Pursuant to your letter of May 3, 1978, I enclose herewith five copies of the statement of the Investment Company Institute. We appreciate the opportunity to provide the Subcommittee with a statement containing our general observations and legislative recommendations relating to our experience as one of the primary funding vehicles of ERISA plans. Enclosures Sincerely yours, Butt PFE Matthew P. Fink STATEMENT OF THE INVESTMENT COMPANY INSTITUTE BEFORE THE SUBCOMMITTEE ON LABOR STANDARDS COMMITTEE ON EDUCATION AND LABOR June 15, 1978 The Investment Company Institute (the Institute) appreciates the opportunity to submit this statement in connection with the Subcommittee on Labor Standards, Pension Task Force Oversight Hearings on the Employee Retirement Income Security Act of 1974 (ERISA). The Institute is the national association or the American mutual fund industry. Our membership includes 455 open-end investment companies (mutual funds), their investment advisers and principal underwriters. Our mutual fund members account for over 90 percent of industry assets and have approximately seven million shareholders. The Institute is vitally concerned with legislation and regulations affecting employee benefit plans. During the course of the legislative process which led to ERISA, the Institute testified before a number of House and Senate committees in support of pension reform legislation. We are pleased to note that ERISA contains several provisions suggested by the Institute which are designed to further the use of mutual fund shares as funding vehicles for employee benefit plans. These provisions as well as the inherent characteristics of mutual funds have allowed mutual funds to serve as a funding medium for all types of employee benefit plans. We note that the report of the Investment Work Group of the Advisory Council to the Department of Labor, dated October 13, 1976, stated: "...the purchase of...mutual fund shares...may Our statistics indicate that mutual funds are, in fact, especially applicable to smaller plans. For instance, at the end of 1977 there were 343,665 individual Keogh accounts invested in mutual funds. These accounts were valued at more than $1.9 billion* and represent about 40% of all the Keogh plans. We had the opportunity in March, 1975, to submit a statement on ERISA to the Subcommittee. At that time, we emphasized the problems we were encountering in the area of prohibited transactions. We are pleased to report that many of those problems have been solved administratively. Therefore, our statement today will focus on our concerns and recommendations for legislative and administrative changes relating to Keogh plans, individual retirement accounts, Section 403(b) programs, and fiduciary and related issues under ERISA. * 1978 Mutual Fund Fact Book, Investment Company Institute, pp.43-44. A. Fiduciary and Related Issues 1. Non-bank Custodians At the suggestion of the Institute, the Code was amended by ERISA to permit the use of appropriate non-bank entities to serve as trustees and custodians for Keogh plans and individual retirement accounts. Our suggestion was based on the desire of a number of mutual fund complexes to utilize their non-bank transfer agents as passive trustees and custodians for these plans in order to reduce administrative costs and delays, particularly since banks are increasingly reluctant to serve as trustees and custodians for small plans for reasonable fees. to non The IRS has issued temporary and proposed regulations relating on-bank trustees and custodians which contain high net worth requirements (the greater of $100,000 or 4% of their accounts with no maximum). These requirements have prevented many mutual fund non-bank transfer agents from serving as trustees and custodians. While most non-bank transfer agents can meet the $100,000 figure, many cannot satisfy the open-ended 4% requirement. In our submissions to the Internal Revenue Service, we pointed out that the net worth requirements serve no valid purpose in the case of mutual fund non-bank transfer agents which are registered with the Securities and Exchange Commission. We believe that Treasury and the IRS should reconsider the net worth requirement and adopt a more realistic method of determining eligibility to serve as non-bank trustees and custodians. We have suggested that the final regulations provide an exemption from the net worth requirements for an entity within a mutual fund complex which serves as a passive trustee or custodian, provided that it is registered as a transfer agent with the SEC under Section 17A of the Securities Exchange Act of 1934. Staff officials of the SEC informally have indicated agreement with our position. We should note that we raised this matter in our testimony on February 24, 1978 at the Ways and Means Committee, Subcommittee on Oversight's hearings on individual retirement accounts. We have continually urged expedited review of the regulations. However, as yet, the regulations have not been finalized. We request that the Subcommittee review this matter. 2. Passive Custodians and Trustees As indicated above, many mutual fund complexes have internalized the trustee/custodian function. This may raise certain questions with respect to the prohibited transaction provisions of ERISA. We filed for interpretive, or in the alternative, exemptive, relief with the Department of Labor and IRS on March 18, 1976. In particular, we urged that a passive custodian or trustee not be considered a fiduciary since passive custodians or trustees have no investment discretion and simply act as recordkeepers. Neither |