Fee Disclosure in Defined Contribution Retirement Plans: Background and Current Legislation

Fee Disclosure in Defined Contribution
Retirement Plans: Background and
Current Legislation
September 22, 2008
John J. Topoleski
Analyst in Income Security
Domestic Social Policy Division



Fee Disclosure in Defined Contribution Retirement
Plans: Background and Current Legislation
Summary
As households become more reliant on 401(k) plans and other defined
contribution pension plans for future retirement income, policymakers have become
more concerned that participants could be unaware of the fees charged in their plans.
Small differences in fees charged can have large impacts on account balances upon
retirement. This report provides information on the kinds of fees that are charged in
401(k) and other defined contribution plans and details the provisions of three bills
that address fee disclosure in retirement plans: H.R. 3185, the 401(k) Fair Disclosure
for Retirement Security Act, which was approved by the Committee on Education
and Labor by a vote of 25-19 on April 16, 2008; H.R. 3765, the Defined Contribution
Plan Fee Transparency Act of 2007, introduced on October 4, 2007; and S. 2473, the
Defined Contribution Fee Disclosure Act of 2007, introduced December 13, 2007.
This report will be updated as legislative action warrants.



Contents
Background on 401(k) Fees..........................................1
The Structure of 401(k) Plans and the Impact of Fees..................1
Structure of 401(k) Plans........................................2
Types of 401(k) Fees...........................................4
Plan Administration Fees....................................4
Investment Fees...........................................5
Individual Service Fees.....................................6
Documents Required by Current Law..............................6
Summary Plan Descriptions..................................6
Annual Report Form 5500...................................7
Benefit Statements.........................................7
Fee Disclosure Legislation in the 110th Congress.........................7
Bill Summaries................................................8
H.R. 3185 and S. 2473......................................8
Minimum Investment Option Requirement in H.R. 3185...........8
H.R. 3765................................................9
Details of 401(k) Fee Legislation..................................9
Disclosure from Service Providers to Plan sponsors...............9
Disclosures from Plan Sponsors to Plan Participants.............12
Minimum Investment Option Requirement in H.R. 3185..........15
Assistance to Small Employers in H.R. 3185 and S. 2473.........15
Enforcement and Review by the Department of Labor in
H.R. 3185 and S. 2473.................................16
Imposition of Taxes in H.R. 3765............................16
List of Figures
Figure 1. Structure of a Typical Defined Contribution Plan.................3
List of Tables
Table 1. Effect of Annual Fees on a $20,000 Balance
(Assuming 7% Annual Real Rate of Return).........................2
Table 2. Number of Defined Contribution Plans and Participants,
by Size of Plan and Extent of Participant Direction of Investments, 2005..5



Fee Disclosure in Defined Contribution
Retirement Plans: Background and
Current Legislation
Background on 401(k) Fees
The Structure of 401(k) Plans and the Impact of Fees
Defined contribution (DC) plans are employer-sponsored retirement plans in
which employees and/or employers contribute to an individual employee’s account
that accrues investment returns.1 Upon retirement, employees use the accounts as a
source of income. DC plans may be “qualified” if they meet certain Internal Revenue
Service (IRS) guidelines with respect to pension plan contributions, benefits, and
distributions. 401(k) plans are qualified plans that include a cash or deferred
arrangement under which participants can choose to contribute part of their
before-tax compensation to the plan rather than receive the compensation in cash.2
The tax code allows employees to contribute a pre-tax maximum of $15,500 in 2008
to their individual 401(k) accounts. Although there are other kinds of DC account
plans in addition to 401(k) plans (such as 457 plans for employees of state or local
governments and 403(b) plans for educational institutions and other tax-exempt
organizations), these plans operate similarly to 401(k) plans, and the term 401(k) plan
often refers to these other plans as well.3 Unless specifically stated, the term 401(k)
plan in this report also refers to these other plans.
The percentage of employees covered by DC plans has been increasing in recent
years. According to the National Compensation Survey from the Bureau of Labor
Statistics, 36% of all workers participated in a DC plan in 1999. This percentage
increased to 43% by 2006. DC plans will continue to play an important role in
Americans’ retirement security.
There has been a growing interest in the fees that participants in 401(k) plans
are charged. Small differences in fees can yield large differences in account balances


1 A defined contribution plan is defined in 26 U.S.C. § 414(i) as “a plan which provides for
an individual account for each participant and for benefits based solely on the amount
contributed to the participant’s account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be allocated to such participant’s
account.”
2 The names for the various types of defined contribution retirement plans are often the
section of the Internal Revenue Code that authorizes these plans (e.g., 26 U.S.C. 401(k) or

26 U.S.C. 457(b)).


3 See 26 U.S.C. § 402(g)(1).

at retirement, especially in the case of yearly or recurring fees.4 For example, Table
1 shows the effect that a 0.5%, a 1.0%, and a 1.5% annual fee would have on an
initial $20,000 account balance that earns 7% yearly. After 20 years, the account
would have about $77,000 if no fee is charged, whereas the account would have
about $70,000 if a 0.5% fee is charged. The account would have a balance of about
$58,000 if a 1.5% fee is charged (17% less than the account that charged a 0.5% fee).
If a 1.5% annual fee is charged, over the course of 30 years an account holder would
pay more than $52,000 in fees. The complexity of 401(k) plan arrangements may
provide opportunities for fees to be higher than they otherwise might be, particularly
if plan sponsors and participants are not fully informed of the fees they pay. Policies
that increase the transparency of fee arrangements may result in participants paying
lower fees.
Table 1. Effect of Annual Fees on a $20,000 Balance
(Assuming 7% Annual Real Rate of Return)
(amount in $)
Account BalanceAnnual FeeNone 0.5% 1.0% 1.5%
After 20 years7,39470,47364,14358,355
After 30 years152,245132,287114,87099,679
Source: CRS calculations.
Note: The average annual real rate of return on the Standard & Poor’s 500 Stock Market Index from
1926 to 2007 was 6.99%.
Under the Employee Retirement Income Security Act (ERISA, P.L. 93-406),
plan sponsors have a fiduciary responsibility to plan participants; that is, they must
carry out their responsibilities prudently and solely in the interest of the plan’s
participants.5 Among other duties, fiduciaries have a responsibility in ERISA to
defray reasonable expenses of administering the plan, but there are limited fee
disclosure requirements to plan participants.6
Structure of 401(k) Plans
Figure 1 details the structure of a typical 401(k) plan, although particular plans
may have slightly different structures. Fee arrangements affect three groups in
401(k) plans: (1) plan participants, (2) plan sponsors and plan administrators, and
(3) service providers. The plan participants are the employees of the company who
have individual accounts to which the employees, the employer, or both contribute.


4 For a detailed analysis of the effects that fees have on account balances, see CRS Report
RL34213, Retirement Savings Accounts: Fees, Expenses, and Account Balances, by Patrick
Purcell.
5 For more information, see CRS Report RL34443, Summary of the Employee Retirement
Income Security Act (ERISA), by Patrick Purcell and Jennifer Staman.
6 See 29 U.S.C. § 1104(a)(1)(A)(ii).

As the plan sponsor, the employer arranges for one or more service providers to
provide various services for the plan. Prior to choosing a service provider, plan
sponsors might ask several providers for details on the products they offer and the
fees they charge. Service providers provide a number of services for plan sponsors
and participants including the day-to-day plan business such as recording
transactions, arranging for loans, cashing out retirees’ accounts, and arranging for
investment options. Most service providers offer several mutual funds to the
retirement plan and may offer other investment options as well, including insurance
company offerings such as variable annuities and bank or trust company pooled
investment trusts.
Figure 1. Structure of a Typical Defined Contribution Plan


Source: CRS.
Employers could purchase these services separately from individual service
providers or employers could purchase two or more services from a single service
provider in a bundled arrangement. In a bundled arrangement, a service provider
offers several services or investment alternatives to the plan for a single fee. The
service provider may contract out the provision of these services to one or more third
parties. Current law does not require the services in bundled arrangements to be
priced separately. The Department of Labor (DOL) has issued regulations to require
service providers to identify all parties who receive payments of more than $5,000
from the plan.7
7 See Department of Labor, “Annual Reporting and Disclosure,” 72 Federal Register 221,
November 16, 2007, pp. 64710-64730.

The terms “plan sponsor” and “plan administrator” are often used
interchangeably, although they need not be the same entity. A plan sponsor is an
employer that establishes a retirement plan. The plan administrator is responsible for
the day to day running of the plan. The plan administrator may be the employer, a
committee of employees, a company executive, or someone hired for that purpose.
The plan administrator is defined in 26 U.S.C. § 414(g) as the person specifically so
designated by the terms of the plan or the employer in the absence of such a
designation. To avoid confusion, this report’s use of the term “plan sponsor” includes
“plan administrator.”
In most DC plans, participants have control over some or all of the assets in
their individual accounts, although this control is limited to the investment options
made available by the service providers. Less common are plans in which the
participants have no control over the assets. Current proposals in Congress would
require plan sponsors of all DC plans to receive fee disclosures from service
providers, but only participants in plans in which the participants exercise control
over the assets would receive fee disclosures from plan sponsors. Table 2 indicates
that 401(k) plans where the employee has control over all or a portion of the assets
in the plan accounted for 88.8% of all DC plans in 2005. Two of the proposals in
Congress (H.R. 3185 and S. 2473) would provide assistance to small employers
(employers with less than 100 employees) by providing educational and compliance
materials to small employers and by providing assistance with finding and
understanding affordable investment options. Table 2 indicates that 13.9% of plan
participants are in plans in which there are fewer than 100 participants.
Types of 401(k) Fees
The Employee Benefits Security Administration (EBSA) is an agency within the
Department of Labor (DOL). It is charged with protecting the integrity of employee
benefits, including retirement plans. An EBSA publication, A Look At 401(k) Plan
Fees, describes three types of fees: plan administration fees, investment-related fees,8
and individual service fees . According to EBSA, investment-related fees are the
largest component of 401(k) plan fees.
Plan Administration Fees. These are fees for the day-to-day operations of
plans such as record keeping, accounting, legal, and trustee services. Additional
services might also be provided, such as access to customer service representatives,
educational seminars, or daily valuation. The amount charged for administrative fees
can vary depending on the quantity and quality of the services offered. For example,
service providers that offer website access with extensive online services might
charge higher fees than service providers that provide only basic website services.
Administrative fees may be charged either as a flat fee per participant or as a
percentage of plan assets.


8 Available at [http://www.dol.gov/ebsa/pdf/401kFeesEmployee.pdf].

Table 2. Number of Defined Contribution Plans and Participants,
by Size of Plan and Extent of Participant Direction
of Investments, 2005
Plans WithPlans with 100
2 - 99or More
All PlansParticipantsParticipants
Number of
Plans 421,776 362,482 59,294
All PlansNumber of
Participants
(in thousands)54,6237,57347,050
Number of
P a r ticip ant Plans 354,849 300,435 54,414
Directs AllNumber of
I nve st me nt s P a r ticip ants
(in thousands)43,2236,59236,631
Number of
P a r ticip ant Plans 19,825 17,230 2,595
Directs PortionNumber of
of AssetsParticipants
(in thousands)8,4803378,143
Number of
Participant DoesPlans47,09944,8162,283
Not Direct AnyNumber of
I nve st me nt s P a r ticip ants
(in thousands)2,9216462,275
Source: U.S. Department of Labor, Table D-6 of Private Pension Plan Bulletin, Abstract of 2005
Form 5500 Annual Reports.
Notes: Table does not include plans that did not report the number of participants. Employers may
have multiple plans. Employees may be in multiple plans and are counted in each plan in which they
participate. The small discrepancies in the totals for each column are found in the original source.
Investment Fees. Investment fees cover the costs of transactions within
investment options, such as the trades a particular mutual fund makes. Some
investment fees include the following.
!Sales Charges: These are also known as loads. A front-end load is
charged upon investing in some mutual funds. Front-end loads
reduce the amount of the initial investment. Back-end loads (also
called deferred sales charges or redemption fees) are charged upon
selling mutual funds.
!Marketing and Distribution Fees: These are called “Rule 12b-1”
fees after the 1980 Securities and Exchange Commission’s (SEC)
rule that allowed mutual funds to charge for marketing and



distribution of mutual fund shares.9 Rule 12b-1 fees are annual fees
that may be charged by mutual funds from fund assets to pay for
promotional costs and commissions to brokers and other
salespeople. A point of contention is that service providers may
receive 12b-1 fees for including particular mutual funds as
investment options for participants in the plans they administer.
Although the SEC does not limit the amount of 12b-1 fees, under the
Financial Industry Regulatory Authority (FINRA) rules, 12b-1 fees
that are used to pay marketing and distribution expenses (as opposed
to shareholder service expenses) cannot exceed 0.75% of a fund’s
average net assets per year.
!Soft Dollar Fees: These payments are for brokerage firm services
(such as research) other than commissions for trade execution.
!Surrender and Transfer Charges: These are fees that insurance
companies may charge when employers withdraw from variable
annuities before the contract expires.
!Wrap Fee: Wrap fees are “all-in-one” fees that combine asset
management, financial planning, and brokerage services together for
one fee.
Individual Service Fees. Individuals are charged fees that are associated
with using optional features in a 401(k) plan, such as loan origination fees and fees
for hardship withdrawals.
Documents Required by Current Law
Three documents required by current law contain information about potential
fees: Summary Plan Descriptions (SPDs), Summary Annual Reports, and Account
statements.
Summary Plan Descriptions. SPDs describe how plans operate.10 Plan
sponsors are required to automatically provide copies of these documents to plan
participants upon enrollment and upon written request of plan participants. Among
other items, SPDs contain information about eligibility and vesting requirements,
plan benefits, and the source of contributions. SPDs are required to disclose a
summary of provisions that may result in a fee charged to a participant, the payment
of which is a condition to the receipt of benefits under the plan. An EBSA Field


9 Prior to the adoption of Rule 12b-1, the SEC generally took the view that section 12b-1 of
the Investment Companies Act of 1940 (15 U.S.C. § § 80a-1 - 80a-64) prohibited mutual
funds from using fund assets to pay for the sale of their shares.
10 See 29 CFR § 2520.103-2 and 29 CFR § 2520.103-3 for regulations concerning the style
and contents of SPDs.

Assistance Bulletin notes that charges for hardship withdrawals, if a plan allows
hardship withdrawals, might be an example of such a charge.11
Plans must also make a Summary of Material Modifications available within
seven months of the end of the plan year in which significant changes to the plan
were made.
Annual Report Form 5500. The Form 5500 was jointly developed by DOL,
the IRS, and the Pension Benefit Guaranty Corporation (PBGC) and is required to
be submitted annually by ERISA-covered plans. This annual report contains various
schedules with information on the financial condition, investments, and operations
of the plans. On November 16, 2007, EBSA issued regulations to revise the Form
5500. Among other requirements, the regulations require administrators and
sponsors of plans with more than 100 participants to disclose the identity of service
providers who receive direct or indirect compensation of $5,000 or greater in
connection with services rendered to the plan.12 The types of compensation include
12b-1 fees, brokerage commissions, and soft dollars. A plan’s annual report may be
available from the employer upon request and is available from DOL in the EBSA
Public Disclosure Facility.
Benefit Statements. Section 508 of the Pension Protection Act of 2006 (P.L.
109-280) requires plan sponsors to provide participants in DC plans with quarterly
benefit statements if the investments are participant-directed and annual statements
if the investments are not participant-directed. The quarterly benefit statement must
include the value of each investment in the individual’s account, an explanation of
any limitations or restrictions on any right of the participant or beneficiary under the
plan to direct an investment, and an explanation of the importance of a well-balanced
and diversified investment portfolio for long-term retirement security. On July 23,
2008, DOL issued proposed regulations that would require plan fiduciaries to
disclose to participants, on a quarterly basis, the actual dollar amount charged to the
participant’s account during the preceding quarter for individual services (such as
fees for processing plan loans).13
Fee Disclosure Legislation in the 110th Congress
Three bills have been introduced in the 110th Congress to address the expenses
and fees charged in 401(k) and other DC plans. The bills would require service
providers to disclose to plan sponsors the services to be provided to the plan and the
expected fees and expenses. The disclosures would be made prior to entering into
a contract for services to a plan and upon any material changes to the contract for
services. The bills would also require plan sponsors to disclose to a participant the


11 See Field Assistance Bulletin 2003-3 issued by EBSA on May 19, 2003.
12 See Department of Labor, “Annual Reporting and Disclosure,” 72 Federal Register 221,
November 16, 2007, pp. 64710-64857.
13 See Department of Labor, “Fiduciary Requirements for Disclosure in Participant-Directed
Individual Account Plans,” 73 Federal Register 142, July 23, 2008, pp. 43013-43044.

expected fees and expenses associated with the plan and the plan’s investment
options. This disclosure would be made prior to any initial contribution by a
participant. Plan sponsors would also have to provide, on a regular basis, each
participant with details of the fees and expenses the participant incurred over a
specified period.
The following paragraphs summarize the bills. Following the summaries, the
report describes the bills’ details in the following categories: (1) disclosures from
service providers to plan sponsors, (2) disclosures from plan sponsors to plan
participants, (3) a minimum investment option, (4) assistance to small employers, (5)
enforcement and review, and (6) imposition of taxes.
Bill Summaries
H.R. 3185 and S. 2473. Representative George Miller introduced H.R. 3185,
the 401(k) Fair Disclosure for Retirement Security Act of 2007 on July 14, 2007, and
the House Committee on Education and Labor passed this bill by a vote of 25-19 on
April 16, 2008. Senator Tom Harkin introduced S. 2473, the Defined Contribution
Fee Disclosure Act of 2007, on December 13, 2007. H.R. 3185 and S. 2473 are
similar in many respects.
The bills would amend ERISA and would require
!service providers to disclose more information on the fees associated
with a particular 401(k) plan to plan sponsors and any relationships
that service providers have with entities providing services to a

401(k) plan;


!plan sponsors to inform 401(k) participants about their investment
options and the kinds and amounts of fees associated with the
investment options;
!plan sponsors to provide each participant in a 401(k) plan with a
detailed breakdown of the fees a participant paid in each quarter; and
!the Secretary of Labor to provide sample notices of the required
documents; to widely disseminate the identity of service providers
found to preclude compliance by plan sponsors; and to audit a
representative sampling of 401(k) plans to determine compliance
with the provisions of the bill. The Congressional Budget Office
estimates that these provisions would increase government spending14
by $3 million over FY2009-FY2013.
Minimum Investment Option Requirement in H.R. 3185. H.R. 3185
has an additional requirement that is not found in S. 2473 or H.R. 3765. H.R. 3185


14 Congressional Budget Office cost estimate, H.R. 3185: 401(k) Fair Disclosure for
Retirement Security Act of 2008, available at [http://www.cbo.gov/ftpdocs/93xx/doc9323/
hr3185.pdf].

would require each 401(k) plan to include at least one investment option that is a
broad-based market index fund (or combination of funds) that would likely meet
retirement income needs at adequate levels of contributions. 401(k) plans that do not
include such an option would lose their protection against liability from participants’
investment losses under ERISA § 404(c).
H.R. 3765. Representative Richard Neal introduced H.R. 3765, the Defined
Contribution Plan Fee Transparency Act of 2007, on October 4, 2007.
This bill would impose taxes on service providers and plan sponsors that failed
to meet the requirements of the bill. The bill would amend the Internal Revenue
Code and would require
!plan sponsors to provide participants with disclosures of fees and
expenses prior to prior to making investments in the plan;
!plan sponsors to provide each participant in the plan an annual
notice of the fees paid by the participant’s account; and
!service providers to disclose to plan sponsors fee information and
any third-party relationships that service providers might have.
Details of 401(k) Fee Legislation
Disclosure from Service Providers to Plan sponsors. All three bills
would require service providers to supply plan sponsors with a written statement
detailing the services to be provided under the contract and an estimate of the
expected total fees and expenses or charges expected under the contract.
Timing of Disclosure. H.R. 3185 would require that plan administrators of
individual account plans receive a Service Disclosure Statement from 401(k) plan
service providers at least 10 business days prior to entering into any contract for
services to the plan if the contract equals or exceeds $5,000. This amount would be
adjusted for inflation beginning in 2010.
S. 2473 would require service providers to provide fee information to plan
sponsors of 401(k) and 403(b) plans reasonably in advance of entering into a contract
for plan services. The law would apply to any contract greater than $5,000 or 0.01%
of the value of plan assets as of the last day of the preceding plan year.
H.R. 3765 would require service providers to provide an “initial disclosure”
statement prior to entering into or materially modifying a contract for the provision
of plan services.
Kinds of Pension Plans. The provisions in H.R. 3185 and S. 2473 requiring
disclosure from service providers to plan sponsors would apply to “individual



account plans.”15 The provisions in H.R. 3765 would apply to “applicable defined
contribution plans.” Both definitions include 401(k) plans, 403(a) plans, and 457(b)
plans.16
Bundled Service Charges. The bills would require service providers to
report the fees and expenses within several categories.
H.R. 3185 would require the allocation of fees to four component charges: (1)
plan administration and record keeping; (2) transaction-based charges; (3) investment
management; and (4) all other charges as may be specified by the Secretary of the
Treasury.
S. 2473 would require the allocation of fees to four component charges: (1)
charges for investment management; (2) charges for record keeping and
administration; (3) sales charges, including commissions, and charges for advisory
services; and (4) any other charges.
H.R. 3765 would require an estimate of the total fees and expenses expected
under the plan and the itemization of (1) annual fees and expenses for investment
management and (2) annual fees for administration and record keeping.
Form of Charges and Permission of Estimates. The bills require some
fees to be reported as dollar amounts and other fees to be reported as percentages of
assets. The bills would allow service providers to report fees as estimates where the
actual amounts of the fees are unknown.
In H.R. 3185, plan administration and record keeping and investment
management charges would be presented as aggregate dollar amounts. Transaction-
based charges may be presented as percentages of applicable base amounts.
Reasonable and representative estimates of the charges are permitted, provided the
statement indicates the charge as being an estimate and provided the estimate is based
on the previous year’s experience.
S. 2473 would allow each charge to be expressed as either a dollar amount or
as percentage of assets. The form of such charges would have to be consistent
throughout the statement. In cases where services are bundled or the costs are
unknown, S. 2473 would require service providers to provide reasonable and
representative estimates of charges.


15 The term individual account plan or defined contribution plan is defined in 29 U.S.C.
1002(34) as “a pension plan which provides for an individual account for each participant
and for benefits based solely upon the amount contributed to the participant’s account, and
any income, expenses, gains and losses, and any forfeitures of accounts of other participants
which may be allocated to such participant’s account.”
16 Specifically, H.R. 3765 applies to defined contribution plans described in 26 U.S.C.

402(c)(8)(B)(iii)-(vi): qualified trusts (such as 401(k) plans), 403(a) plans, 457(b) plans,


and 403(b) plans.

H.R. 3765 would allow the fees and expenses to be expressed as either a dollar
amount or as a percentage of assets (or a combination thereof). H.R. 3765 would
allow reasonable estimates of fees and expenses if the service provider does not
separately price such services and if the service provider discloses the basis for such
estimates.
Third Party Payments. The bills would require disclosure of relationships
that service providers have with third parties who provide services to plans.
H.R. 3185 would require disclosure of any payments that the service provider
receives from any person providing services to the plan. It would also require the
disclosure of any personal, business, or financial relationships that the plan sponsor
has if the relationship results in the service provider deriving any material benefit.
S. 2473 would require disclosure of any financial relationships that a service
provider has with the plan sponsor and any third party providing services to the plan
for which the service provider receives a payment.
H.R. 3765 would require a statement of (1) whether the service provider expects
to remit any of the fees and expenses it receives under the contract to one or more
third-party service providers or intermediaries, (2) the estimated amount to be
remitted, and (3) the identity of each party. The bill would also require a statement
of (1) whether the service provider expects to receive compensation from a source
other than the plan or plan sponsor as a result of the contract, (2) the amount of such
compensation, and (3) the identity of the source of the compensation. Amounts
remitted to third parties and revenues received from sources other than the plan or
plan sponsor would have to be disclosed only if they exceed $5,000 during the year.
Disclosure of Impact Share Classes. Mutual funds may offer shares that
offer differing services (with differing fees). For example, a mutual fund may have
a share class that provides a low front-end load but may have a higher annual expense
charge. Some mutual funds offer share classes that are available only to institutional
investors; these share classes typically have lower fees and expenses compared to
shares that are offered to retail investors. H.R. 3185 and S. 2473 would require
disclosure of the existence of different share classes within the mutual fund
investments offered. H.R. 3765 has no requirement to disclose differing share
classes within mutual funds.
Frequency of Disclosure. H.R. 3185 and S. 2473 would require that a
Service Disclosure Statement be provided to the plan sponsor either (1) after any
material change to the terms of the service agreement or (2) at least annually. H.R.
3765 would require, within 90 days of the end of each plan year, the service provider
to disclose to the plan sponsor the fees and expenses paid by the plan during the year,
including an itemization of the fees paid for (1) investment management and (2)
administration and record-keeping. The service provider would have to disclose
amounts paid to third-parties and the identities of the third parties. It would also have
to disclose the amount of compensation it received from parties other than the plan
sponsor and the identity of each source of the compensation.



Disclosures from Plan Sponsors to Plan Participants. The following
provisions in the bills would require plan sponsors to provide fee information to each
plan participant, prior to any initial contribution or investment by the participant, in
individual account plans where the participant exercises control over the assets in the
account.
Disclosures Prior to Participants’ Initial Contributions Required by
H.R. 3185 and S. 2473. H.R. 3185 would require plan sponsors to provide an
“Advance Notice of Available Investment Options” to all plan participants at least
10 business days prior to (1) a participant’s initial investment of any contribution to
the plan on an annual basis and (2) the effective date of any material change in
investment options in the plan. The notice would indicate which components of each
investment option are payable directly by the participant and how such components
are to be paid.
The following information would be required for each investment option: the
name of the option, the investment objective, the risk level, whether the option by
itself achieves long-term financial security, the historical return, the percentage fee,
an explanation of any asset-based fees or annual fees, and a comparison to a
nationally recognized index or benchmark. The notice would also include a
statement that investment options should not be evaluated solely on the basis of
charges but also on consideration of other factors such as risk and investment
objectives.
S. 2473 would require plan sponsors to provide an “Advance Notice of
Available Investment Options” to all plan participants 15 days prior to a participant’s
initial investment of any contribution made to the plan. The following information
would be required for each investment option: the name of the option, the investment
objective, the risk level, whether the option by itself achieves long-term financial
security, the historical return, the percentage fee, an explanation of any asset-based
fees or annual fees, and a comparison to a nationally recognized index or benchmark.
The provisions in H.R. 3185 and S. 2473 requiring disclosure from service
providers to participants would apply to individual account plans that permit17
participants to exercise control over the assets of their accounts.
Plan and Investment Comparison Chart Required by H.R. 3185 and
S. 2473. In addition to the “Advance Notice of Available Investment Options”
mentioned above, H.R. 3185 would require a Plan Comparison Chart, and S. 2473
would require an Investment Comparison Chart that would detail the actual service
and investment charges that will or could be assessed against the account in the plan
year.


17 These are defined in 29 U.S.C. 1002(34): “a pension plan which provides for an
individual account for each participant and for benefits based solely upon the amount
contributed to the participant’s account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which may be allocated to such participant’s
account.”

H.R. 3185 would require the Plan Comparison Chart to provide information in
relation to the following three categories of fees: (1) charges that vary depending on
the investment option selected (e.g., expense ratios or investment-specific asset-based
charges), (2) charges that are assessed as a percentage of total assets in an account
regardless of the investment option selected, (3) administration and transaction-based
charges that are either automatically deducted each year (such as administration,
compliance, or record keeping costs) or that are transaction-based (such as loan
origination fees, possible redemption fees, or possible surrender charges), and (4) any
other charges.
S. 2473 would require the Investment Comparison Chart to provide information
in the following three categories of fees: (1) fees that vary depending on the
investment option selected (e.g., expense ratios or asset-based fees), (2) fees that are
assessed as a percentage of total assets in an account, and (3) administration fees that
are either automatically deducted each year or that are transaction-based (such as loan
origination fees). The investment comparison chart would have to describe the
purpose of each fee and disclose the extent to which conflicts of interest may exist
with respect to service providers or other parties receiving fees.
Disclosures Prior to Participants’ Initial Contributions Required by
H.R. 3765. H.R. 3765 would require plan sponsors to provide each participant,
before any contributions are invested on his or her behalf, with a written explanation
of the plan’s fees and expenses. This enrollment notice would also include the
following with regards to each investment alternative:
!the “key characteristics” of the plan’s investment alternatives and an
explanation of the process of electing investment alternatives;
!a description of each investment alternative’s investment objectives,
risk and return characteristics, historical rates of return, and the
name of the fund manager;
!a statement of whether the investment alternative is actively or
passively managed; and
!a statement of whether the investment alternative is designed to be
a “comprehensive, stand-alone investment for retirement that
provides varying degrees of long-term appreciation and capital
preservation through a mix of equity and fixed income exposures.”
With respect to fees and expenses, the enrollment notice must disclose (1)
annual asset-based fees for each investment alternative that reduce the investment’s
rate of return and whether any of the fees or expenses applicable to a particular
investment alternative are charged for services other than investment management,
(2) fees and expenses that are charged for administration and record-keeping and an
explanation of the way such fees are allocated to the participant’s account, (3) fees
and expenses attributable to purchases or sales of interests in investment alternatives,
(4) the “existence of” fees and expenses attributable to transactions or services
initiated by the participant (other than for purchases and sales of investments) and the
process by which participants can acquire additional information about these fees, (5)
any other fees or expenses that may be charged to the participant, and (6) a statement
explaining that fees are only one of the factors that a participant should consider
when selecting an investment alternative.



The provisions in H.R. 3765 that require disclosure from service providers to
participants would apply to DC plans that permit participants to exercise control over
the assets in their accounts.18
Quarterly Benefits Statements Required by H.R. 3185 and S. 2473.
H.R. 3185 and S. 2473 would require plan sponsors to provide a quarterly statement
of the fees and expenses that a participant has paid.
H.R. 3185 would require plan sponsors to provide information to each plan
participant regarding the fees paid in their account. H.R. 3185 would require plan
sponsors to provide each plan participant with a quarterly statement (plans that have
fewer than 100 participants may provide an annual statement) that discloses the
following information: the starting and ending balances of the participant’s account;
the employer and employee contributions made during the quarter; the investment
earnings or loses on the account balance during the quarter; the actual or estimated
charges that reduced the account during the quarter, expressed as dollars or as dollar
charges as derived from an expense ratio; other charges in connection with the
participant’s account; and the process for obtaining the most recent Fee Comparison
Chart.
Plan sponsors may provide reasonable and representative estimates of the
charges, provided that the statement indicates the charge as being an estimate and
provided the estimate is based on the previous year’s experience.
S. 2473 would require plan sponsors to provide each participant in a DC plan
in which the participant has the right to direct the investment of assets the following
information in their quarterly benefits statements: the account’s starting balance; the
participant’s vesting status; the employer and employee contributions made during
the quarter; the interest earnings on the account balance during the quarter; the actual
or estimated fees assessed during the quarter, expressed in dollars or as an expense
ratio; the account’s ending balance; the participant’s asset allocation, categorized by
investment option, including the current asset value and the change in the asset’s
value expressed as an amount and as a percentage; and the performance of the
investment options selected by the participant during the quarter as compared to at
least one nationally recognized market-based index. Plans that have fewer than 100
participants may provide the benefits statement on an annual basis.
S. 2473 would require a plan sponsor to provide, within 30 days of a
participant’s request, information on service fees charged against the participant’s
account for each investment option. The following information would be listed
separately: fees that vary depending on the investment option selected, such as
expense ratios, investment- specific asset based fees, or possible redemption fees or
surrender charges; fees that are assessed as a percentage of total assets in the account,
regardless of the investment option selected; administration and transaction-based
fees; and any other fees that might be deducted from the participant’s account.


18 These plans are described in 26 U.S.C. 402(c)(8)(B)(iii)-(vi): qualified trusts (such as

401(k) plans), 403(a) plans, 457 plans, and 403(b) plans.



Annual Statements Required by H.R. 3765. H.R. 3765 would require
plan sponsors to provide each participant, within 90 days of the end of the plan year,
with a written statement of the investment alternatives the participant had selected
as of the end of the plan year and the key characteristics of each of these investment
alternatives.
The statement must include the following information: a description of the
percentage of the participant’s assets invested in each asset class, the fees and
expenses attributable to participant-initiated transactions (other than purchases and
sales of assets) deducted from the participant’s account, the fees and expenses for
administration and record-keeping that were deducted from the participant’s account,
the annual asset-based fees for each investment alternative that reduced the
investment alternative’s rate of return, and the fees and expenses attributable to
purchases or sales of each investment alternative that “have been or may be”
deducted from the participant’s account.
The annual notice also must include, with respect to each investment alternative,
the percentage of the participant’s assets invested in that alternative, a statement of
whether the investment is actively or passively managed, a statement of the
alternative’s risk and return characteristics, and the investment’s historical rates of
return over the most recent one-, five-, and ten-year time period. It must also include
a statement that explains that fees are only one of the factors that a participant should
consider when selecting an investment alternative and that explain how the
participant can access any information required to be disclosed in the enrollment
notice that is not included in the annual notice.
Minimum Investment Option Requirement in H.R. 3185. ERISA §

404(c) protects plan sponsors from liability for investment losses in participant-


directed DC plans. In order to continue to receive this protection, H.R. 3185 would
require 401(k) plans to include at least one investment option that is a broad-based
securities market based index fund or a combination of two or more such funds. The
investment option should offer a combination of historical returns, risk, and charges
that is likely to meet retirement income needs at adequate contribution levels. The
bill specifies that the terms of the plan should indicate that the fund is offered without
the endorsement of the government or plan sponsor. The bill does not specify
particular funds, but examples might include life-cycle or index funds. Life-cycle
funds alter their particular investment mix on the basis of the participant’s investment
time horizon. Index funds are mutual funds that replicate the movements of a group
of investments. Index funds might track a large group of U.S. stocks (such as the
Dow Jones Industrial Average or Standard & Poor’s (S&P) 500 index), foreign
stocks, or various kinds of bonds. Neither H.R. 3765 nor S. 2473 requires 401(k)
plans to offer a particular investment option.
Assistance to Small Employers in H.R. 3185 and S. 2473. H.R. 3185
and S. 2473 would require the Secretary of Labor to provide educational and
compliance materials to assist employers with fewer than 100 employees in selecting
and monitoring service providers. The bills would also require the Secretary of
Labor to provide services to assist employers with fewer than 100 employees in
finding and understanding affordable investment options for the account plans. H.R.

3765 has no such provisions.



Enforcement and Review by the Department of Labor in H.R. 3185
and S. 2473. H.R. 3185 and S. 2473 would require the Secretary of Labor to
widely disseminate the identity of service providers that engage in a pattern or
practice of noncompliance with respect to the provisions relating to the Service
Disclosure Statements and the Advance Notices of Available Investment Options.
The bill would also require the Secretary of Labor to annually audit a representative
sampling of individual account plans to determine their compliance with the
requirements of the provisions relating to the Service Disclosure Statements and the
Advance Notices of Available Investment Options and to report the results of the
audit and any related recommendations to the House Committee on Education and
Labor and the Senate Committee on Health, Education, Labor, and Pensions.
Imposition of Taxes in H.R. 3765. H.R. 3765 would impose a tax on
service providers that failed to meet the requirements of the bill with respect to
disclosure from service providers to plan sponsors. The amount of the tax would be
$100 per participant per day in the noncompliance period. H.R. 3765 would impose
a tax on plan administrators that failed to meet the requirements of the bill with
respect to disclosure from plan administrators to plan participants. The amount of
the tax would be $1,000 per participant for each day in the noncompliance period.