Statement of the Investment Company Institute

On H.R. 2269,
"The Retirement Security Advice Act of 2001"

Submitted to the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce
U.S. House of Representatives

July 17, 2002

The Investment Company Institute (the "Institute")¹ is pleased to submit this statement to the Subcommittee regarding H.R. 2269, "The Retirement Security Advice Act of 2001." The Institute strongly supports the enactment of H.R. 2269 and commends its sponsors and members of this Subcommittee and the Committee on Education and the Workforce for their interest in helping Americans plan more effectively for their retirement years.

The U.S. mutual fund industry serves the retirement savings and other long-term financial needs of millions of individuals. By permitting individuals to pool their savings in a diversified fund that is professionally managed, mutual funds play an important financial management role for American households. Mutual funds are also a significant investment medium for employer-sponsored retirement programs. As of year-end 2000, about 45 percent of all 401(k) plan assets were invested in mutual funds.² In addition to providing investment vehicles for participants in 401(k) and other defined contribution plans, mutual fund companies provide a full range of administrative services to these plans, including trust, recordkeeping and participant education services.

The Institute has long supported efforts to enable individuals to better manage their retirement assets. H.R. 2269 would further this goal by enabling pension plan participants to access sound investment advice from qualified financial institutions, while maintaining strict requirements to assure that participants are protected from imprudent and self-interested actors. These requirements include both full disclosure of any potential conflicts of interest as well as subjecting advice providers to strict fiduciary standards under ERISA. We therefore urge Congress to enact H.R. 2269 this year.

I. "The Advice Gap"
Many retirement plan participants that direct their own account investments, such as those in most 401(k) plans, seek investment advice when selecting investments in their plans. Today's pension laws, however, significantly and unnecessarily limit the availability of investment advice. Indeed, the Employee Retirement Income Security Act (ERISA)-which, at the time of its enactment in 1974, could not have contemplated the growth and popularity of participant-directed retirement plans-severely limits participants' access to advice from the very institutions with the most relevant expertise and with whom participants are most familiar. As a result, today, only 16 percent of all 401(k) participants have an investment advisory service available to them through their retirement plan.³ By contrast, more than half of "retail" mutual fund shareholders outside of the retirement plan context have used a professional adviser when making investment decisions.⁴ Clearly, an "advice gap" exists in the retirement market.

A. Participants Want Investment Advice
Participants consistently rate tools to make retirement planning easier and individual retirement planning assistance as "extremely important" features of their retirement plans.⁵ In fact, these services are substantially more important to them than other significant plan features, such as the availability of plan loans.⁶

As retirement assets grow, individuals naturally and appropriately feel the need to turn to a professional adviser for assistance. 401(k) plan participants had an average account balance at their current employer of $55,500, measured at year-end 1999. Individuals in their 60s with at least 30 years tenure at their current employer have average account balances in excess of $185,000.⁷ In addition, the increasing number of investment options offered under participant-directed retirement plans⁸ and the volatility that the markets recently have experienced further underscore participants' need for sound investment advice.

B. Current Law Inhibits the Delivery of Investment Advisory Services to Retirement Plan Participants
Despite the growing number of participants seeking investment advice, it can be difficult to obtain, because ERISA's prohibited transaction rules prohibit participants from receiving investment advice from the financial institution managing their plan's investment options, which is often the same institution that is already providing educational services to them.⁹

Under ERISA, persons who provide investment advice cannot do so with respect to investment options for which they or an affiliate provide investment management services or from which they otherwise receive compensation.¹⁰ The restriction applies even if the adviser assumes the strict fiduciary obligations under ERISA-which, among other things, requires them to act "solely in the interest of participants and beneficiaries"-and even if an employer selects the investment adviser and monitors the advisory services in accordance with its own fiduciary obligations. Indeed, the per se prohibition applies no matter how prudent and appropriate the advice, how objective the investment methodology used, or how much disclosure is provided to participants. And although the Department of Labor is authorized to provide exemptive relief from these rules, the limited exemptions issued by the Department to certain financial institutions have proven to be wholly inadequate, as they have included conditions that act as de facto prohibitions on the ability of these firms to provide investment advice to plan participants.¹¹

C. Investment Advisory Services Permitted Under Current Law Have Been Limited
In light of current legal constraints, the investment advisory services available to plan participants have largely been limited to "third-party" advice providers. But, as noted above, despite their presence, relatively few 401(k) plan participants have investment advisory services available to them through their retirement plans, especially as compared to investors outside of the retirement plan context. Clearly, the availability of advice from third-party providers has not sufficiently addressed the "advice gap." There are a number of reasons why this is the case.

First, by being forced to retain an entity separate from the plan provider to furnish investment advice to employees, employers frequently have to undertake a costly, cumbersome and time-consuming search. This can act as a significant disincentive to making such advice available. Many employers would prefer to use the 401(k) plan service provider with whom they already have an established relationship. As evidenced by the popularity of "bundled" arrangements, employers frequently prefer obtaining all of their plan services from a single provider, which eliminates the need to maintain multiple relationships with multiple vendors.

Second, some participants may lack confidence in a third-party provider that is relatively new and does not have a "track record." Many third-party vendors may have significantly less experience in offering investment advice than those financial institutions managing the plan's investment options-firms that participants recognize and trust.

Third, most of the existing advisory services offered by third-party providers are web-based. Many participants, however, do not want to be limited to online advice. Some may not own or have access to a computer. Others may be reluctant to use such services because they may be uncomfortable with the internet environment, or have privacy and other concerns about processing personal financial information online. According to one survey, among plan participants with a plan website available to them, only 39% had visited it for education and communication purposes; of those not offered online tools to provide educational information, only 28% indicated they would be likely to use them if they were provided.¹²

Many participants may simply prefer other ways of obtaining investment advice. For example, the results of a survey show that when asked their preferred method of receiving investment advice, 2 ½ times as many individuals preferred an "in-person" method, rather than a web-based method.¹³ These more traditional means of delivering advice, however, remain largely unavailable to participants through retirement plans because third-party providers often do not have the resources to offer them.

II. H.R. 2269-Closing the Advice Gap
Recognizing this important public policy concern, Chairman Boehner has introduced a bipartisan measure to address the "advice gap" that currently exists. H.R. 2269, the "Retirement Security Advice Act of 2001," would remove the legal barriers that significantly inhibit participants' access to investment advice, while fully protecting participants from possible conflicts of interest and imprudence on the part of the advice provider.

A. Greater Access and Choice for Participants and Employers
H.R. 2269 would expand and enhance the investment advisory services available to participants. Because a variety of financial institutions already providing advice to retail investors regarding their non-retirement assets would be able to enter the market, employers and participants would enjoy the benefits of selecting from a much broader array of providers.

Additionally, the legislation would allow advice to be obtained from the institutions most likely to be looked to for such services by participants and employers-the financial institutions already providing investment options to their plans. Participants, therefore, would be able to select their plan providers for advisory services, in addition to third-party advice providers. Similarly, employers would be permitted to arrange for investment advice through a provider with which they are familiar, thereby eliminating the costs and burdens associated with selecting a separate vendor.

B. Stringent Protections for Participants
While it is important to close "the advice gap" by expanding participant access to investment advice, it is also vitally important to assure that the advice provided is prudent and sound, and that there are sufficient remedies available to participants in the event that the investment adviser fails to serve the best interests of participants. H.R. 2269 contains a number of rigorous requirements that must be met before or at the time any advice is rendered. Under the bill, participants also would have legal recourse in the event unsound advice is provided.

First, only specifically identified, qualified entities already largely regulated under federal or state laws would qualify as "fiduciary advisers" permitted to deliver advice to participants under the bill.

Second, such advisers would have to assume fiduciary status under the stringent standards for fiduciary conduct set forth in ERISA. This, among other things, would require them to act solely in the interests of plan participants and beneficiaries. These protections-which have guarded participants in retirement plans from abuses for the past 27 years-would assure that participants are shielded from imprudent or self-interested advice.

Third, employers, in their capacity as plan fiduciaries, would be responsible for prudently selecting and periodically reviewing any advice provider they choose to make available to their plan participants. Thus, participants would be afforded an additional layer of protection by virtue of the employer's responsibilities as a plan fiduciary.

Fourth, the legislation would establish an extensive disclosure regime. Specifically, the "fiduciary adviser" would have to provide timely, clear and conspicuous disclosures to participants that identify any potential conflicts of interest, including any compensation the fiduciary adviser or any of its affiliates would receive in connection with the provision of advice. Additionally, any disclosures required under securities laws, which apply to similar advice provided outside of the retirement plan context, also must be provided to participants. It is important to note that these disclosure requirements would be in addition to the safeguards discussed above. The bill does not rely on disclosure alone to protect participants; rather, it includes disclosure as part of a broad panoply of protections.

Fifth, any advice provided could be implemented only at the direction of the advice recipient. Participants, therefore, would be free to reject any advice for any reason.

Finally, plan participants would have legal recourse available if a fiduciary adviser violates the standards set forth in the bill or ERISA. For instance, under section 502 of ERISA, a plan or participant could seek relief in federal district court to redress the adviser's violation of its fiduciary duties. Similarly, the Department of Labor has authority under ERISA section 502 to file suit against a fiduciary adviser in violation of ERISA and take regulatory enforcement action, including the assessment of civil penalties for any breach of fiduciary duty.

III. Conclusion
Based on currently available data, there is little question that there is an "advice gap." Retirement plan participants are not obtaining the investment advice they seek to assist them in managing their growing 401(k) plan account balances and planning for their retirement. H.R. 2269 would greatly expand the availability of these advisory services, while maintaining rigorous protections against parties that fail to serve participants' interests. We urge Congress to enact this important legislation.

¹The Investment Company Institute is the national association of the American investment company industry. Its membership includes 8,598 open-end investment companies ("mutual funds"), 504 closed-end investment companies and 7 sponsors of unit investment trusts. Its mutual fund members have assets of about $6.991 trillion, accounting for approximately 95% of total industry assets, and over 83.5 million individual shareholders.

²"Mutual Funds and the Retirement Market in 2000," Fundamentals, Vol. 10, No. 2, Investment Company Institute (June 2001). All told, mutual funds held almost $1.2 trillion in qualified retirement plan assets as of year-end 2000.

³"401(k) Participant Attitudes and Behavior - 2000," Spectrem Group (2001). Similarly, a Hewitt Associates survey of major employers found that only 17% offer an outside investment advisory service to their participants. "Survey Findings: Trends and Experience in 401(k) Plans," Hewitt Associates (1999). With respect to internet-based advisory services - the method by which most third-party advisers provide investment advice - a Deloitte & Touche survey found that only 18% of mid-size to large employers with 401(k) plans offered web-based advice to their employees. "2000 Annual 401(k) Benchmarking Survey," Deloitte & Touche (2000).

⁴"Understanding Shareholders' Use of Information and Advisers," Investment Company Institute (Spring 1997).

⁵"DCP 2000 Survey," Boston Research Group (BRG) (2001).

⁶BRG found that only 2/3 the number of plan participants rated plan loan availability as important to them as retirement planning assistance. "DCP 2000 Survey," BRG (2001).

⁷Holden and VanDerhei, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 1999," Perspective, Vol. 7, No. 1, Investment Company Institute (January 2001).

⁸Plans on average make available 11 investment options to participants. 43rd Annual Survey of Profit Sharing and 401(k) Plans, Profit Sharing/401(k) Council of America (2000).

⁹Current Department of Labor guidance permits plan service providers to provide "educational" services, but not give actual "investment advice" without violating the per se prohibited transaction rules of ERISA. See Interpretative Bulletin 96-1, in which the Department of Labor specified activities that constitute the provision of investment "education" rather than "advice."

¹⁰See generally section 406 of ERISA for prohibited transaction rules.

¹¹Under one approach adopted by the Department of Labor, advice may be provided if the institution agrees to a "leveling of fees" it or an affiliate receives from each investment option in the 401(k) plan. This makes little economic sense, however, because advisory fees for various investment options may differ widely from one fund to another, given that the underlying costs differ for each, depending on the type of investments the fund is making. Under another approach, the financial institution may provide advice through a relationship with an "independent" entity, which would require the institution to hire a third party or wholly restructure its business - ultimately denying participants the ability to obtain advice from the very financial institution with which they are familiar and whose very business is the provision of advice.

¹²"DCP 2000 Survey," BRG (2001).

¹³The BRG survey found that 38% of participants preferred an "in-person" method for receiving financial advice regarding their plan investments, whereas 15% preferred to use a "plan website." All told, 69% preferred in-person or other "live" methods such as access to telephone representatives and discussions with an employer's benefits counselor; in contrast, only 20% preferred obtaining this service via a plan's website or e-mail. "DCP 2000 Survey," BRG (2001).