Statement of Paul Schott Stevens
President and CEO
Investment Company Institute

Appropriateness Of Retirement Plan Fees

Hearing Before the Committee on Ways and Means
United States House of Representatives 

October 30, 2007

Table of Contents

Growth in Retirement Savings
Critical Role of Mutual Funds
Ability of the 401(k) System to Provide Americans' Retirement Security
Decisionmaking by Participants and Employers

Current Gaps in Disclosure Rules
Efforts Underway to Improve Disclosure Rules 

Proposals to Favor One Business Model

Oral Statement

Thank you, Chairman [Rangel], Congressman [McCrery], and members of the Committee. I am pleased to take part in today's hearing on behalf of the Investment Company Institute, the national association of US mutual funds.

Mutual funds have helped foster the growth and success of the defined contribution retirement system. They manage more than half of the $4.1 trillion that Americans have invested in 401(k) and other DC plans. For more than two decades, funds have sought to improve the services and investment options available to retirement savers. And ICI has advocated a regulatory framework that best serves America's workers and employers.

Today, I'd like to cover three topics:

First, I want to emphasize, based on our research and that of others, that the 401(k) system shows every sign of success. It is living up to its promise -- and it will be even better as automatic enrollment and other reforms take hold.

Second, I will discuss how we need to further improve the 401(k) system by addressing gaps in current disclosure.

Finally, I will discuss the servicing of 401(k) plans and urge that Congress resist calls to dictate one business model for 401(k) service providers over another.

With respect to the success of the 401(k), one must bear in mind that this system is only 26 years old. No worker in America has enjoyed a full career with 401(k) plans. But the system does warrant the confidence that American workers and businesses are placing in it.

Our organization is a leading center of research on the 401(k) system. With the Employee Benefit Research Institute, we have developed the nation's largest database on 401(k) accounts. As outlined in my written testimony, we have used it to analyze the savings power of 401(k) plans, how workers use their accounts, and how they allocate their investments. We also have used this database to project how today's young workers will fare when they retire. Our projections: based on typical career paths and worker behavior, participants at all income levels can expect 401(k) savings to replace a substantial portion of pre-retirement income.

All of our research indicates that 401(k) plans are working. Can they work even better? Yes. More effective disclosure practices would help -- and this is something we have been urging since the mid-1970s. It is high time we close gaps in disclosure rules and provide clearer information to workers and employers.

Extensive research on investor behavior indicates that workers should receive a clear, concise summary of five items for each of the investment options available under a 401(k) plan. These items include:

Of all the investment options available in 401(k) plans, mutual funds provide the most complete disclosure -- including all of these items and much more. But required disclosure of this kind should not be limited to mutual funds. It should embrace every investment option available to workers in all defined contribution plans.

Fees are important and they claim much of the attention in today's debate. It is a further indication of the success of the 401(k) system that workers investing in mutual funds have concentrated their assets in lower cost funds. On average, 401(k) participants paid less than three-quarters of one percent in mutual fund expenses in 2006.

But fees are not the whole story. That's why a more complete approach to disclosure is vitally important. Focusing on fees alone could lead workers to make decisions that will hurt their retirement prospects. The low-cost option in the Enron 401(k) plan undoubtedly was Enron's own stock. But a focus on fees can also cause investors to take too little risk. Money market mutual funds and stable value funds likewise are low-cost options but not ones best suited to a long-term investment horizon.

Employers who sponsor plans also need effective disclosure. They should be informed of all payments that a service provider receives, whether directly from plan assets or indirectly from third parties. This will assist them, as fiduciaries, to judge the reasonableness of total fees and identify any potential conflicts of interest.

Finally, with respect to the servicing of 401(k) plans, a highly competitive market has given rise to different business models. In some plans, the employer itself, or a consultant on its behalf, assembles the needed components -- record keeping, investment management, participant services, compliance, and so forth. In other plans, the employer engages a full-service provider to supply all these services.

A recent survey by Deloitte Consulting found that three-quarters of plan sponsors used the full-service, or "bundled," approach. This approach has many advantages: the employer faces a lower cost of contracting, gains easy access to additional services, and can hold one party accountable for the quality of service.

Some 401(k) record keepers bundle a part, but not all, of the services required by a plan. They want Congress to legislate their business model for the entire industry. They are seeking a law to require full-service providers to disclose separate "prices" for record keeping and investment management -- even if both services are offered for a single fee. This is akin to a travel agent that only books airfare lobbying to require its packaged-tour competitors to break out hotel, transfers and other charges separately. We join numerous other organizations concerned about the success of the 401(k) system in urging you to reject this special pleading.

The Investment Company Institute welcomes the Committee's interest in these issues. We look forward to assisting this Committee and the Congress on these and other issues as you work to improve the nation's retirement system. I look forward to your questions.

Introduction
My name is Paul Schott Stevens. I am President and CEO of the Investment Company Institute, the national association of U.S. investment companies,¹ which manage about half of 401(k) and IRA assets. The Institute has long called for effective disclosure to participants in individual account plans and the employers that sponsor those plans. I want today to reiterate the mutual fund industry's support for rules giving participants and employers the information they need for the decisions they are required to make. We are pleased to testify before the Ways and Means Committee as it considers these important matters.

My testimony today will be as follows. First I will address how research looking at 401(k)s from various angles demonstrates the success and bright future of the 401(k) system. I will show that confidence in the 401(k) system is warranted and that under current regulations employers² and participants are able to make reasonable decisions in the areas in which they are called upon to act. I will then discuss how we can make the 401(k) system even better by addressing the gaps in current 401(k) disclosure and I will recommend principles that should guide reform. These principles, briefly stated, are that disclosure to participants should be simple, straightforward and focused on the key information, including but not limited to fees and expenses. This disclosure should apply to all investment products offered in 401(k) plans in a way that allows comparability. Finally, disclosure by service providers to employers should focus on the information employers need to fulfill their obligations as plan fiduciaries. Congress should not mandate rules to favor one business model over another.

Success of the 401(k) System
Growth in Retirement Savings
Any discussion of the 401(k) system should begin by recognizing how successful 401(k) plans have been in helping Americans save for retirement. Assets in the U.S. retirement system -- all the tax-advantaged investments earmarked for retirement that supplement Social Security -- have steadily increased as a share of household financial assets, from 12 percent of household financial assets when ERISA was passed in 1974 to nearly 40 percent at year-end 2006.³ 401(k) plans, which have been around only 26 years, numbered 30,000 in 1985 and have grown to almost half a million plans (450,000) in 2006.⁴ In 1985, there were about 10 million active participants compared with 50 million active participants now. 401(k) plans, which are now the predominant defined contribution plan, held $2.7 trillion in assets in 2006, which surpasses the assets held in all private defined benefit plans. The $2.7 trillion held in 401(k) plans does not count 401(k) assets that have been rolled into IRAs. In fact, estimates suggest about half of the $4.2 trillion in IRAs in 2006 came from 401(k) and other employer-sponsored retirement plans.

Critical Role of Mutual Funds
Mutual funds play an important role in 401(k) and similar defined contribution plans. At year-end 2006, slightly more than half of the $4.1 trillion held in all defined contribution plans -- which include 401(k), 403(b) and 457 plans -- were invested in mutual funds.

Defined Contribution Plan Assets and Amounts Held in Mutual Funds Billions of dollars, year-end, 1994-2006

e=estimated *Other defined contribution plans include Keoghs and other defined contribution plans (profit-sharing, thrift-savings, stock bonus, and money purchase) without 401(k) features. Note: Components may not add to the total because of rounding. Sources: Investment Company Institute, Federal Reserve Board, National Association of Government Defined Contribution Administrators, and American Council of Life Insurers

Overall, mutual funds represent about 55 percent of the assets in 401(k) plans, 53 percent of 403(b) plan assets, and 45 percent of 457 plan assets. These percentages have grown significantly over time relative to most other investment products. Both retirement savers and employers have come to rely on mutual funds because of the easy access to professional management, diversification, transparency, and liquidity.⁵ The remaining assets in defined contribution plans are held primarily in pooled investment vehicles that are similar in many respects to mutual funds, including insurance company separate accounts, collective trusts, and stable value funds. Separately managed accounts, guaranteed investment contracts, and employer stock also are often available in 401(k) plans.

Ability of the 401(k) System to Provide Americans' Retirement Security
Some observers of the 401(k) system question the capacity of 401(k) plans to provide adequate retirement security. Some also question whether employers, acting as plan fiduciaries, obtain sufficient information to fulfill their obligations to keep plan costs reasonable and whether plan participants are equipped to make reasonable investment decisions for their accounts. Research by the Institute and others shows that these fears are largely unfounded.

It is commonly reported that the median 401(k) account balance is about $19,000.⁶ Unfortunately, it is not commonly understood that the median account is not a meaningful number for assessing whether 401(k) savers will be prepared for retirement. By definition, the median account includes the newest and youngest participants (who are nowhere near retirement and whose accounts are understandably quite small) and those whose 401(k) accounts supplement a defined benefit plan. It does not account for employees who have 401(k) balances with both current and previous employers. Similarly, the median account balance does not reflect the $4.2 trillion held in IRAs. Finally, it is important to remember that the 401(k) system is still new enough that no one has had a full career with a 401(k) as the primary retirement savings vehicle.⁷ 

The Institute has undertaken extensive research on 401(k) plans. In a collaborative research effort, ICI and the Employee Benefit Research Institute (EBRI) created the largest and most representative repository of 401(k) account data. At year-end 2006, our database includes information on 20 million participants in almost 54,000 employer-sponsored 401(k) plans, holding $1.2 trillion in assets.⁸ The EBRI/ICI database, along with the extensive data we collect and analyze from mutual funds, allows us to examine the 401(k) system from many angles.

The 401(k) system warrants the confidence that Congress, employers, and American workers have placed in it. Even in today's workplace, where no one has had a 401(k) plan for a full career, the 401(k) system has demonstrated its savings power:

We also have examined in collaboration with EBRI whether a full career with 401(k) plans can produce adequate income replacement rates at retirement.¹² The EBRI/ICI 401(k) Accumulation Projection Model examines how 401(k) accumulations might contribute to future retirees' income based on decisions workers make throughout their careers. The model looks at participants of varying income levels, modeling future accumulations under a range of market outcomes and using typical (and often imperfect) individual behaviors. For example, among individuals who were in their late twenties in 2000, after a full career with 401(k) plans, the median individual in the lowest income quartile is projected to replace half of his or her income using 401(k) accumulations. Social Security replaces the other half for the median person in this quartile. The model also demonstrates that when workers move into jobs that do not offer a 401(k) plan, median replacement rates fall significantly -- by about half for workers in the lowest income quartile. In short, the worst thing that can happen to a worker is to be in a job that does not offer retirement savings plan coverage.

Decisionmaking by Participants and Employers
Our research suggests that under the current 401(k) regulatory system participants and employers have been able to make reasonable decisions in the areas in which they are called upon to act. Our research with EBRI has demonstrated that participants generally make sensible choices in investing their accounts. For example, older participants have a lower concentration in equities compared with participants in their twenties and a greater concentration in fixed-income securities.

401(k) Participants Asset Allocation Varies with Age Percent of assets, year-end 2006

*Includes mutual funds and other pooled investments. Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project

Research also suggests that both employers and participants are cost conscious when selecting mutual funds for their 401(k) plans. The Institute has combined our extensive research on trends in mutual fund fees with our tracking of 401(k) plan holdings of mutual funds.¹³ Our research studies mutual fund fees in 401(k) plans because comparable information for other products offered in 401(k) plans is not readily available.

We found that 401(k) savers tend to concentrate their assets in lower-cost funds. In 2006, the average stock mutual fund had an expense ratio of 1.50 percent. This is the simple average that does not reflect investment concentration: 77 percent of stock mutual fund assets in 401(k) plans were invested in funds with a total expense ratio of less than 1.00 percent at year-end 2006. On an asset-weighted basis, the average expense ratio incurred by all mutual fund investors in stock mutual funds was 0.88 percent. And the asset-weighted average expense ratio for 401(k) stock mutual fund investors was even lower: 0.74 percent. Similar results can be seen in each broad category of stock fund, as well as in bond funds. Overall, the asset-weighted average expense ratio across all mutual funds in 401(k) plans was 0.71 percent in 2006.¹⁴

There are several factors that contribute to the relatively low average fund expense ratios incurred by 401(k) plan participants.¹⁵ Employers, acting as plan fiduciaries, play a vital role in selecting and regularly evaluating the plan's investment line-up to ensure that each option's fees and expenses provide good value. Easy access to comparable and transparent mutual fund fee information helps employers and employees in selecting investments for their accounts.

Improving Disclosure
The employer-based 401(k) system has been a great success and has a bright future, but we also agree that it is time to ask whether we can build on the system to make it even better. Congress took a big step in the Pension Protection Act of 2006 by codifying into law the automatic, or autopilot, 401(k) plan, with appropriate default investments designed for long-term saving.¹⁶ In the Institute's view, the 401(k) system could be further strengthened with appropriate disclosure reform.

401(k) Mutual Fund Investors Tend to Pay Lower-Than-Average Expenses Percent of assets, 1996-2006

1The industry average expense ratio is measured as an asset-weighted average. 2The 401(k) average expense ratio is measured as a 401(k) asset-weighted average. Note: Figures exclude mutual funds available as investment choices in variable annuities and tax-exempt mutual funds. Sources: Investment Company Institute; Lipper; Value Line Publishing, Inc.; CDA/Wiesenberger Investment Companies Service; © CRSP University of Chicago, used with permission, all rights reserved (312.263.6400/www.crsp.com); Primary datasource; and Strategic Insight Simfund

Meaningful and effective disclosure to 401(k) participants and employers remains an Institute priority. In 1976 -- at the very dawn of the ERISA era -- the Institute advocated "complete, up-to-date information about plan investment options" for all participants in self-directed plans.¹⁷ We also have consistently supported disclosure by service providers to employers about service and fee arrangements.¹⁸ In January 2007, the Institute's Board of Governors adopted a Policy Statement on Retirement Plan Disclosure that reaffirms and chronicles the Institute's long record in support of better disclosure.¹⁹ The Policy Statement calls upon the Department of Labor to require clear disclosure to employers that highlights the most pertinent information, including total plan costs, and to require that participants in all self-directed plans receive simple, straightforward explanations about the key information on each of the investment options available to them, including information on fees and expenses.

Current Gaps in Disclosure Rules
Fundamentally, there are two gaps in the current 401(k) disclosure rules. First, the Department of Labor's rules produce unequal disclosure to participants. The Department of Labor's rules cover only those plans relying on an ERISA safe harbor (section 404(c)); no rule requires that participants in other self-directed plans receive investment-related information. In plans operating under the safe harbor, the information participants receive depends on the investment product. Participants receive full information on products registered under the Securities Act of 1933, such as mutual funds, because the Department requires that participants receive the full SEC-mandated prospectus. For other investment products, such as bank collective trusts and separately managed accounts, key information, including annual operating expenses and historical performance, is required to be provided only upon request and only if that information has been provided to the plan. This disclosure gap is particularly important because many 401(k) plans use pooled products that look and operate much like mutual funds, but which do not have disclosure requirements comparable to SEC requirements. The ERISA Advisory Council recently found that while mutual funds are the "easiest investment to understand," they have the "heaviest burden" when it comes to disclosure and "less regulated and harder to understand investments might not even provide information regarding fees and performance."²⁰

The second gap in current rules is that there is no specific requirement on service providers to disclose to an employer information on services and fees that allows the employer to determine the arrangement is reasonable and provides reasonable compensation. The Institute supports disclosure of payments a service provider receives directly from plan assets and indirectly from third parties in connection with providing services to the plan. Information on direct and indirect compensation allows employers to understand the total compensation a service provider receives under the arrangement. It also brings to light any potential conflicts of interest associated with receiving payments from another party, for example, when a plan consultant receives compensation from a plan recordkeeper.

Efforts Underway to Improve Disclosure Rules 
The Department of Labor is taking steps to enhance 401(k) plan disclosure. As Assistant Secretary Bradford Campbell testified before the House Education and Labor Committee and the Senate Aging Committee, the Department of Labor has a three-pronged regulatory agenda to improve fee disclosures to participants, plan fiduciaries, and the government.²¹ These projects, in various stages of regulatory development, are intended to close the disclosure gaps described above. In addition, both Chairman George Miller and Subcommittee Chairman Richard Neal have introduced legislation (H.R. 3185 and H.R. 3765, respectively) addressing disclosure in the 401(k) and defined contribution market.

Principles for Disclosure Reform
Initiatives to strengthen the 401(k) disclosure regime should focus on the decisions that plan participants and employers must make and the information they need to make those decisions. The purposes behind fee disclosure to employers 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, or focusing on fees to the neglect of other important information, such as investment objective, historical performance, and risks. On the other hand, employers, as fiduciaries, must consider additional factors in hiring and supervising plan service providers and selecting plan investment options. Information to employers should be designed to meet their needs effectively. Finally, disclosure reform should be carefully considered so as to avoid imposing unnecessary costs, which often are borne by participants.

1. Participants in all self-directed plans need simple, straightforward disclosure focusing on key information, including information on fees and expenses.
Our extensive research into the information that mutual fund investors prefer and use in making investment decisions tells us that shareholders do not consult fund prospectuses or annual reports, which they find too long and difficult to understand. This is especially true among shareholders with less education: 75 percent of mutual fund shareholders with less than a four-year college degree say that a mutual fund prospectus is very or somewhat difficult to understand.²² Overwhelmingly (80 percent), shareholders prefer a concise summary rather than a detailed description. In making a fund purchase, mutual fund shareholders take into account certain key factors, including the historical performance (69 percent of investors considered this), fund risk (61 percent), types of securities held by the fund (57 percent), and the fees and expenses (74 percent).

Based on this research, we believe that 401(k) participants should receive the following key pieces of information for each investment product available under the plan:

Participants also need information about the plan fees that they pay, to the extent those fees are not included in the disclosed fees of the investment products. Finally, participants should be informed of any transaction fees imposed at the time of purchase (brokerage or insurance commissions, sales charges or front loads) or at the time of sale or redemption (redemption fees, deferred sales loads, surrender fees, market value adjustment charges). Disclosure reform should also leverage cost-effective new technologies like the Internet.

Fees and expenses are only one piece of necessary information and must be disclosed in the context of other key information. The lowest fee option in many plans is the option with relatively low returns (such as the money market fund) or relatively higher risk (such as the employer stock) but it is not appropriate for most employees to invest solely in these options. For example, any disclosure of fees associated with employer stock also should describe the risks of failing to diversify and concentrating retirement assets in shares of a single company. In short, it is not enough to tell participants that fees are only one factor in making prudent investment decisions -- they must be shown this by presenting fees in context.

Streamlining disclosure to mutual fund investors to focus on key information is underway at the Securities and Exchange Commission.²³ The SEC expects to propose this fall a new summary mutual fund prospectus that will focus on the information investors need to know, in a form they will use. With half of defined contribution plan assets in mutual funds, any changes to the disclosure system for plan participants should be consistent with the summary prospectus that the SEC develops for mutual funds; otherwise, 401(k) investors will bear the costs of mutual funds operating under different disclosure regimes. Both the SEC and the Department of Labor have indicated that the new summary fund prospectus, the work of years of study by regulators and the investment management community, could serve as a model for disclosure of other products.

2. Disclosure should apply to all investment products regardless of type in a way that allows comparability.
Any disclosure reform must ensure that participants receive basic information that allows them to evaluate and compare all investment options available under the plan. Disclosure of the key information we recommend is appropriate for mutual funds, insurance separate accounts, bank collective trusts, and separately managed accounts. In discussing fees and expenses, for example, the disclosure for any of these options should disclose the operating expenses of the fund or account. In discussing the principal risks, the disclosure should explain the risks associated with the stated investment objectives and strategies.

The same key pieces of information also 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 fixed rate of return. In describing principal risks of these products, the summary should explain that the risks associated with the fixed rate of return include, for example, the risks of interest rate changes, the long-term risk of inflation, and the risks associated with the product provider's insolvency.

3. Employers should receive clear information about plan services and fees, including total costs, that allows them to fulfill their fiduciary duties.
Employers should receive 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 third parties in connection with providing services to the plan. These payments from third parties, sometimes inaccurately referred to as "revenue sharing" but which are really cost sharing, often are used to defray the expenses of plan administration. We support requiring their disclosure by service providers.

ERISA imposes clear responsibilities on employers, in their roles as fiduciaries, in entering into any service arrangement. Under ERISA section 404(a), fiduciaries must act prudently and for the exclusive purpose of providing benefits and defraying the "reasonable" expenses of administering the plan. Under section 408(b)(2), fiduciaries must ensure no more than reasonable compensation is paid for a contract for services. If a service arrangement does not meet these standards, section 4975(d)(2) of the Internal Revenue Code imposes an excise tax against the service provider. Effective disclosure by service providers to employers is essential to enabling employers to enter into and maintain reasonable 401(k) service arrangements.

While a wide variety of practices exist, many plans contract with a recordkeeper to receive both administrative services and access to an array of investment products from which plan fiduciaries construct the menu of investments offered under the plan. The recordkeeper is compensated for its services to the plan, in whole or in part, by asset-based fees paid in connection with the plan's investment choices, which can either be proprietary or third party investment products. The Department of Labor has stated that "many of these arrangements may serve to reduce overall plan costs and provide plans with services and benefits not otherwise affordable."²⁴

There are several reasons plans use asset-based fee arrangements. Using asset-based fees to cover administrative services effectively spreads the costs of acquiring necessary services over a shareholder or participant base. All mutual fund investors, whether in a 401(k) plan, IRA, or taxable account, experience "mutualization." Some costs of administering a mutual fund shareholder's account are relatively fixed, such as the costs of printing prospectuses, maintaining shareholder accounts, and sending shareholder statements. Because mutual funds charge asset-based fees, shareholders with larger accounts subsidize those with smaller accounts. Similarly, wrap fees in separately managed accounts or other brokerage accounts and M&E charges in insurance products mutualize certain costs in those products.

In plans, asset-based fees allow new participants and those with lower wages or smaller accounts to participate without their fixed share of administration costs falling disproportionately, as a percentage of account balance, on them.²⁵ Asset-based fee arrangements also help pay for plan start-up or service provider transition costs, which can be significant. To avoid the plan incurring all those expenses in the first year, asset-based fees allow a provider to recoup its expenses over several years as plan assets grow.

There are practical reasons why plans, especially smaller plans, contract with one party -- a recordkeeper -- to receive all the services the plan requires. Using a single full-service provider to obtain administrative services and access to plan investments eliminates the cost to an employer of dealing with and monitoring multiple providers, and provides a single responsible party for all aspects of the arrangement. A recent survey by Deloitte Consulting and others found that 75 percent of plan sponsors used a "bundled" arrangement.²⁶ In many of these arrangements, a service provider offers access for plan clients to its proprietary mutual funds, or bank or insurance products.

We recommend that a service provider that offers a number of services in a package be required to identify each of the services and the total cost, but not to break out separately the fee for each of the components of the package. If the service provider chooses not to offer services separately, requiring the provider to assign a price to the component services will produce artificial prices that are not meaningful to the employer in making comparisons. Many products and services are "bundles" of individual components that might not be offered separately at the same total price. So-called "package" vacation tours -- often including airfare, hotel, ground transportation and entertainment and amenities all for a single price -- are examples of bundled services. Components of the package are not separately priced, are more easily and conveniently secured as a group, and typically cost less in total than they would if purchased individually. Nonetheless, consumers can, and do, shop for vacations on an unbundled basis.

If a recordkeeper offers to provide participant accounting, compliance services, and participant communications in a single package, it should not have to attribute separate fees to those components. Similarly, if a provider offers proprietary investment products as well as recordkeeping, it should not be required to price these separately if they are offered as a package for a total cost that is disclosed.

In economic terms, products and services are bundled together because the provider believes it is efficient to do so, and it would not be efficient to track and disaggregate accurately the cost of any one component. Any attempt to "price" each component would be artificial. Mutual fund organizations are able to provide 401(k) administrative services efficiently in part because some of these services are similar to those they already provide to retail shareholders of their own funds.

Proposals to Favor One Business Model
One trade group whose members bundle many, but not all, of the 401(k) service components offered by other providers has asked Congress to mandate rules to favor its members' business model. The American Society for Pension Professionals & Actuaries (ASPPA), along with its subsidiary, the Council of Independent 401(k) Recordkeepers, has asked Congress to mandate that service providers offering proprietary investment options disclose to employers a price for recordkeeping and administration and a separate price for investment management, even if this "price" has to be generated artificially and thus will be of questionable accuracy.²⁷ This approach favors one business model -- firms that just bundle together recordkeeping and other administrative services -- over another business model -- firms that offer recordkeeping and administration as well as investment management services, by imposing additional disclosure burdens on the full-service model.

All 401(k) recordkeepers bundle together a variety of recordkeeping services, including transaction processing, participant statements, web access, and participant education. ASPPA's recommendation is not that Congress mandate unbundling the price for the wide variety of administrative services its members provide. Rather, ASPPA seeks unbundling of investment management expenses from administrative and recordkeeping fees by providers that offer proprietary products.

Numerous stakeholders, including those representing employer groups, service providers, and investment providers, have urged Congress not to mandate this unbundling.²⁸ This disclosure is unnecessary, artificial, and would favor one business model over another. The breakout of investment management and recordkeeping expenses is not required by ERISA. As the Department of Labor has made clear, the key for plan fiduciaries is to compare the total cost of recordkeeping and investments of one provider with the total costs of recordkeeping and investments of another provider or group of providers.²⁹

Conclusion
We applaud the Committee for examining this important topic and once again thank you for providing the Institute this opportunity to testify. We look forward to continuing to work with this Committee and its staff in these and other matters of importance to funds and their shareholders.

ENDNOTES

1 ICI 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 ICI have total assets of approximately $11.339 trillion (representing 98 percent of all assets of U.S. mutual funds).

2 For convenience, we refer to "employer" to mean the employer acting in its role as fiduciary to the plan.

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

4 U.S. Department of Labor, Employee Benefits Security Administration, Private Pension Plan Bulletin Historical Tables (March 2007); Cerulli Associates, "Retirement Markets, 2006," Cerulli Quantitative Update (2006).

5 For example, in 1994, only about 27 percent of 401(k) assets were invested in mutual funds. See Brady and Holden, supra note 3.

6 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.

7 Many more individuals in today's workforce will have career-long exposure to 401(k) plans. Academic research shows a trend towards greater participation, especially among younger age groups. The participant rate for workers between 25 and 29 increased from about 50 percent in 1984 to close to 85 percent in 2003. See Poterba, Venti, and Wise, New Estimates of the Future Path of 401(k) Assets, NBER Working Paper, No. 13083 (May 2007).

8 See Holden, VanDerhei, Alonso and Copeland, supra note 6.

9 Participants' loan activity is modest. In 2006, only 18 percent of 401(k) participants eligible for loans had taken one. On average the loans amounted to only 12 percent of the remaining account balance. See Holden, VanDerhei, Alonso and Copeland, supra note 6.

10 Investment Company Institute, Financial Decisions at Retirement, ICI Fundamentals, vol. 9, no. 6 (November 2000).

11 These percentages add to more than 100 percent because some respondents with multiple options chose to receive a partial lump-sum distribution with either a reduced annuity or reduced installment payments, or chose to defer receiving part of the proceeds. See Investment Company Institute, supra note 10.

12 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.

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

14 These expense ratios include any payments a fund makes to recordkeepers to defray the cost of 401(k) plan administration.

15 401(k) investors in mutual funds also tend to hold funds with below-average portfolio turnover, which also helps keep down the costs of investing in mutual funds through 401(k) plans. See Holden and Hadley, supra note 13.

16 Academic research demonstrates the power of automatic enrollment to increase participation rates, particularly among lower income workers. See Choi, James J., David Laibson, Brigitte Madrian, and Andrew Metrick, For Better or For Worse: Default Effects and 401(k) Savings Behavior, NBER Working Paper, No. 8651 (December 2001); and Madrian, Brigitte C., and Dennis F. Shea. The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, NBER Working Paper, No. 7682 (May 2000).

17 Letter from Matthew P. Fink, Associate Counsel, Investment Company Institute, to Morton Klevan, Acting Counsel, Plan Benefit Security Division, Department of Labor (June 21, 1976).

18 See Statement of Investment Company Institute on Disclosure to Plan Sponsors and Participants Before the ERISA Advisory Council Working Group on Disclosure, September 21, 2004.

19 See ICI Policy Statement: Retirement Plan Disclosure, January 30, 2007.

20 Report of the 2006 ERISA Advisory Council's Working Group on Prudent Investment Process.

21 See Written Testimony of Assistant Secretary of Labor Before the Committee on Education and Labor (October 4, 2007). See also Written Testimony of Assistant Secretary of Labor Before the Special Committee on Aging (October 24, 2007).

22 Investment Company Institute, Understanding Investor Preferences for Mutual Fund Information (2006). The Institute surveyed 737 randomly selected fund owners who had purchased shares in stock, bond, or hybrid mutual funds outside workplace retirement plans in the preceding five years.

23 See Statement of Securities and Exchange Commission Before the House Financial Services Committee (June 26, 2007). The SEC's efforts are consistent with efforts to streamline mutual fund disclosure globally; both Canada and the European Union have proposed to amend their relevant disclosure documents to focus on key information. See Joint Forum of Financial Market Regulators, Point of Sale Disclosure for Mutual Funds and Segregated Funds (Proposed Framework 81-406, June 2007) (Canada); Committee of European Securities Regulators, Consultation Paper on Content and Form of Key Investor Information Disclosures for UCITS (CESR/07-669, October 2007) (European Union).

24 Testimony of Robert J. Doyle, Director of Regulations and Interpretations, Employee Benefits Security Administration, Before the Working Group on Fiduciary Responsibilities Update and Revenue Sharing, Advisory Council on Employee Welfare and Benefit Plans (July 11, 2007).

25 For example, if a plan has $50 annual per-participant fixed cost and charges every participant the same $50 charge, a new or lower-paid participant with an account balance of only $1,000 would pay 5 percent of his or her account balance in administration fees in a year. A participant with an account balance of $100,000 would only pay 0.05 percent of his or her account balance. "Mutualizing" the fixed cost by charging, for example, every participant 0.1 percent of his or her account, can help encourage participation by new and lower-income workers.

26 Deloitte Consulting, LLP, International Foundation of Employee Benefit Plans and the International Society of Certified Employee Benefit Specialists, Annual 401(k) Benchmarking Survey 2005/2006 Edition.

27 See Testimony of Tommy Thomasson on behalf of American Society of Pension Professionals & Actuaries and the Council of Independent 401(k) Recordkeepers Before the U.S. House Education and Labor Committee (October 4, 2007).

28 For example, see Testimony of Lew Minsky on behalf of the ERISA Industry Committee, the Society for Human Resource Management, the National Association of Manufacturers, the United States Chamber of Commerce, and Profit Sharing/401k Council Of America Before the U.S. House Education and Labor Committee (October 4, 2007); Testimony of Robert G. Chambers on behalf of the American Benefits Council, the American Council of Life Insurers and the Investment Company Institute Before the U.S. Senate Special Committee on Aging (October 24, 2007).

29 The Department of Labor's model "401(k) Plan Fee Disclosure Form" encourages employers to ask about the services included in a bundled arrangement, and the total cost, but does not require that the "price" for each service be disclosed. The Department of Labor states in its just released "ERISA Fiduciary Adviser" interactive web tool: "In comparing estimates from prospective service providers, ask which services are covered for the estimated fees and which are not. Some providers offer a number of services for one fee, also called a `bundled' services arrangement, while others charge separately for individual services. Compare all services to be provided with the total cost for each provider." See www.dol.gov/elaws/ebsa/fiduciary/q4g.htm. See also "Meeting Your Fiduciary Responsibilities."