total of 605,000 small plans, 1995 data, and using the
assumptions outlined above, we determined that the vast majority of the
assets of small plans are ``qualifying plan assets.'' Specifically, for
all but 5% of small pension plans, at least 95% of plan assets
constitute ``qualifying plan assets.'' The plans that will not meet the
95% threshold are atypical of the industry standard and are
sufficiently few in number such that additional conditions for an audit
waiver to protect participants and plan assets are both warranted and
cost effective.
The Department received a comment that expressed the view that the
proxy group used for assessing the number of small plans that will not
have 95% of assets held or issued by regulated financial institutions
resulted in a significantly inaccurate estimate of the number of plans
impacted, and thus the ultimate cost of the regulation. In the
commenter's view, the distribution of assets in plans with more than
100 participants but less than $2 million in assets would be new plans,
which would be attempting to minimize administrative costs. The
commenter further suggests that the Department assumed a relationship
between the holder of qualifying plan assets and the manner in which a
plan is ``trusteed'' (i.e., uses a corporate trustee such as a bank as
opposed to an individual person such as a representative of the plan
sponsor). Moreover, the commenter suggests delaying any action amending
the audit waiver until an actual study of
[[Page 62968]]
the potentially impacted small plan universe is conducted.
The Department notes that while the statute clearly envisions the
Department adopting rules intended to limit the administrative burdens
imposed on small plans to comply with the annual reporting provisions
in ERISA, and although the more limited reporting requirements actually
in place for small plans results in the availability of more limited
detail concerning the assets of small plans, the annual reports filed
by small plans do provide accurate data with respect to the features of
small plans, their total income, expenses, and assets, and the
breakdown of those assets in broad investment categories. The
Department's methodology in developing detailed estimates of small plan
assets by investment type involved distributing the breakdown of assets
in a slightly larger proxy group across the actual assets of the small
plans potentially affected by this regulation. This larger group is
still within two standard deviations of the mean asset value of the
plans with fewer than 100 participants. The Department continues to
believe this approach offers a reasonable basis for estimating detail
needed to accurately assess economic impact, given that this level of
detail is not available under existing regulatory requirements.
Furthermore, this methodology results only in an estimate of the
types of assets held by small plans. The types of assets, such as
mutual funds, marketable securities, or certificates of deposit, are
assumed to be an indicator of who holds the assets and, thus, the
extent to which they will be qualifying plan assets for purposes of
this regulation. The methodology is not intended to identify the
trustee of the plan, nor is it necessary to do so to assess the
economic impact of the regulation. As the Department has indicated, it
does not intend to alter the investment choices of small plans, or
their arrangements for designating a trustee, but rather to ensure that
either a mechanism is in place for regular confirmation of the
existence of small plan assets by regulated financial institutions
holding those assets, or that enhanced bonding is in place. The
Department continues to be of the view that its approach to identifying
the plans and assets potentially impacted is reasonable in light of the
data available to conduct this analysis.
Finally, as noted earlier, several commenters requested
clarification of the definition of ``qualifying plan assets,''
particularly with respect to assets allocated to individual account
plans in which individuals direct their investments. As discussed in
the Summary of Public Comments section, the Department agrees with the
commenters that the security and accountability objectives of the
proposal can be met, in the case of an individual account plan, for
assets over which the participant or beneficiary has the opportunity to
exercise control if the participant or beneficiary is furnished, at
least annually, a statement from a regulated financial institution
describing the assets held (or issued) by such institution and the
amount of such assets. The final rule includes such assets within the
definition of qualifying plan assets. This has the effect of reducing
the number of plans otherwise subject to the enhanced bonding
requirement from 37,000 to 29,400, and reducing the number of plans
impacted by the new SAR disclosures from 605,115 to 425,709. In
addition to meeting the Department's objectives with respect to small
plan asset security, this modification from the proposal also limits
the potential for imposition of disclosure requirements in this rule
that duplicate the disclosure requirement of other regulatory
provisions, such as those set forth in ERISA section 404(c) and related
regulations, or disclosures made as part of normal business practice.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency certifies that a final rule will not
have a significant economic impact on a substantial number of small
entities, section 603 of the RFA requires that the agency present a
final regulatory flexibility analysis describing the impact of the rule
on small entities at the time of publication of the notice of final
rulemaking. Small entities include small businesses, organizations and
governmental jurisdictions.
For purposes of analysis under the RFA, the Department continues to
consider a small entity to be an employee benefit plan with fewer than
100 participants. The basis of this definition is found in section
104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe
simplified annual reports for pension plans which cover fewer than 100
participants. Under section 104(a)(3) of ERISA, the Secretary may also
provide for exemptions or simplified annual reporting and disclosure
for welfare benefit plans. Pursuant to the authority of section
104(a)(3) of ERISA, the Department has previously issued at 29 CFR
2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46 and 2520.104b-10
certain simplified reporting provisions and limited exemptions from
reporting and disclosure requirements for small plans, including
unfunded or insured welfare plans covering fewer than 100 participants
and satisfying certain other requirements.
Further, while some large employers may have small plans, in
general most small plans are maintained by small employers. Thus, the
Department believes that assessing the impact of this rule on small
plans is an appropriate substitute for evaluating the effect on small
entities. The definition of small entity considered appropriate for
this purpose differs, however, from a definition of small business
which is based on size standards promulgated by the Small Business
Administration (SBA) (13 CFR 121.201) pursuant to the Small Business
Act (15 U.S.C. 631 et seq.). No comments were received with respect to
the standard. Therefore, a summary of the final regulatory flexibility
analysis based on the 100 participant size standard is presented below.
The amount of assets in small pension plans has grown nearly
tenfold since 1975, making small pension plans an increasingly
important retirement savings vehicle for Americans. In light of recent
cases involving embezzlement or other misappropriations of pension
assets that have focused national attention on the potential
vulnerability of small pension plans to fraud and abuse, this
regulation has been written to enhance the security and accountability
of small pension plans.
The rule amends the Department's existing waiver of examination and
report of IQPA for employee benefit plans under ERISA with fewer than
100 participants. This rule impacts all classes of small pension plans
subject to Title I of ERISA with fewer than 100 participants. As shown
by the regulatory analysis, the regulation accomplishes the objective
of enhancing pension plan security without imposing significant costs
via additional reporting, recordkeeping, or other compliance
requirements.
Under the regulation, for each year in which a waiver is claimed,
at least 95 per cent of the assets of the plan must constitute
``qualifying plan assets'' or any person who handles assets of the plan
that do not constitute qualifying plan assets must be bonded in
[[Page 62969]]
accordance with the requirements of section 412, except that the amount
of the bond shall not be less than the amount of such assets. In 1995,
there were approximately 605,000 employee pension plans with fewer than
100 participants that met the requirements for the audit waiver. The
Department estimates that, under the regulation, only 29,400 small
plans will not meet the 95 per cent limit for qualifying plan assets
and will be required to either purchase a fidelity bond or undergo an
audit. We assume that plans will choose the less costly alternative of
bonding to satisfy the regulation. All 605,000 small pension plans,
however, will be subject to SAR disclosure requirements, which include
adding new language to the SAR, providing copies of statements from
regulated financial institutions and bonding information free of charge
to participants and beneficiaries who request them and, for those plans
which are not individual account plans, modifying the SAR on and annual
basis.
The Department received 19 comments regarding the proposal. The
majority commended the Department for striking a reasonable balance
between providing accountability and protection for small pension plans
and minimizing administrative costs and recordkeeping. Four commenters
raised the issue of bonding and its impact on small plans, specifically
questioning whether the cost of the bond would be nominal as described
in the proposal. Commenters expressed the view that a surety might
respond to a perceived additional exposure associated with segregating
a particular group of plans which have the potential of posing greater
risk to the surety because of adverse selection by requesting an audit
by an independent accountant or subjecting the plan to other more
stringent underwriting requirements. The Department had estimated that
cost of a fidelity bond to be $200 per plan.
Before determining that bonding was the best and most cost
efficient way of protecting small assets, the Department considered
several alternatives, including imposing an audit on all small plans
that do not meet the 95% requirement, on-site inspection, periodic
reporting, and eliminating the existing small plan audit waiver for
examination and reporting by an IQPA. All of these options, however,
were either extremely expensive (ranging in cost from $200 million to
$4 billion), thereby conflicting with the Department's priority of
creating a regulatory environment that encourages pension plan
formation, not feasible to implement, or would not have sufficiently
enhanced small pension plan security. After the comment period, the
Department consulted with representatives of the surety industry to
further assess the impact of bonding on small plans. Taking into
consideration the information received from industry representatives as
well as other comments received by the public, the Department has
decided not to change its original estimate of $200 per plan for a
fidelity bond.
The actual cost of a bond, according to representatives from the
surety industry, will best be determined after some period of time in
which the industry will be able to evaluate the risk involved. The cost
of a premium may not change initially, but could be adjusted upward or
downward at some future date. On the other hand, the risk for bonding
small plans invested in assets which are not held or issued by
regulated financial institutions will not be any greater under the
regulation than it is now, and the industry risk factor for ERISA plans
is low. Industry representatives did not believe that audits would be
required. Because underwriting judgment is necessarily applied on a
case-by-case basis, actual industry experience will be the best
predictor of premium cost. Our analysis of available information shows,
therefore, that bonding is the least costly alternative, lowering
aggregate costs by a factor of more than 20 while similarly
accomplishing the goal of enhancing small pension plan security.
It is also worth pointing out that, for some small plans,
compliance with the existing bonding requirements under section 412 of
ERISA will also cover the bonding requirement under this regulation.
Section 412 requires that any person who handles funds or other
property must be bonded in an amount not less than 10 percent of the
amount of funds handled. Unless the value of a small plan's non-
qualifying plan assets exceeds the value of 10 percent of total plan
funds or other property handled, there is no additional cost to small
plans because of this regulation.
For those plans that do not have 95% qualifying plan assets
(approximately 29,414 plans), the Department estimates that the cost
for obtaining a bond will be $574,000 for labor for a professional's
time at $39 per hour. This represents a reduction in cost from the
proposed estimate of $713,600. The Department has made this adjustment
because small pension plans that are individual account plans, which
are generally invested in mutual funds or insurance company
investments, have been provided under the final regulation with an
alternative disclosure approach that should result in a fewer number of
these plans needing to purchase a bond. The cost to small plans for
bond premiums is therefore lower by $1,436,000. The aggregate cost for
labor and for the premiums is $6.5 million, which represents a cost
savings of $1.5 million from the original proposal. The per plan cost
for meeting the bonding requirement is $220.
Commenters also suggested various changes to the proposed SAR
disclosure requirements. Under the regulation, the SAR must disclose to
participants and beneficiaries the names of the regulated financial
institutions which hold or issue qualified plan assets, the amount of
those assets, the fact that the plan must furnish to participants and
beneficiaries on request statements from the financial institutions and
information on bonding, and, finally, that if they do not receive the
statements and bonding information from the plan, they may contact the
plan administrator or the Pension and Welfare Benefits Administration,
U.S. Department of Labor. A number of commenters suggested that, as an
alternative to listing each financial institution and the amount of
assets held or issued by the institution, the SAR could include a model
statement which explained that the statements were available to
participants and beneficiaries on request. The Department considered
changing the disclosure requirements to reflect this alternative, but
determined that the protection offered by furnishing statements and
bonding information about the plans assets to participants and
beneficiaries was of primary consideration in guarding pension plan
assets. A general disclosure about availability of information will not
offer the level of plan protection from fraud and dishonesty to
participants and beneficiaries that they will receive from a plan's
actually furnishing to them on an annual basis statements from
financial institutions and bonding information.
Certain commenters expressed the view that SAR disclosure for
individual account plans should not include statements concerning the
amount of assets held or issued by financial institutions. Participants
and beneficiaries in these plans regularly receive statements informing
them of their asset allocation and the value of the assets in their
individually directed accounts. The commenters stated that furnishing
statements from financial institutions which do not hold or issue their
investments would not be relevant and would not offer additional
protection from fraud or dishonesty. In addition, commenters were
concerned about the lack of privacy for individual
[[Page 62970]]
participant investors if very small plans were required to furnish the
names of the financial institutions and the amount of assets they held
to all participants. As a result of these comments, the Department has
revised the regulation for individual account plan disclosure. The
Department agreed that it was unnecessary to require small plans to
furnish duplicative information. This has the effect of eliminating
both start up and annual modification costs for individual account
plans as well as protecting individual investor privacy, without
compromising SAR disclosure.
As part of the disclosure requirement under the regulation, plans
must add new language to the SAR. Because service providers typically
use software programs to generate SARs, commenters indicated that
estimates for revising existing programs which generate SARs would cost
more than the Department had estimated and would require a
professional's time. The Department agreed with this assessment and
increased its estimate for start up costs for the additional time
needed to rewrite existing software programs. Due to the lack of data
on the number of service providers and the number of plans they serve,
the Department can not specifically estimate a cost for a service
provider to make the required changes. The Department is aware,
however, that some service providers serve very large numbers of plans
and believes that some economies of scale will arise from the
repetition of processes. The Department also increased labor costs for
a professional to $57 per hour from $39 per hour to more accurately
reflect the level of expertise required to accomplish the revision.
Therefore, for the 425,709 non-individually directed small plans, the
start up cost is $12.1 million, based on a professional's time at $57
per hour. This represents an increase of $6.5 million in start up
costs. The start up cost per plan is $29.
Annual modification of the SAR requires updating the list of
financial institutions holding qualified plan assets, including the
amount of those assets as expressed in the institutions' financial
statements, and bonding information. Because plan administrators should
receive from qualifying financial institutions statements identifying
plan assets held or issued by that institution in order to properly
discharge their annual reporting and other obligations under ERISA, no
cost is associated with obtaining the statements. Originally, the
Department did not include an estimate for annual modification because
there is no burden in obtaining the statements from the financial
institutions and little time was involved in transferring the
information to the SAR. However, commenters suggested that modifying
the SAR to include a list of financial institutions holding or issuing
qualifying plan assets and reporting the changing amount of those
assets annually would require a professional's time. The Department has
considered these comments and believes that the costs should include an
adjustment for annual modification of the SAR. The cost to plans, which
are not individual account plans, for annual modification of the SAR is
$4.2 million base on a professional's time at $39 per hour. As
explained above, individual account plans eligible for the alternative
disclosure approach set forth in the final rule are not required to
annually modify SAR information and are therefore not included in the
cost estimate. For those plans meeting the 95% test, the aggregate
annual disclosure cost of $4.2 million translates to $6 per plan.
Finally, plans are required to furnish participants and
beneficiaries with copies of the financial institution statements and
bonding information upon request. Excluding participants and
beneficiaries in individual account plans, the Department assumes that
5% of all small plan participants and beneficiaries will request this
information. The cost to provide the information is $.6 million, which
includes assembling and photocopying by a clerical worker at $15 per
hour and mailing costs of $.37 per mailing. Participants and
beneficiaries of individual account plans are excluded because they are
generally invested in mutual funds and receive statements, at least
annually, related to their personal accounts.
When considering any regulatory action, it is important to consider
the impact on businesses of various sizes. Given that well over half of
all small pension plans (54%) have between 1 and 10 participants, it is
important to focus on these small plans in particular.
Estimates of the Number and Percentage of Very Small Pension Plans (1-9 Participants) Not Meeting the
``Qualifying Plan Assets'' Test at Various Threshold Levels
----------------------------------------------------------------------------------------------------------------
Alternative threshold levels for qualifying plan assets
----------------------------------------------------------------------------
100% 95% 90% 85% 80% 75% 75%
----------------------------------------------------------------------------------------------------------------
Number of plans.................... 186,142 20,377 10,771 9,402 8,737 8,100 49
Percentage of plans................ 54 6 3 3 3 2 .01
----------------------------------------------------------------------------------------------------------------
As the above table shows,\10\ the percent of plans with 1-9
participants that would meet the requirement that 95% of assets be
``qualifying plan assets'' is the same as that for all small plans with
fewer than 100 participants as indicated below. Therefore, the 95%
threshold is reasonable for all classes of plans within the category of
those with fewer than 100 participants.
---------------------------------------------------------------------------
\10\ The data in the table was estimated in the same way as that
for pension plans with more than 100 participants (see Executive
Order 12866 Statement).
Estimates of the Number and Percentage of Small Pension Plans (1-99 Participants) Not Meeting the ``Qualifying
Plan Assets'' Test at Various Threshold Levels
----------------------------------------------------------------------------------------------------------------
Alternative threshold levels for qualifying plan assets
----------------------------------------------------------------------------
100% 95% 90% 85% 80% 75% 75%
----------------------------------------------------------------------------------------------------------------
Number of plans.................... 339,967 29,414 11,409 9,037 7,855 6,743 0
[[Page 62971]]
Percentage of plans................ 56 4 2 2 1 1 0
----------------------------------------------------------------------------------------------------------------
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501-3520) (PRA 95), the Department submitted the information
collection request (ICR) included in the proposed Small Pension Plan
Security Amendments to OMB for review and clearance at the time the
Notice of Proposed Rulemaking (NPRM) was published in the Federal
Register (December 1, 1999, 64 FR 67436). OMB approved the revisions to
the existing information collection, the ERISA Summary Annual Report,
under control number 1210-0040 on February 2, 2000. This approval will
expire on February 28, 2003. Certain additional adjustments have been
made to the ICR and the estimates of burden in response to public
comments. The information collection provisions of this final rule, as
well as the adjustments made to the information collection provisions
and the burden estimates originally incorporated in the proposal, are
discussed below.
The revisions to the small plan audit waiver implemented by this
final rule will increase the security and accountability of small
pension plans, while minimizing the additional paperwork burden imposed
on small plans. No additional paperwork burden is associated with two
of the three provisions in the regulation--the requirement that 95% of
plan assets be ``qualifying plan assets'' and the more protective
bonding requirement for those plans not meeting the 95% test. For those
plans which are not individual account plans, additional burden does
arise from three other provisions: including new language in the SAR;
modifying the SAR annually to identify the institutions holding or
issuing qualifying plan assets and amounts of the assets reported by
the institutions as of the end of the plan year, and; furnishing copies
of financial institution statements and bonding information upon
request.
It is assumed that adding the additional language to the SAR form
will be accomplished by service providers for 90% of plans, and in-
house for the remaining plans. The start up cost is estimated to be
$10.9 million for the 90% of small plans using service providers for 30
minutes of a professional's time at $57 per hour. This amounts to about
$3.6 million when annualized over a three-year period. The hourly
burden for plans that will be required to add additional information to
their SAR themselves (assumed to be 10% of small plans) is 21,286
hours, based on 30 minutes of a professional's time at $57 per hour.
This estimate has been adjusted from the one outlined in the original
proposal. The increase of $6.2 million is the result of an adjustment
in the hourly rate for a professional from $39 per hour to $57 per hour
to reflect the fact that this work may more likely be done by systems
analysts and financial managers rather than the auditors and
accountants previously assumed to perform the task of revising the SAR
format. We have also adjusted the estimated time required to complete
this work from 15 minutes per plan to 30 minutes per plan.
These adjustments are the result of comments received in response
to the NPRM that indicated that both the hourly rate for a professional
and the time allotted for drafting new SAR language and modifying
existing software and information management procedures to produce a
detailed listing of qualifying assets by financial institution at year
end were too low. The revised hourly rate is derived from 1998 BLS data
on occupational wages for financial managers, which is the higher of
the wage rates for financial managers and systems analysts, the two
professional categories assumed most likely to complete this work. The
change in the hourly burden reflects a reevaluation by the Department
in response to comments of the time it will take to make changes to a
plan's current SAR, particularly where these changes may involve
rewriting an existing software package. The Department also recognized
that most SARs are completed by service providers in a systematic
fashion, either through the use of existing software packages
interrelated with the preparation of the Form 5500 (which the SAR
summarizes), or by means of extracting figures from financial
statements supporting the Form 5500. In either case, the service
provider is expected to have ready access to the year end statements
needed to set up an appropriate format for listing institutions and
amounts, as well as modifying the institutions and amounts from year to
year, because the statements must be used in the preparation of the
annual report.
Commenters noted, and the Department recognizes, that revising
software or procedures may in many instances require more than 30
minutes. However, the Department believes that the time required to
change the SAR format and procedures used to produce the detail figures
will be moderated by several factors. First, with the exception of the
institutions and amounts, and the name of the surety issuing the plan's
fidelity bond if the plan has more than 5% of its assets in non-
qualifying assets, the Department has supplied in Sec. 2520.104-
46(b)(1)(i)(B)(3) and (4) the general format of the language to be
added.
In addition, where service providers serve multiple client plans,
it is assumed that they will achieve certain efficiencies in modifying
systems and procedures to generate the revised SAR format, resulting in
lower per plan costs. The Department can not specifically estimate this
effect or develop an estimate of burden per service provider due to the
lack of information, especially with respect to small plans, on the
number of service providers and number of providers servicing multiple
plans. However, the Department is aware that some service providers
prepare annual reports and SARs for very large numbers of plans, and
believes that economies of scale do arise in those situations,
generally lowering estimates derived on a per plan basis.
Finally, the existing systems of service providers to small plans
may more readily accommodate the required format changes to the extent
that these service providers also have large plan clients. As part of
their annual reporting obligations, large pension plans are currently
required to submit a listing of assets held for investment that is
similar in certain respects to the listing of the regulated financial
institutions holding qualifying assets and the amounts held required
under the final rule. Adjusting
[[Page 62972]]
a system already designed to produce the listing of assets held for
investment may require a smaller commitment of resources to meet the
SAR disclosure conditions of the final rule than revising a system that
does not include this capability. For these reasons, the Department
considers 30 minutes per plan to be a reasonable estimate of the
average time required for modification of the SAR format.
The regulation also provides that a plan administrator must, on an
annual basis, modify the SAR to include the names of regulated
financial institutions holding or issuing qualifying plan assets, the
amount of those assets at the end of the plan year, and certain bonding
information. Originally, the Department did not include a cost burden
for the annual modification in the proposal's estimates because there
is no burden associated with obtaining the statements from the
financial institutions and the amount of time required to transfer the
information to the SAR was believed to be nominal. Commenters, however,
observed that modifying the SAR to include a list of financial
institutions holding or issuing qualified plan assets and reporting the
amount of those assets would require a professional's time each year to
accomplish because assets and amounts will typically change from year
to year. The Department has taken these comments into consideration,
and concludes that they support an adjustment of the hour and cost
burdens originally estimated for annual modification of the SAR. This
adjustment results in increases of 10,643 hours and $3.7 million from
prior estimates for the 425,709 plans required to modify the SAR for
changes in the assets and amounts annually. This estimate is based on
an average of 15 minutes of a professional's time at $39 per hour each
year, and the assumption that 90% of plans purchase services to comply
with SAR requirements. Again, some plans may require more time to
modify the SAR listing each year, but the Department notes that the
time required for annual modifications will be reduced to the extent
that plans and service providers are in a position to invest in the
modification of systems and SAR formatting to fully automate the annual
modification process.
It should be noted that the adjustments to the assumptions
described above would have resulted in more substantial increases in
burden estimates in the absence of the modification of the requirements
of the proposal as they relate to those individual account plans in
which investments are individually directed. As described in detail
above in the Summary of Public Comments section of this Notice, the
Department has modified both the definition of qualifying plan assets
to include participant directed assets under specific circumstances and
the disclosure provisions as they relate to participant directed
assets. These changes have the effect of lowering the number of plans
impacted by the SAR and system design modification and the annual asset
listing requirement from 605,115 to 425,709 (179,406 small plans are
reported on Form 5500 to have individually directed assets) while
ensuring that the objectives of the regulation are met without the
imposition of duplicative disclosure obligations. The participants in
those 179,406 plans represent 3,512,000 of the 9,373,000 participants
in all small pension plans.
It is possible that the estimate of individual account plans that
will be excepted from the requirement to list assets, amounts, and
institutions in the SAR because the investments are individually
directed, and account statements for these assets are provided by the
financial institutions to participants at least annually, will differ
to some degree from the actual number that will be excepted. Because
the Form 5500 data element used to estimate this number is an indicator
that some or all of the assets of an individual account plan filer are
individually directed, no data is available to support an estimate of
the number of such plans in which all assets are individually directed.
However, the Department is aware that the assets not subject to
individual direction in these plans often include participant loans and
employer securities, which are also excepted from the detailed SAR
disclosure requirement. Accordingly, the Department believes that the
actual degree of variation from the number of plans assumed to be
excepted will be small.
In addition to addressing the privacy concerns raised by commenters
with respect to the disclosure in the SAR of assets and amounts held in
individually directed accounts, the Department also wished to address
the coordination of the requirements of this rule with other statutory
and regulatory requirements,\11\ as well as existing business practices
relevant to individually directed account plans. While not all plans
that permit participants or beneficiaries to exercise control over
assets in their individual accounts for purposes of this final rule
would intend to meet all of the conditions of section 404(c) and
related regulations, the Department believes that the majority of these
plans do customarily make the statements of the financial institutions
holding the individual account assets available to participants and
beneficiaries at least annually, either to satisfy the conditions of
section 404(c) \12\ or as a result of the business practice of advising
participants of their valued benefits.
---------------------------------------------------------------------------
\11\ See section 404(c) of ERISA and the regulations issued
thereunder, 29 CFR Sec. 2550.404c-1 et seq.
\12\ The burden of the disclosure provisions of the Department's
regulation under section 404(c) of ERISA is accounted for separately
under the currently approved OMB control number 1210-0090.
---------------------------------------------------------------------------
Although the Department considered alternatives in the development
of the final rule that would retain some individual-level SAR
disclosure features for individually directed accounts while addressing
privacy concerns, it ultimately concluded that providing an exception
from plan level disclosures when statements from the regulated
financial institutions are in fact provided annually to individually
directed account holders would adequately protect the assets of these
small plans while ensuring that the information collection is useful
and non-duplicative. As a result, the total cost of system modification
and annual modifications to the SAR is approximately $7 million lower
than it would have been had this exception not been considered an
appropriate response in light of both public comment and the principles
of the Paperwork Reduction Act.
Finally, plan administrators are required under the regulation to
make available for examination or furnish copies of the statements from
the regulated financial institutions and the evidence of bonding when
less than 95% of the assets of the plan are qualifying plans assets, to
participants and beneficiaries who request them. The 3,512,000
participants in the 179,406 small individual account plans in which
assets are reported on Form 5500 to be individually directed are
assumed to be receiving annual statements related to their particular
accounts and are therefore not included in the burden estimates for
furnishing documents on request. The Department assumes that 5% of the
remaining 5,681,000 participants in small plans will request this
information annually. Because the documents already have been provided
by bonding companies and financial institutions, the cost of compliance
involves 5 minutes to ready the appropriate documents for mailing and 2
minutes of photocopying by a clerical worker, at $15 per hour, and
mailing
[[Page 62973]]
costs of $.37 per mailing. The hour burden for the in house furnishing
of the documents is estimated at 3,419. The cost burden for the 90% of
plans assumed to purchase services to comply with the requirement to
make this additional information available upon request is estimated at
$576,479. This estimate is lower than the $995,000 estimated in
connection with the proposal due to the modification of the proposed
requirements with respect to assets in the individual account of a
participant or beneficiary over which the participant or beneficiary
has the opportunity to exercise control, and with respect to which the
participant is furnished a statement at least annually describing the
assets held or issued by the financial institution issuing the
statement.
In summary, the estimated hour and cost burdens of the information
collection provisions of this final rule are as follows:
Agency: Pension and Welfare Benefits Administration, Department of
Labor.
Title: ERISA Summary Annual Report Requirement.
OMB Number: 1210-0040.
Affected Public: Individuals or households; Business or other for-
profit; Not-for-profit institutions.
Frequency of Response: Annually.
Total Respondents: 817,000.
Total Responses: 235,000,000.
Estimated Burden Hours: 1,404,924.
Estimated Annual Cost (Capital/Startup): $3,639,817.
Estimated Annual Costs (Operating and Maintenance): $115,687,000.
Total Annualized Costs: $119,327,000.
Persons are not required to respond to an information collection
request unless it displays a currently valid OMB control number.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, this rule does not include
any Federal mandate that may result in expenditures by State, local or
tribal governments, and does not impose an annual burden exceeding $100
million on the private sector.
Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism and requires the adherence to specific
criteria by federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among the various
levels of government. This final rule does not have federalism
implications because it has no substantial direct effect on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government. Section 514 of ERISA provides, with certain
exceptions specifically enumerated, that the provisions of Titles I and
IV of ERISA supercede any and all laws of the States as they relate to
any employee benefit plan covered under ERISA. Further, this final rule
amends annual reporting and disclosure regulations that have been in
effect in similar form for many years pursuant to the Department's
authority under section 104(a)(2)(A) of ERISA to prescribe, by
regulation, simplified annual reports for pension plans with fewer than
100 participants. The amendments incorporated in this final rule do not
alter the fundamental requirements of the statute with respect to the
reporting and disclosure requirements for employee benefit plans, and
as such have no implications for the States or the relationship or
distribution of power between the national government and the States.
Small Business Regulatory Enforcement Fairness Act
The final rule being issued here is subject to the provisions of
the Small Business Regulatory Enforcement Fairness Act of 1996 (5
U.S.C. 801 et seq.) (SBREFA) and has been transmitted to Congress and
the Comptroller General for review.
Statutory Authority
These regulations are issued pursuant to authority contained in
section 505 of ERISA (Pub. L. 93-406, 88 Stat. 894, 29 U.S.C. 1135) and
sections 103(a) and 104(a) of ERISA, as amended, (Pub. L. 104-191, 110
Stat. 1936, 1951, 29 U.S.C. 1023 and 1024) and under Secretary of
Labor's Order No. 1-87, 52 FR 13139, April 21, 1987.
List of Subjects in 29 CFR Part 2520
Accountants, Disclosure requirements, Employee benefit plans,
Employee Retirement Income Security Act, Pension plans, and Reporting
and recordkeeping requirements.
For the reasons set out in the preamble, Part 2520 of Chapter XXV
of Title 29 of the Code of Federal Regulations is amended as follows:
PART 2520--RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE
1. The authority for Part 2520 continues to read as follows:
Authority: Secs. 101, 102, 103, 104, 105, 109, 110, 111(b)(2),
111(c) and 505, Pub. L. 93-406, 88 Stat. 840-52 and 894 (29 U.S.C.
1021-1025, 1029-31, and 1135); Secretary of Labor's Order No. 27-74,
13-76, 1-87, and Labor Management Services Administration Order 2-6.
Sections 2520.102-3, 2520.104b-1 and 2520.104b-3 also are issued
under sec. 101(a), (c) and (g)(4) of Pub. L. 104-191, 110 Stat. 1936,
1939, 1951 and 1955, and sec. 603 of Pub. L. 104-204, 110 Stat. 2935
(29 U.S.C. 1185 and 1191c).
2. Section 2520.104-41 is amended by revising paragraph (c) as
follows:
Sec. 2520.104-41 Simplified annual reporting requirements for plans
with fewer than 100 participants.
* * * * *
(c) Contents. The administrator of an employee pension or welfare
benefit plan described in paragraph (b) of this section shall file, in
the manner prescribed in Sec. 2520.104a-5, a completed Form 5500
``Annual Return/Report of Employee Benefit Plan,'' including any
required schedules or statements prescribed by the instructions to the
form, and, unless waived by Sec. 2520.104-46, a report of an
independent qualified public accountant meeting the requirements of
Sec. 2520.103-1(b).
* * * * *
3. Section 2520.104-46 is amended by revising paragraphs (b)(1) and
(d) to read as follows:
Sec. 2520.104-46 Waiver of examination and report of an independent
qualified public accountant for employee benefit plans with fewer than
100 participants.
* * * * *
(b) Application. (1)(i) The administrator of an employee pension
benefit plan for which simplified annual reporting has been prescribed
in accordance with section 104(a)(2)(A) of the Act and Sec. 2520.104-41
is not required to comply with the annual reporting requirements
described in paragraph (c) of this section, provided that with respect
to each plan year for which the waiver is claimed --
(A)(1) At least 95 percent of the assets of the plan constitute
qualifying plan assets within the meaning of paragraph (b)(1)(ii) of
this section, or
(2) Any person who handles assets of the plan that do not
constitute qualifying plan assets is bonded in
[[Page 62974]]
accordance with the requirements of section 412 of the Act and the
regulations issued thereunder, except that the amount of the bond shall
not be less than the value of such assets;
(B) The summary annual report, described in Sec. 2520.104b-10,
includes, in addition to any other required information:
(1) Except for qualifying plan assets described in paragraph
(b)(1)(ii)(A), (B) and (F) of this section, the name of each regulated
financial institution holding (or issuing) qualifying plan assets and
the amount of such assets reported by the institution as of the end of
the plan year;
(2) The name of the surety company issuing the bond, if the plan
has more than 5% of its assets in non-qualifying plan assets;
(3) A notice indicating that participants and beneficiaries may,
upon request and without charge, examine, or receive copies of,
evidence of the required bond and statements received from the
regulated financial institutions describing the qualifying plan assets;
and
(4) A notice stating that participants and beneficiaries should
contact the Regional Office of the U.S. Department of Labor's Pension
and Welfare Benefits Administration if they are unable to examine or
obtain copies of the regulated financial institution statements or
evidence of the required bond, if applicable; and
(C) in response to a request from any participant or beneficiary,
the administrator, without charge to the participant or beneficiary,
makes available for examination, or upon request furnishes copies of,
each regulated financial institution statement and evidence of any bond
required by paragraph (b)(1)(i)(A)(2).
(ii) For purposes of paragraph (b)(1), the term ``qualifying plan
assets'' means:
(A) Qualifying employer securities, as defined in section 407(d)(5)
of the Act and the regulations issued thereunder;
(B) Any loan meeting the requirements of section 408(b)(1) of the
Act and the regulations issued thereunder;
(C) Any assets held by any of the following institutions:
(1) A bank or similar financial institution as defined in
Sec. 2550.408b-4(c);
(2) An insurance company qualified to do business under the laws of
a state;
(3) An organization registered as a broker-dealer under the
Securities Exchange Act of 1934; or
(4) Any other organization authorized to act as a trustee for
individual retirement accounts under section 408 of the Internal
Revenue Code.
(D) Shares issued by an investment company registered under the
Investment Company Act of 1940;
(E) Investment and annuity contracts issued by any insurance
company qualified to do business under the laws of a state; and,
(F) In the case of an individual account plan, any assets in the
individual account of a participant or beneficiary over which the
participant or beneficiary has the opportunity to exercise control and
with respect to which the participant or beneficiary is furnished, at
least annually, a statement from a regulated financial institution
referred to in paragraphs (b)(1)(ii)(C), (D) or (E) of this section
describing the assets held (or issued) by such institution and the
amount of such assets.
(iii)(A) For purposes of this paragraph (b)(1), the determination
of the percentage of all plan assets consisting of qualifying plan
assets with respect to a given plan year shall be made in the same
manner as the amount of the bond is determined pursuant to
Secs. 2580.412-11, 2580.412-14, and 2580.412-15.
(B) Examples. Plan A, which reports on a calendar year basis, has
total assets of $600,000 as of the end of the 1999 plan year. Plan A's
assets, as of the end of year, include: investments in various bank,
insurance company and mutual fund products of $520,000; investments in
qualifying employer securities of $40,000; participant loans, meeting
the requirements of ERISA section 408(b)(1), totaling $20,000; and a
$20,000 investment in a real estate limited partnership. Because the
only asset of the plan that does not constitute a ``qualifying plan
asset'' is the $20,000 real estate investment and that investment
represents less than 5% of the plan's total assets, no bond would be
required under the proposal as a condition for the waiver for the 2000
plan year. By contrast, Plan B also has total assets of $600,000 as of
the end of the 1999 plan year, of which $558,000 constitutes
``qualifying plan assets'' and $42,000 constitutes non-qualifying plan
assets. Because 7%--more than 5%--of Plan B's assets do not constitute
``qualifying plan assets,'' Plan B, as a condition to electing the
waiver for the 2000 plan year, must ensure that it has a fidelity bond
in an amount equal to at least $42,000 covering persons handling non-
qualifying plan assets. Inasmuch as compliance with section 412
requires the amount of bonds to be not less than 10% of the amount of
all the plan's funds or other property handled, the bond acquired for
section 412 purposes may be adequate to cover the non-qualifying plan
assets without an increase (i.e., if the amount of the bond determined
to be needed for the relevant persons for section 412 purposes is at
least $42,000). As demonstrated by the foregoing example, where a plan
has more than 5% of its assets in non-qualifying plan assets, the bond
required by the proposal is for the total amount of the non-qualifying
plan assets, not just the amount in excess of 5%.
* * * * *
(d) Limitations. (1) The waiver described in this section does not
affect the obligation of a plan described in paragraph (b) (1) or (2)
of this section to file a Form 5500 ``Annual Return/Report of Employee
Benefit Plan,'' including any required schedules or statements
prescribed by the instructions to the form. See Sec. 2520.104-41.
(2) For purposes of this section, an employee pension benefit plan
for which simplified annual reporting has been prescribed includes an
employee pension benefit plan which elects to file a Form 5500 as a
small plan pursuant to Sec. 2520.103-1(d) with respect to the plan year
for which the waiver is claimed. See Sec. 2520.104-41.
(3) For purposes of this section, an employee welfare benefit plan
that covers fewer than 100 participants at the beginning of the plan
year includes an employee welfare benefit plan which elects to file a
Form 5500 as a small plan pursuant to Sec. 2520.103-1(d) with respect
to the plan year for which the waiver is claimed. See Sec. 2520.104-41.
(4) A plan that elects to file a Form 5500 as a large plan pursuant
to Sec. 2520.103-1(d) may not claim a waiver under this section.
Signed at Washington, D.C., this 16th day of October, 2000.
Leslie B. Kramerich,
Acting Assistant Secretary, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 00-26880 Filed 10-18-00; 8:45 am]
BILLING CODE 4510-29-P
