Statement of the
Investment Company Institute

On “H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act of 2007”

Submitted to the Committee on
Education and Labor
U.S. House of Representatives

October 4, 2007

The Investment Company Institute1 welcomes the interest of Chairman Miller and the House Education and Labor Committee in enhancing disclosure in 401(k) plans and appreciates the opportunity to provide its views in connection with this hearing on H.R. 3185, the “401(k) Fair Disclosure for Retirement Security Act of 2007.” The Institute has long supported effective disclosure to participants in individual account plans and the employers who sponsor those plans.2 Mutual funds currently provide the most complete disclosure of any investment product available in 401(k) plans and the Institute has extensively studied what information is useful to and used by investors.

Chairman Miller has been open in soliciting comments on H.R. 3185 and we value the opportunity to offer constructive input as the Committee explores these issues.

The defined contribution system of 401(k) and similar plans has been a huge success. As of 2006, Americans have saved $4.1 trillion in private defined contribution plans, and another $4.2 trillion in IRAs. (Estimates suggest about half of all IRA assets originate from 401(k) and other employer plans.) Around half of all of the assets in defined contribution plans and IRAs are invested in mutual funds.3 

Collaborative research between the Employee Benefit Research Institute (EBRI) and the Institute demonstrates that participants generally make sensible choices in allocating their investments4 and that a full career with 401(k) plans produces adequate replacement rates at retirement.5 Institute research also suggests that plan participants and plan sponsors are cost conscious when selecting mutual funds for their 401(k) plans. On an asset-weighted basis (that is, taking into account where 401(k) participants concentrate their assets), the average asset-weighted expense ratio for 401(k) stock mutual fund investors was 0.74 percent, half of the simple average stock mutual fund expense ratio in 2006 (1.50 percent).6 

The biggest challenge in ensuring adequate retirement security for all Americans lies in encouraging workers to contribute and encouraging employers to offer a workplace plan. Disclosure reform should seek to improve the 401(k) system without imposing burdens, costs and liabilities that deter employers from offering plans. For these reasons, we urge the Committee to proceed carefully as it considers specific changes to the 401(k) disclosure regime.

Initiatives to strengthen the 401(k) disclosure regime should focus on the decisions that plan participants and sponsors must make and the information they need to make those decisions. The purposes behind fee disclosure to plan sponsors and participants differ. Participants have only two decisions to make: whether to contribute to the plan (and at what level) and how to allocate their account among the investment options the plan sponsor has selected. Disclosure should help participants make those decisions. Voluminous and detailed information about plan fees could overwhelm the average participant and could result in some employees deciding not to participate in the plan. On the other hand, plan sponsors, as fiduciaries, must consider additional factors in hiring and supervising plan service providers and selecting plan investment options. Information to plan sponsors should be designed to meet their needs effectively.

Comments on H.R. 3185

Disclosure to plan sponsors should provide information that allows them to fulfill their fiduciary responsibilities. ERISA requires that plan fiduciaries act prudently and solely in the interest of plans and participants. Plan assets can only be used for the exclusive purpose of providing benefits and defraying reasonable expenses of administering plans. ERISA’s prohibited transaction rules require that a contract with a service provider be for necessary services and provide only reasonable compensation. The Institute has consistently supported efforts to ensure that plan sponsors have the information they need as fiduciaries to select and monitor service providers and review the reasonableness of plan fees.7 The Institute’s views on disclosure to plan sponsors are set out in greater detail in the attached testimony we recently presented to the ERISA Advisory Council.

H.R. 3185 would require plan sponsors to obtain very detailed fee and financial relationship information from plan service providers. We recommend instead that the requirements be streamlined. In our view, plan sponsors should obtain information from service providers on the services that will be delivered, the fees that will be charged, and whether and to what extent the service provider receives compensation from other parties in connection with providing services to the plan. These payments from other parties, commonly called “revenue sharing,” often are used in bundled and unbundled service arrangements to defray the expenses of plan administration.

We also recommend that a service provider that offers a number of services in a package be required to identify each of the services and total cost but not to break out separately the fee for each of the components of the package. If the service provider does not offer the services separately, requiring the provider to assign a price to the component services will produce artificial prices that are not meaningful. In today’s competitive 401(k) market, bundled and unbundled providers compete effectively for plan business. This healthy competition has helped spur innovation in 401(k) products and services, such as new education and advice programs and target date funds. Forcing a 401(k) provider to quote separate prices for component services would constitute an inappropriate decision by policymakers to favor one business model over another. So long as plan fiduciaries can compare the total cost of recordkeeping and investments of a bundled provider with the total costs of recordkeeping and investments of an unbundled provider, they have the relevant information to discharge their fiduciary obligations.

The Institute supports disclosure of revenue sharing by requiring that a service provider disclose to plan sponsors information about compensation it receives from other parties in connection with providing services to the plan. This information will allow the plan sponsor to understand the total compensation a service provider receives under the arrangement. It also will bring to light any potential conflicts of interest associated with revenue sharing payments, for example, where a plan consultant receives compensation from a plan recordkeeper.

Allocations among affiliated service providers are not revenue sharing. When services are provided by affiliates of the service provider, a plan sponsor should understand all the services that will be provided and the aggregate compensation for those services. The service provider should not be required to disclose how payments are allocated within the organization. These allocations are not market transactions and any pricing of these transactions will be artificial, and, thus, of little value. Disclosure of allocations within a firm will not inform the plan sponsor of additional compensation retained by the firm and will not inform the plan sponsor of a potential conflict that is not already apparent given the affiliation of the entities.

Disclosure to plan participants should be simple and focused on key information. Participants should receive the following key pieces of information for each investment product offered under the plan:

  • Types of securities held and investment objective of the product
  • Principal risks associated with investing in the product
  • Annual fees and expenses expressed in a ratio or fee table
  • Historical performance
  • Investment adviser that manages the product’s investments

This list is informed by research on what information investors actually consider before purchasing mutual fund shares.8 The research also found that investors find a summary of information more helpful than a detailed document. This basic information should be provided on all investment options available under the plan, regardless of type.9 The need for cost-effective, simple disclosure focusing on the key information participants need to make informed choices enjoys broad support, as reflected in the attached joint recommendation by 12 trade associations to the Department of Labor.10 

ERISA disclosure rules should encourage and facilitate electronic delivery of investment information to participants. Plans should be allowed to provide online disclosure for every investment option for those employees who have reasonable access to the Internet.

Fees and expenses are only one piece of necessary information. While the fees associated with a plan’s investment options are an important factor participants should consider in making investment decisions, no participant should decide whether to contribute to a plan or allocate his or her account based solely on fees. In many plans the lowest fee option is a money market fund or other low-risk investment because these funds are the least costly to manage. It is not appropriate for most participants to invest solely in these relatively lower return options.11 

H.R. 3185 would require extensive disclosure to participants at enrollment and in annual statements. We do not believe this type of extensive disclosure is effective. Instead, participant disclosure should be short and concise and focused on the key information, described above, that participants need to make informed decisions in allocating their accounts. This is the approach the SEC is taking in developing a new streamlined disclosure document for mutual funds that easily could be adapted for all 401(k) investment products.12 

The SEC’s experience in developing mutual fund disclosure requirements is relevant also with respect to two other matters covered in H.R. 3185. First, H.R. 3185 would require the disclosure to sponsors and participants of the trading costs of a mutual fund or other collective fund used as a 401(k) plan investment. The SEC has repeatedly examined how best to disclose a mutual fund’s “trading costs”13 and has determined that the fund’s turnover ratio is the best proxy for the trading costs of the fund. The turnover ratio can be easily calculated by funds, is easily understood by investors and is readily comparable among funds. It is expected that the SEC will include the fund portfolio turnover ratio as a prominent element of the new mutual fund profile it is developing. We recommend that any ERISA requirement to provide information to plan participants or sponsors about trading costs of pooled accounts use the portfolio turnover ratio as the appropriate proxy.

Second, H.R. 3185 would require that plans translate asset-based fees of plan investments into dollar amounts. The SEC concluded in 2004 that the most comparable and cost-effective way to give shareholders an understanding, in dollar terms, of the implications of asset-based fees on their account was to require a fee example in shareholder reports showing the fee paid on each $1,000 invested.14 More complex dollar disclosures simply impose unnecessary costs and would not facilitate comparability. In 401(k) plans these costs would generally be borne by participants. We recommend that any ERISA requirement to provide participants with disclosure about the impact of fees on their accounts use a similar hypothetical example.

Congress should not mandate a 401(k) plan’s investment line-up. H.R. 3185 would require a 401(k) plan to offer an index fund meeting requirements specified in the bill. The Institute is concerned with mandating in federal law that 401(k) plans offer a particular type of investment option. Congress should not substitute its judgment for investment experts and mandate investment choices properly reserved to plan sponsors as fiduciaries. It also should not endorse one type of investment strategy (indexing) over another (active management). This represents a significant departure from the basic fiduciary structure of ERISA and the Institute is concerned about the precedent this provision would set.

* * * *

The mutual fund industry is committed to meaningful 401(k) disclosure, which is critical to ensuring secure retirements for the millions of Americans that use defined contribution plans. We thank the Committee for the opportunity to submit this statement and look forward to the opportunity for continued dialogue with the Committee and its staff.


Institute Policy Statement on Retirement Plan Disclosure (January 30, 2007)

Institute Statement to ERISA Advisory Council (September 20, 2007)

Joint Trade Association Recommendations on Fee and Expense Disclosures to Participants in Individual Account Plans (July 24, 2007)

Institute Comment Letter to Department of Labor on Fee Disclosure RFI (July 20, 2007)


1  Institute members include 8,889 open-end investment companies (mutual funds), 675 closed-end investment companies, 471 exchange-traded funds, and four sponsors of unit investment trusts. Mutual fund members of the Institute have total assets of approximately $11.339 trillion (representing 98 percent of all assets of U.S. mutual funds); these funds serve approximately 93.9 million shareholders in more than 53.8 million households.

2  Attached to the testimony is a Policy Statement on Retirement Plan Disclosure adopted by the Institute Board of Governors in January 2007 that reaffirms and chronicles the Institute’s long record in support of better disclosure.

3  Brady and Holden, The U.S. Retirement Market, 2006, ICI Fundamentals, vol. 16, no. 3 (July 2007).

4  For example, in 2006, participants in their 20s allocated 59.7 percent of their accounts to pooled equity investments and company stock, and only 18.4 percent to GICs and other fixed-income investments. Participants in their 60s allocated 35.6 percent to GICs and other fixed-income investments. See Holden, VanDerhei, Alonso, and Copeland, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2006, ICI Perspective, vol. 13, no. 1, and EBRI Issue Brief, Investment Company Institute and Employee Benefit Research Institute, August 2007. The 2006 EBRI/ICI database contains 53,931 401(k) plans with $1.228 trillion in assets and 20.0 million participants.

5  See Holden and VanDerhei, Can 401(k) Accumulations Generate Significant Income for Future Retirees? and The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement, ICI Perspective and EBRI Issue Brief, Investment Company Institute and Employee Benefit Research Institute, November 2002 and July 2005, respectively.

6  Holden and Hadley, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2006, ICI Fundamentals, vol. 16, no. 4 (September 2007).

7  For example, see Statement of the Investment Company Institute on Disclosure to Plan Sponsors and Participants Before the ERISA Advisory Council Working Groups on Disclosure (September 21, 2004).

8  See Understanding Investor Preferences for Mutual Fund Information, Investment Company Institute (2006).

9  As described in more detail in the attached Institute comment letter to the Department of Labor, disclosure of this information is appropriate for mutual funds, insurance separate accounts, bank collective trusts, and separately managed accounts. The same key pieces of information are relevant and should be disclosed for fixed-return products, where a bank or insurance company promises to pay a stated rate of return. In describing fees and expenses of these products, for example, the disclosure should explain that the cost of the product is built into the stated rate of return because the insurance company or bank covers its expenses and profit margin by any returns it generates on the participant’s investment in excess of the guaranteed rate of return. In describing principal risks of these products, the summary should explain that the risks associated with the guaranteed rate of return include the risks of interest rate changes, the long-term risk of inflation, and the risks associated with the product provider’s insolvency.

10  Also attached is the Institute’s comment letter to the Department of Labor regarding improvements to participant disclosure.

11  In 2006, the asset-weighted average total mutual fund expense ratio for money market funds held in 401(k) plans was 0.43 percent, compared with 0.56 percent for bond mutual funds and 0.74 percent for stock mutual funds. See Holden and Hadley, supra note 6. In plans offering investment in employer stock, the employer stock option fund may be the lowest fee option because essentially no active investment management is involved, but it also would not be appropriate for participants to invest solely in one security. This point is made in the Department of Labor’s publication for participants, Taking the Mystery Out of Retirement Planning, page 11.

12  See Statement of the Securities and Exchange Commission Before the House Financial Services Committee (June 26, 2007).

13  The trading costs of a pooled investment product such as a mutual fund, collective trust, or insurance company separate account include not only brokerage commissions, but also costs that cannot be quantified or expressed with accuracy, including bid-ask spreads and “market impact” costs.

14  See Securities and Exchange Commission, Final Rule, Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, 69 Fed. Reg. 11244 (March 9, 2004).