401(k) Service Provider Proposal Will Improve Disclosure to Plan Fiduciaries, February 2008

Washington, DC, February 14, 2008 - The Institute has long believed that 401(k) service providers should give effective disclosure to 401(k) plan fiduciaries. A recent Labor Department rule proposal will establish a framework to ensure fiduciaries have the information necessary to fulfill their ERISA obligations.

Background
In December 2007, the Department of Labor proposed a regulation regarding the information that 401(k) and other plan service providers must disclose to plan fiduciaries, including the direct and indirect compensation the service provider will receive and certain information regarding possible conflicts of interest the service provider may have.

Specifically, a service provider would be required to disclose the services to be provided, the compensation or fees received; and the manner of receipt of the fees or compensation.

The disclosure requirements would apply to three categories of service providers:

a service provider that provides services to the plan as a fiduciary;
a service provider that provides banking, consulting, custodial, insurance, investment advisory, investment management, recordkeeping, securities or other brokerage, or third-party administration services; and
a service provider that receives indirect compensation for providing accounting, actuarial, appraisal, auditing, legal, or valuation services to the plan.

ICI Position
ICI wholeheartedly supports the objective of the proposal, but recommends clarifications and modifications to improve the regulation and ensure that the rules will provide meaningful disclosure to plans. ICI believes:

Disclosure to plan fiduciaries should be concise, understandable and relevant. The Department should seek to avoid "disclosure overload" that will inundate fiduciaries and impose unnecessary costs that ultimately are borne by plans and participants.
Disclosure rules should provide clarity to recordkeepers and other service providers on what disclosure is required of them. A service provider must know what information the Department expects to be provided, and must be in a position to provide the information.
The disclosure rules should work consistently with existing securities law requirements. The Department should not require more information with respect to investing in an investment company than is already provided in the fund disclosure documents available to all investors.

In addition, ICI urges the Labor Department to clarify that service providers to investment companies are not service providers to plans, and thus covered by the regulation. ICI notes that funds engage an investment adviser to manage the fund and broker-dealers to execute the fund's portfolio trades. Funds also use other services in the Department's enumerated list, including banking, consulting, custody, insurance, recordkeeping, accounting, auditing, legal and valuation services. However, it has been the long-standing position of the Department of Labor that service providers to investment companies are not parties in interest because they are not providing services to a 401(k) plan and because the assets of the fund are not assets of the plan. In addition, funds already are comprehensively regulated under the Investment Company Act of 1940 and other securities laws and provide extensive disclosure under SEC rules.

If DOL believes that this regulation must require that fiduciaries receive information on the costs of plan investments, this obligation should be placed on someone with a contract with the plan, such as a recordkeeper who offers, as part of its service, access to investment options. With respect to funds, ICI believes recordkeepers should not be required to obtain and provide information beyond that contained in the fund disclosure documents available to all investors.

ICI also makes a number of recommendations to narrow the breadth of DOL's proposed conflict of interest disclosure to focus on information that will be useful to fiduciaries. To give employers and service providers sufficient time to comply with the rules, the letter also recommends that DOL delay the rules' effective date from the proposed 90 days after the rule's enactment to at least 12 months after final rules are issued.

In a separate letter, ICI comments on a class exemption DOL proposed to provide relief for plan fiduciaries in limited circumstances. The letter recommends that to the extent service providers must rely on information provided by others to satisfy the disclosure obligations, the class exemption should be available if the information cannot be obtained despite reasonable efforts.