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CCH® PENSION AND BENEFITS — 10/10/08

Industry groups seek modifications to proposed fee disclosure regs

The ERISA Industry Committee (ERIC), the American Society of Pension Professionals and Actuaries (ASPPA) and the Council of Independent 401(k) Recordkeepers (CIKR), representing plan sponsors, service providers and recordkeepers, have submitted comments to the Department of Labor (DOL) outlining the changes they seek to the regulations proposed on July 23, 2008 regarding the disclosure of plan and investment-related information to participants in participant-directed plans (CCH Pension Plan Guide ¶20,537O).

Postponement of effective date sought

All three organizations are seeking a 12-month extension of the January 1, 2009 effective date of the proposed regulations. ASPPA and CIKR are of the opinion that the regulations could become final no earlier than November 3, 2008, leaving only 58 working days prior to the beginning of the 2009 plan year within which to modify systems and procedures to implement the proposed regulations’ disclosure requirements, thus placing an unreasonably high cost on service providers. ERIC states that some information needed for disclosure is controlled by third parties and not readily available to plan fiduciaries. They note that plan fiduciaries, working with outside experts and third-party administrators, will have to amend plan and trust documents, develop new processes to collect and assemble performance data and fee and expense information, negotiate with external managers of unregistered investment funds to make sure that they will provide required information in an appropriate format, identify and evaluate performance benchmarks, and revise benefit statements and summary plan descriptions. ERIC argues that, without a 12-month extension, providers would be severely strained by having to do this kind of compliance work on thousands of plans, with millions of participants, simultaneously. ASPPA and CIKR presented one study which estimated that, solely due to a condensed 58-day timeframe, costs of compliance would be 30%-40% higher than would compliance implemented over a one-year period.

Implication of pre-existing duty

The three groups object to language in the proposed regulations preamble which implies that, even absent the proposed regulations, ERISA §404(a) imposes a duty to disclose to participants “information necessary to carry out their account management and investment responsibilities in an informed manner.” They argue that the proposed regulation creates new disclosure obligations that have not applied to plan fiduciaries in the past, and they fear that any implication otherwise will encourage litigation. They urge the DOL to modify the preamble language to specify that the disclosure requirement of the regulation is prospective only and that no inference should be drawn that a failure to make the disclosures in the past constitutes a fiduciary breach.

Extent of disclosure duty

ERIC argues that the DOL has no authority to impose strict liability for a fiduciary’s breach of the new rules. Instead, they argue, a fiduciary should only be liable if their failure to disclose required information results in a loss to the plan. ERIC also wants the final regulations to make clear that fiduciaries cannot be held responsible for erroneous information furnished by others unless the fiduciary is aware of the error and fails to take reasonable measures to correct it.

ERIC also objects to language in the proposed regulations which state that the disclosures do not relieve a fiduciary of its duty to prudently to select and monitor service providers, designated investment managers, and designated investment alternatives under a plan. ERIC is concerned that the term “monitor” could be misinterpreted to imply that a fiduciary is required to keep such parties under continuous supervision. ERIC urges the use of the term “periodically review” in place of “monitor.”

Timing, manner of disclosures

Noting that the proposed regulations require initial disclosures “on or before the date of plan eligibility,” ERIC notes that some participants do not enroll as soon as they are eligible to do so. ERIC argues that fiduciaries should not be required to make initial disclosures before the participant enrolls in the plan. For plans with automatic enrollment, ERIC’s position is that initial plan and investment disclosures should not be required until an account is established in the participant’s name, even though this is later than the date required for providing a qualified default investment alternative (QDIA) notice. ERIC also argues that ERISA’s definition of “participants and beneficiaries” includes those who are or may become entitled to benefits. ERIC wants the proposed regulations’ requirement for annual disclosures to apply only to plan participants and beneficiaries, not other employees who are eligible to participate but who have chosen not to enroll.

For electronic disclosures, ERIC, ASPPA and CIKR want rules, similar to proposals by the Securities and Exchange Commission (SEC), where a participant’s affirmative assent would not be required for electronic delivery of disclosure documents. Instead, the participant would have to affirmatively request hard copies of disclosures.

Regarding investment performance comparisons with benchmarks, ERIC argues: 1) that this should not be required when no relevant benchmark is available, 2) that fiduciaries should be permitted to select from a wider range of benchmarks, and to measure characteristics other than the rate of return, and 3) fiduciaries should be able to use appropriate customized benchmarks in place of “an appropriate broad-based securities market index” as proposed.

Bundling

ASPPA and CIKR are seeking a uniform disclosure requirement without regard to whether the service providers to a plan are bundled or not. They argue that the effect of the proposed regulations, under which administrative costs must be separately disclosed only “to the extent not otherwise included in investment-related fees and expenses” will be to require administrative cost disclosures by unbundled providers but not bundled providers. ASPPA and CIKR recommend that the disclosure of administrative costs should be on the same basis as disclosure of investment costs, as a percentage of plan assets, and required only on an annual basis.

Testifying before the Senate Health, Education, Labor, and Pensions (HELP) Committee regarding the fee disclosure proposed regulations, Olena Berg Lacy of the Pension Rights Center, a former head of Employee Benefits Security Administration (EBSA), also expressed concerns regarding bundling. In her view, the proposed regulations do not go far enough because they do not require disclosure of plan administration fees in cases where plan administration fees, individual participant services fees and investment management fees are bundled together. Such aggregated fees make it difficult to monitor the reasonableness of fees, and may disguise potential conflicts of interest, Lacy testified. Lacy also expressed the concern that if disclosure was only required at the aggregate, or bundled, level, plan fiduciaries might be led to believe that their duty to examine fees only extended to the level of disclosure required by the regulations, when in actuality their duty extends beyond that to uncovering conflicts of interest.

Disclosure frequency

ASPPA and CIKR urge the elimination of the quarterly administrative cost disclosure requirement, believing such information would not reflect true costs, would be misleading for participants, and would expose service providers to fiduciary breach claims if the data provided is incorrect. They propose instead annual reporting of all actual costs affecting participants’ account balances, reflecting both investment-related and administrative costs. They further advocate permitting as an alternative, the disclosure of plan-level expense information in the Summary Annual Report (SAR).

Individual brokerage accounts

ASPPA and CIKR note that in the proposed regulations, investment-related disclosures are not required of individual brokerage accounts. Thus a participant-directed plan that provides only for individual brokerage accounts can avoid investment-related disclosures altogether. Concerned that this type of plan is inappropriate for all but the most sophisticated participants and that the absence of any required disclosures might encourage widespread adoption of this investment approach, they ask the DOL to impose additional disclosure requirements on such plans, such as a disclosure that investments offered through those vehicles have not been affirmatively selected by the plan fiduciaries and will not be monitored.

DOL view

Bradford P. Campbell, Assistant Secretary of Labor, in written testimony submitted to the Senate HELP Committee on September 17, 2008, expressed his concern that pending legislative action regarding 401(k) disclosures could disrupt the Department of Labor’s ongoing efforts to regulate disclosures.

“The regulatory process is well-suited to resolving the many technical issues arising as we seek to strike the proper balance in providing participants with cost effective, concise, meaningful information,” he stated. He specifically opposed legislation which would mandate very detailed and costly disclosure documents because “excessively detailed disclosures are likely to be ignored by participants.” He also expressed opposition to proposals which would mandate specific investment options in plans.

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