Default Investment Alternatives Under Participant Directed Individual Account Plans, 56806-56824 [06-8282]
Download as PDF
56806
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2550
RIN 1210–AB10
Default Investment Alternatives Under
Participant Directed Individual Account
Plans
Employee Benefits Security
Administration, Department of Labor.
ACTION: Proposed regulation.
rwilkins on PROD1PC63 with PROPOSAL_3
AGENCY:
SUMMARY: This document contains a
proposed regulation that, upon
adoption, would implement recent
amendments to title I of the Employee
Retirement Income Security Act of 1974
(ERISA) enacted as part of the Pension
Protection Act of 2006, Public Law 109–
280, under which a participant of a
participant directed individual account
pension plan will be deemed to have
exercised control over assets in his or
her account if, in the absence of
investment directions from the
participant, the plan invests in a
qualified default investment alternative.
A fiduciary of a plan that complies with
this proposed regulation will not be
liable for any loss, or by reason of any
breach that occurs as a result of such
investments. The types of investments
that qualify as default investment
alternatives under section 404(c)(5) of
ERISA are described in the proposal.
Plan fiduciaries remain responsible for
the prudent selection and monitoring of
the qualified default investment
alternative. The proposed regulation
conditions relief upon advance notice to
participants and beneficiaries describing
the plan’s provisions governing the
circumstances under which
contributions or other assets will be
invested on their behalf in a qualified
default investment alternative, the
investment objectives of the default
investment alternative, and the right of
participants and beneficiaries to direct
investments out of the default
investment alternative without penalty.
The regulation, upon adoption, will
affect plan sponsors and fiduciaries of
participant directed individual account
plans, the participants and beneficiaries
in such plans, and the service providers
to such plans.
DATES: Written comments on the
proposed regulation should be received
by the Department of Labor on or before
November 13, 2006.
ADDRESSES: Comments should be
addressed to the Office of Regulations
and Interpretations, Employee Benefits
VerDate Aug<31>2005
18:41 Sep 26, 2006
Jkt 208001
Security Administration, Room N–5669,
U.S. Department of Labor, 200
Constitution Avenue, NW., Washington,
DC 20210, Attn: Default Investment
Regulation. Commenters are encouraged
to submit comments electronically to
e-ORI@dol.gov or www.regulations.gov
(follow instructions for submission).
Comments will be available to the
public at www.dol.gov/ebsa and
www.regulations.gov. Comments also
will be available for public inspection at
the Public Disclosure Room, N–1513,
Employee Benefits Security
Administration, 200 Constitution
Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Erin
M. Sweeney or Lisa M. Alexander,
Office of Regulations and
Interpretations, Employee Benefits
Security Administration, (202) 693–
8500. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
It is well established that many of
America’s workers are not adequately
saving for retirement. Part of the
retirement savings problem is
attributable to employees who, for a
wide variety of reasons, do not take
advantage of the opportunity to
participate in their employer’s defined
contribution pension plan (such as a
401(k) plan). The retirement savings
problem is also exacerbated by those
employees who enroll in their
employer’s plan, but do not assume
responsibility for investment of their
contributions, leaving their accounts to
be invested in a conservative default
investment that over the career of the
employee is not likely to generate
sufficient savings for a secure
retirement.
A number of recent studies indicate
that significant improvements can be
made in 401(k) plan participation and in
retirement savings levels through plan
design changes. Specifically, the studies
show that adoption of automatic
enrollment provisions (provisions
pursuant to which employees are
automatically enrolled in the plan and
must affirmatively opt-out of plan
participation) by 401(k) plans can
dramatically increase plan participation
rates.1 However, most surveys suggest
1 Stephen P. Utkus & Jean A. Young, Lessons from
Behavioral Finance and the Autopilot 401(k) Plan,
(Vanguard Center for Retirement Res.) April 2004;
Sarah Holden & Jack VanDerhei, The Influence of
Automatic Enrollment, Catch-Up, and IRA
Contributions on 401(k) Accumulations at
Retirement, 283 Employee Benefit Res. Inst. Issue
Brief (2005). The issue brief indicates that the
‘‘EBRI/ICI model shows that prior to automatic
enrollment, 66 percent of eligible workers at yearend 2000 were participants in 401(k) plans, while
PO 00000
Frm 00002
Fmt 4701
Sfmt 4702
that fewer than 20 percent of the
employers sponsoring 401(k) plans have
adopted an automatic enrollment
provision.2
Many of the studies also indicate that
the accumulation of retirement savings
in automatic enrollment plans depends
heavily on the default investment
alternative and the default contribution
rate provided under the plan.3 The
scope of this proposal is limited to
default investment alternatives in which
individual account plan assets are
invested on behalf of those participants
or beneficiaries who fail to give
investment instructions. Modification of
contribution rates implicates issues
beyond the jurisdiction of the
Department of Labor.
Several studies note that the
contributions of automatically enrolled
participants are frequently invested in
products that present little risk of
capital loss, e.g., money market funds,
stable value funds and similarly
performing investment vehicles.4 It also
appears that many plans without
automatic enrollment provisions 5
immediately after adding automatic enrollment to
the model, the participation rate rises to 92 percent
of eligible employees.’’ Id. at 4. See also James J.
Choi, David Laibson, & Brigitte C. Madrian, Plan
Design and 401(k) Savings Outcomes, 57 National
Tax J. 275 (2004); see also James J. Choi, David
Laibson, Brigitte Madrian, & Andrew Metrick, For
Better or For Worse: Default Effects and 401(k)
Savings Behavior (Pension Research Council,
Working Paper No. 2002–2, 2001), available at
https://prc.wharton.upenn.edu/prc/PRC/WP/
WP2002–2.pdf.
2 The incidence of automatic enrollment appears
to be growing, by one estimate from 8.4 percent of
plans in 2003 to 10.5 percent in 2004 (48th Annual
Survey of Profit Sharing and 401(k) Plans, (Profit
Sharing/401(k) Council of America, Chicago, Ill.),
2005, at 36), by another from 14 percent in 2003
to 19 percent in 2005 (Survey Findings: Trends and
Experiences in 401(k) Plans 2005, (Hewitt
Associates LLC), 2005, at 1, 13). Another survey
found no growth between 2003 and 2004 (2004
Annual 401(k) Benchmarking Survey (Deloitte
Consulting LLP), 2004, at 6).
3 See studies cited supra note 2. See also Stephen
P. Utkus, Selecting a Default Fund for a Defined
Contribution Plan (Vanguard Center for Retirement
Res.), July 2004.
4 Of the responding plans with automatic
enrollment, the default investment option was a
stable value fund for 26.9%, a money market fund
for 23.7%, a balanced fund for 29%, a life cycle
fund for 8.6%, a professionally managed account
for 6.5%, and 5.4% were reported as ‘‘other.’’ 48th
Annual Survey of Profit Sharing/401(k) Plans, supra
note 2, at 37, Table 64. Other surveys indicate the
use of money market, stable value and similarly
performing investment vehicles at 58 percent (2004
Annual 401(k) Benchmarking Survey, supra note 2,
at 7, Exhibit 20) and 81 percent (Stephen P. Utkus,
Selecting A Default Fund for a Defined Contribution
Plan, (Vanguard Center for Retirement Res.),
Volume 14, June 2005, at 3).
5 This proposal encompasses situations beyond
automatic enrollment. Examples include: failure of
a participant or beneficiary to provide investment
instruction following the elimination of an
investment alternative or a change in service
provider, failure of a participant or beneficiary to
E:\FR\FM\27SEP3.SGM
27SEP3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
rwilkins on PROD1PC63 with PROPOSAL_3
utilize similar capital preservation
default investment products for those
employees who enroll in the plan but
fail to direct the investment of their
contributions or their employer’s
matching contributions. As a short-term
investment, money market or stable
value funds may not significantly affect
retirement savings. Such investments
can play a useful role as a component
of a diversified portfolio. However,
when such funds become the exclusive
investment of participants or
beneficiaries, it is unlikely that the rate
of return generated by those funds over
time will be sufficient to generate
adequate retirement savings for most
participants or beneficiaries.6
A frequently cited impediment to
adoption of automatic enrollment
provisions in individual account plans
is the assumption of fiduciary
responsibility for the investment
decisions that the plan fiduciary must
make on behalf of the automatically
enrolled participants. In the case of a
participant directed individual account
plan designed to comply with the
requirements of ERISA section 404(c)(1),
responsibility for the result of specific
investment directions rests with the
directing plan participant or beneficiary,
rather than the plan sponsor or other
fiduciaries.7 Before enactment of the
Pension Protection Act, which became
law on August 17, 2006, the Department
indicated that a participant or
beneficiary would not be considered to
have exercised control when the
participant or beneficiary is merely
apprised of investments that will be
made on his or her behalf in the absence
of instructions to the contrary.8 In effect,
the Department treated the plan
fiduciary’s investment decision on
behalf of a participant or beneficiary as
if the decision were made in connection
with a participant directed individual
account plan that is not designed, or
provide investment instruction following a rollover
from another plan, and any other failure of a
participant or beneficiary to provide investment
instruction.
6 Investments in capital preservation vehicles
deprive investors of the opportunity to benefit from
the returns generated by equity securities that have
historically generated higher returns than fixed
income investments.
7 See Final Regulation Regarding Participant
Directed Individual Account Plans (ERISA Section
404(c) Plans), 57 FR 46,906 (Oct.13, 1992) (codified
at 29 CFR 2550.404c–1).
8 See Rev. Rul. 98–30, 1998–1 C.B. 1273; see also
Rev. Rul. 2000–8, 2000–1 C.B. 617; see also Final
Regulation Regarding Participant Directed
Individual Account Plans (ERISA Section 404(c)
Plans), 57 FR at 46924; see also Retirement Plans,
Cash or Deferred Arrangements Under Section
401(k) and Matching Contributions or Employee
Contributions Under Section 401(m) Regulations,
69 FR 78144, 78146 n. 2 (Dec. 29, 2004) (codified
at 26 CFR pts. 1 & 602).
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
fails, to meet the conditions for a section
404(c) plan. While some employers, in
adopting automatic enrollment
provisions or otherwise dealing with the
absence of investment direction from
plan participants, have been willing to
assume fiduciary responsibility for their
investment decisions, many of those
employers attempt to minimize their
fiduciary liability by limiting default
investments to funds that emphasize
preservation of capital and little risk of
loss (e.g., money market and stable
value funds).
As part of the Pension Protection Act,
section 404(c) of ERISA was amended to
provide relief accorded by section
404(c)(1) to fiduciaries that invest
participant assets in certain types of
default investment alternatives in the
absence of participant investment
direction. Specifically, section 624(a) of
the Pension Protection Act added a new
section 404(c)(5) to ERISA. Section
404(c)(5)(A) of ERISA provides that, for
purposes of section 404(c)(1) of ERISA,
a participant in an individual account
plan shall be treated as exercising
control over the assets in the account
with respect to the amount of
contributions and earnings which, in
the absence of an investment election by
the participant, are invested by the plan
in accordance with regulations
prescribed by the Secretary of Labor.
Section 624(a) of the Pension Protection
Act directed that such regulations
provide guidance on the
appropriateness of designating default
investments that include a mix of asset
classes consistent with capital
preservation or long-term capital
appreciation, or a blend of both. In the
Department’s view, this statutory
language provides the stated relief to
fiduciaries of any participant directed
individual account plan that complies
with its terms and with those of the
Department’s proposed regulation under
section 404(c)(5) of ERISA. This relief
therefore, is not contingent on a plan
being an ‘‘ERISA 404(c) plan’’ or
otherwise meeting the requirements of
the Department’s regulations at
2550.404c–1.
Section 624(a) of the Pension
Protection Act also added notice
requirements in section 404(c)(5)(B)(i)
and (ii) of ERISA. Section 404(c)(5)(B)(i)
requires that each participant—(I)
receive, within a reasonable period of
time before each plan year, a notice
explaining the employee’s right under
the plan to designate how contributions
and earnings will be invested and
explaining how, in the absence of any
investment election by the participant,
such contributions and earnings will be
invested, and (II) has a reasonable
PO 00000
Frm 00003
Fmt 4701
Sfmt 4702
56807
period of time after receipt of such
notice and before the beginning of the
plan year to make such designation.
Section 404(c)(5)(B)(ii) requires each
notice to be sufficiently accurate and
comprehensive to appraise the
employee of such rights and obligations,
and to be written in a manner calculated
to be understood by the average
employee eligible to participate.
The amendments made by section 624
of the Pension Protection Act shall
apply to plan years beginning after
December 31, 2006. Section 624(b) of
the Pension Protection Act directed the
Department to issue final regulations
under section 404(c)(5)(A) of ERISA no
later than 6 months of the date of
enactment of the Pension Protection
Act.
In an effort to increase plan
participation through the adoption of
automatic enrollment provisions, and
increase retirement savings through the
utilization of default investments that
are more likely to increase retirement
savings for participants and
beneficiaries who do not direct their
own investments, the Department,
exercising its authority under section
505 of ERISA and consistent with
section 624 of the Pension Protection
Act, is proposing to provide relief to
fiduciaries of participant directed
individual account plans that invest
participant assets in certain types of
default investment alternatives in the
absence of participant investment
direction. The proposed regulation is
described below.
B. Overview of Proposal
Scope of the Fiduciary Relief
The proposal would, upon adoption,
implement the fiduciary relief afforded
by ERISA section 404(c)(5), under
which a participant, who does not give
investment directions, will be treated as
exercising control over his or her
account with respect to assets that the
plan invests in a qualified default
investment alternative. See § 2550.404c–
5(a)(1).
The relief provided by the proposed
regulation is conditioned on the use of
certain investment alternatives, but the
limitations of the proposed regulation
should not be construed to indicate that
the use of investment alternatives not
identified in the proposed regulation as
qualified default investment alternatives
would be imprudent. For example, the
Department recognizes that investments
in money market funds, stable value
products and similarly performing
investment vehicles may be prudent for
some participants or beneficiaries.
E:\FR\FM\27SEP3.SGM
27SEP3
rwilkins on PROD1PC63 with PROPOSAL_3
56808
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
Paragraph (b) of § 2550.404c–5 defines
the scope of the fiduciary relief
provided. Specifically, paragraph (b)(1)
provides that, subject to certain
exceptions, a fiduciary of an individual
account plan that permits participants
and beneficiaries to direct the
investment of assets in their accounts
and that meets the conditions of the
regulation, as set forth in paragraph (c)
of § 2550.404c–5, shall not be liable for
any loss under part 4 of title I, or by
reason of any breach, that is the direct
and necessary result of investing all or
part of a participant’s or beneficiary’s
account in a qualified default
investment alternative, or of investment
decisions made by the entity described
in paragraph (e)(3) in connection with
the management of a qualified default
investment alternative. The scope of this
relief is the same as that extended to
plan fiduciaries under ERISA section
404(c)(1)(B) in connection with carrying
out investment directions of plan
participants and beneficiaries in an
‘‘ERISA section 404(c) plan’’ as
described in 29 CFR 2550.404c–1(a),
although it is not necessary for a plan
to be an ERISA section 404(c) plan in
order for the fiduciary to obtain the
relief accorded by this proposed
regulation. As with section 404(c)(1) of
the Act and the regulation issued
thereunder (29 CFR 2550.404c–1), the
proposed regulation would not provide
relief from the general fiduciary rules
applicable to the selection and
monitoring of a default investment
alternative or from any liability that
results from a failure to satisfy these
duties, including liability for any
resulting losses. See paragraph (b)(2) of
§ 2550.404c–5. Paragraph (b) further
makes clear that nothing in the
proposed regulation relieves an
investment manager from its general
fiduciary duties or from any liability
that results from a failure to satisfy these
duties, including liability for any
resulting losses. See paragraph (b)(3) of
§ 2550.404c–5. In addition, the
proposed regulation provides no relief
from the prohibited transaction
provisions of section 406 of ERISA or
from any liability that results from a
violation of those provisions, including
liability for any resulting losses. See
paragraph (b)(4) of § 2550.404c–5.
Like other investment alternatives
made available under a plan, a plan
fiduciary would be required to carefully
consider investment fees and expenses
in choosing a qualified default
investment alternative for purposes of
the proposed regulation. To the extent
that a plan offers more than one
investment alternative that could
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
constitute a qualified default investment
alternative, the Department anticipates
that fees and expenses would be an
important consideration in selecting
among the alternatives.
Conditions for the Fiduciary Relief
The conditions for relief are set forth
in paragraph (c) of the proposal. The
proposal has six conditions.
The first condition requires that assets
invested on behalf of participants or
beneficiaries under the proposed
regulation be invested in a ‘‘qualified
default investment alternative.’’ See
§ 2550.404c–5(c)(1). ‘‘Qualified default
investment alternatives’’ are defined in
paragraph (e) of the proposed regulation
and discussed in detail below. The
second condition provides that the
participant or beneficiary on whose
behalf assets are being invested in a
qualified default investment alternative
had the opportunity to direct the
investment of assets in his or her
account but did not direct the assets.
See § 2550.404c–5(c)(2). In other words,
no relief is available when a participant
or beneficiary has provided affirmative
investment direction concerning the
assets invested on the participant’s or
beneficiary’s behalf.
The third condition requires that the
participant or beneficiary on whose
behalf an investment in a qualified
default investment alternative may be
made is furnished a notice within a
reasonable period of time of at least 30
days in advance of the first such
investment, and within a reasonable
period of time of at least 30 days in
advance of each subsequent plan year.
As described in the regulation, the
required notice can be furnished in the
plan’s summary plan description,
summary of material modifications, or
as a separate notification. See
§ 2550.404c–5(c)(3). The specific
content requirements for the notice are
described in paragraph (d) of the
proposed regulation and discussed in
detail below.
The Department notes that a similar
notice requirement is contained in
section 401(k)(13)(E) of the Internal
Revenue Code (Code), as amended by
the Pension Protection Act. The
Department anticipates that the notice
requirements of this proposed
regulation and the notice requirements
of section 401(k)(13)(E) of the Code
could be satisfied in a single notice.
The Department further notes that the
phrase—‘‘in advance of the first such
investment [in a qualified default
investment alternative]’’—is not
intended to foreclose availability of
relief to fiduciaries that, prior to the
adoption of a final regulation, invested
PO 00000
Frm 00004
Fmt 4701
Sfmt 4702
assets on behalf of participants and
beneficiaries in a default investment
alternative that would constitute a
‘‘qualified default investment
alternative’’ under the regulation. In
such cases, the phrase ‘‘in advance of
the first such investment’’ should be
read to mean the first investment with
respect to which relief under the
proposed regulation is intended to
apply after the effective date of the
regulation. The Department is proposing
to make this regulation effective 60 days
after publication of the final rule in the
Federal Register.
The fourth condition of the proposed
regulation requires that the terms of the
plan provide that any material provided
to the plan relating to a participant’s or
beneficiary’s investment in a qualified
default investment alternative (e.g.,
account statements, prospectuses, proxy
voting material) will be provided to the
participant or beneficiary. See
§ 2550.404c–5(c)(4).
The fifth condition requires that any
participant or beneficiary on whose
behalf assets are invested in a qualified
default investment alternative be
afforded the opportunity, consistent
with the terms of the plan (but in no
event less frequently than once within
any three month period), to transfer, in
whole or in part, such assets to any
other investment alternative available
under the plan without financial
penalty. See § 2550.404c–5(c)(5). This
provision assures that participants and
beneficiaries on whose behalf assets are
invested in a qualified default
investment alternative have the same
opportunity as other plan participants
and beneficiaries to direct the
investment of their assets, and that
neither the plan nor the qualified
default investment alternative impose
financial penalties that would restrict
the rights of participants and
beneficiaries to direct their assets to
other investment alternatives available
under the plan. This provision does not
confer greater rights on participants or
beneficiaries whose accounts the plan
invests in qualified default investment
alternatives than are otherwise available
under the plan with respect to the
timing of investment directions. Thus, if
a plan provides participants and
beneficiaries the right to direct
investments on a quarterly basis, those
participants and beneficiaries with
investments in a qualified default
investment alternative need only be
afforded the opportunity to direct their
investments on a quarterly basis.
Similarly, if a plan permits daily
investment direction, participants and
beneficiaries with investments in a
qualified default investment alternative
E:\FR\FM\27SEP3.SGM
27SEP3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
must be permitted to direct their
investments on a daily basis.
The Department notes that this
proposal does not address or provide
relief with respect to the direction of
investments out of a qualified default
investment alternative into another
investment alternative available under
the plan. See generally section 404(c)(1)
of ERISA and 29 CFR 2550.404c–1.
The last condition requires that the
plan offer participants and beneficiaries
the opportunity to invest in a ‘‘broad
range of investment alternatives’’ within
the meaning of 29 CFR 2550.404c–
1(b)(3).9 See § 2550.404c–5(c)(6). For
purposes of the proposed regulation, the
Department believes that participants
and beneficiaries should be afforded a
sufficient range of investment
alternatives to achieve a diversified
portfolio with aggregate risk and return
characteristics at any point within the
range normally appropriate for the
pension plan participant or beneficiary.
The Department believes that the
application of the ‘‘broad range of
investment alternatives’’ standard of the
section 404(c) regulation accomplishes
this objective. Moreover, the
Department believes that virtually all
individual account plans that provide
for participant direction, without regard
to whether such plans meet all the
requirements for an ERISA section
404(c) plan, likely will meet this
standard without having to undertake
significant changes in available
investment alternatives.
Notices
rwilkins on PROD1PC63 with PROPOSAL_3
As discussed above, relief under the
proposed regulation is conditioned on
furnishing participants and beneficiaries
advance notification concerning the
default investment provisions of their
plan. See § 2550.404c–5(c)(3). The
specific information required to be
contained in the notice is set forth in
paragraph (d) of the regulation.
9 29 CFR 2550.404c–1(b)(3) provides that ‘‘[a]
plan offers a broad range of investment alternatives
only if the available investment alternatives are
sufficient to provide the participant or beneficiary
with a reasonable opportunity to: (A) Materially
affect the potential return on amounts in his
individual account with respect to which he is
permitted to exercise control and the degree of risk
to which such amounts are subject; (B) Choose from
at least three investment alternatives: (1) Each of
which is diversified; (2) each of which has
materially different risk and return characteristics;
(3) which in the aggregate enable the participant or
beneficiary by choosing among them to achieve a
portfolio with aggregate risk and return
characteristics at any point within the range
normally appropriate for the participant or
beneficiary; and (4) each of which when combined
with investments in the other alternatives tends to
minimize through diversification the overall risk of
a participant’s or beneficiary’s portfolio; * * *’’
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
Paragraph (d) of § 2550.404c–5
requires that the notice to participants
and beneficiaries be written in a manner
calculated to be understood by the
average plan participant and contain the
following information: (1) A description
of the circumstances under which assets
in the individual account of a
participant or beneficiary may be
invested on behalf of the participant and
beneficiary in a qualified default
investment alternative; (2) a description
of the qualified default investment
alternative, including a description of
the investment objectives, risk and
return characteristics (if applicable), and
fees and expenses attendant to the
investment alternative; (3) a description
of the right of the participants and
beneficiaries on whose behalf assets are
invested in a qualified default
investment alternative to direct the
investment of those assets to any other
investment alternative under the plan,
without financial penalty; and (4) an
explanation of where the participants
and beneficiaries can obtain investment
information concerning the other
investment alternatives available under
the plan.
It is the view of the Department that
the notice requirements of this proposed
regulation are consistent with the notice
requirements added to section 404(c)(5)
of ERISA by section 624 of the Pension
Protection Act. The Department believes
the required information is sufficient to
put participants and beneficiaries on
notice as to the consequences of failing
to direct investment of the assets in
their account, and encourages active
decisionmaking by participants and
beneficiaries. The Department invites
suggestions as to whether additional
information should be considered for
inclusion in the notice.
Qualified Default Investment
Alternatives
Under the proposal, relief from
fiduciary liability is provided with
respect to only those assets invested on
behalf of a participant or beneficiary in
a ‘‘qualified default investment
alternative.’’ See § 2550.404c–5(c)(1).
Paragraph (e) of § 2550.404c–5 sets forth
five requirements for a qualified default
investment alternative.
The first requirement is intended to
limit investment in employer securities
as part of a qualified default investment
alternative’s investment strategy.
Subject to two exceptions, the proposal
provides that a qualified default
investment alternative shall not hold or
permit the acquisition of employer
securities. See § 2550.404c–5(e)(1)(i).
The first exception to this general
prohibition is applicable to employer
PO 00000
Frm 00005
Fmt 4701
Sfmt 4702
56809
securities held or acquired by an
investment company registered under
the Investment Company Act of 1940,
15 U.S.C. 80a–1, et seq., or a similar
pooled investment vehicle regulated
and subject to periodic examination by
a State or Federal agency and with
respect to which investment in such
securities is made in accordance with
the stated investment objectives of the
investment vehicle and independent of
the plan sponsor or an affiliate thereof.
While the Department does not believe
it is appropriate for a qualified default
investment alternative to encourage
investments in employer securities, the
Department also recognizes that an
absolute prohibition against holding or
investing in employer securities may
unnecessarily complicate the selection
and monitoring of qualified default
investment alternatives by publicly
traded companies, the stock of which
may be held or acquired pursuant to an
investment strategy wholly independent
of the employer. The Department
believes that the foregoing exception is
sufficiently broad to accommodate
publicly traded companies and pooled
investment vehicles that may invest in
such companies.
The second exception is for employer
securities acquired as a matching
contribution from the employer/plan
sponsor or at the direction of the
participant or beneficiary. This
exception is intended to make clear that
an investment management service will
not be precluded from serving as a
qualified default investment alternative
under § 2550.404c–5(e)(5)(iii) merely
because the account of a participant or
beneficiary holds employer securities
acquired as matching contributions from
the employer/plan sponsor, or acquired
as a result of prior direction by the
participant or beneficiary, provided that
the investment management service has
the authority to dispose of such
securities.
In the case of employer securities
acquired as matching contributions that
are subject to a restriction on
transferability, relief would not be
available until the investment
management service can exercise
discretion over such securities, at the
expiration of the restriction. Although
an investment management service
would be responsible for determining
whether and to what extent the account
should continue to hold investments in
employer securities, the investment
management service could not, except
as part of an investment company or
similar pooled investment vehicle,
exercise its discretion to acquire
additional employer securities on behalf
E:\FR\FM\27SEP3.SGM
27SEP3
rwilkins on PROD1PC63 with PROPOSAL_3
56810
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
of an individual account without
violating § 2550.404c–5(e)(1).
In the case of prior direction by a
participant or beneficiary, if the
participant or beneficiary provided
investment direction with respect to
employer securities, but failed to
provide investment direction following
an event, such as a change in
investment alternatives, and the terms
of the plan provide that in such
circumstances the account’s assets are
invested in a default investment
alternative, the proposed regulation
would permit an investment
management service to hold and manage
those employer securities in the absence
of participant or beneficiary direction.
While the investment management
service may not acquire additional
employer securities using participant
contributions, the investment
management service may reduce the
amount of employer securities held by
the account of the participant or
beneficiary.
The second requirement provides
that, except as otherwise provided in
paragraph (c)(5), a qualified default
investment alternative may not impose
financial penalties or otherwise restrict
the ability of a participant or beneficiary
to transfer, in whole or in part, his or
her investment from the qualified
default investment alternative to any
other investment alternative available
under the plan. The Department does
not believe that limits on the ability of
a participant or beneficiary to move
from a qualified default investment
alternative should be permitted by the
plan or the qualified default investment
alternative.
The third requirement is that a
qualified default investment alternative
be either managed by an investment
manager, as defined in section 3(38) of
the Act, or an investment company
registered under the Investment
Company Act of 1940. The Department
believes that when plan fiduciaries are
relieved of liability for underlying
investment management/asset allocation
decisions, those responsible for the
investment management/asset allocation
decisions must be investment
professionals who acknowledge their
fiduciary responsibilities and liability
under ERISA. For this reason, the
proposed regulation requires that,
except in the case of registered
investment companies, those
responsible for the management of a
qualified default investment alternative
be ‘‘investment managers’’ within the
meaning of section 3(38) of ERISA.10
10 Section 3(38) of ERISA defines the term
‘‘investment manager’’ to mean ‘‘any fiduciary
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
Inasmuch as the assets of an investment
company registered under the
Investment Company Act of 1940 do
include plan assets solely by virtue of a
plan’s investment in securities issued by
such investment company 11 and such
investment companies are subject to
Federal and State regulation and
oversight, the proposal permits an
investment company registered under
the Investment Company Act of 1940 to
constitute a ‘‘qualified default
investment alternative’’ provided that
the other conditions of the proposed
regulation are satisfied.
The fourth requirement provides that
a qualified default investment
alternative is diversified so as to
minimize the risk of large losses.
The last requirement for a qualified
default investment alternative
conditions relief on the use of one of
three types of investment products,
portfolios or services. See § 2550.404c–
5(e)(5). In defining qualified default
investment alternatives, the Department
presumes that, in those instances when
a participant or beneficiary chooses not
to direct the investment of the assets in
their account, the only objective and
readily available information relevant to
making an investment decision on
behalf of the participant is age. For this
reason, the investment objectives of the
qualified default investment alternatives
are not required to take into account
other factors, such as risk tolerances,
other investment assets, etc.
The first alternative is an investment
fund product or model portfolio that is
designed to provide varying degrees of
long-term appreciation and capital
preservation through a mix of equity
and fixed income exposures based on
the participant’s age, target retirement
date (such as normal retirement age
under the plan) or life expectancy. Such
products and portfolios change their
(other than a trustee or named fiduciary, as defined
in section 402(a)(2) [29 U.S.C. 1102(a)(2)])—(A) who
has the power to manage, acquire, or dispose of any
asset of a plan; (B) who (i) is registered as an
investment adviser under the Investment Advisers
Act of 1940 [15 U.S.C. 80b–1 et seq.]; (ii) is not
registered as an investment adviser under such Act
by reason of paragraph (1) of section 203A(a) of
such Act, is registered as an investment adviser
under the laws of the State (referred to in such
paragraph (1)) in which it maintains its principal
office and place of business, and, at the time the
fiduciary last filed the registration form most
recently filed by the fiduciary with such State in
order to maintain the fiduciary’s registration under
the laws of such State, also filed a copy of such
form with the Secretary; (iii) is a bank, as defined
in that Act [15 U.S.C. 80b–1 et seq.]; or (iv) is an
insurance company qualified to perform services
described in subparagraph (A) under the laws of
more than one State; and (C) has acknowledged in
writing that he is a fiduciary with respect to the
plan.’’
11 See ERISA section 401(b)(1).
PO 00000
Frm 00006
Fmt 4701
Sfmt 4702
asset allocation and associated risk
levels over time with the objective of
becoming more conservative (i.e.,
decreasing risk of losses) with
increasing age. As noted above, asset
allocation decisions for eligible
products and portfolios are not required
to take into account risk tolerances,
investments or other preferences of an
individual participant. An example of
such a fund or portfolio may be a ‘‘lifecycle’’ or ‘‘targeted-retirement-date’’
fund or account. See § 2550.404c–
5(e)(5)(i). The reference to ‘‘an
investment fund product or model
portfolio’’ is intended to make clear that
this alternative might be a ‘‘stand alone’’
product or a ‘‘fund of funds’’ comprised
of various investment options otherwise
available under the plan for participant
investments. In the context of a fund of
funds portfolio, it is likely that money
market, stable value and similarly
performing capital preservation vehicles
will play a role in comprising the mix
of equity and fixed-income exposures.
The second alternative is an
investment fund product or model
portfolio that is designed to provide
long-term appreciation and capital
preservation through a mix of equity
and fixed income exposures consistent
with a target level of risk appropriate for
participants of the plan as a whole. For
purposes of this alternative, asset
allocation decisions for such products
and portfolios are not required to take
into account the age of an individual
participant, but rather focus on the
demographics of the participant
population as a whole. An example of
such a fund or portfolio may be a
‘‘balanced’’ fund. As with the preceding
alternative, the reference to ‘‘an
investment fund product or model
portfolio’’ is intended to make clear that
this alternative might be a ‘‘stand alone’’
product or a ‘‘fund of funds’’ comprised
of various investment options otherwise
available under the plan for participant
investments. In the context of a fund of
funds portfolio, it is likely that money
market, stable value and similarly
performing capital preservation vehicles
will play a role in comprising the mix
of equity and fixed-income exposures
for this alternative.
Unlike the first alternative, which
focuses on the age, target retirement
date (such as normal retirement age
under the plan) or life expectancy of an
individual participant, the second
alternative requires a fiduciary to take
into account the demographics of the
plan’s participants, similar to the
considerations a fiduciary would take
into account in managing an individual
account plan that does not provide for
participant direction. For this reason, a
E:\FR\FM\27SEP3.SGM
27SEP3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
rwilkins on PROD1PC63 with PROPOSAL_3
fiduciary may, in connection with the
duty to monitor investment alternatives
available under the plan, conclude that
a new or additional investment fund
product or model portfolio is required to
take into account significant changes in
the demographics (e.g., age) of the plan’s
participant population.
The third alternative is an investment
management service with respect to
which an investment manager allocates
the assets of a participant’s individual
account to achieve varying degrees of
long-term appreciation and capital
preservation through a mix of equity
and fixed income exposures, offered
through investment alternatives
available under the plan, based on the
participant’s age, target retirement date
(such as normal retirement age under
the plan) or life expectancy. Such
portfolios change their asset allocation
and associated risk levels over time with
the objective of becoming more
conservative (i.e., decreasing risk of
losses) with increasing age. As with the
first alternative, the proposed regulation
makes clear that, as with the other
alternatives described in the regulation,
asset allocation decisions are not
required to take into account risk
tolerances, other investments or other
preferences of an individual participant.
An example of such a service may be a
‘‘managed account.’’ 12
Although investment management
services are included within the scope
of relief, the Department notes that relief
similar to that provided by this
proposed regulation is available to plan
fiduciaries under the statute.
Specifically, section 402(c)(3) of ERISA
provides that ‘‘a person who is a named
fiduciary with respect to control or
management of the assets of a plan may
appoint an investment manager or
managers to manage (including the
power to acquire and dispose of) any
assets of a plan.’’ Section 405(d) of
ERISA provides that ‘‘[i]f an investment
manager or managers have been
appointed under section 402(c)(3), then
* * * no trustee shall be liable for the
acts or omissions of such investment
manager or managers, or be under an
obligation to invest or otherwise manage
12 With regard to this alternative, the Department
notes that in 2003, a working group of the Advisory
Council on Employee Welfare and Pension Benefit
Plans submitted a report on optional professional
management in defined contribution plans. While
the Advisory Council report focused on the use of
managed account services in which participants
played an active role in preparing an investment
profile, the report nonetheless provides support for
including such services within the definition of a
qualified default investment alternative. This report
may be accessed at
https://www.dol.gov/ebsa/publications/
AC_1107b03_report.html.
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
any asset of the plan which is subject to
the management of such investment
manager.’’ The Department included
investment management services within
the scope of fiduciary relief in order to
avoid any ambiguity concerning the
scope of relief available to plan
fiduciaries in the context of participant
directed individual account plans.
C. Miscellaneous Issues
Preemption
Section 902 of the Pension Protection
Act added a new section 514(e)(1) to
ERISA providing that notwithstanding
any other provision of section 514, title
I of ERISA shall supersede any State law
that would directly or indirectly
prohibit or restrict the inclusion in any
plan of an automatic contribution
arrangement. Section 902 further added
section 514(e)(2) to ERISA defining the
term ‘‘automatic contribution
arrangement’’ as an arrangement under
which a participant: may elect to have
the plan sponsor make payments as
contributions under the plan on behalf
of the participant, or to the participant
directly in cash; is treated as having
elected to have the plan sponsor make
such contributions in an amount equal
to a uniform percentage of
compensation provided under the plan
until the participant specifically elects
not to have such contributions made (or
specifically elects to have such
contributions made at a different
percentage); and under which such
contributions are invested in accordance
with regulations prescribed by the
Secretary of Labor under section
404(c)(5) of ERISA. The Department
specifically requests comments on
whether and to what extent regulations
would be helpful in addressing the
preemption provisions of section 514(e)
of ERISA.
56811
Avenue, NW., Washington, DC 20210,
Attn: Default Investment Regulation.
Commenters are encouraged to submit
comments electronically to eORI@dol.gov or www.regulations.gov.
All comments received will be available
to the public at https://www.dol.gov/ebsa
and www.regulations.gov. Comments
also will be available for public
inspection at the Public Disclosure
Room, N–1513, Employee Benefits
Security Administration, 200
Constitution Avenue, NW., Washington,
DC 20210.
Comments on this proposal should be
submitted to the Department on or
before November 13, 2006.
E. Effective Date
The Department proposes to make
this regulation effective 60 days after the
date of publication of the final rule in
the Federal Register.
F. Regulatory Impact Analysis
Summary
D. Request for Comments
This proposed regulation is expected
to have two major, positive economic
consequences. First, default investments
will be directed toward higher-return
portfolios boosting average account
performance. Second, automatic
enrollment provisions will become more
common boosting participation in
retirement savings plans. Both of these
effects will tend on average and on
aggregate to increase retirement savings,
especially among younger workers with
low earnings and frequent job changes.
A substantial number of individuals
will enjoy significant increases in
retirement income.13 The magnitude of
these effects will be large in absolute
terms and proportionately large for
many directly affected individuals, but
will be modest relative to overall
aggregate retirement savings.
The magnitude of the proposed
regulation’s effects will depend on plan
sponsor and participant choices. The
effects will be cumulative and will
become fully realized only after workers
beginning their careers today reach
retirement. For these reasons, any
estimates of the regulation’s effects are
subject to substantial uncertainty. The
Department has developed low- and
high-impact estimates, to illustrate a
range of potential long-term effects.
The Department invites comments
from interested persons on all aspects of
the proposed regulation. Comments
should be addressed to the Office of
Regulations and Interpretations,
Employee Benefits Security
Administration, Room N–5669, U.S.
Department of Labor, 200 Constitution
13 In rare cases, retirement income may decrease
slightly. A few individuals may wind up
contributing for some period of time at a default
rate that is lower than the rate they otherwise
would have elected (this risk will be minimized in
plans that automatically escalate default
contribution rates). A few may realize lower returns
in a qualified default investment alternative than
they would otherwise have realized.
Enforcement
Section 902 of the Pension Protection
Act amended section 502(c)(4) of ERISA
to provide that the Secretary of Labor
may assess a civil penalty against any
person of up to $1,100 a day for each
violation by any person of section
302(b)(7)(F)(vi) or section 514(e)(3) of
ERISA. Implementing regulations will
be developed in a separate rulemaking.
PO 00000
Frm 00007
Fmt 4701
Sfmt 4702
E:\FR\FM\27SEP3.SGM
27SEP3
56812
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
rwilkins on PROD1PC63 with PROPOSAL_3
In the very long run the proposed
regulation is predicted to increase
aggregate 401(k) plan account balances
by between 2 percent and 5 percent, or
approximately $45 billion and $90
billion if represented at 2005 levels. The
portion invested in equity will increase
by between 3 percent and 5 percent, or
$27 billion and $48 billon.
For individuals born in 1985 and
surviving to age 67, holding other
factors constant, low-impact estimates
suggest that the proposed regulation
will increase pension income by an
average of $2,010 per year (in 2005
dollars) for 10 percent, but decrease it
by $1,120 per year on average for 5
percent. Pension income would be
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
unchanged for the remaining 85 percent.
High-impact estimates suggest that
average annual pension income will
increase by $2,740 for 14 percent, fall by
$1,460 for 6 percent, and be unchanged
for 80 percent.
The costs and benefits of the proposed
regulation are not simple, direct
functions of the foregoing gross dollar
estimates. Increases in retirement
savings due to automatic enrollment
will be offset by either decreases in
current consumption or reductions in
other savings, so net benefits will be
smaller than the predicted increases in
retirement savings. The proposed
regulation may also have
macroeconomic consequences, which
PO 00000
Frm 00008
Fmt 4701
Sfmt 4702
are likely to be small but positive. An
increase in retirement saving is likely to
promote investment and long-term
economic productivity and growth. The
Department therefore concludes that the
benefits of this proposed regulation will
exceed its costs by a wide margin.
In accordance with OMB Circular A–
4(available at https://
www.whitehouse.gov/omb/circulars/
a004/a–4.pdf), Table 1 below depicts an
accounting statement showing the
annualized benefits and transfers
associated with the provisions of this
proposed rule.
BILLING CODE 4510–29–P
E:\FR\FM\27SEP3.SGM
27SEP3
BILLING CODE 4510–29–C
Executive Order 12866
Under Executive Order 12866, the
Department must determine whether a
regulatory action is ‘‘significant’’ and
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
therefore subject to the requirements of
the Executive Order and subject to
review by the Office of Management and
Budget (OMB). Under section 3(f) of the
Executive Order, a ‘‘significant
PO 00000
Frm 00009
Fmt 4701
Sfmt 4702
56813
regulatory action’’ is an action that is
likely to result in a rule (1) having an
annual effect on the economy of $100
million or more, or adversely and
materially affecting a sector of the
E:\FR\FM\27SEP3.SGM
27SEP3
EP27SE06.094
rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
56814
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
rwilkins on PROD1PC63 with PROPOSAL_3
economy, productivity, competition,
jobs, the environment, public health or
safety, or State, local or tribal
governments or communities (also
referred to as ‘‘economically
significant’’); (2) creating serious
inconsistency or otherwise interfering
with an action taken or planned by
another agency; (3) materially altering
the budgetary impacts of entitlement
grants, user fees, or loan programs or the
rights and obligations of recipients
thereof; or (4) raising novel legal or
policy issues arising out of legal
mandates, the President’s priorities, or
the principles set forth in the Executive
Order. OMB has determined that this
action is significant under section 3(f)(1)
because it is likely to have an annual
effect on the economy of $100 million
or more. Accordingly, the Department
has undertaken, as described below, an
analysis of the costs and benefits of the
proposed regulation. The Department
believes that the proposed regulation’s
benefits justify its costs.
Alternatives Considered by the
Department
Prior to the enactment of the Pension
Protection Act, the Department
considered providing relief under
section 404(a) of ERISA, rather than
section 404(c), in response to concerns
that conditioning relief on compliance
with the Department’s regulations under
section 404(c), 29 CFR 2550.404c–1,
may deter adoption of automatic
enrollment provisions. Inasmuch as the
relief provided by recently enacted
section 404(c)(5) of ERISA does not
condition relief on compliance with the
Department’s regulations under section
404(c), the Department concluded that
adopting a regulation under section
404(c)(5) effectively provided the same
relief it considered providing under
section 404(a).
In defining the three types of
investment products, portfolios or
services that may be used as a qualified
default investment alternative, the
Department applied certain criteria.
These criteria included consistency
with market trends and mainstream
financial planning practices. The
Department entertained including as an
additional type of investment product
near risk-free fixed income instruments.
Such instruments might have been
defined so as to include money market
mutual funds, certain bank deposits,
and stable value insurance products.
Including such instruments might yield
some benefits. It is possible that at least
some plan sponsors strongly prefer to
use as default investments such
instruments rather than any of the three
types embraced by the proposed rule. It
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
is further possible that some such
sponsors would adopt automatic
enrollment programs if and only if the
fiduciary relief afforded by the proposed
regulation was extended to include such
instruments. In that case, including
such instruments in the proposed
regulation might boost participation and
net retirement income for some
individuals. The Department believes
such cases would be rare, however. The
proposed rule, by providing relief from
fiduciary liability, is both intended and
expected to tilt plan sponsors’ default
investment preferences away from such
instruments and toward the three types
it embraces. Moreover, many plan
sponsors currently use such instruments
as default investments under automatic
enrollment programs, and they and
others might continue to do so after
adoption of the proposed rule. The
proposed rule leaves intact the current
legal provisions applicable to the use of
such instruments as default
investments.
On the other hand, including such
instruments might erode benefits.
Consider plan sponsors that under the
proposed rule will adopt automatic
enrollment programs and use as default
investments one of the three types
defined in the proposed rule. If such
near-risk-free instruments were
included as a fourth type, some of these
plan sponsors might instead use such
instruments as default investments,
thereby reducing average investment
performance and retirement income for
some individuals. The Department
therefore believes that including such
instruments would be more likely to
erode benefits than to increase them.
Accordingly, the Department omitted
such instruments from the types defined
in the proposed rule.
The Department also considered
whether to include or omit an
investment fund product or model
portfolio that establishes a uniform mix
of equity and fixed income exposures
for all affected participants, ultimately
deciding to include such a type as the
second of the three types defined in the
proposed rule. Such a product or model
portfolio has some drawbacks relative to
the other two types of investment
products, portfolios or services that may
be used as a qualified default
investment alternative. Unlike the latter
types, its target level of risk must be
appropriate for participants of the plan
as a whole but cannot be separately
calibrated for each participant or for
particular classes of participants.
Therefore, while its risk level may be
appropriate for all affected participants
it is unlikely to be optimal for all.
However, such a product or model
PO 00000
Frm 00010
Fmt 4701
Sfmt 4702
portfolio may also have relative
advantages. Compared with the other
two types such a product or portfolio
may be simpler, less expensive and
easier to explain and understand. These
advantages may outweigh the potential
advantage of more customized risk
levels, especially for plans covering
relatively homogenous populations.
And the inclusion of such products or
model portfolios along with the other
two types of investment products,
portfolios or services might help
heighten competition in the market and
thereby enhance product quality and
affordability across all three types.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to
Federal rules that are subject to the
notice and comment requirements of
section 553(b) of the Administrative
Procedure Act (5 U.S.C. 551 et seq.) and
are likely to have a significant economic
impact on a substantial number of small
entities. Small entities include small
businesses, organizations, and
governmental jurisdictions.
For purposes of analysis under the
RFA, the Department proposes to
continue to consider a small entity to be
an employee benefit plan with fewer
than 100 participants. The basis of this
definition is found in section 104(a)(2)
of ERISA, which permits the Secretary
to prescribe simplified annual reports
for pension plans that cover fewer than
100 participants. Under section
104(a)(3) of ERISA, the Secretary may
also provide for exemptions or
simplified annual reporting and
disclosure for welfare benefit plans.
Pursuant to the authority of section
104(a)(3) of ERISA, the Department has
previously issued at 29 CFR 2520.104–
20, 2520.104–21, 2520.104–41,
2520.104–46, and 2520.104b–10 certain
simplified reporting provisions and
limited exemptions from reporting and
disclosure requirements for small plans,
including unfunded or insured welfare
plans that cover fewer than 100
participants and satisfy certain other
requirements.
Further, while some large employers
may have small plans, in general small
employers maintain most small plans.
Thus, the Department believes that
assessing the impact of these proposed
rules on small plans is an appropriate
substitute for evaluating the effect on
small entities. The definition of small
entity considered appropriate for this
purpose differs, however, from a
definition of small business that is
based on size standards promulgated by
the Small Business Administration
E:\FR\FM\27SEP3.SGM
27SEP3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
rwilkins on PROD1PC63 with PROPOSAL_3
(SBA) (13 CFR 121.201) pursuant to the
Small Business Act (15 U.S.C. 631 et
seq.). The Department therefore requests
comments on the appropriateness of the
size standard used in evaluating the
impact of these proposed rules on small
entities.
The reasons the Department is
proposing this regulation, and the
objectives of and legal basis for the
proposed regulation, are discussed
earlier in this preamble.
The Department has concluded that
the primary effects of this proposed
regulation will be to increase retirement
savings and pension incomes for
participants and beneficiaries by
directing default investments to higherperforming portfolios and by promoting
the implementation of automatic
enrollment programs in participant
directed individual account pension
plans. Applying this assessment under
the standards of the RFA, the
Department believes that the impact of
this proposed regulation will fall
primarily on participants in participant
directed individual account pension
plans, and not on the plans themselves
or on the employers that sponsor the
plans. By promoting automatic
enrollment programs and thereby
increasing aggregate participant
contributions, the proposed regulation
may also increase some employers’
matching contributions, including
matching contributions made by small
plans. For reasons explained below,
however, the Department has concluded
that this effect is not a sufficient basis
for concluding that the proposed
regulation will have a significant impact
on a substantial number of small
entities.14
Many plan sponsors provide matching
contributions. The Department
estimates that, if the proposed
regulation is finalized, approximately 10
to 20 percent of all small participant
directed defined contribution plans, or
as many as 28,000 to 56,000 small plans,
may adopt automatic enrollment
programs and, consequently, may incur
additional matching contributions. Such
an increase in automatic enrollment
programs could have the indirect effect
of increasing aggregate matching
contributions in small plans by between
$100 million and $300 million annually
(expressed at 2005 levels). The effect of
14 The proposed regulation requires affected plans
to disclose to participants and beneficiaries certain
information related to default investment
provisions and default investments. As discussed
below in connection with the Paperwork Reduction
Act, the burden of compliance with the information
collection provisions, which will be borne by plan
sponsors and plans, will be minor, relative to the
anticipated benefits of the regulation.
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
increased matching contributions is
expected to be proportionately similar
for small and large entities. However,
adverse consequences are not expected,
for either large or small plans, because
the adoption of automatic enrollment
programs and the provision of matching
contributions are, generally, voluntary
and at the discretion of the plan
sponsor. Reliance on the proposed
regulation and, therefore, compliance
with its provisions are also voluntary on
the part of the plan sponsor.
Accordingly, it is highly unlikely that
the proposed regulation would have a
significant impact on a substantial
number of small entities. Therefore, the
head of the Employee Benefits Security
Administration hereby certifies, as
required under section 605(b) of the
RFA, that this proposed regulation will
not, if promulgated, have a significant
economic impact on a substantial
number of small entities.
The Department is unaware of any
duplicative, overlapping or conflicting
federal rules.
Paperwork Reduction Act
As part of its continuing effort to
reduce paperwork and respondent
burden, the Department of Labor
conducts a preclearance consultation
program to provide the general public
and Federal agencies with an
opportunity to comment on proposed
and continuing collections of
information in accordance with the
Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps
to ensure that the public understands
the Department’s collection
instructions; respondents can provide
the requested data in the desired format,
the reporting burden (time and financial
resources) is minimized, and the
Department can properly assess the
impact of collection requirements on
respondents.
Currently, the Department is soliciting
comments concerning the information
collection request (ICR) included in the
Proposed Regulation on Default
Investment Alternatives under
Participant Directed Individual Account
Plans. A copy of the ICR may be
obtained by contacting the person listed
in the PRA Addressee section below.
The Department has submitted a copy
of the proposed regulation to OMB in
accordance with 44 U.S.C. 3507(d) for
review of its information collections.
The Department and OMB are
particularly interested in comments
that:
• Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of the agency, including
PO 00000
Frm 00011
Fmt 4701
Sfmt 4702
56815
whether the information will have
practical utility;
• Evaluate the accuracy of the
agency’s estimate of the burden of the
collection of information, including the
validity of the methodology and
assumptions used;
• Enhance the quality, utility, and
clarity of the information to be
collected; and
• Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology,
e.g., by permitting electronic submission
of responses.
Comments should be sent to the
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10235, New Executive
Office Building, Washington, DC 20503;
Attention: Desk Officer for the
Employee Benefits Security
Administration. Although comments
may be submitted through November
13, 2006, OMB requests that comments
be received within 30 days of
publication of the Notice of Proposed
Rulemaking to ensure their
consideration.
PRA Addressee: Address requests for
copies of the ICR to Susan G. Lahne,
Office of Policy and Research, U.S.
Department of Labor, Employee Benefits
Security Administration, 200
Constitution Avenue, NW., Room N–
5718, Washington, DC 20210.
Telephone: (202) 693–8410; Fax: (202)
219–5333. These are not toll-free
numbers.
The proposed Regulation on Default
Investment Alternatives under
Participant Directed Individual Account
Plans (29 CFR 2550.404c–5) would
provide certain relief for fiduciaries who
make investment decisions on behalf of
participants and beneficiaries in
individual account pension plans that
provide for participant direction of
investments when such participants and
beneficiaries fail to direct the
investment of their account assets. The
regulation describes conditions under
which a participant who fails to provide
investment direction will be treated as
having exercised control over assets in
his or her account under an individual
account plan as provided in section
404(c)(5)(A) of ERISA. The proposed
regulation would require that the assets
of non-directing participants be invested
in one of the qualified default
investment alternatives described in the
proposed regulation and that certain
other specified conditions be met.
E:\FR\FM\27SEP3.SGM
27SEP3
rwilkins on PROD1PC63 with PROPOSAL_3
56816
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
This ICR pertains to two separate
disclosure requirements that are
conditions to the relief created by the
proposed regulation, as follows: (1) An
annual notice containing specified
information that must be provided to
any individual whose assets may in the
future be invested in a qualified default
investment alternative at least 30 days
prior to the fiduciary’s initial
investment, and thereafter at least 30
days before the beginning of each plan
year; and (2) pass-through to
participants and beneficiaries of any
material (such as account statements,
prospectuses, and proxy voting
material) provided to the plan relating
to the participant’s or beneficiary’s
investment in a qualified default
investment alternative. The information
collection provisions of this proposed
regulation are intended to ensure that
participants and beneficiaries who are
provided the opportunity to direct the
investment of their account balances,
but who do not do so, are adequately
informed about the plan’s provisions for
default investment and about
investments made on their behalf under
the plan’s default provisions.
The estimates of respondents and
responses are derived primarily from
the Form 5500 Series filings for the 2003
plan year, which is the most recent
reliable data available to the
Department. The burden for the
preparation and distribution of the
disclosures is treated as an hour burden.
Additional cost burden derives solely
from materials and postage. It is
assumed that electronic means of
communication will be used in 38
percent of the responses pertaining to
annual notices and that such
communications will make use of
existing systems. Accordingly, no cost
has been attributed to the electronic
distribution of information.
Annual Notice—29 CFR 2550.404c–
5(c)(3). The proposed regulation
requires that a notice be provided at
least 30 days before any portion of a
participant’s or beneficiary’s account
balance is initially invested in a
qualified default investment alternative
and annually thereafter. The notice
must describe (1) the circumstances
under which assets in a participant’s
individual account may be invested in
a qualified default investment
alternative; (2) the qualified default
investment alternative, including its
investment objectives, risk and return
characteristics (if applicable), and fees
and expenses; (3) the participants’ and
beneficiaries’ right to direct the
investment of the assets to any other
investment alternative offered under the
plan, without financial penalty; and (4)
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
where participants and beneficiaries can
obtain information about the other
investment alternatives available under
the plan. The proposed regulation states
that the initial notice may be included
in the plan’s summary plan description
or a summary of material modifications,
or it may be provided as a separate
notice.
The Department estimates that
418,000 15 participant directed
individual account pension plans will
prepare and distribute annual notices to
61,612,000 eligible workers, participants
and beneficiaries in the first year in
which this proposed regulation (if
finalized) becomes applicable.
Preparation of the annual notice in the
first year is estimated to require one-half
hour of legal professional time for each
plan, for a total aggregate estimate of
209,000 burden hours. For the 62
percent of participants and beneficiaries
who will receive the annual notice by
mail (38,200,000 individuals),
distribution of the annual notice is
estimated to require an additional
306,000 hours of clerical time, based on
an estimate of one-half minute of
clerical time per notice. No additional
burden hours are attributed to the
distribution of the annual notice to the
remaining 38 percent of participants
and beneficiaries who will receive this
notice electronically (23,413,000
individuals). The total annual burden
hours estimated for the annual notice in
the first year, therefore, are 515,000. The
equivalent cost for this burden hour
estimate is $22,548,000 (legal
professional time is valued at $83 per
hour, and clerical time is valued at $17
per hour).16
In addition to burden hours, the
Department has estimated annual costs
attributable to the annual notice for the
first year, based on materials and
postage, at $18,718,000. This comprises
the material cost for a two-page annual
notice ($.10 per notice) to 38,200,000
participants and beneficiaries (62
percent of 61,612,000 participants and
beneficiaries), which equals $3,820,000,
plus postage at $0.39 per mailing, which
equals $14,898,000. Total annual costs
for the annual notice in the first year are
therefore estimated at $18,718,000.
In years subsequent to the first year of
applicability, the Department estimates
that annual notices will be prepared
only by newly established participant
15 All numbers used in this paperwork burden
estimate have been rounded to the nearest
thousand.
16 Hourly wage estimates are based on data from
the Bureau of Labor Statistics 2000 Occupational
Employment Survey and data from the 2001
Employment Cost Index, and overhead assumptions
by EBSA.
PO 00000
Frm 00012
Fmt 4701
Sfmt 4702
directed individual account pension
plans and plans that changed their
choice of qualified default investment
alternative. For purposes of burden
analysis, the Department has assumed
that one-third (1⁄3) of all participant
directed individual account plans
(139,000 plans) will prepare and
distribute new or updated initial notices
to all participants and beneficiaries,
requiring 24 minutes of legal
professional time per notice. The
preparation of the initial notice in each
subsequent year is estimated to require
56,000 hours. However, the number of
participants receiving initial notices
stays the same. As in the calculation for
the initial year, distribution to the 62
percent of participants and beneficiaries
who will receive the initial notice by
mail (38,200,000 individuals) will
require 306,000 hours and $18,718,000
additional materials and postage cost.
(As for the first year, the Department has
assumed that electronic distribution of
the initial notice in subsequent years
will not add any significant additional
paperwork burden.)
Based on those assumptions, the
Department estimates that the total
burden hours for annual notices in each
year after the first year of applicability
will fall to 361,000 hours. The
equivalent cost of such an hour burden
(using the same assumptions as for the
first year) is $9,823,000. The total cost
burden estimated for subsequent years
for the annual notice will stay at
$18,718,000.
Pass-through Material—29 CFR
2550.404c–5(c)(4). Under the proposed
regulation, any material received by a
plan (such as account statements,
prospectuses, and proxy voting
material) that relates to a default
investment must be passed through to
the participant or beneficiary on whose
behalf the default investment was made.
The proposed regulation imposes this
requirement only with respect to
participants and beneficiaries who have
an investment in a qualified default
investment alternative that was made by
default. In conformity with the
assumptions underlying the other
economic analyses in this preamble, the
Department has assumed that, at any
given time, 5.3 percent of participants
and beneficiaries in participant directed
individual account pension plans
(2,351,000 individuals) will have
default investments. For purposes of
this burden analysis, the Department
has also assumed that plans will receive
materials that must be passed through
the participants and beneficiaries on a
quarterly basis. This assumption takes
into account that many, although not
all, plans will receive quarterly account
E:\FR\FM\27SEP3.SGM
27SEP3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
statements and prospectuses, and that
plans will also receive other passthrough materials on occasion. These
two factors result in an estimate of
9,405,000 responses (distributions of
pass-through materials) per year.
Duplication and packaging of the passthrough material is estimated to require
1.5 minutes of clerical time per
distribution, for an annual hour burden
estimate of 235,000 hours of clerical
time. The equivalent cost of this hour
burden is estimated at $3,997,000.
Additional cost burden for the passthrough of material is estimated to
include paper cost (40 pages of material
yearly per participant or beneficiary)
and postage ($.58 per mailing) at
$10,157,000 annually for 4 distributions
per participant or beneficiary with a
default investment.
These paperwork burden estimates
are summarized as follows:
Type of Review: New collection.
Agency: Employee Benefits Security
Administration, Department of Labor.
Title: Default Investment Alternatives
under Participant Directed Individual
Account Plans.
OMB Number: 1210–NEW.
Affected Public: Business or other forprofit; not-for-profit institutions.
Respondents: 417,000.
Responses: 71,017,000.
Frequency of Response: Annually;
occasionally.
Estimated Total Annual Burden
Hours: 750,000 (first year).
Estimated Total Annual Burden Cost:
$28,875,000.
Congressional Review Act
This notice of proposed rulemaking is
subject to the provisions of the
Congressional Review Act provisions of
the Small Business Regulatory
Enforcement Fairness Act of 1996 (5
U.S.C. 801 et seq.) and, if finalized, will
be transmitted to the Congress and the
Comptroller General for review.
Unfunded Mandates Reform Act
Pursuant to provisions of the
Unfunded Mandates Reform Act of 1995
(Pub. L. 104–4), this rule does not
include any Federal mandate that may
result in expenditures by State, local, or
tribal governments, or the private sector,
which may impose an annual burden of
$100 million or more.
rwilkins on PROD1PC63 with PROPOSAL_3
Discussion of Economic Impacts
Default Investments
A majority 17 of 401(k) plans with
automatic enrollment offer as default
17 Various surveys estimate the proportion at 50
percent (48th Annual Survey of Profit Sharing/
401(k) Plans, supra note 2, at 37, Table 64), 58
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
investment vehicles money market or
stable value funds or similarlyperforming vehicles. The proposed
regulation is expected to reduce this
proportion by encouraging plans to offer
default investment vehicles that include
a mix of equity and fixed income
instruments.
As a result of this proposed
regulation, it is estimated that in the
long run 401(k) plan equity holdings
expressed at 2005 levels will increase by
between $27 billion and $48 billion.
The portion of this estimated increase
that is attributable directly to the
direction of a larger share of default
investments into equity is between $11
billion and $14 billion.18 The rest is
attributable to increased contributions,
which are discussed below under the
heading ‘‘Participation and Contribution
Behavior.’’
Account Performance
Historically, over long time horizons,
diversified portfolios that include
equities have tended to outperform
those consisting only of very low risk,
short term debt instruments, often by
large amounts. From 1926 to 2004, large
company stocks returned 10.4 percent
annually on average, long-term
corporate bonds 5.9 percent, and U.S.
Treasury bills 3.7 percent.19 Stocks are
also riskier, however: the standard
deviations in annual returns for these
three securities classes over this period
were 20.3 percent, 8.6 percent and 3.1
percent.20 One-year large company
stock returns ranged from ¥43 percent
to 54 percent, long-term corporate bond
returns from ¥8 percent to 43 percent,
and U.S. Treasury bill returns from 0
percent to 15 percent.21 But 20-year
returns on these classes of securities
ranged respectively from 3 percent to 18
percent, 1 percent to 12 percent, and
from 0.4 percent to 8 percent.22 Based
on this history, it is widely believed to
percent (2004 Annual 401(k) Benchmarking Survey,
supra note 2, at 7, Exhibit 20), and 81 percent
(Utkus, supra note 4, at 3).
18 It should be noted that these estimates pertain
only to default investments made on behalf of
default participants under automatic enrollment
programs. The default investment proposed
regulation is not so limited. Therefore, these
estimates are likely to omit some of the direction
of a larger share of default investments into equity
that will occur under the proposed regulation. The
Department lacks data on the amount of default
investment activity occurring outside the default
participation context, or any basis for predicting
whether or how much such activity might increase
as a result of the proposed regulation. The
Department invites comments on these questions.
19 Stocks, Bonds, Bills and Inflation 2005
Yearbook, Ibbotson Assocs., at 117, Table 6–7
(2005).
20 Id.
21 Id. at 38–39, Table 2–5.
22 Id. at 50–51, Table 2–11.
PO 00000
Frm 00013
Fmt 4701
Sfmt 4702
56817
be advantageous for long-term savers,
such as workers saving for retirement, to
invest a substantial portion of their
assets in equity.23
As noted above, this proposed
regulation is expected to result in the
direction of default investments from
very low-risk instruments such as
money market funds to diversified
portfolios that include a substantial
proportion of equities. If historical
patterns hold, this in turn is expected to
improve investment results for a large
majority of affected individuals. As a
result of this proposed regulation, in the
long run aggregate 401(k) account
balances are estimated to increase by
between $45 billion and $89 billion,
expressed at 2005 levels. The portion of
this estimated increase directly
attributable to direction of default
investments from very low-risk
instruments into higher-performing
portfolios is between $7 billion and $9
billion; the remainder is attributable to
expected increases in contributions,
discussed below under the heading
‘‘Participation and Contribution
Behavior.’’
Automatic Enrollment
Automatic enrollment programs are
growing in popularity. These programs
covered only about 5 percent of workers
eligible for 401(k) plans in 2002,24 but
the number may have increased to 18
percent today 25 and could reach 25
percent in the near future. The
Department expects and intends that
this proposed regulation, by alleviating
some fiduciary concerns that might
otherwise discourage implementation of
automatic enrollment programs, will
promote wider implementation of such
programs. As a result of the proposed
regulation, in the near future such
programs may cover 35 percent to 45
percent of eligible workers rather than
25 percent.26
23 See,
e.g., Utkus, supra note 4.
of Labor Statistics, National
Compensation Survey: Employee Benefits in Private
Industry in the United States, 2002–2003, Bulletin
2573, at 109 (2005).
25 EBSA estimate. The proportion of plans in
various size classes that provide automatic
enrollment was taken from 48th Annual Survey of
Profit Sharing/401(k) Plans, supra note 2, at 36,
Table 61. EBSA took a weighted average of these
proportions, reflecting the distribution of 401(k)
participants across the plan size classes, as
estimated by EBSA based on annual reports filed by
plans with EBSA.
26 The incidence of automatic enrollment appears
to be growing, by one estimate from 8.4 percent of
plans in 2003 to 10.5 percent in 2004 (Id. at 36),
by another from 14 percent in 2003 to 19 percent
in 2005 (Survey Findings: Trends and Experiences
in 401(k) Plans, 2005, supra note 2, at 1, 13).
Another survey found no growth between 2003 and
2004. 2004 Annual 401(k) Benchmarking Survey,
24 Bureau
E:\FR\FM\27SEP3.SGM
Continued
27SEP3
56818
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
percent. Consequently, the Department
estimates that this proposed regulation
will increase overall 401(k)
participation rates from 72 percent to
between 75 percent and 77 percent.
Aggregate annual contributions are
expected to grow on net by between
$1.9 billion and $3.8 billion, expressed
at 2005 levels. These and related
estimates are summarized Table 2
below.
Retirement Income From 401(k) Plans
For all individuals born in 1985 and
surviving to age 67, holding other
factors constant, low-impact estimates
suggest that the proposed regulation
may increase pension income by an
average of $2,010 per year (in 2005
dollars) for 10 percent, but could
decrease it by $1,120 per year on
average for 5 percent. Pension income
would be unchanged for the remaining
85 percent. High-impact estimates
suggest that average annual pension
income may increase by $2,740 for 14
percent, fall by $1,460 for 6 percent, and
be unchanged for 80 percent. The
number of individuals experiencing
increases in retirement income is
estimated to be approximately twice the
number experiencing decreases, and the
average gains are estimated to be
approximately twice the size of average
losses. These estimates are summarized
Table 3 below. (The incidence and size
of gains are likely to be larger than
estimated here, and those of any losses
are likely to be smaller, if plans provide
for escalating default contribution rates
or higher default contribution rates than
assumed here.)
supra note 2, at 6. Indicators of future growth are
mixed. Most point to a potential for large growth,
but it is unclear how much of this growth will be
realized. The same survey that found no growth
between 2003 and 2004 also found that, in 2004,
14 percent of plan sponsors had not yet
implemented but were considering implementing
automatic enrollment. Id. at 6, Exhibit 17. By
another estimate, in 2005, 28 percent of plan
sponsors indicated that they were likely to
implement automatic enrollment over the next year.
See Survey Findings: Hot Topics in Retirement
2005, (Hewitt Associates LLC) 2005, at 11. But 53
percent indicated they were unlikely to implement
any automatic plan features, including 28 percent
that cited concern about assuming additional
fiduciary responsibility. Id. at 12. To estimate the
impact of this proposed regulation on account
balances and pension income, EBSA adopted the
following assumptions. If current trends and
concerns continued, the incidence of automatic
enrollment would soon reach 25 percent of eligible
employees, and then remain at that level. The
proposed regulation, by relieving fiduciary
concerns that discourage implementation of
automatic enrollment, would increase that
incidence to between 35 percent (low impact
estimates) and 45 percent (high impact estimates).
In addition, new provisions for a nondiscrimination
safe harbor under the Code for ‘‘qualified automatic
contribution arrangements,’’ added by section 902
of the Pension Protection Act, are likely to affect the
future incidence of automatic enrollment. These
assumptions are highly uncertain and EBSA invites
comments on their validity and suggestions as to
how to develop more reliable estimates of the future
incidence of automatic enrollment programs.
27 However, there is also evidence that automatic
enrollment programs can have the effect of lowering
contribution rates for a few employees below the
level that they would have elected absent automatic
enrollment. At present, surveys indicate that the
default contribution rate is usually either 2 percent
or 3 percent of salary. Some employees who might
otherwise have enrolled (either at first eligibility or
later) and elected a higher contribution rate may
instead permit themselves to be enrolled at the
default rate. Once contributing at the default rate
they may continue at that rate for some time. See,
e.g., James J. Choi, David Laibson, Brigitte C.
Madrian & Andrew Metrick, Saving for Retirement
on the Path of Least Resistance, (July 19, 2004); see
also Choi, Laibson & Madrian, supra note 1. The
potential for lowering of contribution rates will be
minimized in plans that provide for automatic
escalation of default contribution rates, such as will
be required under new tax nondiscrimination safe
harbor provisions for ‘‘qualified automatic
contribution arrangements,’’ added by section 902
of the Pension Protection Act.
rwilkins on PROD1PC63 with PROPOSAL_3
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
PO 00000
Frm 00014
Fmt 4701
Sfmt 4702
E:\FR\FM\27SEP3.SGM
27SEP3
EP27SE06.095
Analyses of automatic enrollment
programs demonstrate that such
programs increase participation. The
increase is most pronounced among
employees whose participation rates
otherwise tend to be lowest, namely
lower-paid, younger and shorter-tenure
employees. Automatic enrollment
programs increase many such
employees’ contribution rates from zero
to the default rate, often supplemented
by some employer matching
contribution. These additional
contributions tend to come early in the
employees’ careers and therefore can
add disproportionately to retirement
income as investment returns
accumulate over a long period.27
Plans implementing automatic
enrollment programs may increase their
participation rates on average from
approximately 70 percent to perhaps 90
Participation and Contribution Behavior
Cost
Plan sponsors may incur some
administrative cost in order to meet the
conditions of the proposed regulation.
The Department generally expects such
cost to be low. The annual notice
provision can be satisfied by adding
information to existing notices and
disclosures, such as the Summary Plan
Description, the annual investment
election form, or by adapting
information provided to the plan by the
investment manager of a qualified
default investment alternative. The
requirement to pass through investment
material to participants and
beneficiaries does not impose extensive
costs. These revisions may be no more
extensive than those associated with
other amendments that plans implement
from time to time. The boundaries of the
proposed regulation are sufficiently
broad to encompass a wide range of
readily available and competitively
priced investment products and
services. It is likely that a large majority
of participant directed plans already
offer one or more investment options
that would fall within the proposed
regulation. For these reasons, it is likely
that the administrative cost for a plan
sponsor to take advantage of the relief
afforded by the proposed regulation will
be low. The Department invites
comments on the administrative cost of
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
this proposed regulation, and
suggestions as to how to minimize that
cost.
The proposed regulation may
indirectly prompt some plan sponsors to
shoulder additional costs in terms of
increased retirement benefits paid to
employees. For example, it is expected
that the proposed regulation, by
promoting the adoption of automatic
enrollment programs, will have the
indirect affect of increasing aggregate
employer matching contributions by
between $700 million and $1.3 billion
annually (expressed at 2005 levels).
Adverse consequences are not expected
because the adoption of automatic
enrollment programs and the provision
of matching contributions generally are
at the discretion of the plan sponsor.
Use of the proposed regulation and,
therefore, compliance with its
provisions are also voluntary on the part
of the plan sponsor.
Additional Potential Consequences
The Department anticipates that this
proposed regulation will have two major
economic consequences. Default
investments will be directed toward
higher-return instruments boosting
average account performance, and
automatic enrollment provisions will
become more common boosting
participation. However, it is possible
PO 00000
Frm 00015
Fmt 4701
Sfmt 4702
56819
that the proposed regulation will have
additional, indirect consequences,
which could affect future retirement
income levels. The Department invites
public comment on the likelihood and
implications of any such consequences,
including comments addressing the
following questions.
• Will plan sponsors that direct
default investments from very low-risk
instruments into higher-performing
portfolios make other changes to
investment options or undertake new
efforts to inform or influence
participants’ investment decisions? Will
those plan sponsors that implement
automatic enrollment programs change
other provisions of their plans as well?
For example, might they change
matching contribution formulas,
eligibility or vesting provisions, loan
programs, or distribution policies?
• More than one-half of all
participant directed individual account
plans recently reported compliance with
ERISA section 404(c)(1) and associated
regulations. While the fiduciary
protections afforded by this proposed
regulation for default investments are
intended to be similar to those afforded
by the regulation under section 404(c)(1)
of ERISA for participants’ active
investment elections, it is possible that
some fiduciaries who are covered by the
proposed regulation in connection with
E:\FR\FM\27SEP3.SGM
27SEP3
EP27SE06.096
rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
56820
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
Basis of Estimates
The Department estimated the effect
of the proposed regulation on 401(k)
plan participation, contributions,
account balances, and investment mix,
28 Holden
& VanDerhei, supra note 1, at 15, Figure
rwilkins on PROD1PC63 with PROPOSAL_3
10.
29 As noted below, peer reviewers raised
questions about welfare effects in connection with
peer review.
30 Insofar as the Department expects contributions
to increase, the Department expects taxes on
income to be correspondingly deferred. The
magnitude of this effect would depend on the
timing of contributions and withdrawals and the tax
rates applicable at those times.
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
401(k) savings in each of the four
earnings quartiles by between 6 and 10
percentage points.28
Cost-Benefit Assessment
The costs and benefits of the proposed
regulation are not simple, direct
functions of the foregoing gross dollar
estimates. For example, increases in
retirement savings due to automatic
enrollment will be offset by either
decreases in current consumption or
reductions in other savings. Increases
due to higher returns will entail
additional risk. Therefore, net benefits
will be smaller than the predicted
increases in retirement savings. The
Department did not attempt to quantify
these welfare effects, believing that
there is insufficient data on the time
preference for consumption and level of
risk aversion in the affected
population.29
The proposed regulation will have
distributional consequences, the costs
and benefits of which are open to
different interpretations. Average
increases in pension income will be
larger for individuals with higher career
earnings, but they will be
proportionately larger for those with
lower career earnings (see Table 4
below). Moreover, while average
pension incomes will rise in each of the
four career earnings quarterlies, a small
minority of individuals in each quartile
could lose some pension income (see
Table 3).
The proposed regulation may also
have macroeconomic consequences,
which are likely to be small but
positive. An increase in retirement
saving is likely to promote investment
and long-term economic productivity
and growth. The increase in retirement
saving will be very small relative to
overall market capitalization, and may
be offset in part by reductions in other
saving. Therefore macroeconomic
benefits are likely to be small.30
Based on the foregoing analysis and
estimates, the Department is confident
that the proposed regulation will
increase aggregate retirement savings
and pension income substantially. The
Department therefore concludes that the
benefits of this proposed regulation will
exceed its costs by a wide margin, and
invites comments on this conclusion.
and its effect on pension incomes at age
67, using a microsimulation model of
lifetime pension accumulations for a
birth cohort, known as PENSIM.31 To
produce the low and high impact
estimates presented here, PENSIM was
parameterized and applied as follows.
First, automatic enrollment was
assigned randomly to achieve
incidences of 25 percent (baseline), 35
31 PENSIM was developed for the Department by
the Policy Simulation Group as a tool for examining
the macroeconomic and distributional implications
of private pension trends and policies. Detailed
information on PENSIM is available at https://
www.polsim.com/PENSIM.html. Examples of
PENSIM applications include comparisons of
retirement income prospects for different
generations contained in U.S. Government
Accountability Office, Report No. 03–429,
Retirement Income: Intergenerational Comparisons
of Wealth and Future Income (2003) and
comparisons of pension income produced by
traditional defined benefit pension plans and cash
balance pension plans contained in U.S.
Government Accountability Office, Report No. 06–
42, Private Pensions: Information on Cash Balance
Pension Plans (2005). As noted below, the choice
of PENSIM as the basis for these estimates was
questioned in the context of peer review.
PO 00000
Frm 00016
Fmt 4701
Sfmt 4702
E:\FR\FM\27SEP3.SGM
27SEP3
EP27SE06.097
default investments will not be covered
by the regulation under section 404(c)(1)
in connection with participant directed
investments out of default investments.
If so, how might the proposed
regulation’s incentives interact with
those associated with the existing
ERISA section 404(c) regulation, and to
what effect?
• Will employees who make
additional contributions as a result of
new automatic enrollment programs
reduce their current consumption or
other types of current saving, or some of
each? Will they be more or less likely
than otherwise similar participants to
retain or roll over their accounts,
preserving them into retirement?
Changes such as these could either
augment or offset the effects of this
proposed regulation on retirement
saving and pension income. For
example, by one estimate, among
employees eligible for a 401(k) plan
with automatic enrollment and a life
cycle fund investment default, moving
the default contribution up from 3
percent to 6 percent could increase the
median earnings replacement rate from
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
rwilkins on PROD1PC63 with PROPOSAL_3
percent (low impact) and 45 percent
(high impact) of 401(k) plan eligible
employees. Next, participation and
default participation rates were adjusted
to reflect available research findings on
these rates at various tenures in the
presence and absence of automatic
enrollment programs.32 The default
contribution rate was assumed to be 3
percent, which surveys indicate is the
most common rate currently in use.33
The investment of contributions made
by default was directed as follows:34 in
the baseline estimates, to U.S. Treasury
bonds;35 in the low- and high-impact
estimates, to a mix resembling a life
cycle fund, with 100 percent minus the
participant’s age in equity and the
remainder in U.S. Treasury bonds.
Returns to equity were determined
stochastically. The distribution was
lognormal with a nominal mean of 9.48
32 These findings were drawn from Choi, Laibson
& Madrian, supra note 1. The overall participation
rate under automatic enrollment was adjusted
upward to 90 percent.
33 See, e.g., 2004 Annual 401(k) Benchmarking
Survey; supra note 2, at 6; see also Survey Findings:
Trends and Experiences in 401(k) Plans, supra note
2, at 16;’’ see also 48th Annual Survey of Profit
Sharing/401(k) Plans, supra note 2, at 36.
34 These estimates assume complete
correspondence between default participation in
401(k) plans and default investing. Participants
contributing by default are assumed to invest by
default, while those who actively elect to contribute
or who are in plans without elective contributions
are assumed to actively invest. In practice neither
of these assumptions will hold all of the time. Some
participants contributing by default may actively
direct their investments. Perhaps more important,
some active contributors or participants in plans
without elective contributions may invest by
default—and this proposed regulation may affect
the incidence of such default investing. The
Department did not attempt to estimate the extent
or effect of default investing not associated with
default contributing. The Department was unable to
locate data on the extent of such default investing,
but believes it is likely to be small relative to that
of default investing of default contributions. The
Department is likewise uncertain how much the
proposed regulation might affect the incidence of
such default investing, but believes that the
economic effects of changes in that incidence will
be modest insofar as the asset allocation of the
active investments such default investments would
replace are likely on average and aggregate to not
differ much from the asset allocation of the defaults.
The Department also notes that a large majority of
the estimated economic effects of the proposed
regulation derive from increased contributions
rather than increased equity investment, so the
omission from the estimates of some default
investment effects may have only a modest effect
on the total. The Department invites comments on
its assumptions and estimates relating to the
incidence of default investments.
35 On the risk return spectrum, Treasury bonds
generally fall between money market and stable
value funds on one side and balanced and life cycle
funds on the other. They serve here as a proxy for
the current default investments connected with
automatic enrollment programs, which are mostly
money market and stable value funds but include
a substantial proportion of balanced and life cycle
funds.
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
percent 36 and standard deviation of
16.54 percent.37
To estimate the effects of the
proposed regulation, the Department
compared the baseline estimates with
the low- and high-impact estimates.
Because the proposed regulation’s
effects will be cumulative and gradual,
estimates were prepared for the 1985
birth cohort, whose working lives would
almost entirely follow implementation
of the proposed regulation. To estimate
participation rates, contributions,
account balances and investment mixes,
the cohort was sampled at random ages
from 21 to 65, and results for
individuals participating in 401(k) plans
when sampled were aggregated, with all
dollar amounts adjusted to 2005 levels.
This roughly illustrates a point-in-time
snapshot of plans in the future.38 To
estimate effects on pension incomes,
account balances available at
retirement 39 were converted into
lifetime annuities, and pension incomes
of cohort members surviving to age 67
were measured and compared.
The estimates are highly uncertain.
The long time horizon compounds the
uncertainty. One of the greatest
uncertainties relates to the default
36 This is the rate used by the Office of the
Actuary, U.S. Social Security Administration, to
estimate returns to proposed personal accounts in
the Social Security program.
37 This is parallel to volatility assumed by
Vanguard in illustrating the effects of alternative
default investments. See Utkus, supra note 4, at 17.
38 Because PENSIM is a birth cohort-based model
(rather than a panel-based model that simulates the
experience of an entire population from year to
year) it does not directly provide point-in-time
aggregate estimates for the overall population.
These PENSIM-derived estimates serve as a proxy
for such panel-derived point-in-time estimates. The
PENSIM-based estimates in effect blend the
experience of younger workers in the nearer future
with that of older workers in the more distant
future, producing a sort of longitudinal central
tendency. The estimated participation and
contribution rates serve as proxies for the average
across many future years (reflecting nearimmediate, ongoing effects). The estimated account
balances serve as proxies for some point in the
distant future (reflecting cumulative effects). Actual
aggregate participation rates and contribution
amounts will vary over time because of changes in
certain population variables such as birth rates, agespecific labor force participation rates, and
productivity and compensation levels. Any longterm forecasts of such changes are highly uncertain,
however. The Department therefore did not attempt
to adjust its estimates for such changes, believing
such adjustments would be of questionable analytic
value. Because the PENSIM-derived contribution
estimates blend experience at different points in
time and do not represent changes in population
contributions over time or the timing of those
changes, they do not lend themselves to
discounting, conversion to net present values or
level annuity equivalents. Rather, they can be
interpreted as proxies for level annuity equivalents,
albeit proxies which neglect the aforementioned
changes in population variables.
39 Taking into account individuals’ propensities
to cash out their accounts prior to retirement.
PO 00000
Frm 00017
Fmt 4701
Sfmt 4702
56821
contribution rate, which is assumed to
be fixed at 3 percent.40 Higher initial
default contribution rates, or default
provisions that increase contribution
rates as tenure and/or pay increases,
might enlarge the positive effects on
pension income and reduce the negative
effects. But it is unclear whether plan
sponsors will adopt such approaches, or
if they do, whether they might make
other changes to their plans or whether
more eligible employees might decline
automatic participation. The
Department therefore has no reliable
basis for estimating the effects of such
changes in automatic enrollment
programs.41 The Department invites
comments on this and other areas of
uncertainty in its estimates.
Peer Review
The ‘‘Final Information Quality
Bulletin for Peer Review’’ issued by the
Office of Management and Budget on
December 16, 2004 (the Bulletin)
establishes that important scientific
information shall be peer reviewed by
qualified specialists before it is
disseminated by the federal government.
Collectively, the PENSIM model, the
data and methods underlying it, the
surveys and literature used to
parameterize it, and the Department’s
interpretation of these and application
of them to produce the estimates
presented in this regulatory impact
analysis (RIA) constitute a ‘‘highly
influential scientific assessment’’ under
the Bulletin. Therefore, pursuant to the
Bulletin, the Department arranged for
review of this assessment by three
highly qualified independent reviewers.
The Department provided each reviewer
with instructions for review pursuant to
the Bulletin, a draft of the Notice of
40 As noted below, other areas of uncertainty,
including rates of return, the rate of adoption of
automatic enrollment, participation rates under
automatic enrollment, and other savings decisions,
were raised in connection with peer review.
41 Nonetheless, to illustrate the potential impact
of higher default contribution rates, the Department
estimated the effect of the proposed regulation
where the default contribution rate in automatic
enrollment programs is 5 percent rather than 3
percent. The estimate holds constant other plan
characteristics and participants’ default rates and
elective behaviors. In this scenario, in the very long
run the proposed regulation is predicted to increase
aggregate 401(k) plan account balances by between
3 percent and 6 percent, or approximately $60
billion and $114 billion if represented at 2005
levels. For individuals born in 1985 and surviving
to age 67, holding other factors constant, lowimpact estimates suggest that the proposed
regulation will increase pension income by an
average of $2,200 per year (in 2005 dollars) for 11
percent, and decrease it by $810 per year on average
for 4 percent. Pension income would be unchanged
for the remaining 85 percent. High-impact estimates
suggest that average annual pension income will
increase by $2,880 for 15 percent, fall by $1,040 for
5 percent, and be unchanged for 80 percent.
E:\FR\FM\27SEP3.SGM
27SEP3
rwilkins on PROD1PC63 with PROPOSAL_3
56822
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
Proposed Rulemaking (NPRM)
including a draft RIA, technical
documentation of PENSIM and its
application in support of the RIA, and
detailed tables of related PENSIM
estimates. The instructions directed the
reviewers to focus on the technical and
scientific issues in the assessment rather
than the policy proposed in the NPRM.
Each reviewer separately reviewed the
assessment embodied in these materials
and submitted to the Department a peer
review report. All of the aforementioned
materials are being published together
with the Department’s written response
to the peer reviews on the Department’s
Web site, concurrent with the
publication of this NPRM, at https://
www.dol.gov/ebsa.
The reviews offer both praise for and
criticism of the assessment. They
question numerous specific modeling
assumptions and identify potential
indirect effects that were not estimated.
They note that welfare effects (as
distinguished from simple dollar
impacts on retirement saving), which
the Department did not estimate, may be
negative if consumers are risk averse or
prefer current to future consumption.
One review criticizes PENSIM’s reduced
form modeling approach as lacking the
structural, behavioral foundation
necessary to predict results and evaluate
welfare effects, finds the PENSIM
estimates ‘‘unconvincing,’’ and
concludes that the Department has
failed to provide a scientific rationale
for the policy initiative contained in the
NPRM.
While many of the reviews’ criticisms
have merit, the Department does not
believe that they cast serious doubt on
the RIA’s primary conclusions: that the
proposed rule on net will increase
retirement savings and thereby benefit
consumers. The Department’s written
response to the reviews qualifies and
tempers some of the RIA’s conclusions.
It answers, to the extent possible, major
questions raised in the reviews,
including questions about welfare
effects. It defends the Department’s
reliance on PENSIM as a basis for its
estimates and explains why the
Department did not estimate net welfare
effects but believes such effects to be
positive. It also offers a tentative,
prioritized plan for conducting
sensitivity tests and otherwise refining
its assessment and RIA in connection
with a possible final rulemaking.
Federalism Statement. Executive
Order 13132 (August 4, 1999) outlines
fundamental principles of federalism
and requires federal agencies to adhere
to specific criteria in the process of their
formulation and implementation of
policies that have substantial direct
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
effects on the States, the relationship
between the national government and
the States, or on the distribution of
power and responsibilities among the
various levels of government. The
proposed rule does not have federalism
implications because it has no
substantial direct effect on the States, on
the relationship between the national
government and the States, or on the
distribution of power and
responsibilities among the various
levels of government. Section 514 of
ERISA provides, with certain exceptions
specifically enumerated, that the
provisions of Titles I and IV of ERISA
supersede any and all laws of the States
as they relate to any employee benefit
plan covered under ERISA. The
requirements implemented in the
proposed rule do not alter the
fundamental provisions of the statute
with respect to employee benefit plans,
and as such would have no implications
for the States or the relationship or
distribution of power between the
national government and the States.
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Exemptions,
Fiduciaries, Investments, Pensions,
Prohibited transactions, Real estate,
Securities, Surety bonds, Trusts and
trustees.
For the reasons set forth in the
preamble, the Department proposes to
amend Chapter XXV, Subchapter F, Part
2550 of Title 29 of the Code of Federal
Regulations as follows:
Subchapter F—Fiduciary
Responsibility Under the Employee
Retirement Income Security Act of 1974
PART 2550—RULES AND
REGULATIONS FOR FIDUCIARY
RESPONSIBILITY
1. The authority citation for part 2550
is revised to read as follows:
Authority: 29 U.S.C. 1135; sec. 657, Pub.
L. 107–16, 115 Stat. 38; and Secretary of
Labor’s Order No. 1–2003, 68 FR 5374 (Feb.
3, 2003). Sec. 2550.401b–1 also issued under
sec. 102, Reorganization Plan No. 4 of 1978,
43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978
Comp. 332, effective Dec. 31, 1978, 44 FR
1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332.
Sec. 2550.401c–1 also issued under 29 U.S.C.
1101. Sections 2550.404c–1 and 2550.404c–
5 also issued under 29 U.S.C. 1104. Sec.
2550.407c–3 also issued under 29 U.S.C.
1107. Sec. 2550.408b–1 also issued under 29
U.S.C. 1108(b)(1) and sec. 102,
Reorganization Plan No. 4 of 1978, 3 CFR,
1978 Comp. p. 332, effective Dec. 31, 1978,
44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978
Comp. 332. Sec. 2550.412–1 also issued
under 29 U.S.C. 1112.
2. Add § 2550.404c–5 to read as
follows:
PO 00000
Frm 00018
Fmt 4701
Sfmt 4702
§ 2550.404c–5 Fiduciary relief for
investments in qualified default investment
alternatives.
(a) In general. (1) This section
implements the fiduciary relief
provided under section 404(c)(5) of the
Employee Retirement Income Security
Act of 1974, as amended (ERISA or the
Act), 29 U.S.C. 1001 et seq., under
which a participant or beneficiary in an
individual account plan will be treated
as exercising control over the assets in
his or her account for purposes of
ERISA section 404(c)(1) with respect to
the amount of contributions and
earnings that, in the absence of an
investment election by the participant,
are invested by the plan in accordance
with this regulation. If a participant or
beneficiary is treated as exercising
control over the assets in his or her
account in accordance with ERISA
section 404(c)(1) no person who is
otherwise a fiduciary shall be liable
under part 4 of title I of ERISA for any
loss or by reason of any breach which
results from such participant’s or
beneficiary’s exercise of control. Except
as specifically provided in paragraph
(c)(6) of this section a plan need not
meet the requirements for an ERISA
section 404(c) plan under 29 CFR
2550.404c–1 in order for a plan
fiduciary to obtain the relief under this
section.
(2) The standards set forth in this
section apply solely for purposes of
determining whether a fiduciary meets
the requirements of this proposed
regulation. Such standards are not
intended to be the exclusive means by
which a fiduciary might satisfy his or
her responsibilities under the Act with
respect to the investment of assets in the
individual account of a participant or
beneficiary.
(b) Fiduciary relief. (1) Except as
provided in paragraphs (b)(2), (3), and
(4) of this section, a fiduciary of an
individual account plan that permits
participants or beneficiaries to direct the
investment of assets in their accounts
and that meets the conditions of
paragraph (c) of this section shall not be
liable for any loss, or by reason of any
breach under part 4 of title I of ERISA,
that is the direct and necessary result
of—
(i) Investing all or part of a
participant’s or beneficiary’s account in
a qualified default investment
alternative, or
(ii) Investment decisions made by the
entity described in paragraph (e)(3) of
this section in connection with the
management of a qualified default
investment alternative.
(2) Nothing in this section shall
relieve a fiduciary from his or her duties
E:\FR\FM\27SEP3.SGM
27SEP3
rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
under part 4 of title I of ERISA to
prudently select and monitor any
qualified default investment alternative
under the plan or from any liability that
results from a failure to satisfy these
duties, including liability for any
resulting losses.
(3) Nothing in this section shall
relieve an investment manager
described in paragraph (e)(3)(i) from its
fiduciary duties under part 4 of title I of
ERISA or from any liability that results
from a failure to satisfy these duties,
including liability for any resulting
losses.
(4) Nothing in this section shall
provide relief from the prohibited
transaction provisions of section 406 of
ERISA, or from any liability that results
from a violation of those provisions,
including liability for any resulting
losses.
(c) Conditions. With respect to the
investment of assets in the individual
account of a participant or beneficiary,
a fiduciary shall qualify for the relief
described in paragraph (b)(1) of this
section if:
(1) Assets are invested in a ‘‘qualified
default investment alternative’’ within
the meaning of paragraph (e) of this
section;
(2) The participant or beneficiary on
whose behalf the investment is made
had the opportunity to direct the
investment of the assets in his or her
account but did not direct the
investment of the assets;
(3) The participant or beneficiary on
whose behalf an investment in a
qualified default investment alternative
may be made is furnished within a
reasonable period of time of at least 30
days in advance of the first such
investment and within a reasonable
period of time of at least 30 days in
advance of each subsequent plan year,
a summary plan description, summary
of material modification, or other notice
that meets the requirements of
paragraph (d) of this section;
(4) Under the terms of the plan any
material provided to the plan relating to
a participant’s or beneficiary’s
investment in a qualified default
investment alternative (e.g., account
statements, prospectuses, proxy voting
material) will be provided to the
participant or beneficiary;
(5) Any participant or beneficiary on
whose behalf assets are invested in a
qualified default investment alternative
may, consistent with the terms of the
plan (but in no event less frequently
than once within any three month
period), transfer, in whole or in part,
such assets to any other investment
alternative available under the plan
without financial penalty; and
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
(6) The plan offers a ‘‘broad range of
investment alternatives’’ within the
meaning of 29 CFR 2550.404c—1(b)(3).
(d) Notice. The notice required by
paragraph (c)(3) of this section shall be
written in a manner calculated to be
understood by the average plan
participant and contain the following:
(1) A description of the circumstances
under which assets in the individual
account of a participant or beneficiary
may be invested on behalf of the
participant and beneficiary in a
qualified default investment alternative;
(2) A description of the qualified
default investment alternative,
including a description of the
investment objectives, risk and return
characteristics (if applicable), and fees
and expenses attendant to the
investment alternative;
(3) A description of the right of the
participants and beneficiaries on whose
behalf assets are invested in a qualified
default investment alternative to direct
the investment of those assets to any
other investment alternative under the
plan, without financial penalty; and
(4) An explanation of where the
participants and beneficiaries can obtain
investment information concerning the
other investment alternatives available
under the plan.
(e) Qualified default investment
alternative. For purposes of this section,
a qualified default investment
alternative means an investment
alternative that:
(1)(i) Does not hold or permit the
acquisition of employer securities,
except as provided in paragraph
(e)(1)(ii) of this section.
(ii) Paragraph (e)(1)(i) of this section
shall not apply to:
(A) Employer securities held or
acquired by an investment company
registered under the Investment
Company Act of 1940 or a similar
pooled investment vehicle regulated
and subject to periodic examination by
a State or Federal agency and with
respect to which investment in such
securities is made in accordance with
the stated investment objectives of the
investment vehicle and independent of
the plan sponsor or an affiliate thereof;
or
(B) With respect to a qualified default
investment alternative described in
paragraph (e)(5)(iii) of this section,
employer securities acquired as a
matching contribution from the
employer/plan sponsor, or employer
securities acquired prior to management
by the investment management service;
(2) Except as otherwise provided in
paragraph (c)(5) of this section, does not
impose financial penalties or otherwise
restrict the ability of a participant or
PO 00000
Frm 00019
Fmt 4701
Sfmt 4702
56823
beneficiary to transfer, in whole or in
part, his or her investment from the
qualified default investment alternative
to any other investment alternative
available under the plan;
(3) Is:
(i) Managed by an investment
manager, as defined in section 3(38) of
the Act, or
(ii) An investment company registered
under the Investment Company Act of
1940;
(4) Is diversified so as to minimize the
risk of large losses; and
(5) Constitutes one of the following:
(i) An investment fund product or
model portfolio that is designed to
provide varying degrees of long-term
appreciation and capital preservation
through a mix of equity and fixed
income exposures based on the
participant’s age, target retirement date
(such as normal retirement age under
the plan) or life expectancy. Such
products and portfolios change their
asset allocations and associated risk
levels over time with the objective of
becoming more conservative (i.e.,
decreasing risk of losses) with
increasing age. For purposes of this
paragraph (e)(5)(i), asset allocation
decisions for such products and
portfolios are not required to take into
account risk tolerances, investments or
other preferences of an individual
participant. An example of such a fund
or portfolio may be a ‘‘life-cycle’’ or
‘‘targeted-retirement-date’’ fund or
account.
(ii) An investment fund product or
model portfolio that is designed to
provide long-term appreciation and
capital preservation through a mix of
equity and fixed income exposures
consistent with a target level of risk
appropriate for participants of the plan
as a whole. For purposes of this
paragraph (e)(5)(ii), asset allocation
decisions for such products and
portfolios are not required to take into
account the age, risk tolerances,
investments or other preferences of an
individual participant. An example of
such a fund or portfolio may be a
‘‘balanced’’ fund.
(iii) An investment management
service with respect to which an
investment manager allocates the assets
of a participant’s individual account to
achieve varying degrees of long-term
appreciation and capital preservation
through a mix of equity and fixed
income exposures, offered through
investment alternatives available under
the plan, based on the participant’s age,
target retirement date (such as normal
retirement age under the plan) or life
expectancy. Such portfolios change
their asset allocations and associated
E:\FR\FM\27SEP3.SGM
27SEP3
56824
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules
risk levels for an individual account
over time with the objective of
becoming more conservative (i.e.,
decreasing risk of losses) with
increasing age. For purposes of this
paragraph (e)(5)(iii), asset allocation
decisions are not required to take into
account risk tolerances, investments or
other preferences of an individual
participant. An example of such a
service may be a ‘‘managed account.’’
Signed at Washington, DC, this 22nd day
of September.
Ann L. Combs,
Assistant Secretary, Employee Benefits
Security Administration, Department of
Labor.
[FR Doc. 06–8282 Filed 9–26–06; 8:45 am]
rwilkins on PROD1PC63 with PROPOSAL_3
BILLING CODE 4510–29–P
VerDate Aug<31>2005
17:45 Sep 26, 2006
Jkt 208001
PO 00000
Frm 00020
Fmt 4701
Sfmt 4702
E:\FR\FM\27SEP3.SGM
27SEP3
Agencies
[Federal Register Volume 71, Number 187 (Wednesday, September 27, 2006)]
[Proposed Rules]
[Pages 56806-56824]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-8282]
[[Page 56805]]
-----------------------------------------------------------------------
Part VI
Department of Labor
-----------------------------------------------------------------------
Employee Benefits Security Administration
-----------------------------------------------------------------------
29 CFR Part 2550
Default Investment Alternatives Under Participant Directed Individual
Account Plans; Proposed Rule
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 /
Proposed Rules
[[Page 56806]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB10
Default Investment Alternatives Under Participant Directed
Individual Account Plans
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Proposed regulation.
-----------------------------------------------------------------------
SUMMARY: This document contains a proposed regulation that, upon
adoption, would implement recent amendments to title I of the Employee
Retirement Income Security Act of 1974 (ERISA) enacted as part of the
Pension Protection Act of 2006, Public Law 109-280, under which a
participant of a participant directed individual account pension plan
will be deemed to have exercised control over assets in his or her
account if, in the absence of investment directions from the
participant, the plan invests in a qualified default investment
alternative. A fiduciary of a plan that complies with this proposed
regulation will not be liable for any loss, or by reason of any breach
that occurs as a result of such investments. The types of investments
that qualify as default investment alternatives under section 404(c)(5)
of ERISA are described in the proposal. Plan fiduciaries remain
responsible for the prudent selection and monitoring of the qualified
default investment alternative. The proposed regulation conditions
relief upon advance notice to participants and beneficiaries describing
the plan's provisions governing the circumstances under which
contributions or other assets will be invested on their behalf in a
qualified default investment alternative, the investment objectives of
the default investment alternative, and the right of participants and
beneficiaries to direct investments out of the default investment
alternative without penalty. The regulation, upon adoption, will affect
plan sponsors and fiduciaries of participant directed individual
account plans, the participants and beneficiaries in such plans, and
the service providers to such plans.
DATES: Written comments on the proposed regulation should be received
by the Department of Labor on or before November 13, 2006.
ADDRESSES: Comments should be addressed to the Office of Regulations
and Interpretations, Employee Benefits Security Administration, Room N-
5669, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210, Attn: Default Investment Regulation. Commenters
are encouraged to submit comments electronically to e-ORI@dol.gov or
www.regulations.gov (follow instructions for submission). Comments will
be available to the public at www.dol.gov/ebsa and www.regulations.gov.
Comments also will be available for public inspection at the Public
Disclosure Room, N-1513, Employee Benefits Security Administration, 200
Constitution Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Erin M. Sweeney or Lisa M. Alexander,
Office of Regulations and Interpretations, Employee Benefits Security
Administration, (202) 693-8500. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
A. Background
It is well established that many of America's workers are not
adequately saving for retirement. Part of the retirement savings
problem is attributable to employees who, for a wide variety of
reasons, do not take advantage of the opportunity to participate in
their employer's defined contribution pension plan (such as a 401(k)
plan). The retirement savings problem is also exacerbated by those
employees who enroll in their employer's plan, but do not assume
responsibility for investment of their contributions, leaving their
accounts to be invested in a conservative default investment that over
the career of the employee is not likely to generate sufficient savings
for a secure retirement.
A number of recent studies indicate that significant improvements
can be made in 401(k) plan participation and in retirement savings
levels through plan design changes. Specifically, the studies show that
adoption of automatic enrollment provisions (provisions pursuant to
which employees are automatically enrolled in the plan and must
affirmatively opt-out of plan participation) by 401(k) plans can
dramatically increase plan participation rates.\1\ However, most
surveys suggest that fewer than 20 percent of the employers sponsoring
401(k) plans have adopted an automatic enrollment provision.\2\
---------------------------------------------------------------------------
\1\ Stephen P. Utkus & Jean A. Young, Lessons from Behavioral
Finance and the Autopilot 401(k) Plan, (Vanguard Center for
Retirement Res.) April 2004; Sarah Holden & Jack VanDerhei, The
Influence of Automatic Enrollment, Catch-Up, and IRA Contributions
on 401(k) Accumulations at Retirement, 283 Employee Benefit Res.
Inst. Issue Brief (2005). The issue brief indicates that the ``EBRI/
ICI model shows that prior to automatic enrollment, 66 percent of
eligible workers at year-end 2000 were participants in 401(k) plans,
while immediately after adding automatic enrollment to the model,
the participation rate rises to 92 percent of eligible employees.''
Id. at 4. See also James J. Choi, David Laibson, & Brigitte C.
Madrian, Plan Design and 401(k) Savings Outcomes, 57 National Tax J.
275 (2004); see also James J. Choi, David Laibson, Brigitte Madrian,
& Andrew Metrick, For Better or For Worse: Default Effects and
401(k) Savings Behavior (Pension Research Council, Working Paper No.
2002-2, 2001), available at https://prc.wharton.upenn.edu/prc/PRC/WP/
WP2002-2.pdf.
\2\ The incidence of automatic enrollment appears to be growing,
by one estimate from 8.4 percent of plans in 2003 to 10.5 percent in
2004 (48th Annual Survey of Profit Sharing and 401(k) Plans, (Profit
Sharing/401(k) Council of America, Chicago, Ill.), 2005, at 36), by
another from 14 percent in 2003 to 19 percent in 2005 (Survey
Findings: Trends and Experiences in 401(k) Plans 2005, (Hewitt
Associates LLC), 2005, at 1, 13). Another survey found no growth
between 2003 and 2004 (2004 Annual 401(k) Benchmarking Survey
(Deloitte Consulting LLP), 2004, at 6).
---------------------------------------------------------------------------
Many of the studies also indicate that the accumulation of
retirement savings in automatic enrollment plans depends heavily on the
default investment alternative and the default contribution rate
provided under the plan.\3\ The scope of this proposal is limited to
default investment alternatives in which individual account plan assets
are invested on behalf of those participants or beneficiaries who fail
to give investment instructions. Modification of contribution rates
implicates issues beyond the jurisdiction of the Department of Labor.
---------------------------------------------------------------------------
\3\ See studies cited supra note 2. See also Stephen P. Utkus,
Selecting a Default Fund for a Defined Contribution Plan (Vanguard
Center for Retirement Res.), July 2004.
---------------------------------------------------------------------------
Several studies note that the contributions of automatically
enrolled participants are frequently invested in products that present
little risk of capital loss, e.g., money market funds, stable value
funds and similarly performing investment vehicles.\4\ It also appears
that many plans without automatic enrollment provisions \5\
[[Page 56807]]
utilize similar capital preservation default investment products for
those employees who enroll in the plan but fail to direct the
investment of their contributions or their employer's matching
contributions. As a short-term investment, money market or stable value
funds may not significantly affect retirement savings. Such investments
can play a useful role as a component of a diversified portfolio.
However, when such funds become the exclusive investment of
participants or beneficiaries, it is unlikely that the rate of return
generated by those funds over time will be sufficient to generate
adequate retirement savings for most participants or beneficiaries.\6\
---------------------------------------------------------------------------
\4\ Of the responding plans with automatic enrollment, the
default investment option was a stable value fund for 26.9%, a money
market fund for 23.7%, a balanced fund for 29%, a life cycle fund
for 8.6%, a professionally managed account for 6.5%, and 5.4% were
reported as ``other.'' 48th Annual Survey of Profit Sharing/401(k)
Plans, supra note 2, at 37, Table 64. Other surveys indicate the use
of money market, stable value and similarly performing investment
vehicles at 58 percent (2004 Annual 401(k) Benchmarking Survey,
supra note 2, at 7, Exhibit 20) and 81 percent (Stephen P. Utkus,
Selecting A Default Fund for a Defined Contribution Plan, (Vanguard
Center for Retirement Res.), Volume 14, June 2005, at 3).
\5\ This proposal encompasses situations beyond automatic
enrollment. Examples include: failure of a participant or
beneficiary to provide investment instruction following the
elimination of an investment alternative or a change in service
provider, failure of a participant or beneficiary to provide
investment instruction following a rollover from another plan, and
any other failure of a participant or beneficiary to provide
investment instruction.
\6\ Investments in capital preservation vehicles deprive
investors of the opportunity to benefit from the returns generated
by equity securities that have historically generated higher returns
than fixed income investments.
---------------------------------------------------------------------------
A frequently cited impediment to adoption of automatic enrollment
provisions in individual account plans is the assumption of fiduciary
responsibility for the investment decisions that the plan fiduciary
must make on behalf of the automatically enrolled participants. In the
case of a participant directed individual account plan designed to
comply with the requirements of ERISA section 404(c)(1), responsibility
for the result of specific investment directions rests with the
directing plan participant or beneficiary, rather than the plan sponsor
or other fiduciaries.\7\ Before enactment of the Pension Protection
Act, which became law on August 17, 2006, the Department indicated that
a participant or beneficiary would not be considered to have exercised
control when the participant or beneficiary is merely apprised of
investments that will be made on his or her behalf in the absence of
instructions to the contrary.\8\ In effect, the Department treated the
plan fiduciary's investment decision on behalf of a participant or
beneficiary as if the decision were made in connection with a
participant directed individual account plan that is not designed, or
fails, to meet the conditions for a section 404(c) plan. While some
employers, in adopting automatic enrollment provisions or otherwise
dealing with the absence of investment direction from plan
participants, have been willing to assume fiduciary responsibility for
their investment decisions, many of those employers attempt to minimize
their fiduciary liability by limiting default investments to funds that
emphasize preservation of capital and little risk of loss (e.g., money
market and stable value funds).
---------------------------------------------------------------------------
\7\ See Final Regulation Regarding Participant Directed
Individual Account Plans (ERISA Section 404(c) Plans), 57 FR 46,906
(Oct.13, 1992) (codified at 29 CFR 2550.404c-1).
\8\ See Rev. Rul. 98-30, 1998-1 C.B. 1273; see also Rev. Rul.
2000-8, 2000-1 C.B. 617; see also Final Regulation Regarding
Participant Directed Individual Account Plans (ERISA Section 404(c)
Plans), 57 FR at 46924; see also Retirement Plans, Cash or Deferred
Arrangements Under Section 401(k) and Matching Contributions or
Employee Contributions Under Section 401(m) Regulations, 69 FR
78144, 78146 n. 2 (Dec. 29, 2004) (codified at 26 CFR pts. 1 & 602).
---------------------------------------------------------------------------
As part of the Pension Protection Act, section 404(c) of ERISA was
amended to provide relief accorded by section 404(c)(1) to fiduciaries
that invest participant assets in certain types of default investment
alternatives in the absence of participant investment direction.
Specifically, section 624(a) of the Pension Protection Act added a new
section 404(c)(5) to ERISA. Section 404(c)(5)(A) of ERISA provides
that, for purposes of section 404(c)(1) of ERISA, a participant in an
individual account plan shall be treated as exercising control over the
assets in the account with respect to the amount of contributions and
earnings which, in the absence of an investment election by the
participant, are invested by the plan in accordance with regulations
prescribed by the Secretary of Labor. Section 624(a) of the Pension
Protection Act directed that such regulations provide guidance on the
appropriateness of designating default investments that include a mix
of asset classes consistent with capital preservation or long-term
capital appreciation, or a blend of both. In the Department's view,
this statutory language provides the stated relief to fiduciaries of
any participant directed individual account plan that complies with its
terms and with those of the Department's proposed regulation under
section 404(c)(5) of ERISA. This relief therefore, is not contingent on
a plan being an ``ERISA 404(c) plan'' or otherwise meeting the
requirements of the Department's regulations at 2550.404c-1.
Section 624(a) of the Pension Protection Act also added notice
requirements in section 404(c)(5)(B)(i) and (ii) of ERISA. Section
404(c)(5)(B)(i) requires that each participant--(I) receive, within a
reasonable period of time before each plan year, a notice explaining
the employee's right under the plan to designate how contributions and
earnings will be invested and explaining how, in the absence of any
investment election by the participant, such contributions and earnings
will be invested, and (II) has a reasonable period of time after
receipt of such notice and before the beginning of the plan year to
make such designation. Section 404(c)(5)(B)(ii) requires each notice to
be sufficiently accurate and comprehensive to appraise the employee of
such rights and obligations, and to be written in a manner calculated
to be understood by the average employee eligible to participate.
The amendments made by section 624 of the Pension Protection Act
shall apply to plan years beginning after December 31, 2006. Section
624(b) of the Pension Protection Act directed the Department to issue
final regulations under section 404(c)(5)(A) of ERISA no later than 6
months of the date of enactment of the Pension Protection Act.
In an effort to increase plan participation through the adoption of
automatic enrollment provisions, and increase retirement savings
through the utilization of default investments that are more likely to
increase retirement savings for participants and beneficiaries who do
not direct their own investments, the Department, exercising its
authority under section 505 of ERISA and consistent with section 624 of
the Pension Protection Act, is proposing to provide relief to
fiduciaries of participant directed individual account plans that
invest participant assets in certain types of default investment
alternatives in the absence of participant investment direction. The
proposed regulation is described below.
B. Overview of Proposal
Scope of the Fiduciary Relief
The proposal would, upon adoption, implement the fiduciary relief
afforded by ERISA section 404(c)(5), under which a participant, who
does not give investment directions, will be treated as exercising
control over his or her account with respect to assets that the plan
invests in a qualified default investment alternative. See Sec.
2550.404c-5(a)(1).
The relief provided by the proposed regulation is conditioned on
the use of certain investment alternatives, but the limitations of the
proposed regulation should not be construed to indicate that the use of
investment alternatives not identified in the proposed regulation as
qualified default investment alternatives would be imprudent. For
example, the Department recognizes that investments in money market
funds, stable value products and similarly performing investment
vehicles may be prudent for some participants or beneficiaries.
[[Page 56808]]
Paragraph (b) of Sec. 2550.404c-5 defines the scope of the
fiduciary relief provided. Specifically, paragraph (b)(1) provides
that, subject to certain exceptions, a fiduciary of an individual
account plan that permits participants and beneficiaries to direct the
investment of assets in their accounts and that meets the conditions of
the regulation, as set forth in paragraph (c) of Sec. 2550.404c-5,
shall not be liable for any loss under part 4 of title I, or by reason
of any breach, that is the direct and necessary result of investing all
or part of a participant's or beneficiary's account in a qualified
default investment alternative, or of investment decisions made by the
entity described in paragraph (e)(3) in connection with the management
of a qualified default investment alternative. The scope of this relief
is the same as that extended to plan fiduciaries under ERISA section
404(c)(1)(B) in connection with carrying out investment directions of
plan participants and beneficiaries in an ``ERISA section 404(c) plan''
as described in 29 CFR 2550.404c-1(a), although it is not necessary for
a plan to be an ERISA section 404(c) plan in order for the fiduciary to
obtain the relief accorded by this proposed regulation. As with section
404(c)(1) of the Act and the regulation issued thereunder (29 CFR
2550.404c-1), the proposed regulation would not provide relief from the
general fiduciary rules applicable to the selection and monitoring of a
default investment alternative or from any liability that results from
a failure to satisfy these duties, including liability for any
resulting losses. See paragraph (b)(2) of Sec. 2550.404c-5. Paragraph
(b) further makes clear that nothing in the proposed regulation
relieves an investment manager from its general fiduciary duties or
from any liability that results from a failure to satisfy these duties,
including liability for any resulting losses. See paragraph (b)(3) of
Sec. 2550.404c-5. In addition, the proposed regulation provides no
relief from the prohibited transaction provisions of section 406 of
ERISA or from any liability that results from a violation of those
provisions, including liability for any resulting losses. See paragraph
(b)(4) of Sec. 2550.404c-5.
Like other investment alternatives made available under a plan, a
plan fiduciary would be required to carefully consider investment fees
and expenses in choosing a qualified default investment alternative for
purposes of the proposed regulation. To the extent that a plan offers
more than one investment alternative that could constitute a qualified
default investment alternative, the Department anticipates that fees
and expenses would be an important consideration in selecting among the
alternatives.
Conditions for the Fiduciary Relief
The conditions for relief are set forth in paragraph (c) of the
proposal. The proposal has six conditions.
The first condition requires that assets invested on behalf of
participants or beneficiaries under the proposed regulation be invested
in a ``qualified default investment alternative.'' See Sec. 2550.404c-
5(c)(1). ``Qualified default investment alternatives'' are defined in
paragraph (e) of the proposed regulation and discussed in detail below.
The second condition provides that the participant or beneficiary on
whose behalf assets are being invested in a qualified default
investment alternative had the opportunity to direct the investment of
assets in his or her account but did not direct the assets. See Sec.
2550.404c-5(c)(2). In other words, no relief is available when a
participant or beneficiary has provided affirmative investment
direction concerning the assets invested on the participant's or
beneficiary's behalf.
The third condition requires that the participant or beneficiary on
whose behalf an investment in a qualified default investment
alternative may be made is furnished a notice within a reasonable
period of time of at least 30 days in advance of the first such
investment, and within a reasonable period of time of at least 30 days
in advance of each subsequent plan year. As described in the
regulation, the required notice can be furnished in the plan's summary
plan description, summary of material modifications, or as a separate
notification. See Sec. 2550.404c-5(c)(3). The specific content
requirements for the notice are described in paragraph (d) of the
proposed regulation and discussed in detail below.
The Department notes that a similar notice requirement is contained
in section 401(k)(13)(E) of the Internal Revenue Code (Code), as
amended by the Pension Protection Act. The Department anticipates that
the notice requirements of this proposed regulation and the notice
requirements of section 401(k)(13)(E) of the Code could be satisfied in
a single notice.
The Department further notes that the phrase--``in advance of the
first such investment [in a qualified default investment
alternative]''--is not intended to foreclose availability of relief to
fiduciaries that, prior to the adoption of a final regulation, invested
assets on behalf of participants and beneficiaries in a default
investment alternative that would constitute a ``qualified default
investment alternative'' under the regulation. In such cases, the
phrase ``in advance of the first such investment'' should be read to
mean the first investment with respect to which relief under the
proposed regulation is intended to apply after the effective date of
the regulation. The Department is proposing to make this regulation
effective 60 days after publication of the final rule in the Federal
Register.
The fourth condition of the proposed regulation requires that the
terms of the plan provide that any material provided to the plan
relating to a participant's or beneficiary's investment in a qualified
default investment alternative (e.g., account statements, prospectuses,
proxy voting material) will be provided to the participant or
beneficiary. See Sec. 2550.404c-5(c)(4).
The fifth condition requires that any participant or beneficiary on
whose behalf assets are invested in a qualified default investment
alternative be afforded the opportunity, consistent with the terms of
the plan (but in no event less frequently than once within any three
month period), to transfer, in whole or in part, such assets to any
other investment alternative available under the plan without financial
penalty. See Sec. 2550.404c-5(c)(5). This provision assures that
participants and beneficiaries on whose behalf assets are invested in a
qualified default investment alternative have the same opportunity as
other plan participants and beneficiaries to direct the investment of
their assets, and that neither the plan nor the qualified default
investment alternative impose financial penalties that would restrict
the rights of participants and beneficiaries to direct their assets to
other investment alternatives available under the plan. This provision
does not confer greater rights on participants or beneficiaries whose
accounts the plan invests in qualified default investment alternatives
than are otherwise available under the plan with respect to the timing
of investment directions. Thus, if a plan provides participants and
beneficiaries the right to direct investments on a quarterly basis,
those participants and beneficiaries with investments in a qualified
default investment alternative need only be afforded the opportunity to
direct their investments on a quarterly basis. Similarly, if a plan
permits daily investment direction, participants and beneficiaries with
investments in a qualified default investment alternative
[[Page 56809]]
must be permitted to direct their investments on a daily basis.
The Department notes that this proposal does not address or provide
relief with respect to the direction of investments out of a qualified
default investment alternative into another investment alternative
available under the plan. See generally section 404(c)(1) of ERISA and
29 CFR 2550.404c-1.
The last condition requires that the plan offer participants and
beneficiaries the opportunity to invest in a ``broad range of
investment alternatives'' within the meaning of 29 CFR 2550.404c-
1(b)(3).\9\ See Sec. 2550.404c-5(c)(6). For purposes of the proposed
regulation, the Department believes that participants and beneficiaries
should be afforded a sufficient range of investment alternatives to
achieve a diversified portfolio with aggregate risk and return
characteristics at any point within the range normally appropriate for
the pension plan participant or beneficiary. The Department believes
that the application of the ``broad range of investment alternatives''
standard of the section 404(c) regulation accomplishes this objective.
Moreover, the Department believes that virtually all individual account
plans that provide for participant direction, without regard to whether
such plans meet all the requirements for an ERISA section 404(c) plan,
likely will meet this standard without having to undertake significant
changes in available investment alternatives.
---------------------------------------------------------------------------
\9\ 29 CFR 2550.404c-1(b)(3) provides that ``[a] plan offers a
broad range of investment alternatives only if the available
investment alternatives are sufficient to provide the participant or
beneficiary with a reasonable opportunity to: (A) Materially affect
the potential return on amounts in his individual account with
respect to which he is permitted to exercise control and the degree
of risk to which such amounts are subject; (B) Choose from at least
three investment alternatives: (1) Each of which is diversified; (2)
each of which has materially different risk and return
characteristics; (3) which in the aggregate enable the participant
or beneficiary by choosing among them to achieve a portfolio with
aggregate risk and return characteristics at any point within the
range normally appropriate for the participant or beneficiary; and
(4) each of which when combined with investments in the other
alternatives tends to minimize through diversification the overall
risk of a participant's or beneficiary's portfolio; * * *''
---------------------------------------------------------------------------
Notices
As discussed above, relief under the proposed regulation is
conditioned on furnishing participants and beneficiaries advance
notification concerning the default investment provisions of their
plan. See Sec. 2550.404c-5(c)(3). The specific information required to
be contained in the notice is set forth in paragraph (d) of the
regulation.
Paragraph (d) of Sec. 2550.404c-5 requires that the notice to
participants and beneficiaries be written in a manner calculated to be
understood by the average plan participant and contain the following
information: (1) A description of the circumstances under which assets
in the individual account of a participant or beneficiary may be
invested on behalf of the participant and beneficiary in a qualified
default investment alternative; (2) a description of the qualified
default investment alternative, including a description of the
investment objectives, risk and return characteristics (if applicable),
and fees and expenses attendant to the investment alternative; (3) a
description of the right of the participants and beneficiaries on whose
behalf assets are invested in a qualified default investment
alternative to direct the investment of those assets to any other
investment alternative under the plan, without financial penalty; and
(4) an explanation of where the participants and beneficiaries can
obtain investment information concerning the other investment
alternatives available under the plan.
It is the view of the Department that the notice requirements of
this proposed regulation are consistent with the notice requirements
added to section 404(c)(5) of ERISA by section 624 of the Pension
Protection Act. The Department believes the required information is
sufficient to put participants and beneficiaries on notice as to the
consequences of failing to direct investment of the assets in their
account, and encourages active decisionmaking by participants and
beneficiaries. The Department invites suggestions as to whether
additional information should be considered for inclusion in the
notice.
Qualified Default Investment Alternatives
Under the proposal, relief from fiduciary liability is provided
with respect to only those assets invested on behalf of a participant
or beneficiary in a ``qualified default investment alternative.'' See
Sec. 2550.404c-5(c)(1). Paragraph (e) of Sec. 2550.404c-5 sets forth
five requirements for a qualified default investment alternative.
The first requirement is intended to limit investment in employer
securities as part of a qualified default investment alternative's
investment strategy. Subject to two exceptions, the proposal provides
that a qualified default investment alternative shall not hold or
permit the acquisition of employer securities. See Sec. 2550.404c-
5(e)(1)(i).
The first exception to this general prohibition is applicable to
employer securities held or acquired by an investment company
registered under the Investment Company Act of 1940, 15 U.S.C. 80a-1,
et seq., or a similar pooled investment vehicle regulated and subject
to periodic examination by a State or Federal agency and with respect
to which investment in such securities is made in accordance with the
stated investment objectives of the investment vehicle and independent
of the plan sponsor or an affiliate thereof. While the Department does
not believe it is appropriate for a qualified default investment
alternative to encourage investments in employer securities, the
Department also recognizes that an absolute prohibition against holding
or investing in employer securities may unnecessarily complicate the
selection and monitoring of qualified default investment alternatives
by publicly traded companies, the stock of which may be held or
acquired pursuant to an investment strategy wholly independent of the
employer. The Department believes that the foregoing exception is
sufficiently broad to accommodate publicly traded companies and pooled
investment vehicles that may invest in such companies.
The second exception is for employer securities acquired as a
matching contribution from the employer/plan sponsor or at the
direction of the participant or beneficiary. This exception is intended
to make clear that an investment management service will not be
precluded from serving as a qualified default investment alternative
under Sec. 2550.404c-5(e)(5)(iii) merely because the account of a
participant or beneficiary holds employer securities acquired as
matching contributions from the employer/plan sponsor, or acquired as a
result of prior direction by the participant or beneficiary, provided
that the investment management service has the authority to dispose of
such securities.
In the case of employer securities acquired as matching
contributions that are subject to a restriction on transferability,
relief would not be available until the investment management service
can exercise discretion over such securities, at the expiration of the
restriction. Although an investment management service would be
responsible for determining whether and to what extent the account
should continue to hold investments in employer securities, the
investment management service could not, except as part of an
investment company or similar pooled investment vehicle, exercise its
discretion to acquire additional employer securities on behalf
[[Page 56810]]
of an individual account without violating Sec. 2550.404c-5(e)(1).
In the case of prior direction by a participant or beneficiary, if
the participant or beneficiary provided investment direction with
respect to employer securities, but failed to provide investment
direction following an event, such as a change in investment
alternatives, and the terms of the plan provide that in such
circumstances the account's assets are invested in a default investment
alternative, the proposed regulation would permit an investment
management service to hold and manage those employer securities in the
absence of participant or beneficiary direction. While the investment
management service may not acquire additional employer securities using
participant contributions, the investment management service may reduce
the amount of employer securities held by the account of the
participant or beneficiary.
The second requirement provides that, except as otherwise provided
in paragraph (c)(5), a qualified default investment alternative may not
impose financial penalties or otherwise restrict the ability of a
participant or beneficiary to transfer, in whole or in part, his or her
investment from the qualified default investment alternative to any
other investment alternative available under the plan. The Department
does not believe that limits on the ability of a participant or
beneficiary to move from a qualified default investment alternative
should be permitted by the plan or the qualified default investment
alternative.
The third requirement is that a qualified default investment
alternative be either managed by an investment manager, as defined in
section 3(38) of the Act, or an investment company registered under the
Investment Company Act of 1940. The Department believes that when plan
fiduciaries are relieved of liability for underlying investment
management/asset allocation decisions, those responsible for the
investment management/asset allocation decisions must be investment
professionals who acknowledge their fiduciary responsibilities and
liability under ERISA. For this reason, the proposed regulation
requires that, except in the case of registered investment companies,
those responsible for the management of a qualified default investment
alternative be ``investment managers'' within the meaning of section
3(38) of ERISA.\10\ Inasmuch as the assets of an investment company
registered under the Investment Company Act of 1940 do include plan
assets solely by virtue of a plan's investment in securities issued by
such investment company \11\ and such investment companies are subject
to Federal and State regulation and oversight, the proposal permits an
investment company registered under the Investment Company Act of 1940
to constitute a ``qualified default investment alternative'' provided
that the other conditions of the proposed regulation are satisfied.
---------------------------------------------------------------------------
\10\ Section 3(38) of ERISA defines the term ``investment
manager'' to mean ``any fiduciary (other than a trustee or named
fiduciary, as defined in section 402(a)(2) [29 U.S.C. 1102(a)(2)])--
(A) who has the power to manage, acquire, or dispose of any asset of
a plan; (B) who (i) is registered as an investment adviser under the
Investment Advisers Act of 1940 [15 U.S.C. 80b-1 et seq.]; (ii) is
not registered as an investment adviser under such Act by reason of
paragraph (1) of section 203A(a) of such Act, is registered as an
investment adviser under the laws of the State (referred to in such
paragraph (1)) in which it maintains its principal office and place
of business, and, at the time the fiduciary last filed the
registration form most recently filed by the fiduciary with such
State in order to maintain the fiduciary's registration under the
laws of such State, also filed a copy of such form with the
Secretary; (iii) is a bank, as defined in that Act [15 U.S.C. 80b-1
et seq.]; or (iv) is an insurance company qualified to perform
services described in subparagraph (A) under the laws of more than
one State; and (C) has acknowledged in writing that he is a
fiduciary with respect to the plan.''
\11\ See ERISA section 401(b)(1).
---------------------------------------------------------------------------
The fourth requirement provides that a qualified default investment
alternative is diversified so as to minimize the risk of large losses.
The last requirement for a qualified default investment alternative
conditions relief on the use of one of three types of investment
products, portfolios or services. See Sec. 2550.404c-5(e)(5). In
defining qualified default investment alternatives, the Department
presumes that, in those instances when a participant or beneficiary
chooses not to direct the investment of the assets in their account,
the only objective and readily available information relevant to making
an investment decision on behalf of the participant is age. For this
reason, the investment objectives of the qualified default investment
alternatives are not required to take into account other factors, such
as risk tolerances, other investment assets, etc.
The first alternative is an investment fund product or model
portfolio that is designed to provide varying degrees of long-term
appreciation and capital preservation through a mix of equity and fixed
income exposures based on the participant's age, target retirement date
(such as normal retirement age under the plan) or life expectancy. Such
products and portfolios change their asset allocation and associated
risk levels over time with the objective of becoming more conservative
(i.e., decreasing risk of losses) with increasing age. As noted above,
asset allocation decisions for eligible products and portfolios are not
required to take into account risk tolerances, investments or other
preferences of an individual participant. An example of such a fund or
portfolio may be a ``life-cycle'' or ``targeted-retirement-date'' fund
or account. See Sec. 2550.404c-5(e)(5)(i). The reference to ``an
investment fund product or model portfolio'' is intended to make clear
that this alternative might be a ``stand alone'' product or a ``fund of
funds'' comprised of various investment options otherwise available
under the plan for participant investments. In the context of a fund of
funds portfolio, it is likely that money market, stable value and
similarly performing capital preservation vehicles will play a role in
comprising the mix of equity and fixed-income exposures.
The second alternative is an investment fund product or model
portfolio that is designed to provide long-term appreciation and
capital preservation through a mix of equity and fixed income exposures
consistent with a target level of risk appropriate for participants of
the plan as a whole. For purposes of this alternative, asset allocation
decisions for such products and portfolios are not required to take
into account the age of an individual participant, but rather focus on
the demographics of the participant population as a whole. An example
of such a fund or portfolio may be a ``balanced'' fund. As with the
preceding alternative, the reference to ``an investment fund product or
model portfolio'' is intended to make clear that this alternative might
be a ``stand alone'' product or a ``fund of funds'' comprised of
various investment options otherwise available under the plan for
participant investments. In the context of a fund of funds portfolio,
it is likely that money market, stable value and similarly performing
capital preservation vehicles will play a role in comprising the mix of
equity and fixed-income exposures for this alternative.
Unlike the first alternative, which focuses on the age, target
retirement date (such as normal retirement age under the plan) or life
expectancy of an individual participant, the second alternative
requires a fiduciary to take into account the demographics of the
plan's participants, similar to the considerations a fiduciary would
take into account in managing an individual account plan that does not
provide for participant direction. For this reason, a
[[Page 56811]]
fiduciary may, in connection with the duty to monitor investment
alternatives available under the plan, conclude that a new or
additional investment fund product or model portfolio is required to
take into account significant changes in the demographics (e.g., age)
of the plan's participant population.
The third alternative is an investment management service with
respect to which an investment manager allocates the assets of a
participant's individual account to achieve varying degrees of long-
term appreciation and capital preservation through a mix of equity and
fixed income exposures, offered through investment alternatives
available under the plan, based on the participant's age, target
retirement date (such as normal retirement age under the plan) or life
expectancy. Such portfolios change their asset allocation and
associated risk levels over time with the objective of becoming more
conservative (i.e., decreasing risk of losses) with increasing age. As
with the first alternative, the proposed regulation makes clear that,
as with the other alternatives described in the regulation, asset
allocation decisions are not required to take into account risk
tolerances, other investments or other preferences of an individual
participant. An example of such a service may be a ``managed account.''
\12\
---------------------------------------------------------------------------
\12\ With regard to this alternative, the Department notes that
in 2003, a working group of the Advisory Council on Employee Welfare
and Pension Benefit Plans submitted a report on optional
professional management in defined contribution plans. While the
Advisory Council report focused on the use of managed account
services in which participants played an active role in preparing an
investment profile, the report nonetheless provides support for
including such services within the definition of a qualified default
investment alternative. This report may be accessed at https://
www.dol.gov/ebsa/publications/AC_1107b03_report.html.
---------------------------------------------------------------------------
Although investment management services are included within the
scope of relief, the Department notes that relief similar to that
provided by this proposed regulation is available to plan fiduciaries
under the statute. Specifically, section 402(c)(3) of ERISA provides
that ``a person who is a named fiduciary with respect to control or
management of the assets of a plan may appoint an investment manager or
managers to manage (including the power to acquire and dispose of) any
assets of a plan.'' Section 405(d) of ERISA provides that ``[i]f an
investment manager or managers have been appointed under section
402(c)(3), then * * * no trustee shall be liable for the acts or
omissions of such investment manager or managers, or be under an
obligation to invest or otherwise manage any asset of the plan which is
subject to the management of such investment manager.'' The Department
included investment management services within the scope of fiduciary
relief in order to avoid any ambiguity concerning the scope of relief
available to plan fiduciaries in the context of participant directed
individual account plans.
C. Miscellaneous Issues
Preemption
Section 902 of the Pension Protection Act added a new section
514(e)(1) to ERISA providing that notwithstanding any other provision
of section 514, title I of ERISA shall supersede any State law that
would directly or indirectly prohibit or restrict the inclusion in any
plan of an automatic contribution arrangement. Section 902 further
added section 514(e)(2) to ERISA defining the term ``automatic
contribution arrangement'' as an arrangement under which a participant:
may elect to have the plan sponsor make payments as contributions under
the plan on behalf of the participant, or to the participant directly
in cash; is treated as having elected to have the plan sponsor make
such contributions in an amount equal to a uniform percentage of
compensation provided under the plan until the participant specifically
elects not to have such contributions made (or specifically elects to
have such contributions made at a different percentage); and under
which such contributions are invested in accordance with regulations
prescribed by the Secretary of Labor under section 404(c)(5) of ERISA.
The Department specifically requests comments on whether and to what
extent regulations would be helpful in addressing the preemption
provisions of section 514(e) of ERISA.
Enforcement
Section 902 of the Pension Protection Act amended section 502(c)(4)
of ERISA to provide that the Secretary of Labor may assess a civil
penalty against any person of up to $1,100 a day for each violation by
any person of section 302(b)(7)(F)(vi) or section 514(e)(3) of ERISA.
Implementing regulations will be developed in a separate rulemaking.
D. Request for Comments
The Department invites comments from interested persons on all
aspects of the proposed regulation. Comments should be addressed to the
Office of Regulations and Interpretations, Employee Benefits Security
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution
Avenue, NW., Washington, DC 20210, Attn: Default Investment Regulation.
Commenters are encouraged to submit comments electronically to e-
ORI@dol.gov or www.regulations.gov. All comments received will be
available to the public at https://www.dol.gov/ebsa and
www.regulations.gov. Comments also will be available for public
inspection at the Public Disclosure Room, N-1513, Employee Benefits
Security Administration, 200 Constitution Avenue, NW., Washington, DC
20210.
Comments on this proposal should be submitted to the Department on
or before November 13, 2006.
E. Effective Date
The Department proposes to make this regulation effective 60 days
after the date of publication of the final rule in the Federal
Register.
F. Regulatory Impact Analysis
Summary
This proposed regulation is expected to have two major, positive
economic consequences. First, default investments will be directed
toward higher-return portfolios boosting average account performance.
Second, automatic enrollment provisions will become more common
boosting participation in retirement savings plans. Both of these
effects will tend on average and on aggregate to increase retirement
savings, especially among younger workers with low earnings and
frequent job changes. A substantial number of individuals will enjoy
significant increases in retirement income.\13\ The magnitude of these
effects will be large in absolute terms and proportionately large for
many directly affected individuals, but will be modest relative to
overall aggregate retirement savings.
---------------------------------------------------------------------------
\13\ In rare cases, retirement income may decrease slightly. A
few individuals may wind up contributing for some period of time at
a default rate that is lower than the rate they otherwise would have
elected (this risk will be minimized in plans that automatically
escalate default contribution rates). A few may realize lower
returns in a qualified default investment alternative than they
would otherwise have realized.
---------------------------------------------------------------------------
The magnitude of the proposed regulation's effects will depend on
plan sponsor and participant choices. The effects will be cumulative
and will become fully realized only after workers beginning their
careers today reach retirement. For these reasons, any estimates of the
regulation's effects are subject to substantial uncertainty. The
Department has developed low- and high-impact estimates, to illustrate
a range of potential long-term effects.
[[Page 56812]]
In the very long run the proposed regulation is predicted to
increase aggregate 401(k) plan account balances by between 2 percent
and 5 percent, or approximately $45 billion and $90 billion if
represented at 2005 levels. The portion invested in equity will
increase by between 3 percent and 5 percent, or $27 billion and $48
billon.
For individuals born in 1985 and surviving to age 67, holding other
factors constant, low-impact estimates suggest that the proposed
regulation will increase pension income by an average of $2,010 per
year (in 2005 dollars) for 10 percent, but decrease it by $1,120 per
year on average for 5 percent. Pension income would be unchanged for
the remaining 85 percent. High-impact estimates suggest that average
annual pension income will increase by $2,740 for 14 percent, fall by
$1,460 for 6 percent, and be unchanged for 80 percent.
The costs and benefits of the proposed regulation are not simple,
direct functions of the foregoing gross dollar estimates. Increases in
retirement savings due to automatic enrollment will be offset by either
decreases in current consumption or reductions in other savings, so net
benefits will be smaller than the predicted increases in retirement
savings. The proposed regulation may also have macroeconomic
consequences, which are likely to be small but positive. An increase in
retirement saving is likely to promote investment and long-term
economic productivity and growth. The Department therefore concludes
that the benefits of this proposed regulation will exceed its costs by
a wide margin.
In accordance with OMB Circular A-4(available at https://
www.whitehouse.gov/omb/circulars/a004/a-4.pdf), Table 1 below depicts
an accounting statement showing the annualized benefits and transfers
associated with the provisions of this proposed rule.
BILLING CODE 4510-29-P
[[Page 56813]]
[GRAPHIC] [TIFF OMITTED] TP27SE06.094
BILLING CODE 4510-29-C
Executive Order 12866
Under Executive Order 12866, the Department must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f) of the Executive
Order, a ``significant regulatory action'' is an action that is likely
to result in a rule (1) having an annual effect on the economy of $100
million or more, or adversely and materially affecting a sector of the
[[Page 56814]]
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local or tribal governments or communities
(also referred to as ``economically significant''); (2) creating
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order. OMB has
determined that this action is significant under section 3(f)(1)
because it is likely to have an annual effect on the economy of $100
million or more. Accordingly, the Department has undertaken, as
described below, an analysis of the costs and benefits of the proposed
regulation. The Department believes that the proposed regulation's
benefits justify its costs.
Alternatives Considered by the Department
Prior to the enactment of the Pension Protection Act, the
Department considered providing relief under section 404(a) of ERISA,
rather than section 404(c), in response to concerns that conditioning
relief on compliance with the Department's regulations under section
404(c), 29 CFR 2550.404c-1, may deter adoption of automatic enrollment
provisions. Inasmuch as the relief provided by recently enacted section
404(c)(5) of ERISA does not condition relief on compliance with the
Department's regulations under section 404(c), the Department concluded
that adopting a regulation under section 404(c)(5) effectively provided
the same relief it considered providing under section 404(a).
In defining the three types of investment products, portfolios or
services that may be used as a qualified default investment
alternative, the Department applied certain criteria. These criteria
included consistency with market trends and mainstream financial
planning practices. The Department entertained including as an
additional type of investment product near risk-free fixed income
instruments. Such instruments might have been defined so as to include
money market mutual funds, certain bank deposits, and stable value
insurance products. Including such instruments might yield some
benefits. It is possible that at least some plan sponsors strongly
prefer to use as default investments such instruments rather than any
of the three types embraced by the proposed rule. It is further
possible that some such sponsors would adopt automatic enrollment
programs if and only if the fiduciary relief afforded by the proposed
regulation was extended to include such instruments. In that case,
including such instruments in the proposed regulation might boost
participation and net retirement income for some individuals. The
Department believes such cases would be rare, however. The proposed
rule, by providing relief from fiduciary liability, is both intended
and expected to tilt plan sponsors' default investment preferences away
from such instruments and toward the three types it embraces. Moreover,
many plan sponsors currently use such instruments as default
investments under automatic enrollment programs, and they and others
might continue to do so after adoption of the proposed rule. The
proposed rule leaves intact the current legal provisions applicable to
the use of such instruments as default investments.
On the other hand, including such instruments might erode benefits.
Consider plan sponsors that under the proposed rule will adopt
automatic enrollment programs and use as default investments one of the
three types defined in the proposed rule. If such near-risk-free
instruments were included as a fourth type, some of these plan sponsors
might instead use such instruments as default investments, thereby
reducing average investment performance and retirement income for some
individuals. The Department therefore believes that including such
instruments would be more likely to erode benefits than to increase
them. Accordingly, the Department omitted such instruments from the
types defined in the proposed rule.
The Department also considered whether to include or omit an
investment fund product or model portfolio that establishes a uniform
mix of equity and fixed income exposures for all affected participants,
ultimately deciding to include such a type as the second of the three
types defined in the proposed rule. Such a product or model portfolio
has some drawbacks relative to the other two types of investment
products, portfolios or services that may be used as a qualified
default investment alternative. Unlike the latter types, its target
level of risk must be appropriate for participants of the plan as a
whole but cannot be separately calibrated for each participant or for
particular classes of participants. Therefore, while its risk level may
be appropriate for all affected participants it is unlikely to be
optimal for all. However, such a product or model portfolio may also
have relative advantages. Compared with the other two types such a
product or portfolio may be simpler, less expensive and easier to
explain and understand. These advantages may outweigh the potential
advantage of more customized risk levels, especially for plans covering
relatively homogenous populations. And the inclusion of such products
or model portfolios along with the other two types of investment
products, portfolios or services might help heighten competition in the
market and thereby enhance product quality and affordability across all
three types.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and are likely to
have a significant economic impact on a substantial number of small
entities. Small entities include small businesses, organizations, and
governmental jurisdictions.
For purposes of analysis under the RFA, the Department proposes to
continue to consider a small entity to be an employee benefit plan with
fewer than 100 participants. The basis of this definition is found in
section 104(a)(2) of ERISA, which permits the Secretary to prescribe
simplified annual reports for pension plans that cover fewer than 100
participants. Under section 104(a)(3) of ERISA, the Secretary may also
provide for exemptions or simplified annual reporting and disclosure
for welfare benefit plans. Pursuant to the authority of section
104(a)(3) of ERISA, the Department has previously issued at 29 CFR
2520.104-20, 2520.104-21, 2520.104-41, 2520.104-46, and 2520.104b-10
certain simplified reporting provisions and limited exemptions from
reporting and disclosure requirements for small plans, including
unfunded or insured welfare plans that cover fewer than 100
participants and satisfy certain other requirements.
Further, while some large employers may have small plans, in
general small employers maintain most small plans. Thus, the Department
believes that assessing the impact of these proposed rules on small
plans is an appropriate substitute for evaluating the effect on small
entities. The definition of small entity considered appropriate for
this purpose differs, however, from a definition of small business that
is based on size standards promulgated by the Small Business
Administration
[[Page 56815]]
(SBA) (13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C.
631 et seq.). The Department therefore requests comments on the
appropriateness of the size standard used in evaluating the impact of
these proposed rules on small entities.
The reasons the Department is proposing this regulation, and the
objectives of and legal basis for the proposed regulation, are
discussed earlier in this preamble.
The Department has concluded that the primary effects of this
proposed regulation will be to increase retirement savings and pension
incomes for participants and beneficiaries by directing default
investments to higher-performing portfolios and by promoting the
implementation of automatic enrollment programs in participant directed
individual account pension plans. Applying this assessment under the
standards of the RFA, the Department believes that the impact of this
proposed regulation will fall primarily on participants in participant
directed individual account pension plans, and not on the plans
themselves or on the employers that sponsor the plans. By promoting
automatic enrollment programs and thereby increasing aggregate
participant contributions, the proposed regulation may also increase
some employers' matching contributions, including matching
contributions made by small plans. For reasons explained below,
however, the Department has concluded that this effect is not a
sufficient basis for concluding that the proposed regulation will have
a significant impact on a substantial number of small entities.\14\
---------------------------------------------------------------------------
\14\ The proposed regulation requires affected plans to disclose
to participants and beneficiaries certain information related to
default investment provisions and default investments. As discussed
below in connection with the Paperwork Reduction Act, the burden of
compliance with the information collection provisions, which will be
borne by plan sponsors and plans, will be minor, relative to the
anticipated benefits of the regulation.
---------------------------------------------------------------------------
Many plan sponsors provide matching contributions. The Department
estimates that, if the proposed regulation is finalized, approximately
10 to 20 percent of all small participant directed defined contribution
plans, or as many as 28,000 to 56,000 small plans, may adopt automatic
enrollment programs and, consequently, may incur additional matching
contributions. Such an increase in automatic enrollment programs could
have the indirect effect of increasing aggregate matching contributions
in small plans by between $100 million and $300 million annually
(expressed at 2005 levels). The effect of increased matching
contributions is expected to be proportionately similar for small and
large entities. However, adverse consequences are not expected, for
either large or small plans, because the adoption of automatic
enrollment programs and the provision of matching contributions are,
generally, voluntary and at the discretion of the plan sponsor.
Reliance on the proposed regulation and, therefore, compliance with its
provisions are also voluntary on the part of the plan sponsor.
Accordingly, it is highly unlikely that the proposed regulation would
have a significant impact on a substantial number of small entities.
Therefore, the head of the Employee Benefits Security Administration
hereby certifies, as required under section 605(b) of the RFA, that
this proposed regulation will not, if promulgated, have a significant
economic impact on a substantial number of small entities.
The Department is unaware of any duplicative, overlapping or
conflicting federal rules.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that the public
understands the Department's collection instructions; respondents can
provide the requested data in the desired format, the reporting burden
(time and financial resources) is minimized, and the Department can
properly assess the impact of collection requirements on respondents.
Currently, the Department is soliciting comments concerning the
information collection request (ICR) included in the Proposed
Regulation on Default Investment Alternatives under Participant
Directed Individual Account Plans. A copy of the ICR may be obtained by
contacting the person listed in the PRA Addressee section below.
The Department has submitted a copy of the proposed regulation to
OMB in accordance wi