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Employee Benefits Security Administration

EBSA Proposed Rule

Fee and Expense Disclosures to Participants in Individual Account Plans [04/25/2007]

[PDF Version]

Volume 72, Number 79, Page 20457-20460

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB07

 
Fee and Expense Disclosures to Participants in Individual Account 
Plans

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Request for information.

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SUMMARY: The Department of Labor is currently reviewing the rules under 
the Employee Retirement Income Security Act (ERISA) applicable to the 
disclosure of plan administrative and investment-related fee and 
expense information to participants and beneficiaries in participant-
directed individual account plans (e.g., 401(k) plans). The purpose of 
this review is to determine to what extent rules should be adopted or 
modified, or other actions should be taken, to ensure that participants 
and beneficiaries have the information they need to make informed 
decisions about the management of their individual accounts and the 
investment of their retirement savings. The purpose of this notice is 
to solicit views, suggestions and comments from plan participants, plan 
sponsors, plan service providers and members of the financial 
community, as well as the general public, on this important issue.

DATES: Written or electronic responses should be submitted to the 
Department of Labor on or before July 24, 2007.

ADDRESSES: Responses: To facilitate the receipt and processing of 
responses, EBSA encourages interested persons to submit their responses 
electronically by e-mail to e-ORI@dol.gov, or by using the Federal 
eRulemaking portal at http://www.regulations.gov (follow instructions 

for submission of comments). Persons submitting responses 
electronically are encouraged not to submit paper copies. Persons 
interested in submitting written responses on paper should send or 
deliver their responses (preferably, at least three copies) to the 
Office of Regulations and Interpretations, Employee Benefits Security 
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution 
Avenue, N.W., Washington, DC 20210, Attention: Fee Disclosure RFI. All 
written responses will be available to the public, without charge, 
online at http://www.regulations.gov and http://www.dol.gov/ebsa, and 
at the Public Disclosure Room, N-1513, Employee Benefits Security 
Administration, U.S. Department of Labor, 200 Constitution Avenue, NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Katherine D. Lewis, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, Room N-5669, U.S. Department of Labor, Washington, DC 
20210, telephone (202) 693-8510. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

    According to the Department's most recent data, an estimated 41 
million participants in 401(k) plans are permitted to direct the 
investment of all or a portion of their plan accounts. While 
contributions and earnings increase retirement savings in 401(k) and 
other participant-directed plans, fees and expenses charged to 
participant accounts can substantially reduce that growth. For this 
reason, it is important that plan participants, particularly those 
responsible for making their own investment decisions, consider what 
and how fees and expenses are charged to their individual accounts.
    In general, the purpose of this Request for Information (RFI) is to 
obtain, from the perspective of plan participants, plan sponsors and 
plan service providers, information concerning: (1) What administrative 
and investment-related fee and expense information participants should 
consider; (2) the manner in which that information should be provided 
or made available to participants; and, (3) who should be responsible 
for providing the information. Responses to this RFI will be used to 
assist the Department in determining to what extent rules should be 
developed or modified, or other courses of action pursued, to improve 
the information currently available to participants and beneficiaries 
relating to administrative and investment-related fees and expenses, 
recognizing that in many instances participants may have to bear the 
cost of disclosing such information.
    In considering the questions set forth in the RFI, commenters are 
encouraged to take into consideration the following initiatives.

Section 404(c) Regulation

    In 1992, the Department adopted a final regulation under section 
404(c) of ERISA.\1\ In general, the regulation sets forth the 
conditions under which participants are considered to be exercising 
control over the assets in their accounts, thereby relieving 
fiduciaries from liability for the results of participants' investment 
decisions. Among other matters, the regulation, at Sec.  2550.404c-
1(b)(2)(i)(B), conditions relief upon participants and beneficiaries 
being provided and having access to specific information concerning 
their plan and the investment options offered thereunder. In framing 
the disclosure requirements, the Department attempted to strike a 
balance between what it believed participants needed to make informed 
investment decisions and the burdens

[[Page 20458]]

and costs to participants and plan sponsors resulting from a broader 
disclosure mandate. There have been a number of changes since 1992 in 
what and how information is communicated to plan participants and 
investors generally. For this reason, this RFI seeks information on 
what changes, if any, should be made to the section 404(c) regulation. 
An example of one such change is the use of summary or profile 
prospectuses by mutual funds as a means by which to communicate basic 
information to investors. The use of profile prospectuses as a 
permissible means by which to communicate to participant-investors for 
purposes of compliance with the section 404(c) requirements was 
addressed in Advisory Opinion 2003-11A.\2\
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    \1\ See Final Regulation Regarding Participant Directed 
Individual Account Plans (ERISA Section 404(c) Plans), 57 FR 46,906 
(Oct.13, 1992) (codified at 29 CFR Sec.  2550.404c-1). This 
regulation may be accessed at http://s.dol.gov/90#29:9.1.3.6.5.0.16.9
.

    \2\ This advisory opinion may be accessed at http://www.dol.gov/ebsa/regs/aos/ao2003-11a.html
 (September 8, 2003).

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    To facilitate consideration of the section 404(c) disclosure 
requirements, the applicable provisions of section 2550.404c-1(b)(2)(i) 
are set forth below in relevant part:

    (B) The participant or beneficiary is provided or has the 
opportunity to obtain sufficient information to make informed 
decisions with regard to investment alternatives available under the 
plan, and incidents of ownership appurtenant to such investments. 
For purposes of this subparagraph, a participant or beneficiary will 
not be considered to have sufficient investment information unless--
    (1) The participant or beneficiary is provided by an identified 
plan fiduciary (or a person or persons designated by the plan 
fiduciary to act on his behalf):
* * * * *
    (ii) A description of the investment alternatives available 
under the plan and, with respect to each designated investment 
alternative, a general description of the investment objectives and 
risk and return characteristics of each such alternative, including 
information relating to the type and diversification of assets 
comprising the portfolio of the designed investment alternative;
* * * * *
    (v) A description of any transaction fees and expenses which 
affect the participant's or beneficiary's account balance in 
connection with purchases or sales of interests in investment 
alternatives (e.g., commissions, sales load, deferred sales charges, 
redemption or exchange fees);
    (vi) The name, address, and phone number of the plan fiduciary 
(and, if applicable, the person or persons designated by the plan 
fiduciary to act on his behalf) responsible for providing the 
information described in paragraph (b)(2)(i)(B)(2) upon request of a 
participant or beneficiary and a description of the information 
described in paragraph (b)(2)(i)(B)(2) which may be obtained on 
request;
* * * * *
    (viii) In the case of an investment alternative which is subject 
to the Securities Act of 1933, and in which the participant or 
beneficiary has no assets invested, immediately following the 
participant's or beneficiary's initial investment, a copy of the 
most recent prospectus provided to the plan. This condition will be 
deemed satisfied if the participant or beneficiary has been provided 
with a copy of such most recent prospectus immediately prior to the 
participant's or beneficiary's initial investment in such 
alternative;
    (ix) Subsequent to an investment in a investment alternative, 
any materials provided to the plan relating to the exercise of 
voting, tender or similar rights which are incidental to the holding 
in the account of the participant or beneficiary of an ownership 
interest in such alternative to the extent that such rights are 
passed through to participants and beneficiaries under the terms of 
the plan, as well as a description of or reference to plan 
provisions relating to the exercise of voting, tender or similar 
rights.
    (2) The participant or beneficiary is provided by the identified 
plan fiduciary (or a person or persons designated by the plan 
fiduciary to act on his behalf), either directly or upon request, 
the following information, which shall be based on the latest 
information available to the plan:
    (i) A description of the annual operating expenses of each 
designated investment alternative (e.g., investment management fees, 
administrative fees, transaction costs) which reduce the rate of 
return to participants and beneficiaries, and the aggregate amount 
of such expenses expressed as a percentage of average net assets of 
the designated investment alternative;
    (ii) Copies of any prospectuses, financial statements and 
reports, and of any other materials relating to the investment 
alternatives available under the plan, to the extent such 
information is provided to the plan;
    (iii) A list of the assets comprising the portfolio of each 
designated investment alternative which constitute plan assets 
within the meaning of 29 CFR 2510.3-101, the value of each such 
asset (or the proportion of the investment alternative which it 
comprises), and, with respect to each such asset which is a fixed 
rate investment contract issued by a bank, savings and loan 
association or insurance company, the name of the issuer of the 
contract, the term of the contract and the rate of return on the 
contract;
    (iv) Information concerning the value of shares or units in 
designated investment alternatives available to participants and 
beneficiaries under the plan, as well as the past and current 
investment performance of such alternatives, determined, net of 
expenses, on a reasonable and consistent basis; and
    (v) Information concerning the value of shares or units in 
designated investment alternatives held in the account of the 
participant or beneficiary.

Advisory Council Report

    In 2004, the Advisory Council on Employee Welfare and Pension 
Benefit Plans' Working Group on Fee and Related Disclosures to 
Participants reviewed the current disclosure requirements applicable to 
participant-directed individual account plans. Their review sought to 
assess the adequacy and usefulness of such requirements and to 
determine whether changes to the requirements would help participants 
more effectively manage their retirement savings. Focusing on the 
requirements applicable to section 404(c) plans, the working group 
issued a report containing a consensus recommendation, which is 
summarized below:

    The working group recognizes that providing actual fee 
information for a particular participant's account over a stated 
period of time is not justified at this time by the cost of 
providing that information. Given the current state of technology 
and recordkeeping practices, it is a complex and costly procedure to 
sum the total costs to a particular participant's account because of 
investment changes over time. Nonetheless, the working group saw 
examples of investment statements showing the expense of each 
investment option expressed as a ratio for each fund in which a 
participant was invested as of the date of the statement. The 
working group believes that this is pertinent information that is 
helpful in making the investment decision. This information can also 
be presented in an understandable format.

    With regard to the section 404(c) regulation, the consensus of the 
working group, recognizing that different considerations apply to open 
platform (also known as open brokerage) options in plans, made the 
following recommendations:

    The profile prospectus of each investment option should be 
delivered to each employee upon eligibility to participate. For 
those options not subject to the prospectus requirements, the 
working group recommended that the Department should require a 
disclosure with information substantially similar to the information 
on the profile prospectus. Providing this information prior to the 
initial investment decision should eliminate the need to 
automatically provide a full prospectus or other information 
concerning the particular investment options elected immediately 
after the investment options are elected. A participant would still 
be able to request such materials.
    Participants must be given materials (like a glossary) that 
explain the meaning of the terms used in the profile prospectus (or 
other like document) coincident with the delivery of the profile 
prospectus. This explanation would include a description of an 
expense ratio and what it means to have the investment expenses of 
an investment option expressed as a ratio. Included in this would be 
a mathematical example demonstrating the calculation necessary to 
approximately determine the expenses that apply to a

[[Page 20459]]

particular participant's account investments as of a particular 
date.
    Account and investment recordkeepers should be encouraged to 
develop internet Web sites where participants can research 
information about plan investment options and review information 
about their own investment choices. Additionally, these 
recordkeepers should be encouraged to develop web-based tools for 
participants to calculate alternative investment scenarios that 
incorporate assumptions about investment expenses as well as rates 
of return. Nonetheless, it is not intended that the suggestions in 
this paragraph be made into requirements.
    To the extent that an annual statement is provided by the 
recordkeeper, the statement must provide the expenses of each 
investment option expressed as a ratio along with other information 
provided about the investment options. There must also be an 
identification of the investment expenses that are paid entirely or 
in part by the plan sponsor. The investment expenses do not include 
other expenses for general plan maintenance paid by the plan 
sponsor, including, but not limited to, legal expenses, consulting 
expenses and accounting expenses. If such investment expenses were 
paid in part by the plan sponsor, the portion so paid would be 
identified.
    Any new requirement implemented under this item 3 [annual 
statement recommendation] should have a delayed effective date as 
applied to small and medium sized plans, based on the number of 
participants. New requirements like those described in this item 
[annual statement recommendation] could be more costly to implement 
for such plans than for large plans. Defining what a small to medium 
size plan is for these purposes should err on the high side. Perhaps 
plans covering fewer than 500 participants would come within this 
classification. Delaying the application would likely allow service 
providers time to design necessary systems to provide the 
contemplated disclosures in a cost effective manner for such 
sponsors.
    The Department should provide a sample model disclosure format 
that is available on its Web site. This would be a helpful addition 
to existing tools already provided on its Web site for understanding 
expenses both from the perspective of a participant and a plan 
sponsor.

    Commenters are encouraged to consider the report and 
recommendations of the working group in reviewing the issues identified 
in this RFI. This report may be accessed at http://www.dol.gov/ebsa/publications/AC_111704_report.html
.


GAO Report

    In November 2006, the Government Accountability Office (GAO) 
published Report GAO-07-21 entitled ``Private Pensions: Changes Needed 
to Provide 401(k) Plan Participants and the Department of Labor Better 
Information on Fees.'' This report recommends that, in order to better 
enable the Department to effectively oversee 401(k) plan fees, the 
Secretary of Labor should require plan sponsors to report a summary of 
all fees that are paid out of plan assets or by participants. The 
summary should list fees by type, particularly investment fees 
indirectly incurred by participants.
    Commenters are encouraged to consider the report and 
recommendations of the GAO in reviewing the issues identified in this 
RFI, including the GAO's specific recommendation relating to fee 
disclosure. The GAO report referenced above may be accessed at 
http://www.gao.gov/htext/d0721.html.


B. Issues Under Consideration

    The purpose of this notice is to solicit views, suggestions and 
comments from plan participants, plan sponsors, plan service providers 
and members of the financial community, as well as the general public, 
as to what extent rules should be adopted or modified, or other action 
taken, to ensure that participants and beneficiaries have the 
information they need to make informed decisions about the management 
of their individual accounts and the investment of their retirement 
savings. To facilitate consideration of the issues, the Department has 
set forth below a number of matters with respect to which views, 
suggestions, comments and information are requested. Interested 
persons, however, are encouraged to address any other matters they 
believe to be germane to the Department's consideration of fee and 
expense disclosure issues.

Request for Information

Disclosure of Information Relating to Plan Investment Options
    1. What basic information do participants need to evaluate 
investment options under their plans? If that information varies 
depending on the nature or type of investment option (options offered 
by a registered investment company, options offered under a group 
annuity contract, life cycle fund, stable value product, etc.), please 
include an explanation.
    2. What specific information do participants need to evaluate the 
fees and expenses (such as investment management and 12b-1 fees, 
surrender charges, market value adjustments, etc.) attendant to 
investment options under their plans? If that information varies 
depending on the nature or type of option, or the particular fee 
arrangement relating to options (e.g., bundled service arrangements), 
please include an explanation.
    3. To what extent is the information participants need to evaluate 
investment options and the attendant fees and expenses not currently 
being furnished or made available to them? Should such information be 
required to be furnished or made available by regulation or otherwise? 
Who should be responsible for furnishing or making available such 
information? What, if any, additional burdens and/or costs would be 
imposed on plan sponsors or plans (plan participants) for such 
disclosures?
    4. Should there be a requirement that information relating to 
investment options under a plan (including the attendant fees and 
expenses) be provided to participants in a summary and/or uniform 
fashion? Such a requirement might provide that: A) all investment 
options available under a participant-directed individual account plan 
must disclose information to participants in a form similar to the 
profile prospectus utilized by registered investment companies; or B) 
plan fiduciaries must prepare a summary of all fees paid out of plan 
assets directly or indirectly by participants and/or prepare annually a 
single document setting forth the expense ratios of all investment 
options under the plan.\3\ Who should be responsible for preparing such 
documents? Who should bear the cost of preparing such documents? What 
are the burden/cost implications for plans of making any recommended 
changes?
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    \3\ See recommendations of the GAO as set forth Report GAO-07-21 
(November, 2006), http://www.gao.gov/htext/d0721.html.

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    5. How is information concerning investment options, including 
information relating to investment fees and expenses, communicated to 
plan participants, and how often? Does the information or the frequency 
with which the information is furnished depend on whether the plan is 
intended to be a section 404(c) plan?
    6. How does the availability of information on the internet 
pertaining to specific plan investment options, including information 
relating to investment fees and expenses, affect the need to furnish 
information to participants in paper form or electronically?
    7. What changes, if any, should be made to the section 404(c) 
regulation, to improve the information required to be furnished or made 
available to plan participants and beneficiaries, and/or to improve 
likelihood of compliance with the disclosure or other requirements of 
the section 404(c) regulation? What are the burden/cost implications 
for plans of making any recommended changes?

[[Page 20460]]

    8. To what extent should participant-directed individual account 
plans be required to provide or promote investment education for 
participants? For example, should plans be required or encouraged to 
provide a primer or glossary of investment-related terms relevant to a 
plan's investment options (e.g., basis point, expense ratio, benchmark, 
redemption fee, deferred sales charge); a copy of the Department's 
booklet entitled ``A Look at 401(k) Fees'' (http://www.dol.gov/ebsa/publications/401k_employee.html
) or similar publication; or investment 

research services? Should such a publication include an explanation of 
other investment concepts such as risk and return characteristics of 
available investment options? Please explain views, addressing costs 
and other issues relevant to adopting such a requirement.
Disclosure of Information Relating to Plan and Individual Account 
Administrative Fees and Expenses
    9. What information is currently furnished to participants about 
the plan and/or individual administrative expenses charged to their 
individual account? Such expenses may include, for example: audit fees, 
legal fees, trustee fees, recordkeeping expenses, individual 
participant transaction fees, participant loan fees or expenses.
    10. What information about administrative expenses would help plan 
participants, but is not currently disclosed? Please explain the nature 
and usefulness of such information.
    11. How are charges against an individual account for 
administrative expenses typically communicated to participants? Is such 
information included as part of a participant's individual account 
statement or furnished separately? If separately, is the information 
communicated via paper statements, electronically, or via website 
access?
    12. How frequently is information concerning administrative 
expenses charged to a participant's account communicated?
    13. What, if any, requirements should the Department impose to 
improve the disclosure of administrative expenses to plan participants? 
Please be specific as to any recommendation and include estimates of 
any new compliance costs that may be imposed on plans or plan sponsors.
    14. Should charges for administrative expenses be disclosed as part 
of the periodic benefit statement required under ERISA section 105?
General Questions
    15. What, if any, distinctions should be considered in assessing 
the informational needs of participants in plans that intend to meet 
the requirements of section 404(c) as contrasted with those of 
participants in plans that do not intend to meet the requirements of 
section 404(c)?
    16. What (and what portion of) plan administrative and investment-
related fees and expenses typically are paid by sponsors of 
participant-directed individual account plans? How and when is such 
information typically communicated to participants?
    17. How would providing additional fee and expense information to 
participants affect the choices or conduct of plan sponsors and 
administrators, and/or that of vendors of plan products and services? 
Please explain any such effects.
    18. How would providing additional fee and expense information to 
participants affect their plan investment choices, plan savings conduct 
or other plan related behavior? Please explain any such effects and 
provide specific examples, if available.
    19. Please identify any particularly cost-efficient (high-value but 
inexpensive) fee and expense disclosures to participants, and to the 
contrary any particularly cost-inefficient ones. Please provide any 
available estimates of the dollar costs or benefits of such 
disclosures.

    Signed at Washington, DC, this 20th day of April 2007.
Bradford P. Campbell,
Acting Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E7-7884 Filed 4-24-07; 8:45 am]

BILLING CODE 4510-29-P