February 27, 2004
BB 04—23

In this issue:

  • Senate Banking Committee Hearings on Mutual Funds Continue
  • CMS Preparing to Implement Drug Discount Card and Transitional Assistance Program

Senate Banking Committee Hearings on Mutual Funds Continue

On February 26, the Senate Committee on Banking, Housing and Urban Affairs continued its examination of the mutual fund industry with a hearing on fund operations and governance. The Committee heard testimony from:

  • Jack Bogle, Founder, The Vanguard Group
  • Mellody Hobson, President, Ariel Capital Management
  • David Pottruck, President, Chief Executive Officer and a member of the Board of Directors, Charles Schwab
  • David Ruder, Former Chairman of the Securities and Exchange Commission and Founder of the Mutual Fund Directors Forum

Each witness used their time to highlight different issues. The thrust of Ruder's testimony was that Congress should rely on the SEC to remedy problems in the mutual fund industry. The only issue Mr. Ruder thought Congress should address was repeal of Section 28(e) of the Securities and Exchange Act so that the SEC could regulate soft dollar payments. Pottruck spent a good portion of his time expressing concern over the SEC's rule proposing a "hard 4 p.m." close on mutual fund orders. He emphasized that an intermediary exception was needed to prevent investor disparity. Bogle maintained that Congress needed to get involved to ensure shareholder interests came before the interest of managers.

Hobson focused on fees and stressed the importance of the Rule 12b-1 fee to small mutual fund companies in gaining access to third-party distribution. Under rule 12b-1, which was issued under the Investment Company Act of 1940, fees can be assessed against the assets of mutual funds to cover advertising and distribution costs. However, these fees are commonly used to pay for the services of retirement plan administrators and recordkeepers.

During the question-and-answer period, senators asked questions about 12b-1 fees and how they work. Pottruck and Hobson stressed the legitimacy and importance of 12b-1 fees, while Ruder suggested that advisers should pay management and distribution costs out of their own budget and 12b-1 fees should be repealed. Bogle advocated the elimination of 12b-1 fees but stated it may be necessary to phase them out, instead of repealing them immediately.

Committee Chairman Richard Shelby (R-AL) also asked about the feasibility of alternatives to the 4 p.m. hard close. Pottruck responded that 90% of mutual fund trades come through intermediaries and he believes that intermediaries should be allowed to submit orders after market close, provided the intermediaries adopt certain protections, such as electronic code time stamps, designed to prevent late trading. Bogle, however, argued that exceptions to the 4 p.m. close are not necessary and said that he would suggest a 2:30 p.m. hard close time, which is how they handle index funds.

The Committee is scheduled to hold another hearing on mutual fund operation and governance on March 2. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

CMS Preparing to Implement Drug Discount Card and Transitional Assistance Program

The Centers for Medicare & Medicaid Services (CMS) is preparing to implement the prescription drug discount card and transitional assistance program, which are part of the recently-enacted Medicare reform and prescription drug bill. A CMS presentation on the program is available on the Council's web site.

Enrollment in the drug discount cards will begin in May 2004 and the $600 assistance for low-income beneficiaries will be available starting in June. CMS will begin contacting beneficiaries at the end of April about the enrollment process and cards available in their area. Medicare beneficiaries who have employer-provided retiree health benefits are not eligible for the low-income assistance, though they may purchase a drug discount card. In addition to posting information on the CMS website, the agency will maintain toll-free customer service call centers. Individuals who go to the Web site or contact the call centers will obtain information on enrollment for a drug discount card and eligibility for the additional $600 assistance for prescription drug purchasing.

A recent Kaiser Family Foundation poll found that while two-thirds of seniors say they followed the Medicare debate closely, only 15 percent say they understand the new law and seven in ten surveyed did not know that the bill was signed into law. However, Administration officials believe the successful implementation of the discount card program will help pave the way for a smoother transition for Medicare's new prescription drug coverage starting in 2006. For more information, contact Maria Ghazal, Council director, health policy, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.