Guest Article

(From the August 6, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

More on 401(k) Fee Bill

Chairman George Miller (D-CA) of the U.S. House Committee on Education and Labor on July 26, 2007 introduced H.R. 3185, the "401(k) Fair Disclosure for Retirement Security Act." The bill's purpose is to make 401(k) plan fees more transparent to participants and beneficiaries, which would be accomplished by imposing substantial new disclosure requirements on 401(k) plan administrators. Chairman Miller's committee has exclusive jurisdiction over the bill as introduced, but House Ways and Means Committee Chairman Charlie Rangel (D-NY) has suggested his committee plans to be involved with this issue.

Disclosure, Disclosure, Disclosure

The driving force behind Chairman Miller's bill is the concern that 401(k) plan participants generally do not have enough information about their plans' investment options -- and especially about the various costs and fees associated with those options -- to make informed investment decisions. H.R. 3185 would address that by requiring all individual account plans to give an "advance notice of available investment options" ("Investment Notice") and a "Benefit Statement" each year to participants and beneficiaries who can decide how to invest their account balances.

The Investment Notice would have to be given to participants at the time they join the plan, and thereafter at least 15 days before the beginning of each plan year and at least 15 days before the effective date of any material change in the plan's investment options. The Investment Notice would have to include the following information for each available investment option:

The Investment Notice also would have to include a statement explaining that fees are not the only relevant consideration when choosing among a plan's investment options. The Investment Notice would have to counsel participants to make their investment decisions based on other "key factors," including historical rates of return and the level of risk associated with each option. But that guidance would be juxtaposed against the Investment Notice's required "fee menu," which would consist of "a menu of the potential service fees that could be assessed against the account of the participant or beneficiary with respect to the plan year."

The fee menu would have to provide information relating to the following three categories of fees:

The fee menu also would have to describe potential conflicts of interest with respect to any service providers or other parties-in-interest receiving these fees.

The Benefit Statement would have to be provided to participants and beneficiaries no more than 90 days after the close of each plan year. Each participant's or beneficiary's Benefit Statement would have to disclose, for the preceding plan year, the following information:

The Benefit Statement may -- but would not be required to -- include information about historical returns and risk levels for each investment option, as well as "the estimated amount that the participant needs to save each month to retire at age 65." Most plan sponsors and administrators understandably would be reluctant to provide estimates of how much participants need to save each month to retire at age 65 without some specific fiduciary protection, which H.R. 3185 would not provide.

How Would Plan Administrators Get the Information Needed to Comply?

Obviously, plan administrators will need help from their investment providers and other service providers in order to comply with the Investment Notice and Benefit Statement requirements. Chairman Miller's bill would not impose any mandates on service providers. Instead, it would force 401(k) plan administrators to use their powers as purchasers to extract the necessary information from their service providers. And it would require the Secretary of Labor to notify the Securities and Exchange Commission or other appropriate regulatory authority if it finds a service provider is engaging in a "pattern or practice" that precludes plan administrators from complying with these requirements.

Before entering into any contract with a service provider for services costing $1,000 or more, a 401(k) plan administrator would first be required to obtain a written statement ("Statement") from the service provider that --

The cost of services would have to be itemized and include the following information:

In cases where the service provider does not charge a fee for its services to the plan or plan sponsor, or the fees are discounted or subject to rebate, there may be charges against the individual accounts of participants and beneficiaries. If so, the Statement must disclose this.

Additionally, the Statement would be required to disclose any relationships the service provider has with the plan, the plan sponsor, or other service provider to the plan "for which the service provider receives a payment for services." Specific "conflicts" the service provider would have to disclose include the extent to which it uses its own proprietary investment products, and the extent to which it is paid for including certain investment options as part of a menu of investment options.

The Statement also would have to explain that participants may pay different share prices for mutual funds purchased inside and outside the plan due to the availability of different classes of shares.

Each contract between a 401(k) plan and service provider would have to require the service provider to provide an updated Statement at least annually. Additionally, the contract would have to require the service provider to provide an updated Statement within 30 days of any material change in the information provided in the Statement.

The plan administrator would be required to furnish copies of these Statements to any participant or beneficiary upon written request. Additionally, they will be obligated to post Statements to any Intranet web site the plan sponsor maintains (or the plan administrator maintains on behalf of the plan sponsor).

Estimates and Models

The bill would permit estimates to be used for certain purposes in Statements, Investment Notices, and Benefit Statements. However, estimates must be "reasonable and representative" and identified as "estimates." Also, any time an estimate is later determined to be materially incorrect, the plan administrator would be required to issue an amended document with the correct information "as soon as practicable."

H.R. 3185 would require the Department of Labor to issue Model Statements, Investment Notices, and Benefit Statements plan administrators could use to satisfy these requirements.

Mandatory Investment Option

Although the bill mostly focuses on disclosure, it also would require 401(k) plans that allow participants to direct investments to offer a "minimum" investment option. This minimum option would have to be "a nationally recognized market-based index fund" that "offers a combination of historical returns, risk, and fees that is likely to meet retirement income needs at adequate levels of contribution." The Department of Labor would be given the unenviable task of issuing guidance on this requirement.

Outlook

Chairman Miller almost certainly will move H.R. 3185 through his committee in the near future -- probably soon after Congress returns from its August recess. But Chairman Rangel of the Ways and Means Committee has his sights set on these issues as well. Shortly after Chairman Miller introduced his bill, Chairman Rangel announced the Ways and Means Committee would hold hearings on 401(k) fees later this year. The full House probably will not act on H.R. 3185 or any other 401(k) fee bill unless and until Chairmen Miller and Rangel agree on the appropriate legislative approach.

In the meantime, the Department of Labor is continuing to work on these issues. Thus, new regulations may become a reality before any new legislation is enacted.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.