Proposed Small Pension Plan Security Amendments

SUMMARY: This document contains proposed amendments to the regulations

governing the circumstances under which small pension plans are exempt

from the requirements to engage an independent qualified public

accountant and to include a report of the accountant as part of the

annual report under Title I of the Employee Retirement Income Security

Act of 1974, as amended (ERISA). Regulation 29 CFR 2520.104-46 provides

a waiver of the annual examination and report of an independent

qualified public accountant for employee benefit plans with fewer than

100 participants at the beginning of the plan year. The proposed

amendments are designed to increase the security of assets in small

pension plans by conditioning the waiver of the requirements concerning

the engagement of an accountant on enhanced disclosure of information

to participants and beneficiaries and, in certain instances, improved

bonding requirements. This regulatory action is being proposed as a way

of enhancing the security and accountability of small pension plans

because of recent cases involving embezzlement or other

misappropriations of pension assets that have focused national

attention on the potential vulnerability of small pension plans to

fraud and abuse. The proposed amendments do not affect the exemption

for small welfare plans (such as group health plans) under

Sec. 2520.104-46. Conforming amendments are made to the simplified

annual reporting requirements specified in 29 CFR 2520.104-41. If

adopted, the proposal would affect participants and beneficiaries

covered by small pension plans, sponsors and administrators of small

pension plans, and service providers holding assets of small pension

plans.

DATES: Written comments concerning the proposed regulations must be

received by January 31, 2000.

ADDRESSES: Written comments (preferably three copies) should be sent

to: Office of Regulations and Interpretations, Room N-5669, Pension and

Welfare Benefits Administration, U.S. Department of Labor, 200

Constitution Avenue, NW, Washington, DC 20210, Attention: Small Pension

Plan Security Proposal. All submissions will be open to public

inspection in the Public Disclosure Room, Pension and Welfare Benefits

Administration, Room N-5638, 200 Constitution Avenue, NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT: John Keene, Office of Regulations and

Interpretations, Pension and Welfare Benefits Administration, (202)

219-8521. This is not a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

In general, the administrator of an employee benefit plan required

to file an annual report under Title I of ERISA must include as part of

that report the opinion of an independent qualified public accountant

(IQPA). These annual reporting requirements can be satisfied by filing

the Form 5500 ``Annual Return/Report of Employee Benefit Plan.''

1 The requirements governing the content of the opinion and

report of the IQPA are set forth in ERISA section 103(a)(3)(A) and 29

CFR 2520.103-1(b). Section 104(a)(2)(A) permits the Department of Labor

(Department) to prescribe, by regulation, simplified annual reports for

pension plans with fewer than 100 participants. Section 104(a)(3)

permits the Department to prescribe exemptions from the reporting and

disclosure requirements or simplified reporting and disclosure for

welfare plans. In accordance with the Department's authority under

sections 104(a)(2)(A) and 104(a)(3), the Department adopted, at 29 CFR

2520.104-41, simplified annual reporting requirements for pension and

welfare benefit plans with fewer than 100 participants. In addition,

the Department, at 29 CFR 2520.104-46, prescribed for small plans a

waiver from the requirement of section 103(a)(3)(A) to engage an IQPA

and to include the opinion of the accountant as part of the plan's

annual report.

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\1\ See sections 101(b)(4) and 103 of ERISA, and 29 CFR

2520.103-1.

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Since the adoption of Sec. 2520.104-46 in 1976, the amount of

assets held in small pension plans has increased dramatically and small

pension plans have become important retirement savings vehicles for an

increasing number of American workers. Recently, media coverage of a

case involving misappropriation of pension assets over several years

focused national attention on the potential vulnerability of small

pension plans to fraud and abuse. There have been other cases where

service providers, administrators or other fiduciaries have misused

retirement savings held in small pension plans and have concealed their

acts by falsifying financial and other information to plan sponsors,

trustees, and participants. Although such cases are rare and legal

remedies often can be pursued in an effort to recover lost assets, the

Department believes that, given the increasing extent to which workers

are depending on their employment-based pension plans as a primary

source of retirement income, it is appropriate to take steps to improve

the security of pension assets in small pension plans.

One approach to improving the security of assets in small pension

plans is to require all such plans to comply with the audit

requirements of section 103(a)(3)(A). As noted above, the assets of

plans with fewer than 100 participants, unlike larger plans, are not

required to be examined by an IQPA. While subjecting the assets of

small pension plans to an audit would, in the view of the Department,

provide a high degree of certainty that the assets reported on a plan's

annual report are actually available to pay benefits, the Department

recognizes that the costs attendant to such a requirement may be

significant for many plans and plan sponsors. Consistent with the

Department's goal of encouraging pension plan establishment and

maintenance, particularly in the small business community, the

Department concluded that engaging an accountant should not be the only

means by which the security of small plan pension assets can be

improved.

In assessing alternatives to a mandatory audit requirement, the

Department concluded that a three-pronged approach--focusing on (1) Who

holds the plan'' assets, (2) Enhanced disclosure to participants and

beneficiaries and (3) In limited situations, an improved bonding

requirement--could enhance the level of security and accountability for

small pension plan assets, while keeping administrative burdens and

costs to a minimum by building on current recordkeeping, disclosure and

bonding requirements and practices. Based on our experience in dealing

with thousands of inquiries every year from participants regarding

their plans, we have determined that well informed participants and

beneficiaries are often in the best position to be watchdogs over their

own pension plans and can catch problems early. We also have determined

that, based on industry estimates, the costs of enhancing fidelity bond

coverage will be nominal for most

[[Page 67437]]

plans and less than the cost of an annual audit by an IQPA.

The alternative referenced above is set forth as proposed new

conditions for obtaining a waiver from the requirements concerning the

engagement of an IQPA under Sec. 2520.104-46. A description of the

proposal follows.

B. Proposed Amendment to Sec. 2520.104-46

Currently, the conditions to obtaining a waiver from the

requirement to engage an accountant under Sec. 2520.104-46 are that a

pension plan have fewer than 100 participants at the beginning of the

plan year and the plan administrator properly file the ``Form 5500-C/R

Return/Report of Employee Benefit Plan (With fewer than 100

participants).'' As discussed below, the proposal would, upon adoption,

amend the regulation to further condition eligibility for the waiver on

additional disclosures to plan participants and beneficiaries

concerning the assets held by their plans and, in certain instances, an

increase in the amount of a plan's fidelity bond.2

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\2\ On September 3, 1997, the Department of Labor, the Internal

Revenue Service, and the Pension Benefit Guaranty Corporation

published (62 FR 46556) proposed revisions to the annual return/

report forms filed for employee benefit plans. The Agencies proposal

replaced the Form 5500, Form 5500-C and Form 5500-R with one Form

5500 to be used by both large and small plan filers beginning with

1999 plan year filings. On June 24, 1998 the Agencies published a

notice of the submission of the revised Form 5500 for OMB review (63

FR 34493). PWBA received conditional approval for the revised Form

5500 under OMB control number 1210-0110. The Department also

published on December 10, 1998 (63 FR 68370) a notice of proposed

rulemaking to conform its regulations relating to the annual

reporting and disclosure requirements of Part 1 of Title I of ERISA

to the revised forms. The proposed amendments to the small pension

plan IQPA waiver contained in this notice would modify the proposed

amendments to Sec. 2520.104-41 and Sec. 2520.104-46 published in the

December 10 notice. The Form 5500 series may need to be adjusted

following adoption of a final rule in connection with this proposal

to reflect changes to the small pension plan IQPA waiver.

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In general, the Department believes that statements of plan assets

prepared by certain regulated financial institutions (such as banks,

insurance companies, mutual funds, and securities broker-dealers), if

made available to participants and beneficiaries, provide a means by

which participants and beneficiaries can independently confirm that the

assets reported by the plan to be available to pay benefits as of the

end of the plan year were, in fact, available according to the books

and records of the institution holding the assets. Such disclosure, in

the Department's view, reduces the likelihood of losses over long

periods due to acts of fraud or dishonesty. The Department also

believes that supplemental bonding requirements also will serve to

reduce the risk of loss due to acts of fraud or dishonestly where a

substantial percentage of a plan's assets are held by entities that may

not be subject to state or federal regulatory oversight.

1. Qualifying plan assets and bond requirement

The first part of the proposal, therefore, focuses on the extent to

which a plan's assets are held by regulated financial institutions.

See: Proposed Sec. 2520.104-46(b)(1)(i)(A). The proposal uses the term

``qualifying plan assets'' in applying the conditions of the waiver.

``Qualifying plan assets'' are defined in the proposal to include any

assets held by: a bank or similar financial institution, as defined in

Sec. 2550.408b-4(c); an insurance company qualified to do business

under the laws of a state; an organization registered as a broker-

dealer under the Securities and Exchange Act of 1934; or any other

organization authorized to act as a trustee for individual retirement

accounts under section 408 of the Internal Revenue Code. The term

``qualifying plan assets'' also includes assets that the Department

believes present little risk of loss to participants and beneficiaries

as a result of acts of fraud or dishonesty `` participant loans meeting

the requirements of ERISA section 408(b)(1) and qualifying employer

securities, as defined in ERISA section 407(d)(1). See Proposed

Sec. 2520.104-46(b)(1)(ii).

The proposal provides that, with respect to each plan year for

which the waiver is claimed, at least 95% of the assets of the plan

constitute ``qualifying plan assets'' or any person who handles plan

funds or other property that do not constitute ``qualifying plan

assets'' is covered by a bond meeting the requirements of ERISA section

412, except that the amount of the bond is not less than the value of

such assets.3 The 95% test is provided in recognition of the

fact that some small plans may have assets (such as limited partnership

or real estate interests) held by parties that are not regulated

financial institutions. It is not the intent of the Department in

proposing these amendments to directly or indirectly influence how the

assets of small plans are invested through application of the audit

requirements. Accordingly, only where more than 5% of a plan's assets

do not constitute ``qualifying plan assets'' will the bonding component

of the proposal apply. As noted above, the bonding component of the

proposal would require a bond meeting the requirements of ERISA section

412 in an amount equal to 100% of the assets that do not constitute

``qualifying plan assets.'' Based on industry estimates as detailed

below, it does not appear that the costs attendant to compliance with

the proposed bonding requirement will be significant enough to affect

plan investments in assets that are not ``qualifying plan assets.''

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\3\ Section 412 of ERISA and the regulations issued thereunder,

29 C.F.R. Sec. 2580.412-1 et seq., set forth the bonding

requirements generally applicable to ERISA-covered pension and

welfare benefit plans.

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Under the proposal, the percentage of a plan's assets that

constitute ``qualifying plan assets'' and, as appropriate, the amount

of supplemental bond coverage necessary to comply with the regulation

are to be determined for each plan year for which the waiver is

claimed. Accordingly, the administrator of a plan electing the waiver

must make the required determinations as of the beginning of the plan

year. For purposes of this requirement, the required determinations are

to be made in a manner consistent with the requirements of section 412.

Inasmuch as a determination that more than 5% of a plan's assets do not

constitute ``qualifying plan assets'' may necessitate an increase in

the amount of the plan's section 412 bond, assuming the administrator

does not elect to engage an accountant, the Department concluded that

the determination of ``qualifying plan assets'' should be made on the

same basis as the required bond. In this regard, 29 CFR 2580.412-14

requires that the amount of the section 412 bond be determined by

reference to the preceding reporting year. In the case of new plans,

with respect to which there is no preceding report year, Sec. 2580.412-

15 provides procedures for making estimates for the current year.

For example, Plan A, which reports on a calendar year basis, has

total assets of $600,000 as of the end of the 1999 plan year. Plan A's

assets, as of the end of year, include: investments in various bank,

insurance company and mutual fund products of $520,000; investments in

qualifying employer securities of $40,000; participants loans, meeting

the requirements of ERISA section 408(b)(1) totaling $20,000; and a

$20,000 investment in a real estate limited partnership. Because the

only asset of the plan that does not constitute a ``qualifying plan

asset'' is the $20,000 real estate investment and that investment

represents less than 5% of the plan's total assets, no bond would be

required under the proposal as a

[[Page 67438]]

condition for the waiver for the 2000 plan year. By contrast, Plan B

also has total assets of $600,000 as of the end of the 1999 plan year,

of which $558,000 constitutes ``qualifying plan assets'' and $42,000

constitutes non-qualifying plan assets. Because 7%--more than 5%--of

Plan B's assets do not constitute ``qualifying plan assets,'' Plan B,

as a condition to electing the waiver for the 2000 plan year, must

ensure that it has a fidelity bond in an amount equal to at least

$42,000 covering persons handling non-qualifying plan assets. Inasmuch

as compliance with section 412 generally requires the amount of bonds

to be not less than 10% of the amount of all the plan's funds or other

property handled, the bond acquired for section 412 purposes may be

adequate to cover the non-qualifying plan assets without an increase

(i.e., if the amount of the bond determined to be needed for the

relevant persons for section 412 purposes is at least $42,000). As

demonstrated by the foregoing example, where a plan has more than 5% of

its assets in non-qualifying plan assets, the bond required by the

proposal is for the total amount of the non-qualifying plan assets, not

just the amount in excess of 5%.

2. Disclosure

In addition to the bonding requirement, discussed above, the

proposal further conditions the waiver of the requirement to engage an

accountant on the disclosure of certain information to participants and

beneficiaries. Specifically, Sec. 2520.104-46(b)(1)(i)(B) of the

proposal requires that the summary annual report (SAR) of a plan

electing the waiver include, in addition to the other information

required by 29 C.F.R. Sec. 2520.104b-10: (1) The name of each

institution holding ``qualifying plan assets'' and the amount of such

assets held by each institution as of the end of the plan year; (2) The

name of the surety company issuing the bond, if the plan has more than

5% of its assets in non-qualifying plan assets; (3) A notice indicating

that participants and beneficiaries may, upon request and without

charge, examine, or receive copies, of evidence of the required bond

and statements received from each institution holding qualifying assets

which describe the assets held by the institution as of the end of the

plan year; and (4) A notice stating that participants and beneficiaries

should contact the Regional Office of the U.S. Department of Labor's

Pension and Welfare Benefits Administration if they are unable to

examine or obtain copies of statements received from each institution

holding qualifying assets or evidence of the required bond, if

applicable. Proposed Sec. 2520.104-46(b)(1)(i)(C) is intended to make

clear that plan administrators must, without charge, make the required

documents available for examination and, upon request, provide copies

of those documents to participants and beneficiaries.

As indicated earlier, these requirements, in an effort to minimize

costs to plans, are intended to build on existing recordkeeping and

disclosure requirements. In this regard, the Department believes that

all plans will receive year-end statements from institutions holding

``qualifying plan assets.'' The proposal does not require the year-end

statements to be in any particular form, but the statements, at a

minimum, must identify the institution holding the assets and the

amount of assets held as of the end of the year. Such information is

typically furnished in the normal course of business and would,

nonetheless, be necessary for administrators to properly discharge

their annual reporting obligations under ERISA. Moreover, because

annual reports generally are not required to be filed earlier than the

end of the 7th month after the end of plan year and summary annual

reports are not required to be distributed until 9 months after the

close of the plan year or, if there is an approved extension of time to

file, 2 months after the close of the extension period,4

administrators are afforded ample time to ensure the availability of

the information necessary to satisfy the disclosure obligation on which

the waiver is conditioned.

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\4\ See 29 C.F.R. 2520.104a-5 (regulation on date of filing for

annual reports), 29 C.F.R. 2520.104a-6 (regulation on date of filing

for annual reports for plans which are part of a group insurance

arrangement) and 29 C.F.R. 2520.104b-10(c) (regulation on when to

furnish summary annual reports)

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3. Limitations

The proposal would also make clear that this section does not

affect the obligation of a plan electing a waiver of the audit

requirement to file a Form 5500 ``Annual Return/Report of Employee

Benefit Plan,'' including any schedules or statements required by the

instructions to the form. In addition, the proposal would clarify that

a plan electing to file a Form 5500 as a small plan pursuant to the

``80 to 120 rule'' in 29 CFR 2520.103-1(d) may also claim the waiver

afforded in this section in the same manner as a plan with fewer than

100 participants. Under the ``80 to 120 rule,'' if the number of

participants covered under the plan as of the beginning of the plan

year is between 80 and 120, and an annual report was filed as a small

plan filer for the prior year, the plan administrator may elect to

continue to file as a small plan filer and claim the waiver afforded by

this section even though the plan covered more than 100 participants as

of the beginning of the plan year. On the other hand, a plan with fewer

than 100 participants as of the beginning of the plan year that elects

to continue to file a Form 5500 as a large plan pursuant to the ``80 to

120 rule'' is not eligible to claim the waiver afforded to small plan

filers.

C. Conforming Changes to the Simplified Annual Reporting Regulation

Conforming amendments to the simplified annual reporting provisions

in Sec. 2520.104-41 would clarify that, although other simplified

reporting options would continue to be available, if an employee

benefit plan with fewer than 100 participants does not meet the

criteria set forth in Sec. 2520.104-46, it would be required to engage

an IQPA to conduct an examination of the financial statements of the

plan, include with the plan's annual report the financial statements,

notes and schedules prescribed in ERISA section 103(b) and 29 CFR

2520.103-1, and include within the plan's annual report a report of an

IQPA as prescribed in ERISA section 103(a)(3)(A) and 29 CFR 2520.103-

1(b)(5).

D. Effective Date

This regulation is proposed to be effective 60 days after

publication of a final rule in the Federal Register. If adopted, the

proposed amendments would be applicable to the first plan year

beginning after the effective date of the final regulations.

E. Request for Public Comments on Alternatives

During the development of this proposal, small business groups

expressed concern about the Department taking actions in this area that

would increase administrative costs for small business owners thinking

about continuing existing pension plans or offering new ones. The

Department shares these concerns. Data indicate that more than one half

of the private sector workforce does not participate in a pension plan,

and this problem is particularly serious in the small business sector.

In developing this proposal we attempted to balance the interest in

providing secure retirement savings for participants and beneficiaries

with the interest in minimizing costs and burdens on small

[[Page 67439]]

pension plans and the sponsors of those plans.

To aid in this effort as we develop a final regulation, the

Department is interested in obtaining views and comments from the

benefit plan community on whether there are alternative approaches that

would provide significant enhancements in the security of small pension

plan assets and the accountability of persons handling those assets

which would be more effective or involve less cost and burden than this

proposal. In that regard, the Department specifically invites comments

on requiring as conditions of being eligible for the audit waiver that

small pension plans (1) Obtain a fidelity bond covering persons who

handle plan funds in an amount equal to at least 80% of the value of

the plan's assets and (2) Make available to participants and

beneficiaries a schedule of the plan's assets held for investment

purposes as of the end of the plan year similar to the schedule

currently required as part of the Form 5500 annual report filed by

pension plans with 100 or more participants. Additionally, the

Department requests comments on the investment of small pension plans

assets; specifically, the proportion of assets that are ``qualifying

plan assets'' as defined in this proposal.

Executive Order 12866 Statement

Under Executive Order 12866, the Department must determine whether

the 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), the order defines a

``significant regulatory action'' as 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 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.

Pursuant to the terms of the Executive Order, it has been

determined that this action is ``significant'' and subject to OMB

review under Section 3(f)(4) of the Executive Order. Consistent with

the Executive Order, the Department has undertaken to assess the costs

and benefits of this regulatory action. The Department's assessment,

and the analysis underlying that assessment, is detailed below.

Overview

In the Department's view, the benefits of the proposed additional

requirements for the IQPA waiver outweigh the costs. The enhanced

accountability and security of small pension plans resulting from

additional IQPA waiver conditions will benefit plan participants who

are counting on these pensions for retirement security. Given the more

than $300 billion in small pension plan assets, any increase in

security and accountability is valuable. The additional conditions will

also strengthen confidence in the pension system as a whole, and this

added confidence may encourage more employers to offer pension plans,

as well as additional workers to participate in pension plans that are

offered. The costs to small pension plans will not be large `` it is

estimated to be less than 1% of total annual administrative costs for

all small pension plans. Estimates from Form 5500 data indicate that

most small pension plans (as quantified below) would meet the

requirement that at least 95% of their assets be ``qualifying plan

assets.'' For the few plans not meeting this requirement, the cost of

obtaining fidelity bonds to enable them to meet the conditions required

for the waiver are low. The statements required from qualifying

financial institutions will impose no additional costs on plans because

these records are kept as part of usual and customary business

practices as the information is necessary for administrators to

properly discharge their annual reporting obligations under ERISA.

Finally, the cost of meeting disclosure requirements is small because

after an initial start up cost to modify the SAR, no additional

preparation costs are associated with SAR disclosure beyond the SAR

statutory requirements. Additionally, no preparation is associated with

distributing the statements and evidence of fidelity bonds that

participants may request under the proposal.

The total costs imposed by the additional conditions this proposal

would place on the small plan audit waiver are expected to be a one

time cost of $5.9 million, plus $9.0 million annually.5 This

is composed of a $5.9 million start up cost to include summary language

on the financial statements and bonds in the SAR, an $8.0 million cost

for the estimated 37,000 plans not meeting the 95% test to obtain a

bond, and a $995,000 cost to plans for providing copies of the

statements and bonds upon request.

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\5\ The cost estimates are derived from 1995 data on pension

plans (the latest available) and 1997 BLS data on occupational

wages.

Costs Imposed by Proposed Small Pension Plan Security Amendments

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Provide

requested

Proposed regulatory provision SAR summary language Obtain a bond copies of

statements and

bonds

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Number of plans impacted................ 605,000................... 37,000.................... 605,000

Total Cost.............................. $5.9 million.............. $8.0 million.............. $995,000

Cost per plan........................... $10....................... $220...................... $1.64

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Statement of Need for Proposed Action

As noted earlier, recent cases involving embezzlement or other

misappropriations of pension assets have focused national attention on

the potential vulnerability of small pension plans to fraud and abuse.

As a result, the Department has determined that modifications to the

small plan audit waiver would enhance pension plan security. Imposing

the additional conditions on the audit waiver would

[[Page 67440]]

help reduce the risk of loss due to acts of fraud or dishonesty with

small plan assets. It would also provide participants with more

information about their pension plans, thus better enabling them to

help provide the checks and balances needed to ensure the integrity of

the pension plan.

Examination of Alternative Approaches

To improve the security of pension plan assets, and to better

provide participants and other parties to the plan the ability to

verify and monitor the existence of small pension plan assets, various

alternatives to the proposal were considered. The voluntary nature of

the private pension system requires the Department to be particularly

sensitive to costs imposed by regulations and to avoid, when possible,

any action that would negatively impact small pension plan formation or

maintenance. The Department therefore consulted industry groups and

associations regarding alternatives available to enhance pension plan

security and the burdens imposed by these various alternatives. The

proposed regulation was crafted using these suggestions, and is

intended to accomplish these goals without imposing significant costs

on pension plans.

Among the alternatives considered were on-site inspection, periodic

reporting, additional compliance penalties, additional bonding

requirements, and eliminating the existing small plan audit waiver of

examination and report of an accountant. However, all of these options

were either extremely expensive (ranging in cost from $200 million to

$4 billion paid by plans or plan sponsors) and thus conflicted with the

Department's priority of creating a regulatory environment that

encourages pension plan formation, not feasible to implement, or would

not have sufficiently enhanced small pension plan security.

Cost Analysis

The requirements contained in this proposal were developed to best

conform to the actual investment patterns of small plans, rather than

to alter these patterns. To understand the investment patterns of plans

and the typical percentage of plan assets that would meet the

``qualifying plan assets'' requirement, we used Form 5500 data to

examine how pension plans report their allocation of assets among

various investment categories. Plan asset allocation information on the

Form 5500 C/R filed by small plans is currently limited to very general

categories. Because of this lack of detailed financial information, the

Form 5500 filings of plans with more than 100 participants but less

than $2 million in assets (within two standard deviations of the mean

asset value of small plans) were used as a proxy. Data show that within

this proxy group, the proportion of investments in ``qualifying plan

assets'' to total investments does not vary with plan size except among

the largest plans (those with 2,500 or more participants), which

represent less than 1 percent of the proxy group. We obtained a

distribution of these plans based upon the proportion of each plan's

assets that are ``qualifying plan assets.'' We then applied this

distribution to the actual 1995 count of small plans to estimate a

distribution of small plans based on the proportion of assets that are

``qualifying plan assets.'' We assumed that assets reported as cash,

CD's, U.S. Government Securities, corporate debt and equity, loans,

employer securities and the value of interest in direct filing

entities, registered investment companies, and insurance company

general accounts constitute ``qualified plan assets'' as defined in

this proposal.

The chart below shows the results of the analysis of 1995 data (the

most recent year of available data) using these assumptions, and how

many plans out of the 605,000 would not meet the ``qualifying plan

assets'' test if the threshold were set at the various percentages

outlined in the table. This shows that the vast majority of the assets

of small plans are ``qualifying plan assets.'' Specifically, for all

but 6% of small pension plans, at least 95% of plan assets constitute

``qualifying plan assets.'' Similarly, for all but 3% of plans, at

least 90% of plan assets constitute ``qualifying plan assets.'' As the

threshold moves below 90%, very few additional plans are added to the

list of those having the required percentage of ``qualifying plan

assets.'' The analysis of the data indicates that the 95% threshold

represents the point at which most small plans maintain their assets in

investments which represent minimal risks to their security.

Consequently, the 95% threshold requirement is the means by which most

plans will meet the requirement for the audit waiver. The plans that

will not meet the 95% threshold are atypical of the industry standard,

impose a greater risk on plan asset security, and are sufficiently few

in number such that additional conditions for an audit waiver to

protect participants and plan assets are warranted and are also cost

effective.

Estimates of the Number and Percentage of Small Pension Plans (1-99 Participants) Not Meeting the ``Qualifying Plan Assets'' Test at Various Threshold

Levels

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Alternative Threshold Levels for Qualifying Plan Assets

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100% 95% 90% 85% 80% 75% 6 to the 6% of plans with these

$150,000 in assets needing bonding coverage yields a cost of $7.3

million. In addition to the average bond premium of $200 per plan,

obtaining the bond is estimated to involve one-half hour of an

analyst's time at $39 per hour per small plan, for a cost of $0.7

million. Summing these costs yields $8.0 million to comply with the

additional bonding requirement.

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\6\ The bonding premium was estimated based on information

supplied by industry representatives.

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To address the need to enhance the ability of participants to

monitor the financial status of plans that do not receive financial

audits, the proposed regulation would require that the SAR be modified

to include summary information describing the statements and fidelity

bonds and a notice that copies are available upon request. This

requirement merely involves an initial start up cost to plans to modify

their automated SAR forms to include the language required by the

regulation. Similar to the assumptions made for the Form 5500 and SAR

regulatory analyses, 90% of plans are assumed to use service providers

for the required SAR modifications, with the remaining plans performing

the modifications in-house. The one-time cost of modifying the SAR form

is estimated to be $5.9 million--15 minutes of a professional's time at

$39 per hour for all small plans. Any preparation burden associated

with completing the SAR form is not attributable to this proposal, but

rather, to SAR requirements in general. Another burden associated with

disclosure requirements is providing copies of the statements and

bonding information to those participants and beneficiaries who request

them. The Department assumes that 5% of participants and beneficiaries

will request this information. Since the documents already have been

provided by bonding companies and financial institutions, the cost of

compliance merely involves assembling the appropriate documents and

photocopying, by a clerical worker at $15 per hour, and mailing costs

at $.37 per distribution--for an aggregate cost of about $995,000 to

plans.

Benefits Analysis

The proposed regulation is intended to accomplish two purposes: to

limit pension plan fraud and to provide all parties of small pension

plans with information to monitor their plan assets and plan

fiduciaries. The benefits of reducing fraud and improving information

disclosure are numerous. In addition to the benefits listed below, this

proposal strengthens the self-regulating aspects of ERISA. With minimum

government intervention, participants and other parties to the plan

will have an improved ability to verify and monitor plan assets. The

following bullets highlight the other potential benefits of the

proposed regulation in a qualitative, and when possible, quantitative,

way:

Confidence in the private pension system may be

strengthened and may result in increased participation among the nearly

600,000 private wage and salary workers who currently elect not to

participate in a small plan that is offered;

In 1998, more than $6 million in pension plans assets were

recovered as a result of criminal investigations. If new conditions are

imposed on the small plan audit exemption, fewer assets may be missing

from plans in the future because of the checks and balances put in

place by improved information disclosure;

The investigations and litigation associated with

recovering assets of small pension plans can be very costly to private

parties and to the Government. In 1998, nearly 6,000 civil

investigations were initiated by the Department. If new conditions are

imposed on the small plan audit exemption, losses will likely decline

and fewer investigations of small pension plans may be needed. This

will have the dual effect of lowering investigation-related costs for

small plans and permitting Federal authorities to enhance the security

of other participants by directing their efforts elsewhere; and

When workers discover that their pension plan assets are

missing or are jeopardized, worker productivity declines. Time at work

may be spent investigating what happened to plan assets, whether they

will be restored, and whether retirement will be possible without these

pension assets. If fewer instances of embezzlement occur as a result of

additional conditions being imposed on the small plan audit exemption,

this productivity loss will likely be reduced or eliminated.

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 which are

likely to have a significant economic impact on a substantial number of

small entities. Unless an agency determines that a proposed rule is not

likely to have a significant economic impact on a substantial number of

small entities, section 603 of the RFA requires that the agency present

an initial regulatory flexibility analysis at the time of the

publication of the notice of proposed rulemaking describing the impact

of the rule on small entities and seeking public comment on such

impact. Small entities include small businesses, organizations and

governmental jurisdictions.

For purposes of analysis under the RFA, PWBA 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 the Employee Retirement Income Security Act of 1974

(ERISA), which permits the Secretary of Labor to prescribe simplified

annual reports for pension plans which cover fewer than 100

participants. Under section 104(a)(3), 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),

the Department has previously issued at 29 C.F.R. Secs. 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 covering fewer than 100 participants and which

satisfy certain other requirements.

Further, while some large employers may have small plans, in

general most small plans are maintained by small employers. Thus, PWBA

believes that assessing the impact of this proposed rule 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

which is based on size standards promulgated by the Small Business

Administration (SBA) (13 CFR 121.201) pursuant to the Small Business

Act (15 U.S.C. 631 et seq.). PWBA therefore requests comments on the

appropriateness of the size standard used in evaluating the impact of

this proposed rule on small entities.

On this basis, however, PWBA has preliminarily determined that this

rule will not have a significant economic impact on a substantial

number of small entities. In support of this determination, and in an

effort to provide a sound basis for this conclusion, PWBA has prepared

the following regulatory flexibility analysis.

[[Page 67442]]

The amount of assets in small pension plans has grown nearly

tenfold since 1975, making small pension plans an increasingly

important retirement savings vehicle for Americans. In light of recent

cases involving embezzlement or other misappropriations of pension

assets that have focused national attention on the potential

vulnerability of small pension plans to fraud and abuse, this

regulatory action is being considered to enhance the security and

accountability of small pension plans.

The objective of the proposed rule is to verify the existence of

small pension plan assets and to provide information to all parties to

the plan in order to enhance pension plan security. The requirements

governing the proposed regulation are set forth in ERISA section

104(a)(2), in which Congress evidenced specific intent to provide small

plans with relief from burdensome and expensive reporting requirements,

and in the regulations Secs. 2520.104-41 and 2520.104-46.

The proposed regulation amends the Department's existing waiver of

examination and report of an independent qualified public accountant

for employee benefit plans with fewer than 100 participants under

ERISA. In 1995, there were about 605,000 employee pension plans with

fewer than 100 participants that met the requirements for the audit

waiver. Under the proposed regulation, an estimated 94% of these plans

will meet the additional audit waiver requirement that at least 95% of

plan assets be ``qualifying plan assets.'' This means that only about

37,000 small plans will be subject to the requirement that the plan

either purchase fidelity bonds for those assets that are not

``qualifying plan assets'' or obtain an audit. All 605,000 small

pension plans will be subject to the disclosure requirement that the

SAR contain summary information on the financial institution statements

and bonds, and that the information be provided free of charge upon

request.

This proposed rule impacts all classes of small pension plans with

fewer than 100 participants subject to Title I of ERISA. The proposal

described here is the one that accomplishes the objective of enhancing

pension plan security without imposing significant costs via additional

reporting, recordkeeping, and other compliance requirements. The 6% of

plans that do not meet the proposed criteria for an audit waiver must

either purchase a fidelity bond to cover the funds that are not

``qualifying plan assets'' or obtain an audit. We assume plans will

choose the less costly alternative--bonding. In addition to the average

bond premium of $200 per plan, obtaining the bond is estimated to

involve one-half hour of an analyst's time at $39 per hour per small

plan, for an aggregate cost of $8 million. Second, the plan

administrator would have to receive from each qualifying financial

institution a statement identifying each plan asset held. No cost is

associated with this requirement because the statements required from

qualifying financial institutions are records that these institution

dispense as part of usual and customary business practices and that

plan administrators must obtain to properly discharge their annual

reporting obligations under ERISA. Third, the plan's SAR would have to

include summary information describing the statements and fidelity

bonds and a notice that copies of the statements and bonds are

available at no charge. This requirement involves an initial start up

cost of $5.9 million--15 minutes of a professional's time at $39 for

all 605,000 small plans to modify their SAR forms to include the

language required by the regulation. Additionally, plans would be

required to provide participants and beneficiaries copies of the

statements and bonding information upon request. The Department assumes

that 5% of participants and beneficiaries will request this information

at a cost of $995,000 to plans--assembling and photocopying by a

clerical worker at $15 per hour for 7 minutes per distribution, and

mailing costs of $.37 per mailing. The aggregate annual disclosure cost

of $995,000 translates to only $1.64 per plan and is the only annual

cost imposed by this regulation on the estimated 568,000 plans meeting

the 95% test. For the 37,000 plans not meeting the 95% test, they also

face an annual cost of $8 million for bonding requirements, or an

additional $220 per plan. Additionally, all 605,000 plans face the one

time start up cost of $10 per plan.

When considering any regulatory action, it is important to consider

the impact on businesses of various sizes. Given that well over half of

all small pension plans (57%) have between 1 and 10 participants, it is

important to focus on these small plans in particular.

Estimates of the Number and Percentage of Very Small Pension Plans (1-9 Participants) Not Meeting the ``Qualifying Plan Assets'' Test at Various

Threshold Levels

--------------------------------------------------------------------------------------------------------------------------------------------------------

Alternative Threshold Levels for Qualifying Plan Assets

------------------------------------------------------------------------------------------

100% 95% 90% 85% 80% 75% Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information will have practical utility;

Evaluate the accuracy of the agency's estimate of the

burden of the proposed 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., 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, D.C. 20503; Attention: Desk Officer for

the Pension and Welfare Benefits Administration. Although comments may

be submitted through January 31, 2000, OMB requests that comments be

received within 30 days of publication of the Notice of Proposed

Rulemaking to ensure their consideration.

ADDRESSEE (PRA 95): Gerald B. Lindrew, Office of Policy and Research,

U.S. Department of Labor, Pension and Welfare Benefits Administration,

200 Constitution Avenue, NW, Room N-5647, Washington, D.C. 20210.

Telephone: (202) 219-4782 (this is not a toll-free number); Fax: (202)

219-4745.

The proposed modifications to the small plan audit waiver will

increase the security and accountability of small pension plans. The

paperwork burden imposed on plans will be minimal. No paperwork burden

is associated with two of the three provisions in the regulation--the

requirement that 95% of plan assets be--qualifying plan assets'' and

the improved bonding requirement for those plans not meeting the 95%

test. Paperwork does arise from the third provision--modifying the SAR

to include summary information describing the statements and bonds and

noting that copies are available upon request. This requirement

involves a one-time start up cost to plans to modify their SAR forms to

include the language required by the regulation. Since 90% of plans are

assumed to use service providers to comply with ERISA Form 5500 and SAR

reporting requirements, it is assumed that the modifications to the SAR

form will be done by service providers for 90% of plans, and in-house

for the remaining plans. The start up cost (averaged over a three year

period) is estimated to be $1.8 million for the 90% small plans using

service providers and 15,000 hours for the remaining plans--15 minutes

per plan, at $39 per hour (professional's rate) for those plans using

service providers. Another cost associated with the SAR disclosure

requirements is providing copies of the statements and bonding

information to participants and beneficiaries who request them. The

Department assumes that 5% of participants and beneficiaries will

request this information. Since the documents already have been

provided by bonding companies and financial institutions, the cost of

compliance per distribution merely involves 5 minutes to ready the

appropriate documents for mailing and 2 minutes of photocopying by a

clerical worker, at a $15 hourly rate for plans using service

providers, and mailing costs of $.37 per mailing. The aggregate burden

is $912,000 and 5,500 hours.

Type of Review: Revision of an existing information collection.

Agency: Pension and Welfare Benefits Administration, Department of

Labor.

Title: ERISA Summary Annual Report Requirement.

OMB Number: 1210-0040.

Affected Public: Individuals or households; Business or other for-

profit; Not-for-profit institutions.

Frequency of Response: Annually.

Total Respondents: 817,000.

Total Responses: 235,000,000.

Estimated Burden Hours: 1,390,172 total (1,369,577 for existing

information collection request, and 20,595 for proposed amendments).

Estimated Annual Cost (Capital/Startup): $1,770,000 total.

Estimated Annual Costs (Operating and Maintenance): $112,287,000

total ($111,375,000 for the existing information collection request,

and $912,000 for proposed amendments).

Total Annualized Costs: $114,057,000 total ($111,375,000 for the

existing information collection request, and $2,682,000 for proposed

amendments).

Comments submitted in response to this notice will be summarized

and/or included in the request for OMB approval of the information

collection request; they will also become a matter of public record.

Unfunded Mandates Reform Act

For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.

104-4), as well as Executive Order 12875, this proposed rule does not

include any Federal mandate that may result in expenditures by State,

local or tribal governments, and does not impose an annual burden

exceeding $100 million on the private sector.

Small Business Regulatory Enforcement Fairness Act

The rule proposed in this action is subject to the provisions of

the Small Business Regulatory Enforcement Fairness Act of 1996 (5

U.S.C. 801, et seq.) (SBREFA) and is a major rule under SBREFA. The

rule, if finalized, will be transmitted to Congress and the Comptroller

General for review.

Statutory Authority

These regulations are proposed pursuant to authority contained in

section 505 of ERISA (Pub. L. 93-406, 88 Stat. 894, 29 U.S.C. 1135) and

section 104(a) of ERISA, as amended, (Pub. L. 104-191, 110 Stat. 1936,

1951, 29 U.S.C. 1024), and under Secretary of Labor's Order No. 1-87,

52 FR 13139, April 21, 1987.

List of Subjects in 29 CFR Part 2520

Accountants, Disclosure requirements, Employee benefit plans,

Employee Retirement Income Security Act, Pension plans, and Reporting

and recordkeeping requirements.

For the reasons set out in the preamble, Part 2520 of Chapter XXV

of Title 29 of the Code of Federal Regulations is proposed to be

amended as follows:

PART 2520--RULES AND REGULATIONS FOR REPORTING AND DISCLOSURE

PART 2520--[AMENDED]

1. The authority for Part 2520 continues to read as follows:

Authority: Secs. 101, 102, 103, 104, 105, 109, 110, 111(b)(2),

111(c) and 505, Pub. L. 93-406, 88 Stat. 840-52 and 894 (29 U.S.C.

1021-1025, 1029-31, and 1135); Secretary of

[[Page 67444]]

Labor's Order No. 27-74, 13-76, 1-87, and Labor Management Services

Administration Order 2-6.

Sections 2520.102-3, 2520.104b-1 and 2520.104b-3 also are issued

under sec. 101(a), (c) and (g)(4) of Pub. L. 104-191, 110 Stat.

1936, 1939, 1951 and 1955, and sec. 603 of Pub. L. 104-204, 110

Stat. 2935 (29 U.S.C. 1185 and 1191c).

2. Section 2520.104-41 is amended by revising paragraph (c) as

follows:

Sec. 2520.104-41 Simplified annual reporting requirements for plans

with fewer than 100 participants.

* * * * *

(c) Contents. The administrator of an employee pension or welfare

benefit plan described in paragraph (b) of this section shall file, in

the manner prescribed in Sec. 2520.104a-5, a completed Form 5500

``Annual Return/Report of Employee Benefit Plan,'' including any

required schedules or statements prescribed by the instructions to the

form, and, unless waived by Sec. 2520.104-46, a report of an

independent qualified public accountant meeting the requirements of

Sec. 2520.103-1(b).

* * * * *

3. Section 2520.104-46 is amended by revising paragraphs (b)(1) and

(d) to read as follows:

Sec. 2520.104-46 Waiver of examination and report of an independent

qualified public accountant for employee benefit plans with fewer than

100 participants.

* * * * *

(b) Application. (1)(i) The administrator of an employee pension

benefit plan for which simplified annual reporting has been prescribed

in accordance with section 104(a)(2)(A) of the Act and Sec. 2520.104-41

is not required to comply with the annual reporting requirements

described in paragraph (c) of this section, provided that with respect

to each plan year for which the waiver is claimed--

(A) (1) At least 95 percent of the assets of the plan constitute

qualifying plan assets within the meaning of paragraph (b)(1)(ii) of

this section, or

(2) Any person who handles assets of the plan that do not

constitute qualifying plan assets is bonded in accordance with the

requirements of section 412 of the Act and the regulations issued

thereunder, except that the amount of the bond shall not be less than

the value of such assets;

(B) The summary annual report, described in Sec. 2520.104b-10,

includes, in addition to any other required information:

(1) The name of each institution holding qualifying plan assets and

the amount of such assets held by each institution as of the end of the

plan year;

(2) The name of the surety company issuing a bond for purposes of

paragraph (b)(1)(i)(A)(2);

(3) A notice indicating that participants and beneficiaries may,

upon request and without charge, examine or receive copies of evidence

of any bond required by paragraph (b)(1)(i)(A)(2) and copies of

statements received from each institution holding qualifying assets

which describe the assets held by the institution as of the end of the

plan year; and

(4) A notice stating that participants and beneficiaries should

contact the Regional Office of the U.S. Department of Labor's Pension

and Welfare Benefits Administration if they are unable to examine or

obtain copies of the statements received from each institution holding

qualifying assets or evidence of the bond, if applicable; and

(C) In response to a request from any participant or beneficiary,

the administrator, without charge to the participant or beneficiary,

makes available for examination, or upon request furnishes copies of,

evidence of any bond required by paragraph (b)(1)(i)(A)(2) and the

statement of assets from each financial institution holding qualifying

assets as of the end of the plan year.

(ii) For purposes of paragraph (b)(1), the term ``qualifying plan

assets'' means:

(A) Qualifying employer securities, as defined in section 407(d)(1)

of the Act and the regulations issued thereunder;

(B) Any loan meeting the requirements of section 408(b)(1) of the

Act and the regulations issued thereunder; and

(C) Any assets held by the following institutions:

(1) A bank or similar financial institution as defined in

Sec. 2550.408b-4(c);

(2) An insurance company qualified to do business under the laws of

a state;

(3) An organization registered as a broker-dealer under the

Securities and Exchange Act of 1934; or

(4) Any other organization authorized to act as a trustee for

individual retirement accounts under section 408 of the Internal

Revenue Code.

(iii) For purposes of paragraph (b)(1), the determination of the

percentage of all plan assets consisting of qualifying plan assets with

respect to a given plan year shall be made in the same manner as the

amount of the bond is determined pursuant to Secs. 2580.412-11,

2580.412-14, and 2580.412-15.

* * * * *

(d) Limitations. (1) The waiver described in this section does not

affect the obligation of a plan described in paragraph (b) (1) or (2)

of this section to file a Form 5500 ``Annual Return/Report of Employee

Benefit Plan,'' including any required schedules or statements

prescribed by the instructions to the form. See Sec. 2520.104-41.

(2) For purposes of this section, an employee pension benefit plan

for which simplified annual reporting has been prescribed includes an

employee pension benefit plan which elects to file a Form 5500 as a

small plan pursuant to Sec. 2520.103-1(d) with respect to the plan year

for which the waiver is claimed. See Sec. 2520.104-41.

(3) For purposes of this section, an employee welfare benefit plan

that covers fewer than 100 participants at the beginning of the plan

year includes an employee welfare benefit plan which elects to file a

Form 5500 as a small plan pursuant to Sec. 2520.103-1(d) with respect

to the plan year for which the waiver is claimed. See Sec. 2520.104-41.

(4) A plan that elects to file a Form 5500 as a large plan pursuant

to Sec. 2520.103-1(d) may not claim a waiver under this section.

Signed at Washington, D.C., this 24th day of November, 1999.

Richard M. McGahey,

Assistant Secretary, Pension and Welfare Benefits Administration, U.S.

Department of Labor.

[FR Doc. 99-31110 Filed 11-30-99; 8:45 am]

BILLING CODE 4510-29-P