August 1, 1997

MEMORANDUM FOR:   JOHN J. GETEK
                           Assistant Inspector General for Audit

                                                   / s /
FROM:                    OLENA BERG

SUBJECT:                       Draft Audit Report No. 09-97-004-12-121
                            Changes Are Needed In ERISA Reporting And
                            Disclosure Requirements and Processes

I am writing to provide comments from the Pension and Welfare Benefits Administration regarding the draft audit report of the Office of Inspector General on our ERISA reporting and disclosure activities during fiscal years 1994 through 1996.

We welcome your overall conclusion that "PWBA is generally enforcing ERISA reporting and disclosure requirements@" although we believe it would have been appropriate for your report to have specifically acknowledged some of our initiatives in this area during FY 94 through FY 96. For example, your report could have noted our outreach efforts designed to educate plan administrators on the annual reporting requirements, as well as our efforts to educate participants and beneficiaries on how they can use ERlSA's reporting and disclosure provisions to police their own plans and protect their own pension assets. Your report also could have cited our efforts to evaluate and improve the independent accountant audits and reports that are a required part of the ERISA annual report filed by many employee benefit plans. We are disappointed that our positive efforts in this area are ignored in your report.

Instead, the audit report makes recommendations in only two substantive areas: (i) elimination of filing requirements for summary plan descriptions (SPDs) and summaries of material modifications (SMMs) and (ii) improvement in PWBA's use of annual information reports filed directly with the Department of Labor by certain financial institutions holding pension plan assets, so called "direct filing entity" or "DFE" annual information reports. Since these OIG recommendations essentially concur in two PWBA initiatives that pre-dated the OIG audit by several months, in the case of the DFE reports, and several years, in the case of the SPD/SMM filing requirement, we do not take issue with the substance of either set of recommendations. As you know, however, we were given the opportunity to review a "Statement of Facts/Tentative Findings and Recommendations" that was supplied to us as part of our exit conference with the regional OIG staff who conducted the audit, and we raised the following objections to the presentation of your recommendations.


As to the filing requirements for SPDs and SMMs, we agree with the OIG conclusion that "the current framework for SPDs and SMMs needs to be improved." In fact, the audit report acknowledges that PWBA has been pursuing legislative changes in this area for several years. We, however, find the following statement (and others like it) in the draft audit report internally inconsistent: In light of the fact that OIG agrees PWBA does not need SPDs and SMMs on file to satisfy its statutory responsibilities and that public and private funds are being "wasted" by the current requirement to file SPDs and SMMs, PWBA questions what additional public and private funds OIG would have had PWBA waste to "effectively" enforce the filing requirement and what "effective" enforcement would entail. PWBA has long been of the view that filing SPDs/SMMs was not a cost-effective requirement and that our response was to target our limited human and capital resources on more important ERISA reporting and disclosure requirements while also working to get legislation enacted to eliminate the filing requirement. In fact@ the SPD/SMM legislative changes that we proposed are in the Budget Reconciliation spending and revenue bills (H.R. 2015 and H.R. 2014) that were passed by the House and Senate on July 30, 1997 and July 31, 1997. As you are aware1 as recently as 1993, the OIG opposed PWBA's efforts to eliminate this filing requirement. We welcome the OlG's acknowledgment, albeit implicit, of the correctness of PWBA's position that the SPD filing requirement is "wasting" public and private funds.

        As to the DFE recommendation, we agree with the OIG conclusion that "[p]ublic funds . . . could be put to better use if regulations regarding reporting and disclosure requirements are revised to . . . require DFEs to file annual reports on a standard form and the DFE information was entered into PWBA's ERISA Information System ...." PWBA is keenly aware that an increasing percentage of pension plan assets are being invested in financial entities that file or are eligible to file annual information reports on behalf of their investing ERISA plans. We also are aware that the absence of a standard format for the filings inhibits our ability to develop a useable DFE information database. Our first response was in 1991 to hire a private contractor to create a database of the DFE information then on file. We took this step in an effort to determine whether a useful database could be developed in a cost-effective way from the information now being filed by DFEs. Although we developed a database that has been useful for research and statistical purposes, the effort ultimately led us to conclude that most efficient solution to this problem would be to require DFEs that file annual reports to use a standard format compatible with our Form 5500 information processing system. We have incorporated that approach into the overall streamlining of the Form 5500 annual/return report being done as part of the Administration's


pension simplification initiative announced in 1995. We will be publishing the streamlined Form 5500, including a significantly modified reporting regime for DFEs, for public comment within the next few weeks. OIG staff were briefed on our assessment of the DFE problem and our proposed new reporting regime. The draft audit report, and especially the failure to credit our DFE initiatives in the streamlined Form 5500 project, create the misleading impression that the OIG audit not only uncovered a need to improve the DFE reporting system, but also that the OIG independently arrived at the conclusion that the DFE reports should be merged into the information management system being used for the streamlined Form 5500. Despite the fact that the draft report gives the reader the impression that the DFE recommendations originated with the OIG, we welcome the OlG's support of our Form 5500 proposal.

It is my hope that the OIG audit function could serve to help PWBA identify areas where we could improve our organization and that the OIG could be a source of constructive criticism. The OIG draft audit report serves that objective to some extent by providing us with independent confirmation that initiatives we were already pursuing are in the public interest and consistent with our statutory mission.


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