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Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans

Proposed Rule

Score: 37 / 60

RULE SUMMARY

This document contains a proposed regulation under the Employee Retirement Income Security Act of 1974 (ERISA) that, upon adoption, would require the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans (e.g., 401(k) plans).

METHODOLOGY

There are twelve criteria within our evaluation within three broad categories: Openness, Analysis and Use. For each criterion, the evaluators assign a score ranging from 0 (no useful content) to 5 (comprehensive analysis with potential best practices). Thus, each analysis has the opportunity to earn between 0 and 60 points.

CriterionScore

Openness

1. How easily were the RIA , the proposed rule, and any supplementary materials found online?
The RIA is in the proposed rule. A link to the proposed rule is four intuitive clicks from the home page via the "laws and regulations" heading on EBSA's page. A search using the regulation's name and "proposed regulation" immediately produces links to the proposed regulation. The proposed rule is also available on regulations.gov.
5/5
2. How verifiable are the data used in the analysis?
Sources are provided for most data. Some would be hard to verify for readers not already familiar with the data.
3/5
3. How verifiable are the models and assumptions used in the analysis?
Almost all models/assumptions are sourced to peer-reviewed literature or other authoritative sources.
3/5
4. Was the analysis comprehensible to an informed layperson?
The analysis is a bit tedious, but well-organized and pretty well explained. It does, however, include some jargon.
4/5

Analysis

5. How well does the analysis identify the desired outcomes and demonstrate that the regulation will achieve them?
3/5
Does the analysis clearly identify ultimate outcomes that affect citizens’ quality of life?
Reduced fees paid by investors in self-directed retirement plans.
4/5
Does the analysis identify how these outcomes are to be measured?
Fee savings induced by the mandated disclosures.
4/5
Does the analysis provide a coherent and testable theory showing how the regulation will produce the desired outcomes?
Investors are confused, and it takes time to research fee differences. Mandated disclosures lead investors to choose options with lower fees.
3/5
Does the analysis present credible empirical support for the theory?
The analysis cites some studies showing that investors often choose options with higher fees than necessary to produce an equivalent amount of value, as well as experiments showing that investors choose lower-cost fee options when information is clearly disclosed.
4/5
Does the analysis adequately assess uncertainty about the outcomes?
Not explicitly, but the sensitivity analysis at the end does vary the size of costs and benefits. It is not clear that these simple multiplications reflect the actual probabilistic distributions of individuals action sets.
2/5
6. How well does the analysis identify and demonstrate the existence of a market failure or other systemic problem the regulation is supposed to solve?
3/5
Does the analysis identify a market failure or other systemic problem?
The department claims that investors lack accurate, easy to understand information about fees, but does not explain how this can persist in a competitive market.
2/5
Does the analysis outline a coherent and testable theory that explains why the problem (associated with the outcome above) is systemic rather than anecdotal?
See above.
2/5
Does the analysis present credible empirical support for the theory?
The analysis cites some studies showing that investors often choose options with higher fees than necessary to produce an equivalent amount of value received.
4/5
Does the analysis adequately assess uncertainty about the existence or size of the problem?
The analysis does not acknowledge that the problem's existence is uncertain, but the analysis does note uncertainty about the percent of investors who might make different choices as a result of the disclosures. Analysis assumes that much less than 100% of investors would make different decisions.
3/5
7. How well does the analysis assess the effectiveness of alternative approaches?
3/5
Does the analysis enumerate other alternatives to address the problem?
There are several alternatives: No action, make plans comply only with an existing regulation, impose a less specific disclosure mandate, or impose prospectus-like disclosure requirements.
5/5
Is the range of alternatives considered narrow (e.g., some exemptions to a regulation) or broad (e.g., performance-based regulation vs. command and control, market mechanisms, nonbinding guidance, information disclosure, addressing any government failures that caused the original problem)?
All of the proposals involve varying the extent of the disclosure mandate, but there do seem to be meaningful differences.
3/5
Does the analysis evaluate how alternative approaches would affect the amount of the outcome achieved?
This is implicit for the no action alternative, since it is the baseline. It is explicitly done only for the option that would require plans to comply with an existing, less stringent, regulation.
2/5
Does the analysis adequately address the baseline? That is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?
No action is the explicit baseline. The agency did not consider how disclosures have evolved in response to competition or how they are likely to do so in the future.
2/5
8. How well does the analysis assess costs and benefits?
2/5
Does the analysis identify and quantify incremental costs of all alternatives considered?
The analysis quantifies costs of two options.
3/5
Does the analysis identify all expenditures likely to arise as a result of the regulation?
The analysis considers compliance costs only. The assumption that the review of a plan requires only a half-hour of a lawyer's time is not sourced/documented.
3/5
Does the analysis identify how the regulation would likely affect the prices of goods and services?
The analysis assumes that all benefits are passed through to investors; it is not clear if it assumes compliance costs are also passed through.
3/5
Does the analysis examine costs that stem from changes in human behavior as consumers and producers respond to the regulation?
The analysis notes that the costs might dissuade some businesses from offering retirement plans, but they suggest this is unlikely based on survey data. No other behavioral changes are considered on the cost side. There is no consideration of other benefits for investors the investment firms might curtail in response to the lower fees.
2/5
If costs are uncertain, does the analysis present a range of estimates and/or perform a sensitivity analysis?
A sensitivity analysis shows effects of various percent changes in various assumptions. It is not clear what these percentages are based on.
3/5
Does the analysis identify the alternative that maximizes net benefits?
Net benefits are explicitly calculated for two options. Several other options are dismissed on the grounds that they would produce few benefits or higher costs, which are not explicitly calculated.
3/5
Does the analysis identify the cost-effectiveness of each alternative considered?
Cost-effectiveness could be calculated for the two options for which cost and benefits figures are given, but the analysis does not do this.
1/5
Does the analysis identify all parties who would bear costs and assess the incidence of costs?
Plan sponsors bear costs. The analysis estimates average costs and costs for smallest (1 participant) plan.
2/5
Does the analysis identify all parties who would receive benefits and assess the incidence of benefits?
Investors in general receive benefits. Benefits are not broken down by different groups of investors.
1/5

Use

9. Does the proposed rule or the RIA present evidence that the agency used the analysis?
The RIA may have affected the agency's decision to regulate or choice of disclosure requirement. The principal reference to results of the analysis occurs where the department notes that total benefits and net benefits would be much lower under the other option for which the department calculated them.
4/5
10. Did the agency maximize net benefits or explain why it chose another alternative?
The agency picked the option that appears to maximize net benefits. But the analysis of several other options lacks actual calculations.
4/5
11. Does the proposed rule establish measures and goals that can be used to track the regulation's results in the future?
None are established, but the analysis in the RIA could be used to design measures and set goals.
1/5
12. Did the agency indicate what data it will use to assess the regulation's performance in the future and establish provisions for doing so?
It should not be hard to observe how investor decisions change after these disclosures are implemented, but the rule makes no provisions for doing so.
2/5
 
Total37 / 60

Additional details

Agency
Department of Labor
Regulatory Identification Number
1210-AB07
Agency Name
Department of Labor
Rule Publication Date
07/23/2008