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United States Government Accountability Office: 
GAO: 

Report to the Ranking Member, Committee on Education and the 
Workforce, House of Representatives: 

January 2011: 

401(K) Plans: 

Improved Regulation Could Better Protect Participants from Conflicts 
of Interest: 

GAO-11-119: 

GAO Highlights: 

Highlights of GAO-11-119, a report to the Ranking Member, Committee on 
Education and the Workforce, House of Representatives. 

Why GAO Did This Study: 

Recent volatility in financial markets highlights the need for prudent 
investment decisions if 401(k) plans are to provide an adequate source 
of retirement income. While plan sponsors and participants may receive 
help in assessing their investment choices, concerns have been raised 
about the impartiality of the advice provided. GAO was asked to 
describe circumstances where service providers may have conflicts of 
interest in providing assistance related to the selection of 
investment options for (1) plan sponsors and (2) plan participants, 
and (3) steps the Department of Labor (Labor) has taken to address 
conflicts of interest related to the selection of investment options. 

What GAO Found: 

The sponsors of 401(k) plans face conflicts of interest from service 
providers assisting in the selection of investment options because of 
third-party payments and other business arrangements. For example, 
providers who help sponsors to establish and maintain their plans may 
receive third-party payments from investment fund companies. The 
payments, sometimes called revenue sharing, create a conflict of 
interest because the provider may receive greater compensation from 
certain funds. Moreover, providers are reported to commonly structure 
their relationships with sponsors in a manner that avoids being 
subject to fiduciary standards under the Employee Retirement Income 
Security Act (ERISA). According to several industry experts, many 
sponsors, particularly of smaller plans, do not understand whether or 
not providers to the plan are fiduciaries, nor are they aware that the 
provider’s compensation may vary based on the investment options 
selected. Such conflicts could lead to higher costs for the plan, 
which are typically borne by participants. 

In certain situations, participants face conflicts of interest from 
providers that have a financial interest when providing investment 
assistance. For example, although investment education is defined as 
generalized investment information, providers may highlight their own 
funds as examples of investments available within asset classes even 
though they may have a financial interest in the funds. According to 
industry experts, participants perceive education as investment 
advice. Thus, participants may not understand that the provider is not 
a fiduciary adviser required to act solely in participants’ best 
interests. Also, several industry experts expressed concerns that 
providers stand to gain higher profits from marketing investment 
products outside of plans to participants, a practice known as cross-
selling. For example, if participants use their plan provider for 
Individual Retirement Account rollovers, they may not understand, 
because of insufficient disclosures, that fees are often higher for 
products offered outside the plan and that the provider may not be 
serving as a fiduciary adviser. Consequently, participants may choose 
funds that do not meet their needs and pay higher fees, which reduce 
their retirement savings. 

While Labor has taken steps to address the potential for conflicted 
investment advice provided to sponsors and participants, more can be 
done to ensure they receive impartial advice. In fiscal year 2007, the 
Employee Benefits Security Administration (EBSA) began a national 
enforcement project that focuses on the receipt of improper or 
undisclosed compensation by certain providers, but its enforcement 
efforts are constrained to fiduciary providers and limited by EBSA’s 
approach for generating cases. In addition, EBSA issued regulations to 
revise the definition of an ERISA fiduciary and require enhanced 
disclosure of providers’ compensation and fiduciary status. These 
regulations, as currently specified, would help EBSA and sponsors 
detect and deter conflicted investment advice. However, the 
regulations do not require that certain disclosures be made in 
consistent or summary formats, which may leave sponsors with 
information that is not sufficient or comparable. 

What GAO Recommends: 

GAO recommends that Labor amend pending regulations to require that 
service providers disclose compensation and fiduciary status in a 
consistent, summary format and revise current standards, which permit 
a service provider to highlight investment options in which it has a 
financial interest. GAO also recommends that the Department of the 
Treasury amend proposed regulations to require disclosure that 
investment products outside a plan typically have higher fees than 
products available within a plan. Overall, Labor and Treasury 
generally agreed to consider our recommendations as they evaluate 
comments received on pending regulations. 

View [hyperlink, http://www.gao.gov/products/GAO-11-119] or key 
components. For more information, contact Charlie Jeszeck at (202) 512-
7215 or jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Service Providers May Have Conflicts of Interest in Providing 
Investment Assistance to Plan Sponsors because of Third-Party Payments 
and Other Business Arrangements: 

Participants May Receive Conflicted Investment Education and Advice 
from Service Providers in Certain Circumstances, but Enhanced 
Disclosure Could Help Mitigate Such Conflicts: 

EBSA's Enforcement Program and Recent Regulatory Actions Take Steps to 
Address the Potential for Conflicted Investment Advice, but Further 
Changes Could Better Address Conflicts of Interest: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Common Formats for Delivering Investment Education and 
Advice: 

Appendix III: Types of Computer Model Advice Arrangements: 

Appendix IV: Comments from the Department of Labor: 

Appendix V: GAO Contacts and Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: EBSA's Definition of Investment Education: 

Table 2: Basic Summary of Standards of Conduct for Investment Service 
Providers under Federal Law: 

Table 3: Examples of Potential Conflicts of Interest for Service 
Providers from Revenue Sharing and Other Third-Party Payments: 

Table 4: Examples of Potential Conflicts of Interest from a Service 
Provider's Affiliated Businesses: 

Table 5: Potential Conflict of Interest Scenario for Investment 
Assistance Provided to Plan Sponsors: 

Table 6: Types of Investment Advice Arrangements and Computer Models: 

Table 7: Trends in Distribution of Defined Contribution Plan Assets 
when Participants Terminate Their Plans: 

Table 8: Categories of Service Provider Disclosures Required under 
Interim Final EBSA Regulations Effective July 2011: 

Figures: 

Figure 1: Structure of Service Provider Arrangements in 401(k) Plans: 

Figure 2: Revenue-Sharing Arrangement That Entails a Conflict of 
Interest for the Service Provider: 

Figure 3: Potential Impact of Revenue Sharing on Distribution of 
Record-Keeping Costs among Participants with Equivalent Account 
Balances: 

Figure 4: 401(k) Service Provider May Fail to Be Deemed an ERISA 
Fiduciary for Purposes of Investment Advice by Not Meeting One Part of 
EBSA's Current Five-Part Test: 

Figure 5: IRA Assets from Contributions and Rollovers, 1998 to 2007: 

Figure 6: GAO Poll Results from SHRM Respondents: 

Figure 7: The Direct Service Model Advice Arrangement: 

Figure 8: The SunAmerica Advice Arrangement: 

Figure 9: The PPA Computer Model Advice Arrangement: 

Abbreviations: 

bps: basis points: 

CAP: Consultant/Adviser Project: 

DB: defined benefit: 

DC: defined contribution: 

EBSA: Employee Benefits Security Administration: 

EIAA: eligible investment advice arrangement: 

ERISA: Employee Retirement Income Security Act: 

FINRA: Financial Industry Regulatory Authority, Inc. 

ICI: Investment Company Institute: 

IRA: individual retirement account: 

IRS: Internal Revenue Service: 

NASD: National Association of Securities Dealers: 

OIG: Office of Inspector General: 

PPA: Pension Protection Act: 

PSCA: Profit Sharing/401(k) Council of America: 

QDIA: qualified default investment alternative: 

RIA: registered investment advisor: 

SEC: Securities and Exchange Commission: 

SHRM: Society for Human Resource Management: 

SIPP: Survey of Income and Program Participation: 

SPARK: Society of Professional Asset-Managers and Record Keepers: 

SRO: self-regulatory organization: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

January 28, 2011: 

The Honorable George Miller: 
Ranking Member: 
House Education and the Workforce Committee: 
United States House of Representatives: 

Dear Mr. Miller: 

In recent high-profile court cases, 401(k) plan participants allege 
they have lost millions of dollars because of investment options that 
benefited the plan's service provider at the expense of participants. 
[Footnote 1] Plan sponsors and participants may rely on investment 
education or advice from their service provider to help them assess 
their investment choices at two key points: first, when the plan 
sponsor decides which investment options to include in the plan, and 
second, when each plan participant decides where to invest his or her 
assets given the available options in the plan. However, questions 
have been raised about the impartiality of the assistance provided 
when the service provider has a conflict of interest. A conflict of 
interest occurs when someone in a position of trust, like a pension 
plan adviser, has competing professional or personal financial 
interests. For example, the structure of advisers' compensation and 
their other business arrangements could create competing interests 
that may bias their investment recommendations to plan sponsors or 
participants. If left unchecked, conflicts of interest could lead plan 
sponsors or participants to select investment options with higher fees 
or mediocre performance, which, while beneficial to the service 
provider, could amount to a significant reduction in retirement 
savings over a worker's career. 

The potential for financial harm to participants from conflicted 
investment advice has raised questions about its nature and extent in 
401(k) plans. To better understand how conflicts of interest may arise 
in investment assistance provided to plan sponsors or participants and 
to evaluate how such conflicts are addressed by current and proposed 
regulations, you asked us to address the following questions: 

1. What are circumstances where service providers may have conflicts 
of interest in providing assistance related to the selection of 
investment options by plan sponsors? 

2. What are circumstances where service providers may have conflicts 
of interest in providing assistance related to the selection of 
investment options by plan participants? 

3. What steps has the Department of Labor (Labor) taken to address 
conflicts of interest related to the selection of investment options? 

To answer these questions, we reviewed relevant research and federal 
laws and regulations on investment advice arrangements for plan 
sponsors and participants. We conducted interviews with 401(k) plan 
service providers, government officials, and other industry experts to 
identify different practices that may create conflicts of interest in 
the provision of investment advice to plan sponsors and participants. 
In addition, we reviewed relevant Securities and Exchange Commission 
(SEC) and Labor enforcement cases and spoke with field investigators 
to examine revenue-sharing arrangements and other business practices 
where conflicts of interest were identified. To identify current 
practices in participant-level investment advice, we conducted a poll 
of plan sponsors and service providers in partnership with the Society 
for Human Resource Management (SHRM) and the Society of Professional 
Asset-Managers and Record Keepers (SPARK). In addition, we obtained 
and analyzed data from service providers, the Investment Company 
Institute (ICI), and the Survey of Income and Program Participation 
(SIPP) to ascertain the percentage of plan participants who have 
transferred or rolled 401(k) plan assets into individual retirement 
accounts (IRA). We assessed the reliability of the data we present and 
found the data to be sufficiently reliable as used in this report. To 
determine the extent to which Labor's actions address the potential 
for conflicted investment advice, we reviewed relevant federal laws 
and regulations and interviewed Labor's Employee Benefits Security 
Administration (EBSA) officials, including Consultant/Adviser Project 
and field investigators, and industry experts. In addition, we 
reviewed reports and interviewed officials from Labor's Office of 
Inspector General (OIG) who evaluated EBSA's efforts to protect 
pension plan assets from conflicts of interest in pension plan service 
providers. We also interviewed service providers and industry experts 
on the likely impact of recent regulations issued by Labor pertaining 
to investment advice to participants and disclosure of compensation 
received by service providers. For additional information on the 
methodology used in this review, see appendix I. 

We conducted this performance audit from January 2010 through January 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

In contrast to workers in a traditional defined benefit (DB) plan, 
workers in a 401(k) plan, the predominant type of defined contribution 
(DC) plan in the United States, have more control over their 
retirement assets, but also bear greater responsibility and risk in 
the investment of assets. In a typical 401(k) plan, workers decide 
whether or not to make contributions into an individual account. 
Contributions may also be made by their employer. Participants direct 
these contributions to mutual funds and other financial market 
investments to accumulate pension benefits, dependent on investment 
returns net of fees. As we reported in 2006, investment fees are 
usually paid by participants and administrative fees are often paid by 
employers, but participants bear them in a growing number of plans. 
[Footnote 2] Depending on contributions and net investment returns, 
participants accumulate an account balance that will then be withdrawn 
at or after retirement. Over the last decade, participation in DC 
plans among all private industry employees has increased from 36 
percent in 1999 to 43 percent in 2008.[Footnote 3] In 2008, about 49.8 
million workers actively participated in a 401(k) plan.[Footnote 4] 

The degree of responsibility and risk borne by workers in 401(k) plans 
underscores the need for prudent investment decisions if these plans 
are to provide an adequate source of income in retirement. Poor 
investment decisions--either by the plan sponsors when they decide 
which investment options to offer in the plans, or by participants 
when, given these options, they decide where to invest their assets-- 
can result in lower returns and correspondingly less retirement 
savings. Several studies have found that, from 1988 to 2006, DC plans 
underperformed DB plans by 1 percentage point or more, which may be 
explained by higher fees in 401(k) plans and a lack of diversification 
in participants' investment allocations.[Footnote 5] Numerous studies 
on financial literacy have also pointed to the need to educate 
participants to improve their investment decision-making and savings 
outcomes.[Footnote 6] For example, one study found that a large 
percentage of American workers have not conducted meaningful 
retirement planning, even when retirement is in the near future. 
[Footnote 7] Another study found that most workers acknowledge they do 
not know as much as they should about retirement planning and that 
many workers actually guessed at their retirement savings needs. 
[Footnote 8] 

To address the challenges of investment risk in 401(k) plans, both 
plan sponsors and participants may seek assistance from service 
providers in selecting investment options. At the plan sponsor level, 
many plans rely heavily on the expertise and guidance of their 
advisers when making investment decisions. The service providers that 
offer these advisory services to plan sponsors can vary considerably 
in their business arrangements. While some service providers operate 
as independent, "fee-only" advisers, who are compensated solely by 
their clients and do not receive additional compensation contingent on 
the purchase or sale of a financial product, other service providers 
offer affiliated services, including brokerage and money management, 
in addition to advisory services. As shown in figure 1, service 
providers can be used to provide a number of services necessary to 
operate a 401(k) plan, which can be bundled or unbundled with 
investment management services or advisory services. Under a bundled 
service arrangement, the plan sponsor hires a company that provides 
multiple services directly or through subcontracts. 

Figure 1: Structure of Service Provider Arrangements in 401(k) Plans: 

[Refer to PDF for image: illustration] 

Plan participant: 
Makes contributions and allocates them according to options available 
within the plan. 

Plan sponsor: 
Establishes and maintains 401(k) plan; may make matching contributions. 

Some 401(k) plans delegate much of the fund’s daily operation to a 
bundled plan service provider. 

Bundled plan service provider: 
Directly employs or contracts with an array of service providers to 
offer a number of services. 

Investment advisor: 
Assists with selecting investment options for the plan. 

Other participant customer services: 
Provides telephone or Web-based service to participants 401(k) plan. 

Fund manager: 
Manages the assets of investment funds selected by participant. 

Plan asset trustee or custodian: 
Secures 401(k) plan’s assets in a bank. 

Record keeper: 
Tracks individual account contributions and returns. 

Source: GAO analysis of information from industry practitioners. 

[End of figure] 

At the participant level, advisory services can also be provided 
through a variety of methods, including call centers or help desks, 
group seminars, one-on-one sessions, computer models (e.g., software 
that estimates future retirement income needs or asset allocation 
models), or brochures and other printed materials provided by plan 
service providers. When providing this assistance to participants, a 
service provider may furnish either investment education or investment 
advice. As specified by EBSA, investment education consists of general 
investment information, including general information about the plan 
and asset allocation models that is not tailored to the needs or 
interests of an individual plan participant (see table 1).[Footnote 9] 
Investment advice, on the other hand, consists of one or more 
individualized investment recommendations tailored to a participant's 
particular investment needs. 

Table 1: EBSA's Definition of Investment Education: 

In June 1996, EBSA issued an interpretive bulletin defining 
participant investment education (codified at 29 C.F.R. § 2509.96-
1(d)). The bulletin identified specific categories of investment-
related information that, when furnished to plan participants or 
beneficiaries, would not constitute the rendering of investment advice 
under the Employee Retirement Income Security Act of 1974 (ERISA). The 
categories of information include the following: 

* Plan information: information and materials that inform a 
participant or beneficiary about the benefits of plan participation, 
the impact of preretirement withdrawals on retirement income, the 
terms and operation of the plan, and other general plan information. 
Such information cannot reference the appropriateness of any 
investment option for a particular participant or beneficiary; 

* General financial and investment information: information and 
materials that inform a participant or beneficiary about, among other 
things, general financial and investment concepts, historic 
differences in rates of return between different asset classes, 
effects of inflation, and estimating future retirement income needs. 
Such general information cannot directly relate to any investment 
alternatives available to participants and beneficiaries; 

* Asset allocation models: 
information and materials that provide a participant or beneficiary 
with models of asset allocation portfolios of hypothetical individuals 
with different time horizons and risk profiles. If an asset allocation 
model identifies specific investment alternatives available under a 
plan, the model must be accompanied by a statement that other 
investment alternatives having similar risk and return characteristics 
may be available under the plan; 

* Interactive investment materials: includes questionnaires, 
worksheets, software, and similar materials that provide a participant 
or beneficiary the means to estimate future retirement income needs 
and assess the impact of different asset allocations on retirement 
income. 

Source: GAO review of EBSA's interpretive bulletin relating to 
participant investment education (codified at 29 C.F.R. § 2509.96- 
1(d)). 

[End of table] 

While plan sponsors and participants may rely on service providers for 
assistance in making investment decisions, concerns have been raised 
about the independence of the advice provided in some cases. A 2005 
SEC report noted that its examination of investment advisers providing 
pension consultant services found that many such consultants provide 
services to both plans and money managers, a situation that has the 
potential to compromise the objectivity of the consultant's 
recommendations to the plan.[Footnote 10] Namely, the report states 
that concerns exist that consultants may steer plans to hire certain 
money managers or other vendors based on the consultant's (or an 
affiliate's) other business relationships and receipt of fees from 
these firms, rather than because the money manager is best suited to 
the plan's needs. As we reported in 2007, no complete information 
exists about the presence of conflicts of interest at pension plan 
service providers.[Footnote 11] However, the 2005 SEC examination of 
the activities of 24 pension consultants from 2002 through 2003 
revealed that 13 out of 24 of the service providers examined failed to 
disclose significant ongoing conflicts of interest, such as affiliated 
businesses or compensation received from money managers.[Footnote 12] 

Regulation of Investment Advice: 

ERISA: 

Investment advice provided to plan sponsors and participants and any 
related conflicts of interest are regulated under ERISA. ERISA states 
that a person who renders investment advice for a fee or other 
compensation, direct or indirect, with respect to any moneys or 
property of a plan or has any authority or responsibility to do so is 
a fiduciary and thus is subject to fiduciary standards outlined in the 
law and regulations.[Footnote 13] This statutory definition of 
fiduciary for investment advice is currently subject to a five-part 
test, set forth in regulations, each element of which must be met for 
an individual to be considered a fiduciary.[Footnote 14] Specifically, 
under this test, a consultant or adviser is determined to be providing 
investment advice only if the advice was provided for a fee either 
direct or indirect, and the advice was provided: 

1. as to the value of securities or other property or as to the 
advisability of investing in, purchasing, or selling securities or 
other property; 

2. on a regular basis; 

3. pursuant to a mutual agreement, arrangement, or understanding; 

4. as a primary basis for investment decisions; and: 

5. based on the particular needs of the plan.[Footnote 15] 

Although plan sponsors often rely on consultants and other service 
providers to assist them in asset management, which includes selecting 
money managers and monitoring money managers' performance and 
brokerage transactions, not all of these consultants and service 
providers are at all times fiduciaries under ERISA based on the 
application of the five-part test. 

For plan sponsors and other service providers who are fiduciaries, 
ERISA requires they discharge duties solely in the interest of the 
participants and beneficiaries with care, skill, prudence, and 
diligence.[Footnote 16] Although ERISA generally prohibits fiduciaries 
from acting on conflicts of interest, certain transactions are 
strictly precluded under prohibited transaction rules, regardless of 
whether or not participants are harmed.[Footnote 17] In particular, 
prohibited transaction rules preclude fiduciaries from "self-dealing," 
which includes an individual dealing with plan assets for his or her 
own benefit.[Footnote 18] In addition, EBSA has explained that ERISA 
obligates fiduciaries to obtain and consider information relating to 
the cost of plan services and potential conflicts of interest 
presented by such service arrangements.[Footnote 19] 

EBSA is responsible for enforcing these provisions of Title I of 
ERISA, as well as educating and assisting plan participants, 
beneficiaries, and plan sponsors. Fiduciaries that breach their plan 
duties are personally liable for making up losses to the plan and 
restoring any profits made through the use of plan assets. In 
addition, they may face removal as plan fiduciaries.[Footnote 20] 
Participants may also seek recovery against nonfiduciaries in certain 
circumstances.[Footnote 21] In addition to carrying out its 
enforcement responsibilities, EBSA assists regulated parties in 
complying with ERISA by issuing technical guidance, including advisory 
opinions and interpretive bulletins, and educating plan participants, 
beneficiaries, and plan sponsors. 

Securities Laws: 

In addition to being regulated by ERISA, investment advice and 
conflicts of interest are also regulated under securities laws. SEC 
regulates certain money managers and pension consultants under the 
Investment Advisers Act of 1940 (Advisers Act), which requires those 
firms meeting certain criteria to register with the commission as 
investment advisers.[Footnote 22] For these registered investment 
advisers, SEC requires that they disclose information about 
affiliations, business interests, and compensation arrangements to 
their advisory clients, primarily by providing a brochure that meets 
the requirements of Part 2 of SEC's Form ADV to new and prospective 
clients. In addition, registered investment advisers must annually 
deliver either an updated brochure with a summary of material changes 
or a summary of material changes and offer to provide an updated copy 
of the brochure.[Footnote 23] According to SEC, all investment 
advisers--whether registered with SEC or not--have a fiduciary 
obligation under the Advisers Act to avoid conflicts of interest and, 
at a minimum, make full disclosure of material conflicts of interest 
to their clients. When an adviser fails to disclose information 
regarding material conflicts of interest, clients are unable to make 
informed decisions about entering into or continuing the advisory 
relationship. Failure to act in accordance with requirements under the 
Advisers Act may constitute a violation. If SEC becomes aware of 
conflicts of interest that are inadequately disclosed or pose harm to 
investors, it can take enforcement action against the service provider. 

SEC also regulates broker-dealers under the Securities Exchange Act of 
1934 (Exchange Act), which requires that broker-dealers register with 
SEC, unless an exception or exemption applies. In addition, broker- 
dealers that deal with the public must become members of the Financial 
Industry Regulatory Authority, Inc. (FINRA).[Footnote 24] Under the 
anti-fraud provisions of the federal securities laws, including just 
and equitable principles of trade, broker-dealers are required to deal 
fairly with their customers. Salespersons of broker-dealers are 
subject to licensing requirements, including examinations. Broker-
dealers are held to a suitability standard when rendering investment 
recommendations.[Footnote 25] When a broker-dealer makes a 
recommendation to buy, exchange, or sell a security to a retail 
investor, that broker-dealer must recommend only those securities that 
the broker reasonably believes are suitable for the customer. In 
addition, a broker-dealer must disclose all material information 
regarding the security and the recommendation,[Footnote 26] including, 
among other things, any material adverse facts or material conflicts 
of interest.[Footnote 27] However, according to FINRA staff, up-front 
general disclosure of a broker-dealer's business activities and 
relationships that may cause conflicts of interest with retail 
customers is not required.[Footnote 28] SEC staff has noted that, in 
practice, with broker-dealers, required disclosures of conflicts have 
been more limited than with investment advisers and apply at different 
points in the relationship.[Footnote 29] Table 2 provides a comparison 
of the standards of conduct required by ERISA, and those required of 
investment advisers and broker-dealers. 

Table 2: Basic Summary of Standards of Conduct for Investment Service 
Providers under Federal Law: 

Applicable federal law: Employee Retirement Income Security Act of 
1974; 
Standard of conduct: ERISA fiduciary standard (prudent man standard of 
care):[A] Fiduciary must render services solely in the best interest 
of plan participants and beneficiaries; 
Who must abide by standard of conduct: ERISA fiduciary: A person who 
renders investment advice for a fee or other compensation. 
Additionally, a person is a fiduciary with respect to a plan to the 
extent (1) he exercises any discretionary authority or control 
respecting management of such plan and plan assets, and (2) he has any 
discretionary authority or responsibility in the administration of 
such plan. See 29 U.S.C. § 1002(21) for a more detailed description of 
this provision; 
Specific requirements and prohibitions: Requires that fiduciaries with 
respect to the plan not engage in prohibited transactions, as 
specified in the statute.[B] As such, a conflict of interest does not 
represent a violation of ERISA's prohibited transaction rules unless, 
based on the facts and circumstances, it constitutes self-dealing. 
EBSA notes that ERISA §404(a) continues to obligate fiduciaries to 
obtain and consider information relating to potential conflicts of 
interest by such service arrangements.[C] 

Applicable federal law: The Investment Advisers Act of 1940; 
Standard of conduct: Advisers Act fiduciary standard:[D] Person has an 
affirmative duty to render services solely in the best interests of 
clients; 
Who must abide by standard of conduct: Investment adviser: Person who, 
for compensation, is engaged in the business of advising others as to 
the value of securities or the purchase or sale of securities; 
Specific requirements and prohibitions: Requires advisers to eliminate 
or disclose material conflicts of interest to clients.[E]. 

Applicable federal law: Securities Exchange Act of 1934 and rules from 
SEC and self-regulatory organizations; 
Standard of conduct: Regulatory requirements:[F] Broker-dealers are 
required to deal fairly with customers. Specific obligations are 
imposed regarding suitability, fair pricing, communications with 
customers, disclosure, and other business conduct obligations[G]; 
Who must abide by standard of conduct: Brokers or dealers: Brokers: 
Person engaged in the business of effecting transactions in securities 
for the account of others; Dealers: Person engaged in the business of 
buying and selling securities; 
Specific requirements and prohibitions: Requires brokers to comply 
with rules governing their conduct, including the suitability 
standard, as well as to disclose material conflicts of interest when 
making recommendations to customers. 

Source: GAO analysis of ERISA and securities laws and regulations. 

[A] ERISA requires a fiduciary to render services in accordance with a 
prudent man standard of care, with the care, skill, prudence, and 
diligence that a prudent man acting in a like capacity and familiar 
with such matter would use in the conduct. See 29 U.S.C. §1104(a)(1) 
for a more detailed description of this provision. 

[B] See 29 U.S.C. § 1106 for more information about ERISA's prohibited 
transactions rules. 

[C] 45 Fed. Reg. 41,603 (Preamble to the Interim Final 408(b)(2) 
regulations) (July 16, 2010). 

[D] In SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), the 
Supreme Court recognized that the Advisers Act imposes a fiduciary 
duty on investment advisers. This standard imposes an affirmative duty 
to act solely in the best interests of the client. The investment 
adviser must eliminate or disclose all conflicts of interest. 

[E] SEC has, in effect, established rules of conduct for investment 
advisers, including requirements for disclosing of conflicts of 
interest, obtaining the best execution on behalf of clients, 
allocating investments among clients fairly, ensuring that investments 
are suitable for clients, and ensuring that there is a reasonable 
basis for recommendations. SEC also requires investment advisers to 
maintain records pertaining to client accounts and business operations. 

[F] The standards of conduct for broker-dealers are also based on 
antifraud provisions of the securities law and agency principles. 
Broker-dealers also have a duty of fairness in their contracts with 
customers and specific business conduct obligations under SRO rules. 
Broker-dealers that handle discretionary accounts or that have a 
relationship of trust and confidence are generally thought to owe 
fiduciary obligations to their customers. 

[G] Duties imposed on broker-dealers by the Exchange Act include the 
duty to supervise persons subject to supervision and the duty to keep 
records and file reports. 

[End of table] 

Recent Legislation: 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- 
Frank), signed into law on July 21, 2010, includes provisions that 
amend the Advisers Act and the Exchange Act that affect investment 
advisers and broker-dealers. Under these provisions, SEC, among other 
things, conducted a 6-month study on the effectiveness of existing 
standards of care for broker-dealers and investment advisers and 
examined whether there are legal and regulatory gaps, shortcomings, or 
overlaps in legal or regulatory standards in the protection of retail 
customers.[Footnote 30] Based on its review, SEC staff recommended 
that SEC propose rules that apply a uniform standard of conduct which 
requires broker-dealers and investment advisers, when providing 
personalized investment advice to retail customers, to act in the best 
interest of the customer without regard to the financial or other 
interest of the broker, dealer, or investment adviser. SEC staff also 
recommended that SEC should facilitate the provision of uniform, 
simple and clear disclosures to retail customers about the terms of 
their relationships with broker-dealers and investment advisers, 
including any material conflicts of interest.[Footnote 31] 

Service Providers May Have Conflicts of Interest in Providing 
Investment Assistance to Plan Sponsors because of Third-Party Payments 
and Other Business Arrangements: 

Service Providers' Business Arrangements May Create Conflicts of 
Interest in Investment Assistance Provided to Plan Sponsors: 

Several industry experts we spoke with cited third-party payments, 
also known as revenue sharing, as a potential conflict of interest for 
service providers involved in the fund selection process for a 401(k) 
plan. Revenue sharing, in the pension plan industry, generally refers 
to indirect payments made from one service provider, such as the 
investment fund provider, to another service provider in connection 
with services provided to the plan, rather than payments made directly 
by the plan sponsor for plan services.[Footnote 32] According to 
industry experts, revenue sharing is a widespread practice among 
401(k) service providers. As we have previously reported, revenue-
sharing payments can be used to offset expenses the plan has agreed to 
pay and thus be cost-neutral to the plan.[Footnote 33] However, as 
shown in figure 2, revenue sharing may, depending on the 
circumstances, also create a conflict of interest if it is not 
structured to be cost-neutral to the plan and may result in increased 
compensation to service providers. Industry experts we spoke with 
explained that this situation creates an incentive for the service 
provider to suggest funds with higher revenue-sharing payments. 
Because of these conflicts of interest, the service provider may 
suggest funds that have poorer performance or higher costs for 
participants compared with other available funds. The amount of 
revenue-sharing payments can vary considerably, both across investment 
funds and within a fund through different share classes.[Footnote 34] 
Documentation we obtained showed revenue-sharing payments from 
hundreds of share classes of different investment funds that ranged 
from 5 to 125 basis points (bps). Given this variation, EBSA field 
investigators told us that a service provider might only recommend or 
include fund share classes that pay higher revenue sharing and exclude 
other fund share classes that pay lower or no revenue sharing. 

Figure 3: Revenue-Sharing Arrangement That Entails a Conflict of 
Interest for the Service Provider: 

[Refer to PDF for image: illustration] 

Plan participant: contributes to plan. 

Plan sponsor: may contribute to plan on participant’s behalf. 

401(k) plan: invests contributions in various funds: 
Investment funds: invest contributions to earn returns: 
Fund A’s revenue-sharing agreement results in a payment of $2,000; 
Fund B’s revenue-sharing agreement results in a payment of $7,000; 
Fund C’s revenue-sharing agreement results in a payment of $9,000. 

Service provider receives $18,000 total payments from revenue-sharing 
agreements. 

Service provider: helps establish and/or administer the plan, which 
may include help with fund selection. 

Plan sponsor contracts with a service provider and agrees to pay a 
total fee of $10,000. 

$10,000 in revenue-sharing payments used to offset fees owed to the 
service provider. 

Service provider retains excess revenue-sharing payments, rather than 
reimbursing the money to the plan, providing an incentive to recommend 
funds with more lucrative payments. 

Source: GAO analysis of information from industry practitioners. 

Note: In the example above, the service provider receives revenue- 
sharing payments from three funds offered by the 401(k) plan, which 
amount to $18,000. The service provider is owed $10,000 in fees for 
assistance provided to the plan. Of the $18,000 received in revenue- 
sharing payments, $10,000 is used to offset the fees owed to the 
service provider. The service provider has a conflict of interest 
because, rather than reimbursing the remaining $8,000 to the plan, the 
service provider retains the remainder as revenue. 

[End of figure] 

As described in table 3, revenue sharing can include various forms of 
payments, such as 12b-1 fees, that may create conflicts of interest 
for service providers assisting with the selection of investment 
options for a 401(k) plan. 

Table 3: Examples of Potential Conflicts of Interest for Service 
Providers from Revenue Sharing and Other Third-Party Payments: 

Source of potential conflict: 12b-1 fees; 
Explanation of payments: Fees known as 12b-1 fees, which EBSA field 
investigators told us can range from 25 to 100 bps, are paid out of 
fund assets to other service providers for several purposes, including 
the following: 
* paying sales-based compensation; 
* covering marketing expenses,[A] or; 
* for shareholder services[B]; 
Potential conflict of interest: A service provider may increase its 
compensation by not refunding or only partially refunding 12b-1 fees 
to the plan. In some cases, EBSA officials and an industry expert told 
us that if a fund stops paying 12b-1 fees to a service provider, the 
service provider may recommend changes to plans to replace funds that 
no longer pay 12b-1 fees with other funds that pay these fees. 

Source of potential conflict: Other sales-based payments, such as 
front-end or deferred sales loads; 
Explanation of payments: A front-end or deferred sales load is charged 
to investors as a percentage of their investment, generally when they 
initially invest or redeem their shares, and is used to compensate 
another party for selling fund shares.[C] EBSA field investigators and 
a service provider representative said that some service providers 
receive payments of about 100 bps in addition to 12b-1 fees; 
Potential conflict of interest: If a service provider can increase its 
compensation through payments from investment funds, it creates a 
conflict of interest. The service provider has the incentive to 
recommend funds with higher sales loads or other payments over funds 
that have lower or no such payments. Example: 
* In a 2006 EBSA enforcement case, a service provider was found to 
have steered pension plan clients, including 401(k) plans, to invest 
in a hedge fund that, in turn, paid the service provider an incentive 
fee. The service provider did not disclose the incentive fee 
arrangement it had with the hedge fund to its pension plan clients, 
although it was required to do so. This case is still in litigation. 

Source of potential conflict: Subtransfer agent fees; 
Explanation of payments: Subtransfer agent fees are used to reimburse 
a plan's record keeper for shareholder services the fund would have 
otherwise provided, such as maintaining participant-level accounts and 
distributing the fund's prospectus. EBSA field investigators told us 
that some funds do not pay any subtransfer agent fees, while others 
pay between 10 and 20 bps. A representative from a large bundled 
service provider told us the fees received for record-keeping 
reimbursements from outside funds can range from zero to 40 bps; 
Potential conflict of interest: According to an industry expert, the 
payment of subtransfer agent fees is a potential conflict of interest 
because a service provider may receive most of its compensation from a 
few funds, so it has the incentive to recommend that those funds be 
kept in the plan even if they offer inferior performance.[D] 
Representatives from an advisory firm to many large plans said that, 
in some cases, a service provider will only recommend funds that pay 
subtransfer agent fees or other fees back to the provider, which may 
use these fees to cover expenses or for extra revenue without 
disclosing this arrangement to plan sponsors or participants. 

Source: GAO analysis based on information from industry practitioners 
and EBSA enforcement cases. 

Note: A conflict of interest may or may not be a violation of ERISA or 
applicable securities laws, depending on the facts and circumstances. 

[A] Under FINRA rules, 12b-1 fees that are used to pay marketing and 
distribution expenses (as opposed to shareholder service expenses) 
cannot exceed 75 bps of a fund's average net assets per year. NASD 
Conduct Rule 2830(d)(2)(E). 

[B] SEC Rule 12b-1 allows mutual funds to pay for marketing and 
distribution expenses directly from fund assets. Not all funds pay 12b-
1 fees and, within a fund, some share classes may pay 12b-1 fees while 
other share classes do not. While 12b-1 fees are included in a fund's 
expense ratio, SEC has noted that many investors do not understand 
these fees nor are they aware the fees are being deducted from their 
investments. SEC has proposed new rules to replace Rule 12b-1 with a 
new framework that would separately regulate service fees and asset-
based sales charges. See Mutual Fund Distribution Fees; Confirmations, 
75 Fed. Reg. 47,064 (August 4, 2010). 

[C] SEC does not limit the size of sales load a fund may charge, but 
FINRA does not permit mutual fund sales loads to exceed 8.5 percent. 
The percentage is lower if a fund imposes other types of charges. NASD 
Conduct Rule 2830(d)(1)(2). Both 12b-1fees and sales loads are 
required to be disclosed in a fund's prospectus and annual report. A 
payment to sales personnel can be made through onetime charges against 
fund assets or it can be built into ongoing fees for the fund. 

[D] A record keeper may function as a bundled service provider and 
also provide investment assistance. 

[End of table] 

Besides creating a potential conflict of interest, using revenue 
sharing to reimburse for record-keeping expenses can have other 
adverse effects on the plan and participants. Service providers told 
us these payments are often not clearly disclosed to the plan. As 
shown in figure 3, this could result in participants paying a greater 
or lesser share of record-keeping expenses depending on which funds 
they choose to invest their assets. Further, because subtransfer agent 
fees are based on the amount of assets under management, the record-
keeping costs increase as the fund grows and may get quite large if 
not revised. According to one service provider we interviewed, these 
fees can result in the plan continuing to pay more for record-keeping 
services as assets grow, although the cost of providing record-keeping 
services tends to remain the same. 

Figure 4: Potential Impact of Revenue Sharing on Distribution of 
Record-Keeping Costs among Participants with Equivalent Account 
Balances: 

[Refer to PDF for image: illustration] 

How revenue-sharing payments would affect fees on three $50,000 
accounts: 

Participant 1: $50,000; 
Fund A: Zero basis points: (No revenue-sharing payments to reimburse 
for record keeping); 
Participant 1’s record-keeping costs: 50,000 x 0% = 0. 

Participant 2: $50,000; 
Fund A: $25,000; 
Fund B: 10 basis points (Revenue-sharing payments to reimburse for 
record keeping); 
Participant 2’s record-keeping costs: 
Fund A: 50,000 x 0% = 0; 
plus: 
Fund B: 25,000 x .001% = $25; 
Total: $25. 

Participant 3: $50,000; 
Fund B: $25,000; 
Fund C: 20 basis points (Revenue-sharing payments to reimburse for 
record keeping); 
Participant 3’s record-keeping costs: 
Fund B: 25,000 x .001% = $25; 
plus: 
Fund C: 25,000 x .002% = $50; 
Total: $75. 

Source: GAO analysis of information from industry practitioners. 

Note: In the example above, each participant has an account balance of 
$50,000 that he allocates to different investment options in his 
401(k) plan. Record-keeping expenses for the plan are paid through 
revenue-sharing payments from funds B and C. Because participant 1 
invests exclusively in fund A, which does not have any revenue-sharing 
payments, he does not pay any record-keeping fees. Participant 2 
invests half of his account balance in fund A, which has no revenue- 
sharing payments, and half in fund B, which has revenue-sharing 
payments. Thus, participant 2 pays some record-keeping fees through 
his investments in fund B. Participant 3 pays the most in record-
keeping fees because he invests exclusively in funds that make revenue-
sharing payments. 

[End of figure] 

Payments from Brokerage Firms to Other Service Providers: 

In addition to revenue-sharing payments from fund companies, payments 
from brokerage firms, which execute trades for participants' 
investment funds, to other service providers can also create conflicts 
of interest related to a 401(k) plan's investments. For example, in a 
2007 SEC case, an investment adviser was alleged to have advised its 
pension plan clients, including 401(k) plans, to use a specific 
brokerage firm under certain circumstances. The brokerage firm 
allegedly paid the service provider annual compensation based in part 
on the amount of commissions generated, which the adviser failed to 
disclose to its pension plan clients although the adviser was required 
to do so.[Footnote 35] The contingent compensation from the brokerage 
firm to the investment adviser created an incentive for the service 
provider to steer plans to use that particular brokerage firm. 

In other cases, industry experts told us that, at the request of an 
investment adviser, brokerage firms can use commission revenues from 
trading shares to make payments to other service providers that can 
create conflicts of interests if not handled properly. Under the 
Securities Exchange Act of 1934, investment advisers are permitted to 
pay broker-dealers more than the lowest available commission rate for 
trading shares under certain circumstances.[Footnote 36] The 
investment adviser can direct the broker-dealer to use the commission 
revenues to pay the fees of other service providers or to purchase 
services of value to investors, such as investment research to improve 
the management of the fund.[Footnote 37] However, if the commission 
revenues are not used for the benefit of the plan, it could create a 
conflict of interest. A 2005 SEC report concerning examinations of 
pension consultants identifies several areas of concern and examples 
of poorly managed conflicts of interest.[Footnote 38] For example, 

* Using commission revenues to pay for another service provider's 
fees, (i.e., a "commission recapture" arrangement) such as for a 
pension consultant, can result in greater compensation to that service 
provider, because such arrangements may not be capped to terminate 
when fees due to the service provider have been paid in full, 
resulting in the plan overpaying for services. 

* These arrangements are not always well documented and raise concerns 
that plans may not receive "best execution," meaning that the plan's 
service provider may recommend that the plan use a broker-dealer with 
whom it has such an arrangement even if the broker-dealer does not 
offer the most favorable terms for the plan. 

* These arrangements can also create the incentive for the service 
provider to recommend a more active trading strategy to increase the 
number of transactions and, consequently, the amount of commissions. 

Other Business Arrangements That May Create Conflicts of Interest: 

In addition to payments among service providers, other types of 
business arrangements can also create conflicts of interest. As shown 
in table 4, service providers may have affiliated businesses, such as 
proprietary investment funds or a brokerage arm, that can profit from 
the investment of plan assets. For example, a service provider that 
offers its own investment funds has the incentive to steer plan 
sponsors to select these proprietary funds even if other funds are 
available from different providers that better suit the needs of the 
plan. 

Table 4: Examples of Potential Conflicts of Interest from a Service 
Provider's Affiliated Businesses: 

Source of potential conflict from affiliated businesses: Bundled 
service provider with proprietary investment funds; 
Potential conflict of interest: A service provider has an incentive to 
recommend its own funds to the plan even if other funds that better 
suit the needs of the plan might be available from other fund 
providers. Industry experts we interviewed gave the following examples: 
* Bundled providers may require plan sponsors to include their 
proprietary funds as investment options in the plan as a prerequisite 
to servicing the plan; 
* Bundled providers may require the plan to designate one of their 
proprietary funds as the qualified default investment alternative 
(QDIA).[A] 
Representatives of bundled service providers that offer proprietary 
funds we spoke with said that they do not offer investment advice as 
ERISA fiduciaries. However, representatives from other service 
providers told us that many plans rely on investment recommendations 
from these service providers without recognizing the potential 
conflict. 

Source of potential conflict from affiliated businesses: Service 
provider with affiliated brokerage arm; 
Potential conflict of interest: The service provider may advise plans 
to select investment funds that use the services of its affiliated 
brokerage arm, which results in greater revenue to the affiliate and, 
potentially, the service provider. Representatives from advisory firms 
we interviewed provided the following example: 
* A service provider with an affiliated brokerage arm only recommends 
investment funds that use the services of its brokerage arm; likewise, 
the investment fund provider uses a specific brokerage firm in order 
to win favorable recommendations from the brokerage firm's affiliated 
service provider. Such arrangements may not be disclosed to plan 
sponsors or participants. 
In a 2009 case, SEC found that a service provider with an affiliated 
brokerage arm advised its pension plan clients, including 401(k) 
plans, to direct their investment fund providers to execute trades 
through the affiliated brokerage arm.[B] Although this arrangement 
resulted in significantly higher revenue to both the service provider 
and the affiliate, the service provider did not disclose the conflict 
of interest as required. 

Source: GAO analysis based on information from industry practitioners 
and an SEC enforcement case. 

Note: A conflict of interest may or may not be a violation of ERISA or 
applicable securities laws, depending on the facts and circumstances. 

[A] For more information on QDIAs, see a forthcoming GAO report. 

[B] In the Matter of Merrill Lynch, Pierce, Fenner, and Smith, Inc., 
Investment Advisers Act Release No. 2834 (January 30, 2009). The firm 
agreed to settle charges with SEC and pay a civil money penalty of $1 
million. 

[End of table] 

Many Service Providers Are Reported to Arrange Their Association with 
Plan Sponsors in a Manner That Avoids ERISA Fiduciary Responsibility: 

Although service providers that are subject to ERISA fiduciary 
standards are prohibited from benefiting from the investment of plan 
assets, many service providers that assist in selecting investment 
options are reported to structure their relationships with plans to 
avoid being subject to these standards. Under ERISA, a person who 
provides investment advice for direct or indirect compensation is a 
fiduciary; however, the EBSA regulations currently in effect establish 
a five-part test, each part of which must be met, to determine if a 
service provider is a fiduciary for purposes of providing investment 
advice.[Footnote 39] Many industry experts we spoke with said that 
service providers often do not meet one or more parts of the test and 
thus avoid being subject to ERISA fiduciary standards. Consequently, 
these service providers may have a conflict of interest by increasing 
their compensation based on the funds selected by the plan without 
violating ERISA. Service providers may structure their association 
with a 401(k) plan to avoid meeting one or more parts of the current 
five-part test, as shown in figure 4. For example, an ERISA attorney 
said that although service providers give investment recommendations, 
they will include a provision in their contract that states that the 
investment recommendations provided are not intended to be the primary 
basis for decision making. A recent report by Labor's OIG found that 
some service providers included in their review and identified to have 
significant undisclosed conflicts of interest attempted to avoid 
meeting the criteria for ERISA fiduciary status under the current five-
part test by simply stating in their investment adviser contract that 
they were not fiduciaries.[Footnote 40] The 2010 report examined 
EBSA's handling of certain service providers, acting as pension 
consultants, that were determined by SEC in a 2005 staff report to 
have significant undisclosed conflicts of interest. According to the 
SEC report, many plan sponsors rely heavily on these pension 
consultants in making investment decisions. Other industry experts 
said that a service provider can avoid meeting the criteria of the 
five-part test if it offers investment recommendations as part of 
setting up the plan, rather than on a regular, recurring basis (see 
table 5). According to EBSA officials, it can easily be asserted by a 
service provider that advice given on a onetime basis does not meet 
the five-part test.[Footnote 41] 

Figure 5: 401(k) Service Provider May Fail to Be Deemed an ERISA 
Fiduciary for Purposes of Investment Advice by Not Meeting One Part of 
EBSA's Current Five-Part Test: 

[Refer to PDF for image: illustration] 

A service provider is currently determined to be an ERISA fiduciary if 
the investment advice provided for a fee, direct or indirect, 

1) regarded the purchase or sale of securities or that of other 
property of the plan, and: 

2) was given on a regular basis; 

3) was pursuant to a mutual agreement, arrangement, or understanding, 
and: 

4) was a primary basis for investment decisions, and: 

5) was based on the particular needs of the plan. 

Source: GAO analysis of EBSA regulations. 

Note: The current five-part test is reflected in EBSA's regulations. 
29 C.F.R. § 2510.3-21(c). 

[End of figure] 

Table 5: Potential Conflict of Interest Scenario for Investment 
Assistance Provided to Plan Sponsors: 

The following example describes how a service provider may steer plan 
sponsors to select investment funds in which the service provider has 
a conflict of interest without giving formal investment advice subject 
to ERISA fiduciary standards: 

* A plan sponsor works with a service provider to establish a 401(k) 
plan. The service provider presents investment fund options to the 
plan sponsor for consideration, but does not formally recommend the 
selection of any particular investment fund. The plan sponsor will 
select 20 funds to offer in the 401(k) plan; 

* The service provider representative can receive compensation, such 
as through 12b-1 fees or a sales load, from these funds and selects 
those 20 funds that provide the highest payments for the plan's 
consideration; 

* The representative does not consider himself to be acting as an 
ERISA fiduciary because the plan sponsor makes the final decision 
about which investment options to include in the plan. 

Alternatively, the representative may provide a larger pool of funds 
(e.g., 50 funds) for the plan's consideration. Although the plan 
sponsor selects from a larger pool of funds, the service provider 
still has a conflict of interest because the representative chooses 
the 50 funds that provide the highest payments. 

Source: GAO example based on information from industry practitioners. 

[End of table] 

When selecting investment options for the plan, plan sponsors can work 
with various types of service providers subject to different 
regulations, some of which may not be required to provide advice in 
the best interest of the plan or disclose conflicts of interest. 
Several industry experts we interviewed said that while some plan 
sponsors hire registered investment advisers (RIA) who are subject to 
SEC regulations and often acknowledge ERISA fiduciary responsibility, 
many other plan sponsors work with broker-dealer or insurance company 
representatives who are not subject to ERISA fiduciary responsibility 
and may also not be subject to SEC regulations. Under the Advisers 
Act, RIAs must seek to avoid conflicts of interest and, at a minimum, 
make full disclosure of material conflicts of interest.[Footnote 42] 
However, other service providers, such as insurance company 
representatives, may not be subject to ERISA fiduciary duty or certain 
SEC regulations and thus may not be required to make recommendations 
in the best interest of their clients, or to disclose all conflicts of 
interest.[Footnote 43] Furthermore, plan sponsors may contract 
directly with a bundled service provider that offers its own 
investment funds and does not provide formal investment advice subject 
to ERISA or SEC regulations. 

No comprehensive data are available to determine how many service 
providers are ERISA fiduciaries for purposes of providing investment 
advice. Although plan sponsors are required to provide certain 
information about the plan and service providers in annual filings to 
EBSA, this information does not include which service providers are 
acting as ERISA fiduciaries. As we previously reported, ERISA requires 
that at least one fiduciary be named in the plan documents provided to 
participants, although others may be identified voluntarily.[Footnote 
44] Consequently, determinations as to ERISA fiduciary status of 
service providers may not be made unless an investigation by EBSA is 
initiated or a lawsuit is filed claiming that the plan has been 
harmed. Misunderstanding can also occur because many large providers 
offer a range of services that a sponsor can choose from, including 
some that involve fiduciary duties and others that may not.[Footnote 
45] 

Despite reports indicating that many service providers are not acting 
as ERISA fiduciaries in providing investment assistance, industry 
experts and EBSA field investigators told us that plan sponsors are 
often not aware when a service provider is not an ERISA fiduciary and 
often assume the advice they receive from them is subject to these 
standards.[Footnote 46] Consequently, plan sponsors may not be aware 
that service providers can have a financial incentive to recommend 
certain funds that would be prohibited if they were ERISA fiduciaries. 
As we previously reported, plan sponsors may also assume they have 
delegated all of their fiduciary duties to an outside professional 
hired to run the plan, even though the sponsor always retains some 
fiduciary obligation.[Footnote 47] Several industry experts we spoke 
with, including EBSA field investigators, indicated that there is a 
considerable amount of confusion among plan sponsors about whether or 
not they are receiving investment advice subject to ERISA fiduciary 
standards. For example, unless disclosed on the schedule A of the 
annual form 5500, they noted that, in their opinion, plan sponsors are 
generally not aware, when dealing with service providers who are 
broker-dealers or insurance company representatives, that the 
providers are not giving formal investment advice subject to ERISA 
fiduciary standards and thus may be earning sales-based compensation 
on fund sales. Contributing to the confusion, broker-dealers or 
insurance company representatives can refer to themselves as advisers 
even though they are not providing advice as ERISA fiduciaries and are 
receiving sales-based compensation.[Footnote 48] A service provider 
representative said that, from the plan sponsor's perspective, 
investment assistance provided by a nonfiduciary service provider that 
may have conflicts of interest often looks very similar to investment 
advice provided by an independent service provider with no ties to 
investment funds. 

Smaller plans may be more exposed to conflicts of interest on the part 
of service providers because they are less likely than larger plans to 
receive investment assistance from a service provider that is acting 
as a fiduciary. Several industry experts we spoke with said that 
larger plans are much more likely to employ RIAs who are subject to 
fiduciary standards under the Advisers Act in providing investment 
advice. Larger plans may also have sufficient resources and in-house 
expertise to make investment decisions without assistance. Smaller 
plans, on the other hand, often lack the resources to perform these 
tasks in-house or to hire an independent adviser who will act as an 
ERISA fiduciary. Smaller plans also often receive investment 
assistance from insurance brokers or broker-dealers, who are not 
acting as ERISA fiduciaries and also may not be subject to fiduciary 
standards under the Advisers Act, which requires the adviser to act 
solely in the best interests of the client.[Footnote 49] 

Conflicts of Interest in the Selection of Investment Options May Cause 
Problems for Plan Sponsors and Reduce Participants' Savings for 
Retirement: 

The potential conflicts of interest described by industry experts we 
interviewed could cause problems for plan sponsors if appropriate 
action is not taken. Under ERISA, plan sponsors are obligated to take 
steps to identify and address service providers' potential conflicts 
of interest and ensure that the plan is run in the best interest of 
participants.[Footnote 50] For example, an advisory opinion issued by 
EBSA describes conditions under which revenue-sharing payments 
received by a fiduciary are permissible under ERISA. Specifically, the 
advisory opinion states that, in order for a fiduciary to avoid a 
prohibited transaction, revenue-sharing payments should be fully 
disclosed to the plan and used either to offset fees the plan is 
obligated to pay, on a dollar-for-dollar basis, or else be rebated to 
the plan.[Footnote 51] In addition, EBSA and SEC developed a list of 
questions to assist plan sponsors with identifying and assessing 
service providers' potential conflicts of interest that is available 
on SEC's Web site.[Footnote 52] The questions include inquiries about 
a service provider's compensation, affiliations, or other business 
relationships with money managers, and ERISA fiduciary status. 
Representatives of service providers and ERISA attorneys we spoke with 
also described steps plan sponsors could take to address service 
providers' potential conflicts of interest. For example, plan sponsors 
could: 

* examine a service provider's direct and indirect compensation, 

* ensure that the investment options offered are diversified and not 
entirely composed of the service provider's proprietary funds, 

* negotiate for institutional fund share classes which do not have 
revenue-sharing payments so that fees are paid through direct charges 
to the plan,[Footnote 53] or: 

* specify in their contract that the service provider will not receive 
any compensation other than what is allowed for in the contract. 

Although plan sponsors may take steps to address potential conflicts 
of interest, several industry experts we spoke with said that the 
complexity of service providers' business arrangements and 
insufficient disclosures pose challenges to plan sponsors who want to 
obtain information regarding potential conflicts. Some of these 
conflicts might rise to the level of a prohibited transaction, such as 
self-dealing. Even though revenue sharing is reported to be a 
widespread practice among 401(k) service providers, several industry 
experts we spoke with said that plan sponsors, especially of smaller 
plans, may not fully understand or even be aware of these payments. 
Further, some industry experts said that even if disclosures are 
provided, they are very complicated and difficult to understand. 

If not addressed, conflicts of interest could lead to 401(k) plans 
offering investment funds with higher fees or mediocre performance, 
which can substantially reduce the amount of savings available for 
retirement. A service provider with a conflict of interest may steer 
plan sponsors toward investment funds that increase the service 
provider's compensation even if other funds with better performance 
are available at equal or lower cost. Several industry experts we 
interviewed said that the financial impact of conflicts of interest 
can be considerable. For example, representatives from one service 
provider we interviewed said fees for plans that have been managed by 
service providers with conflicts of interest can be reduced by 30 
percent or more. Similarly, a representative from an advisory firm 
that does not accept payments from investment funds said that, in some 
cases, fees for the firm's 401(k) plan clients are reduced by 180 bps 
or more. As we previously reported, however, a detailed financial 
audit would be necessary to precisely estimate the financial impact of 
a conflict of interest in a specific situation.[Footnote 54] While the 
financial harm from conflicted investment advice is difficult to 
estimate, several studies provide a general sense of the magnitude of 
the effect of an increase in fees for retirement savings over a 
worker's career. Based on a 1 percentage point increase in fees, 
projections from EBSA, a prior GAO report, and an industry study range 
from a 17 to 28 percent decline in final account balances.[Footnote 
55] The size of the impact varies based on the time horizon, the 
projected rate of return, and other assumptions made in the projection. 

Participants May Receive Conflicted Investment Education and Advice 
from Service Providers in Certain Circumstances, but Enhanced 
Disclosure Could Help Mitigate Such Conflicts: 

Participants May Perceive Investment Education as Advice and May Be 
Unaware of Situations when Service Providers Have Conflicts of 
Interest: 

Participants may be unaware that service providers, when furnishing 
education, may have financial interests in the investment options 
available to participants. For example, investment education, which 
may be provided to participants in brochures, other written materials, 
and computer models, can include asset allocation models that 
highlight specific investment options as examples of investments 
available under an asset class.[Footnote 56] In particular, funds in 
which the service provider has a financial interest can be highlighted 
and participants may perceive this information as investment advice. 
In one case, representatives from a service provider for many large 
401(k) plans told us that because the company can highlight its own 
funds as examples of investment options under each asset class through 
investor education, it has no plans to offer investment advice. While 
investment advice is subject to ERISA fiduciary standards, which 
require that the advice must be in the participant's best interest and 
prohibit the adviser from having a financial interest in the 
investment options recommended, investment education is not subject to 
these standards.[Footnote 57] Thus, a provider furnishing education 
may do so despite a conflict of interest, such as a financial stake in 
the outcome of participants' investment decisions. EBSA requires 
providers who highlight proprietary funds as part of an asset 
allocation model to provide a statement that other investment options 
may be available under a plan; however, this statement may not 
sufficiently prevent participants from construing information on 
investment alternatives as advice.[Footnote 58] For example, the 
statement is not required to explain that the service provider is not 
providing advice as an ERISA fiduciary who is required to act in the 
participants' best interests, and the provider may stand to profit 
from participants' investment decisions. Consequently, without the 
benefit of an enhanced disclaimer that explicitly states that the 
highlighted funds are not advice and that the service provider may 
have a financial interest in the funds, participants may believe that 
providers are giving investment advice that is in participants' best 
interests, even in situations where this may not be the case. In 
addition to furnishing asset allocation models, some service providers 
may highlight specific investment funds in communications with 
participants, as part of providing investment education, by using 
language such as "you may wish to consider [this investment fund]" 
instead of "I recommend," which makes a subtle differentiation between 
investment education and advice that most participants will not 
understand. Moreover, agency field investigators said that service 
providers who avoid rendering formal investment advice subject to 
ERISA fiduciary standards may, nonetheless, refer to themselves as 
investment advisers to participants. Participants who confuse 
investment education for impartial advice may choose investments that 
do not meet their needs, pay higher fees than with other investment 
options, and have lower savings available for retirement. 

Although several industry professionals said that providing investment 
advice to participants through computer models, subject to ERISA 
standards, has advantages in addressing potential conflicts of 
interest, others said that these models could have biases that are 
difficult to detect. While investment advice--through a direct service 
arrangement--can be provided to participants through a computer model 
from a service provider that does not have any affiliations with the 
investment options offered, two other computer model arrangements are 
permitted, the SunAmerica and the Pension Protection Act (PPA) 
eligible investment advice arrangements, in cases where the service 
provider may have a conflict of interest (see table 6). See appendix 
II for more information regarding the common formats providers use to 
deliver investment education and advice.[Footnote 59] 

Table 6: Types of Investment Advice Arrangements and Computer Models: 

Advisory opinions, guidance by EBSA, and the Pension Protection Act of 
2006 set forth additional arrangements for investment advice that may 
be provided--by service providers if they meet applicable 
requirements--to plan participants in specified circumstances: 
* SunAmerica advice arrangement--in December 2001, EBSA issued an 
advisory opinion (2001-09A), in response to a request by SunAmerica 
Retirement Markets Inc., asking if a retirement plan provider could 
hire an independent third party to provide participants in a 401(k) 
plan with investment advice using asset allocation models. EBSA, in 
the advisory opinion, specified that such advice arrangements were 
allowed as long as certain requirements were met. For example,[A]: 
- The asset allocation model must be developed and maintained by an 
independent financial expert; 
- The advice arrangement must preserve the financial expert's ability 
to develop the model portfolios solely in the interest of the plan 
participants and beneficiaries; 
- Participants have the option to implement or disregard the 
investment advice generated by the model; 
* Pension Protection Act's eligible investment advice arrangements-- 
Section 601 of the PPA provided two eligible investment advice 
arrangements (EIAA)--in the form of statutory exemptions from ERISA's 
prohibited transaction rules--for fiduciaries who might otherwise have 
conflicts of interest when rendering investment advice: (1) computer 
model-based advice arrangements and (2) level fee-based advice 
arrangements. For both types of arrangements, PPA provisions set forth 
compliance requirements. In addition, EBSA has proposed regulations 
pursuant to the PPA to outline additional technical requirements for 
PPA EIAAs. 75 Fed. Reg. 9,360; 
- PPA computer model arrangement--advice may be provided to 
participants or beneficiaries using a computer model that, among other 
things, is certified by an eligible investment expert and audited 
annually by an independent auditor[B]; 
- PPA fee-leveling arrangement--advice may be provided to participants 
or beneficiaries by an adviser whose compensation does not vary 
depending on the basis of any investment option selected by plan 
participants or beneficiaries. This advice arrangement must be audited 
annually by an independent auditor. Labor has stated (see Field 
Assistance Bulletin No. 2007-01) that such requirements do not extend 
to fiduciaries' affiliates. 

[A] The requirements listed above are just a few examples of the 
requirements detailed in EBSA's Advisory Opinion. See advisory opinion 
2001-09A for a complete list of requirements. 

[B] According to the proposed regulations, the computer model must 
also (1) apply generally accepted investment theories that take into 
account the historic returns of different asset classes over defined 
periods of time; (2) utilize relevant information about the 
participant, which may include age, life expectancy, retirement age, 
and risk tolerance; (3) utilize prescribed objective criteria to 
provide asset allocation portfolios composed of investment options 
available under the plan; (4) operate in a manner that is not biased 
in favor of investments offered by the fiduciary adviser or a person 
with material affiliation or contractual relationship with the 
fiduciary adviser; and (5) take into account all investment options 
under the plan in specifying how a participant's account balance 
should be invested and is not inappropriately weighted with respect to 
any investment option. 

Source: GAO review of the PPA and EBSA regulations and materials. 

[End of table] 

Several industry professionals we interviewed said these models ensure 
consistency in the content of the advice rendered to multiple 
participants. In addition, unlike a one-on-one consultation or group 
presentation, a computer model may be audited to determine whether it 
is generating impartial information.[Footnote 60] Despite these 
advantages of computer model-based advice, other industry 
professionals said that it is possible to build biases into these 
models that may be difficult to detect. For example, a computer model 
may be designed to exclude certain types of investment options, which 
results in situations in which participants are receiving advice that 
does not include all investment options available to participants. In 
particular, representatives from one service provider told us that a 
computer model's exclusion of target date funds could allow a provider 
to steer participants toward investment options that charge higher 
fees, such as managed accounts. 

Although a number of studies have been conducted about the 
availability of investment assistance for participants, these studies 
do not always discern whether participants are provided investment 
education or advice.[Footnote 61] According to a poll of 401(k) plan 
sponsors and service providers that we conducted in coordination with 
the Society of Human Resource Management and the Society of 
Professional Asset-Managers and Record Keepers, investment education 
is more commonly offered to participants than investment advice, 
although many respondents offered both.[Footnote 62] Among 
respondents, brochures or other written materials were one of the most 
commonly used formats for delivering education and advice. Computer 
modeling, including Web-based tools, was also one of the most common 
methods of delivery reported. 

Conflicts of Interest May Arise from Compensation to Service Providers 
for Cross-Selling Financial Products outside of Retirement Plans to 
Participants: 

Several industry experts we spoke with said that conflicts of interest 
also arise for 401(k) service providers who sell nonplan products and 
services, such as IRA rollovers, to participants outside their 401(k) 
plan, a practice known as cross-selling, which can considerably 
increase the service provider's compensation. While IRAs may serve 
participants' retirement needs by assisting them in saving for 
retirement, industry professionals we spoke to had concerns about the 
manner in which providers cross-sell IRA rollovers and other products 
to participants. Cross-selling products outside of a plan to 
participants can substantially increase a service provider's 
compensation, which creates an incentive for the service provider to 
steer participants toward the purchase of these products even though 
such purchases may not serve the participants' best interests. For 
example, products offered outside a plan may not be well suited to 
participants' needs or participants may be able to secure lower fees 
by choosing investment funds within their plans comparable with 
products offered outside their plans.[Footnote 63] Industry 
professionals we spoke with said that cross-selling IRA rollovers to 
participants, in particular, is an important source of income for 
service providers. For example, according to an industry professional, 
a service provider could earn $6,000 to $9,000 in fees from a 
participant's purchase of an IRA, compared with $50 to $100 in fees if 
the same participant were to invest in a fund within a plan. 

Plan sponsors can take steps to preclude service providers from cross- 
selling nonplan products and services to plan participants. For 
example, some plan sponsors require their plans' service providers to 
sign nonsolicitation agreements that prevent the service providers 
from marketing nonplan products and services to participants, but such 
agreements may not be widely used among plan sponsors. In addition, 
some service providers do not directly cross-sell products and 
services outside of a 401(k) plan to participants unless the service 
providers obtain permission from plan sponsors to do so, or unless 
participants initiate the discussion with service providers and 
inquire about products and services that are outside of their plans' 
investment offerings. According to our poll of 401(k) plan sponsors 
and service providers, of the 475 SHRM respondents who sponsored a 
401(k) plan, 30 respondents explicitly allowed providers to market, or 
cross-sell, nonplan products to participants. Among the 30 respondents 
who allowed providers to engage in cross-selling, IRA rollovers were 
the most common product marketed to participants. However, the extent 
of cross-selling may be greater than reflected by the poll responses 
because service providers may do so without explicit permission. An 
industry professional told us that many sponsors of small and midsized 
plans may not be aware that their providers are cross-selling nonplan 
products and services to plan participants; hence, sponsors would not 
know to ask their providers to stop cross-selling nonplan products to 
participants. 

Available data on IRA rollovers indicate that many participants choose 
to roll their assets into an IRA rather than keep their assets in an 
existing plan or roll them into a new employer's plan. As shown in 
figure 5, from 1998 to 2007, more than 80 percent of funds flowing 
into IRAs came from rollovers of lump-sum payments or account balances 
from defined benefit and defined contribution plans.[Footnote 64] 

Figure 5: IRA Assets from Contributions and Rollovers, 1998 to 2007: 

[Refer to PDF for image: stacked multiple line graph] 

Year: 1998; 
IRA contributions: $31.4 billion; 
Rollovers: $128.6 billion; 
Total: $160 billion. 

Year: 1999; 
IRA contributions: $33.5 billion; 
Rollovers: $166.4 billion; 
Total: $199.9 billion. 

Year: 2000; 
IRA contributions: $36.4 billion; 
Rollovers: $189.2 billion; 
Total: $225.6 billion. 

Year: 2001; 
IRA contributions: $35.8 billion; 
Rollovers: $152 billion; 
Total: $187.8 billion. 

Year: 2002; 
IRA contributions: $42.2 billion; 
Rollovers: $162.2 billion; 
Total: $204.4 billion. 

Year: 2003; 
IRA contributions: $44 billion; 
Rollovers: $161 billion; 
Total: $205 billion. 

Year: 2004; 
IRA contributions: $48.7 billion; 
Rollovers: $166.2 billion; 
Total: $214.9 billion. 

Year: 2005; 
IRA contributions: $52.3 billion; 
Rollovers: $194.2 billion; 
Total: $246.5 billion. 

Year: 2006; 
IRA contributions: $57 billion; 
Rollovers: $225.1 billion; 
Total: $282.1 billion. 

Year: 2007; 
IRA contributions: $58.8 billion; 
Rollovers: $264.3 billion; 
Total: $323.1 billion. 

Source: Investment Company Institute. 

[End of figure] 

According to data collected in 2006 from the Survey of Income and 
Program Participation, a survey relating to income and related 
information conducted by the U.S. Census Bureau, approximately 69 
percent--or approximately 4.87 million--survey respondents who 
received a lump-sum distribution from their retirement plans rolled 
their distributed funds into IRAs.[Footnote 65] Additionally, as shown 
in table 7, data from three large service providers indicate that, 
among participants who terminated their DC plan, between 42 and 48 
percent of participants' plan assets were rolled into IRAs in the 
observed time periods. 

Table 7: Trends in Distribution of Defined Contribution Plan Assets 
when Participants Terminate Their Plans: 

Rolled funds into IRAs: 
Service provider 1[A] 03/2005 to 05/2010: 48%; 
Service provider 2[B] 01/2008 to 03/2009: 43%; 
Service provider 3[C] calendar year 2008: 42%. 

Took cash or other distributions: 
Service provider 1[A] 03/2005 to 05/2010: 11%; 
Service provider 2[B] 01/2008 to 03/2009: 8%; 
Service provider 3[C] calendar year 2008: 6%. 

Took other forms of distributions: 
Service provider 1[A] 03/2005 to 05/2010: 0%; 
Service provider 2[B] 01/2008 to 03/2009: 2%; 
Service provider 3[C] calendar year 2008: 2%. 

Moved funds into new employers' plans: 
Service provider 1[A] 03/2005 to 05/2010: 3%; 
Service provider 2[B] 01/2008 to 03/2009: 4%; 
Service provider 3[C] calendar year 2008: 0%. 

Remained in former employers' plans: 
Service provider 1[A] 03/2005 to 05/2010: 38%; 
Service provider 2[B] 01/2008 to 03/2009: 43%; 
Service provider 3[C] calendar year 2008: 50%. 

Source: GAO review of proprietary data from three plan service 
providers. 

[A] Data based on 976,600 terminated participants in service provider 
1's retirement plan services from 03/01/2005 to 05/31/2010. 

[B] Data based on 9,790 terminated participants in service provider 
2's retirement plan services 401(k) plans from 01/01/2008 to 
03/31/2009. 

[C] Reported data among participants with termination dates in service 
provider 3's retirement plan services in 2008. The universe consists 
of more than 2,200 qualified plans and more than 3 million 
participants. 

[End of table] 

An advisory opinion issued by EBSA states that ERISA fiduciary 
standards do not apply to a service provider cross-selling an IRA 
rollover to a participant unless the service provider is already 
servicing the plan as an ERISA fiduciary.[Footnote 66] Consequently, 
unless the service provider is already an ERISA fiduciary, the service 
provider may advise a participant to roll his or her account funds 
into an IRA, even if such a transaction may not be in a participant's 
best interest. Without disclosures that indicate whether the service 
provider's assistance is subject to ERISA fiduciary standards and 
whether the service provider has a financial interest in the 
investment products, participants may mistakenly assume that service 
providers are required to act in the participant's best interest. 
[Footnote 67] Furthermore, while final regulations may require a 
service provider to furnish IRA fee disclosures--such as a disclosure 
statement or a fee schedule--to participants, ERISA does not impose 
similar disclosure requirements for IRAs. In particular, service 
providers are not required to provide fee disclosures that 
specifically alert participants to the difference in fees between 
comparable funds available in their plan and funds offered by the 
plan's service provider. As we reported in 2009, owners of IRAs 
generally pay higher fees than participants in 401(k) plans because an 
individual IRA's account balance is usually not big enough to purchase 
an amount of investments large enough to qualify for volume discounts 
on fees.[Footnote 68] Representatives from a 401(k) record-keeping 
firm said that, typically, IRA owners pay higher fees in the range of 
25 to 30 bps and, in some cases, as high as 65 bps, which can be two 
to three times higher than fees paid by plan participants for in-plan 
investments. As a result of the lack of disclosure requirements on 
fees associated with IRAs, participants may be unaware of the higher 
fees associated with IRAs' rollovers and may not understand that 
paying these higher fees can reduce their retirement savings over time. 

In March 2010, EBSA proposed a regulation that may improve fee 
disclosure to participants by requiring ERISA fiduciary advisers to 
disclose all fees or other compensation that they or their affiliates 
might receive in connection with an IRA rollover before providing 
investment advice on investment options for rollovers.[Footnote 69] 
However, the requirements would not apply to nonfiduciaries that are 
providing advice to participants about IRA rollovers or inform 
participants that fees for IRAs may actually be higher than fees for 
investments in a plan. The U.S. Department of the Treasury (Treasury) 
has proposed a separate regulation to require advisers to provide 
notice to plan participants about the consequences of taking money out 
of a retirement plan.[Footnote 70] Specifically, the disclosure would 
state that, among other things, investment options available in a plan 
may not be available for the same costs outside of a plan. However, 
without more explicit disclosure that IRAs typically have higher fees 
than investments in a plan, participants may not understand the 
difference in fees between IRAs and investments in a plan or the 
implication of higher fees on retirement savings over time. 

EBSA's Enforcement Program and Recent Regulatory Actions Take Steps to 
Address the Potential for Conflicted Investment Advice, but Further 
Changes Could Better Address Conflicts of Interest: 

EBSA's Enforcement Efforts Do Not Address Potential Conflicts of 
Interest of Nonfiduciary Service Providers Involving the Selection of 
Investment Options: 

EBSA's enforcement efforts regarding potential conflicts of interest 
related to investment advice have not addressed potential violations 
by non-ERISA fiduciary service providers.[Footnote 71] As we have 
previously reported, EBSA's ability to recover losses related to 
conflicts of interest by a service provider through its enforcement 
program is largely limited by the extent to which the service provider 
functions as a fiduciary under ERISA. For EBSA to take action against 
an individual or entity, there generally must be a breach of that 
fiduciary duty.[Footnote 72] This can be an obstacle for EBSA given 
that many service providers structure their contracts with plans to 
attempt to avoid meeting one or more of the five parts of the current 
ERISA fiduciary definition reflected in EBSA regulations.[Footnote 73] 
EBSA officials noted that it was rare to find a pension consultant to 
an employee benefit plan who acknowledged ERISA fiduciary status. 
Moreover, EBSA officials told us that proving ERISA fiduciary status 
under the five-part test tends to be a difficult and complex task 
because it depends on the facts and circumstances of each case. These 
cases are usually very resource-intensive and involve interviewing 
plan sponsors and service providers and reviewing a significant amount 
of documentation, which may need to be subpoenaed.[Footnote 74] If 
EBSA is unable to determine that the service provider was an ERISA 
fiduciary pursuant to the five-part test currently in effect, or was 
otherwise an ERISA fiduciary, EBSA officials told us that they have 
the authority to cite plan sponsors or other plan fiduciaries to take 
corrective action for not prudently selecting and monitoring their 
service providers. However, according to Labor's OIG officials, EBSA 
does not focus its enforcement activities on plan sponsors or other 
plan fiduciaries that fail to detect conflicts of interest on the part 
of nonfiduciaries.[Footnote 75] 

Indeed, although EBSA has taken steps to address conflicted investment 
advice provided to plan sponsors or other plan fiduciaries by 
establishing the Consultant/Adviser Project (CAP), this effort is 
constrained by the current definition of an ERISA fiduciary investment 
adviser in its regulations. EBSA launched CAP, a national enforcement 
effort, at the beginning of fiscal year 2007 to investigate situations 
where ERISA fiduciary pension consultants or advisers may have used 
positions of trust with pension plans to generate improper, 
undisclosed fees for themselves or their affiliates. Since its launch, 
EBSA has designated 40 CAP cases and, as of August 2010, closed 16. 
[Footnote 76] Of these 16 cases, only 5 yielded results, including 
restoration of plan assets and actions taken by ERISA fiduciaries to 
ensure that the conflicts of interest did not occur again. However, 
EBSA was unable to take action in other closed cases because it was 
unable to prove that service providers were ERISA fiduciaries under 
the five-part test or acted otherwise as fiduciaries. For example, 
EBSA investigated 12 of the 13 pension consultants identified in a 
2005 SEC staff report for failing to disclose significant ongoing 
conflicts of interest to their pension fund clients[Footnote 77]--all 
13 of which were considered fiduciaries under the Advisers Act, which 
was used as a criterion in the SEC review--but EBSA told us that many 
of the 13 pension consultants were adept at avoiding fiduciary status 
under EBSA's five-part test. As a result, Labor's OIG recently 
reported that EBSA was only able to take action on 2 of these 13 
consultants because only those 2 consultants were determined to be 
ERISA fiduciaries and were engaged in prohibited 
transactions.[Footnote 78] The OIG report noted that without 
establishing ERISA fiduciary status, EBSA was unable to enforce 
conflict of interest issues and did not take any further action on 
these cases. 

EBSA's Approach for Initiating Enforcement Cases May Also Fail to 
Detect Some Conflict of Interest Violations by ERISA Fiduciaries: 

EBSA's enforcement efforts through CAP may also miss violations by 
some ERISA fiduciaries because EBSA's approach for detecting 
violations does not currently include routine compliance examinations, 
which could help identify these violations. We reported in 2007 that 
EBSA does not conduct routine compliance examinations to focus its 
enforcement efforts the way other agencies do, and as a result, EBSA 
is not positioned to focus its resources on key areas of noncompliance 
or have adequate measurable performance goals to evaluate its impact 
on improving industry compliance.[Footnote 79] For example, EBSA 
officials told us that they do not assess overall service provider 
compliance with the SunAmerica advisory opinion, which describes an 
appropriate method for providing one form of advice to participants, 
[Footnote 80] and that they do not plan to assess compliance with the 
Pension Protection Act's eligible investment advice arrangement 
provisions after they are finalized.[Footnote 81] Instead of routine 
compliance examinations, CAP cases have been initiated based on a 
variety of sources, including referrals from other agencies, spin-offs 
from regular enforcement cases, tips, and media reports. According to 
EBSA, 18 of the 40 initiated CAP cases were based on referrals from 
external sources, including the SEC staff report. While these leads 
may be specific and detailed, EBSA may not be able to rely on 
consistent referrals from these external sources because they may not 
always review the same topics. For example, many of SEC's referrals to 
EBSA, which resulted in CAP cases, stemmed from a onetime review by 
SEC of pension consultants in 2005.[Footnote 82] In addition, 9 CAP 
cases were initiated by EBSA investigators based on leads from the 
media and participant complaints. While these sources are important, 
such methods may not reveal violations that are more complex or 
hidden. For example, it may be difficult for participants to detect 
conflict of interest violations and submit complaints to EBSA, since 
service providers' business arrangements may be complicated and their 
disclosures may be insufficient or difficult to understand.[Footnote 
83] Finally, Labor's OIG told us that EBSA does not have a formal 
process for looking at conflicts of interest regarding nonfiduciary 
service providers during EBSA's regular enforcement investigations--
neither at the front end, when a plan hires a service provider, nor 
later on during transactions of plan assets. If EBSA's investigators 
come across a potential conflict of interest violation during their 
regular enforcement efforts, EBSA officials told us that the 
investigators refer the conflict of interest portion of the 
investigation to the CAP program. However, officials from Labor's OIG 
told us that, even though there have been numerous cases referred to 
the CAP program in this manner, as of July 2010, none had progressed 
to a CAP case in which EBSA took action against a service provider. 
[Footnote 84] 

To address such limitations, we previously recommended EBSA consider 
conducting routine compliance examinations.[Footnote 85] Specifically, 
we recommended that EBSA evaluate the extent to which it could 
supplement its current enforcement practices with strategies used by 
similar agencies, such as routine compliance examinations and 
dedicating staff for risk management. EBSA officials told us that, 
starting in fiscal year 2011, they will implement routine compliance 
examinations. 

Labor's Recent and Proposed Regulations Address Some of the Potential 
for Conflicts of Interest in Investment Advice and Lack of Disclosure: 

In addition to its enforcement efforts, EBSA has recently announced 
several regulatory initiatives that would address some potential 
conflicts of interest on the part of service providers. These efforts 
include (1) revising the definition of an ERISA fiduciary, (2) 
requiring enhanced disclosure of providers' direct or indirect 
compensation and fiduciary status, and (3) establishing safeguards for 
PPA investment advice arrangements. If the requirements specified in 
these regulations are implemented as they are currently written, they 
may help EBSA and plan sponsors detect and deter conflicted investment 
advice, but plan sponsors and participants still would not have 
sufficient and comparable information to identify potential conflicts 
of interest because disclosures are not required to be provided in a 
consistent and summary format. 

Fiduciary Definition Regulations: 

Proposed regulations by EBSA to amend the definition of an ERISA 
fiduciary for purposes of investment advice, if implemented, would 
help address potential conflicts of interest on the part of service 
providers by encompassing a greater number of advisory relationships 
in which the plan sponsor relies on the service provider when making 
investment decisions.[Footnote 86] Existing regulations have been in 
effect for 35 years, and EBSA officials told us they need to be 
revised based on knowledge and experience EBSA has gained through its 
enforcement efforts, as well as the evolution of the 401(k) industry. 
[Footnote 87] In addition, a 2010 report by Labor's OIG noted that the 
five-part test is narrow and hampers EBSA's enforcement efforts. In 
place of the five-part test, the proposed regulation would establish 
ERISA fiduciary status based on a broader standard. In particular, the 
proposed regulation makes the following key changes, among others: 

* Acknowledgment or representation as an ERISA fiduciary is sufficient 
to result in ERISA fiduciary status. 

* Advice does not need to be provided on a regular basis to be 
considered a fiduciary act. 

* The parties do not need to have a mutual understanding that the 
advice will serve as a primary basis for plan investment decisions. 

Fulfilling any of the independent and alternative conditions specified 
in the proposal would be sufficient to result in ERISA fiduciary 
status for purposes of investment advice.[Footnote 88] By reducing the 
number of conditions that need to be met to be deemed an ERISA 
fiduciary, the proposed regulation would encompass a greater number of 
service providers assisting plan sponsors with selecting investment 
options. In addition, the revised standards more closely align with 
advisory relationships that industry experts and service providers 
told us plan sponsors rely on to make investment decisions. As a 
result, the proposed regulations should help reduce confusion on the 
part of plan sponsors, many of whom are reported to currently believe 
they are receiving impartial advice subject to ERISA fiduciary 
standards when this is not the case. Moreover, the regulation may aid 
EBSA's enforcement efforts regarding conflicted investment advice by 
simplifying the method EBSA uses to determine who is an ERISA 
fiduciary. In addition to amending the five-part test, the proposed 
regulations also state that selling or marketing investment options to 
a plan sponsor does not constitute investment advice if it is 
disclosed in writing that the person is not undertaking to provide 
impartial investment advice.[Footnote 89] However, the proposed 
regulation does not specify the format for this disclosure. Given that 
industry experts told us there is a considerable amount of confusion 
among plan sponsors about whether or not they are receiving investment 
advice subject to ERISA fiduciary standards, some plan sponsors may 
continue to be unaware of the distinction between ERISA fiduciary 
advice and sales or marketing activities without a requirement that 
this disclosure be made in a consistent and prominent manner. While 
the proposed regulations should result in a greater number of advisory 
relationships being subject to ERISA fiduciary standards, the 
regulation has yet to be finalized. If EBSA does not finalize this 
regulation and replace the five-part test, many service providers may 
continue to act outside of ERISA fiduciary standards and EBSA's 
enforcement efforts will remain limited. 

Service Provider Disclosure Regulations: 

Interim final regulations released by EBSA in July 2010 require 
enhanced service provider disclosure of compensation and ERISA 
fiduciary status.[Footnote 90] These regulations, effective on July 
16, 2011, for both new and existing arrangements between service 
providers and ERISA plans, specify that a contract between a covered 
plan[Footnote 91] and a covered service provider[Footnote 92] is not 
reasonable unless certain disclosures are made to the responsible plan 
fiduciary.[Footnote 93] Required disclosures include descriptions of 
the services to be provided to the plan and the compensation the 
provider expects to receive for those services. In addition, if 
service providers expect to provide ERISA fiduciary services to plans, 
they are required to make a statement to such effect.[Footnote 94] 
Industry experts indicated that this regulation should help plan 
sponsors identify conflicts of interest and assess whether they are 
causing harm to participants' balances. In addition the new disclosure 
requirements will allow EBSA to exercise enforcement authority over 
service providers who refuse to disclose direct and indirect 
compensation.[Footnote 95] As shown in table 8, disclosures required 
by this regulation would provide plan sponsors with valuable 
information and could enhance their ability to evaluate compensation 
arrangements and potential conflicts of interest.[Footnote 96] 

Table 8: Categories of Service Provider Disclosures Required under 
Interim Final EBSA Regulations Effective July 2011: 

Type of disclosure: Primary compensation disclosures; 
Requirement[A]: The service provider must describe all of the 
compensation it expects to receive.[B] For this purpose, the 
compensation will fall into one or more of the following four 
categories: 
* Direct compensation: a description of all direct compensation, 
either in the aggregate or by service, that the service provider 
reasonably expects to receive in connection with the covered plan; 
* Indirect compensation:[C] a description of all indirect compensation 
that the covered service provider reasonably expects to receive. The 
description must include identification of the services for which the 
indirect compensation will be received and identification of the payer 
of the indirect compensation; 
* Compensation paid among related parties: a description of any 
compensation that will be paid among the covered service provider, an 
affiliate, or a subcontractor if it is set on a transaction basis 
(e.g., commissions, soft dollars, finder's fees, or other similar 
incentive compensation based on business placed or retained) or 
charged directly against the covered plan's investments and reflected 
in the net value of the investments (e.g., 12b-1 fees). The 
description must include identification of the services for which the 
compensation will be paid and identification of the payers and 
recipients of the compensation (including the status of the payer or 
recipient as an affiliate or subcontractor); 
* Compensation for termination of arrangement: a description of any 
compensation that the service provider reasonably expects to receive 
in connection with termination of the contract or arrangement and how 
any prepaid amounts will be calculated and refunded upon such 
termination. 

Type of disclosure: Additional disclosures for record-keeping services; 
Requirement[A]: In addition, if record-keeping services will be 
provided to the covered plan, a covered record-keeping service 
provider must give a description of all direct and indirect 
compensation that the covered service provider, affiliate, or 
subcontractor reasonably expects to receive in connection with the 
record-keeping services, and; 
* if the covered service provider reasonably expects record-keeping 
services to be provided, in whole or in part, without explicit 
compensation for such record-keeping services, or; 
* when compensation for record-keeping services is offset or rebated 
based on other compensation received; 
A reasonable and good faith estimate of the cost to the covered plan 
of such record-keeping services, including the following: 
* an explanation of the methodology and assumptions used to prepare 
the estimate, and; 
* a detailed explanation of the record-keeping services that will be 
provided to the covered plan; 
Under this disclosure requirement, if a provider who is a record 
keeper receives other compensation (e.g., revenue such as subtransfer 
agency fees) and offsets it against its stated fee or gives credits 
against its record-keeping fees (e.g., for the use of mutual funds 
managed by affiliated managers), the record keeper must disclose to 
the responsible plan fiduciary the reasonable costs of the record-
keeping services without the offsets or credits. Generally speaking, 
the reasonable cost is what the provider would charge for those 
services if there was no revenue sharing and if proprietary funds were 
not used. 

Type of disclosure: Additional disclosures required for certain 
investments; 
Requirement[A]: Fiduciary services: In the case of a covered fiduciary 
service provider who manages a separate contract, product, or entity 
that holds plan assets, the provider must disclose the following 
information for each investment in which the plan has a direct equity 
interest, and for which fiduciary services will be provided: 
* a description of any compensation that will be charged directly 
against the amount invested in connection with the acquisition, sale, 
or transfer of, or withdrawal from, the investment contract, product, 
or entity (e.g., sales loads, sales charges, deferred sales charges, 
redemption fees, surrender charges, exchange fees, account fees, and 
purchase fees); 
* a description of the annual operating expenses (e.g., expense 
ratio)--if the return on the investment is not fixed, and; 
* a description of any ongoing expenses in addition to annual 
operating expenses (e.g., wrap fees, mortality and expense fees); 
Record-keeping or brokerage services: In the case of a covered service 
provider who provides record-keeping or brokerage services for a 
participant-directed plan with designated investment options, for each 
designated investment alternative for which record-keeping services or 
brokerage services will be provided, the same information must be 
provided as for fiduciaries (above). 

Source: EBSA's Interim Final Regulations on Service Provider 
Disclosures: 75 Fed. Reg. 41,600. 

[A] The disclosures must contain a description of the manner in which 
the compensation will be received, such as whether the plan will be 
billed or the compensation will be deducted directly from the covered 
plan's accounts or investments. 

[B] Compensation is defined in the regulation as anything of monetary 
value, such as money, gifts, awards, and trips, but excluding 
nonmonetary items of $250 or less received during the term of the 
contract or arrangement. 

[C] Indirect compensation is compensation that is received from any 
source other than the covered plan, the covered plan sponsor, the 
covered service provider, an affiliate of the service provider, or a 
subcontractor of the service provider. 

[End of table] 

While these disclosures may help plan sponsors and EBSA detect and 
deter conflicted investment advice, they may leave out important 
information that could help plan sponsors compare compensation 
arrangements and assess the potential for conflicts of interest. 
Specifically, the interim final regulations do not specify that these 
disclosures be made in any particular manner or format. As a result, 
the disclosures may be made through multiple documents, which could 
reduce their usefulness for plan sponsors and EBSA in detecting 
conflicts of interest given that, as industry experts told us, such 
disclosures can be very complicated and difficult to understand. As 
part of the comment process on these interim final regulations, EBSA 
solicited comments about the feasibility of requiring the disclosures 
to be reported in a consistent and summary format, such as taking the 
form of a summary document, limited to one or two pages, that would 
include key information intended to provide an overview for the 
responsible plan fiduciary of the information required to be 
disclosed.[Footnote 97] The summary also would be required to include 
a road map for the plan fiduciary describing where to find the more 
detailed elements of the disclosures required by the regulation. EBSA 
plans to examine the comments received before it includes this kind of 
requirement in the final regulations. Without being presented in a 
consistent summary format, the disclosure regulations may not be as 
effective as intended. 

Another limitation of these interim final regulations is that they do 
not require that service providers specifically disclose whether they 
have conflicts of interest. Since many conflicts result from the 
payment of money or other items of monetary value, EBSA and others 
have argued that the direct and indirect compensation disclosures 
required by this interim regulation will reveal some conflicts of 
interest. But, while these regulations may provide more compensation 
information to plan sponsors, Labor's OIG told us that the regulations 
do not necessarily ensure that plan sponsors understand how the 
compensation translates into business arrangements with potential 
conflicts of interest. In a recent report, Labor's OIG found that the 
disclosures required by EBSA's interim final regulation would not 
require that conflicts from two of the cases identified in the 2005 
SEC study be disclosed. They pointed to these two cases as examples to 
show how conflicts of interest could go undetected under the interim 
final regulations. As a result, OIG recommended that EBSA require the 
disclosure of all conflicts of interest. In response, EBSA stated that 
it felt that the interim final regulation may already provide this 
requirement through the detailed disclosures of direct and indirect 
compensation and that it was in the process of providing clarifying 
interpretations. Given that plan sponsors must assess conflicts of 
interest when selecting service providers, it is important that such 
conflicts be clearly disclosed. 

In addition, the interim final regulation requires service providers 
to disclose information to plan sponsors, but not participants. 
[Footnote 98] While some of these disclosures may make it to 
participants through various communications by plan sponsors, complete 
information on service provider compensation is not readily available 
to participants. As an attempt to remedy this, EBSA also published 
final regulations on October 20, 2010, designed to improve participant-
level fee disclosure by requiring that plan sponsors provide 
participants core information about investments available under the 
plan, including performance and fee information, in a chart or similar 
format designed to facilitate investment comparisons.[Footnote 99] 

PPA Eligible Investment Advice Arrangement Regulations: 

Many industry experts we interviewed said that investment advice 
arrangements permitted under the PPA should make investment advice 
more widely available to participants; however, some industry experts 
said the established safeguards may not sufficiently address potential 
conflicts of interests on the part of service providers. ERISA 
generally precludes service providers with conflicts of interest from 
furnishing investment advice. However, in an effort to expand the 
availability of investment advice to more participants, the PPA 
created two eligible investment advice arrangements that allow service 
providers who have a conflict of interest to furnish advice to plan 
participants. Specifically, under the PPA, an otherwise conflicted 
service provider may furnish investment advice using either a computer 
model arrangement or a level fee arrangement. 

EBSA proposed regulations in March 2010 to administer these 
requirements of the PPA and received comments from industry 
professionals and other interested parties.[Footnote 100] Several 
industry professionals and service providers submitted comments in 
support of EBSA's efforts to increase participants' access to unbiased 
investment advice and minimize the effects of service providers' 
potential conflicts of interests. However, some industry professionals 
we interviewed expressed concerns about whether the PPA advice 
arrangements sufficiently minimize the risks posed by service 
providers' conflicts of interest since it is possible to embed 
investment biases into computer models, which may be difficult to 
detect even when computer models are audited. For example, an industry 
representative said that adequate monitoring and auditing of computer 
models may be costly and that auditors may not be aware of the various 
ways in which computer models could be manipulated. In addition, 
computer models may be designed to exclude certain types of investment 
options, such as target date funds. If basic investment options 
offered in a plan are excluded from the computer model, the advice 
provided will be based on an incomplete analysis of investment options 
or holdings the participant may have in his or her 401(k) account. The 
exclusion of certain investment options from computer models may have 
the effect of steering participants toward options that may involve 
higher fees. Furthermore, even in the situation where a service 
provider's profits do not vary depending on participants' investment 
decisions, the service provider may nonetheless exhibit a natural bias 
toward its proprietary funds when furnishing fund recommendations to 
participants. 

Conclusions: 

While there are no comprehensive data on the prevalence or impact of 
service providers' conflicts of interest, available evidence suggests 
that there are a broad range of potential conflicts of interests that 
may harm participants and beneficiaries. Numerous industry experts we 
spoke with identified a wide variety of arrangements, often, but not 
always, complex, where conflicts of interest can occur to the possible 
detriment of plans and their participants. The arrangements are often 
designed in a way that makes it difficult for conscientious plan 
sponsors to detect them. Participants rely on the plan and its 
fiduciaries to review the investment options and services provided 
through the plan. Given the potential for financial harm to 
participants, it is important to ensure that plan sponsors, as 
fiduciaries, are aware of whether a conflict of interest exists and 
that the actions of service providers are appropriate. Conflicts of 
interest related to the plan's investment options can negatively 
affect 401(k) participants through higher fees and lower investment 
returns, which, ultimately, reduce their income in retirement. When 
service providers stand to gain from a plan sponsor or participant's 
selection of investment options, it is important to ensure that those 
providers do not have an undue influence over the plan sponsor or 
participant's selection process--or participants' balances could 
suffer. However, the complexity of business arrangements with service 
providers presents significant challenges for plan sponsors to fulfill 
their obligation to identify and mitigate potential conflicts of 
interest and ensure that the plan is operated in the best interest of 
participants. This may be particularly problematic for smaller plans, 
which do not have the resources to hire an independent adviser to 
review their options. The presence of conflicts of interest and the 
potential for financial harm hinder participants' retirement security 
and call into question the integrity of the 401(k) system, and may 
undermine participants' trust and willingness to save for retirement. 

EBSA has a pivotal role in helping plan sponsors ensure that plans are 
operated in participants' best interests. In order to make prudent 
investment decisions, plan sponsors and participants need to 
understand when a service provider is acting in the role of a 
salesperson rather than a fiduciary adviser, required by law to act in 
the best interests of the plan and its participants. It is especially 
important for plan sponsors and participants to know if a service 
provider stands to gain from the selection of particular investment 
options. EBSA has recently taken several important steps to address 
the potential for conflicts of interest in investment advice. In 
particular, EBSA's interim final regulations, which require service 
providers to give enhanced disclosure of compensation arrangements, 
could help plan sponsors more clearly identify potential conflicts of 
interest and the fiduciary status of service providers. These 
regulations should help address the challenges faced by plan sponsors 
and participants. However, unless the disclosures are presented in a 
format that allows for a consistent comparison across investment 
options, it will inhibit the effectiveness of these regulations. If 
changes are not made to current disclosures, plan sponsors will not be 
able to make meaningful comparisons among different funds and 
providers. In addition, given that EBSA's enforcement efforts for 
conflicts of interest focus on service providers rather than plan 
sponsors, EBSA should finalize its proposed regulations to revise the 
current five-part test to better ensure that service providers that 
recommend investment options are subject to ERISA's fiduciary 
standard, and enhance disclosure to plan sponsors when investment 
assistance is not impartial. If the five-part test is not changed, 
service providers may still make investment recommendations to plan 
sponsors without being subject to ERISA fiduciary standards, and 
EBSA's ability to take enforcement actions will continue to be 
limited. Moreover, if disclosures to plan sponsors are not required to 
be made in a consistent and prominent manner, some plan sponsors may 
continue to be unaware of the distinction between ERISA fiduciary 
advice and sales or marketing activities. 

Additional measures are also needed to better ensure that participants 
are protected from the potential consequences of conflicted investment 
advice. To better ensure that participants are not improperly swayed 
by educational communications, requirements for guidance to 
participants on the difference between education and advice may need 
to be evaluated. Without a change in current standards, participants 
may continue to perceive education as advice and make decisions on the 
basis of information communicated by service providers with a 
financial interest in the investment funds. Improved disclosures may 
also be needed to help participants understand whether their service 
provider is acting as a salesperson rather than a fiduciary adviser 
when providing assistance to participants in acquiring financial 
products outside of the plan, such as an IRA rollover. Otherwise, 
participants will continue to be unaware if their plan's service 
provider is not required to provide advice in the best interest of the 
participant and may be earning a commission from these product sales. 
Efforts for improved disclosure may be strengthened through 
coordination with the Department of the Treasury on proposed 
regulations designed to help participants understand the potential 
consequences of moving assets outside of their plan. If no action is 
taken and conflicts of interest persist, participants' confidence and 
willingness to save in the 401(k) system may be weakened and an untold 
number of 401(k) participants may pay unnecessarily high costs, 
through investment fees and IRA rollovers; accrue lower investment 
returns; and have correspondingly less savings available for 
retirement. 

Recommendations for Executive Action: 

To better ensure that plan sponsors and participants can rely on 
impartial information in making investment decisions, we recommend 
that the Secretary of Labor direct the Assistant Secretary for EBSA to 
take the following actions: 

* Amend and finalize proposed regulations to change the definition of 
a fiduciary for purposes of investment advice. Specifically, the 
Secretary should amend the proposed regulations to require that 
service providers' written disclosures specifying that they are not 
undertaking to provide impartial investment advice be provided to the 
plan sponsor in a consistent and prominent manner. 

* Amend and finalize interim final regulations regarding disclosure of 
service providers' direct and indirect compensation from plan 
investments and fiduciary status to require that the information be 
provided in a consistent and summary format. 

* Evaluate and revise Labor's interpretive bulletin on investment 
education, which is important in helping participants and 
beneficiaries make investment decisions. Specifically, in light of 
current practices, the Secretary should revise current standards, 
which permit a service provider to highlight certain investment 
alternatives, such as proprietary funds, which may result in greater 
revenue to the service provider, in educational materials. Labor could 
consider a variety of steps to address this potential conflict of 
interest, such as requiring service providers to disclose that they 
may have a financial interest in the options highlighted or 
prohibiting them from using proprietary funds as examples. 

* Require that service providers, when assisting participants with the 
purchase of investment products offered outside of their plan, 
disclose in a consistent and prominent manner, either before or at the 
point of sale, any financial interests they may have in the outcomes 
of such transactions and inform participants as to whether their 
assistance is subject to ERISA fiduciary standards. 

In addition, to better ensure that plan participants have sufficient 
information when deciding whether to move plan funds into investment 
alternatives outside their plan, we recommend that the Secretary of 
the Treasury amend the applicable requirements of its proposed 
disclosure rule to specifically require that service providers, when 
recommending the purchase of investment products outside retirement 
plans, inform plan participants that fees applicable outside their 
plans may be higher than fees applicable within their plans. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Department of Labor, SEC, 
and Treasury for their review. Treasury generally agreed with our 
recommendation to amend its proposed disclosure rule to specify that 
fees applicable for investment products outside of plans may be higher 
than fees applicable within plans. Treasury and SEC also provided 
technical comments, which we have incorporated where appropriate. 

Overall, Labor generally agreed with our findings and to consider our 
recommendations as it conducts a review of these issues and evaluates 
public comments received on pending regulations. Labor noted that the 
interim final regulation to require enhanced disclosure of service 
providers' compensation arrangements represents significant progress 
and disagreed with our conclusion that these disclosures will not be 
effective unless they are presented in a format that allows for a 
consistent comparison across investment options. We concur that the 
disclosures required by this regulation would provide plan sponsors 
with valuable information and could enhance their ability to evaluate 
potential conflicts of interest. However, industry experts we spoke 
with noted that such disclosures can be very complicated and difficult 
to understand. Furthermore, as Labor has previously pointed out in the 
interim final rule regarding fee disclosure (75 Fed. Reg. 41,600), in 
the absence of a summary format, a service provider can fulfill this 
requirement by providing different documents from separate sources. 
Providing disclosures in multiple formats in different documents will 
inhibit the effectiveness of this regulation, particularly for plans 
that do not have the requisite expertise or the resources to hire an 
independent adviser to review their options. 

Additionally, Labor noted that GAO did not conduct a cost-benefit 
analysis of recommendations to address potential conflicts of 
interest. GAO conducts its work in response to congressional requests 
for information and employs a variety of qualitative and quantitative 
methodologies in carrying out our mission. We choose these 
methodologies based on a variety of factors and constraints, such as 
the scope of our research objectives, availability of reliable data, 
costs and time constraints, as well as other considerations. We 
acknowledge that there are a number of options Labor could consider 
for the format of a summary disclosure and we agree that this 
requirement should be implemented at minimal cost to service providers 
and sponsors. We support Labor's following the appropriate 
administrative procedures in conducting its regulatory reviews and 
initiatives, including conducting a cost-benefit analysis. In this 
context, we wish to reiterate our past concerns about the harm plan 
participants can experience from undisclosed conflicts of interest. 
For example, as we reported in 2007, our analysis of available data on 
pension consultants and DB plans revealed a statistical association 
between inadequate disclosure of conflicts of interest and lower 
investment returns for ongoing plans. We also note that disclosing 
potential conflicts of interest in a manner that is readily apparent 
could benefit EBSA's oversight and enforcement efforts. Further, if 
Labor found the cost to service providers in preparing a summary 
document to be significant, this would also point to the difficulty 
that plan sponsors would have in extracting this information from 
multiple documents to obtain consistent information to allow for 
comparisons across different investment options and providers. 

Labor also noted, regarding our recommendation to revise the 
interpretive bulletin on investment education, that current standards 
take a number of steps to limit the potential for abuse and Labor 
would need to evaluate several factors in considering any changes. 
While we concur that the interpretive bulletin includes several 
requirements to address the potential for conflicts of interest, it 
does not specifically alert participants when the service provider has 
a financial interest in investment options highlighted as examples, 
nor does it state that these examples do not constitute investment 
advice. Without an explicit disclaimer to this effect, participants 
may believe that providers are giving investment advice that is in 
participants' best interests, even in situations where this may not be 
the case. We look forward to Labor's evaluation of this issue and 
options to address it. 

Finally, Labor noted that it may not have the authority to act on our 
recommendation to require service providers to disclose financial 
interests they may have in the sale of financial products outside of 
the plan, such as IRA rollovers. In the recently proposed regulation 
to amend the definition of an ERISA fiduciary, Labor noted concerns 
that participants may not be adequately protected from advisers who 
provide distribution recommendations that subordinate participants' 
interests to the advisers' own interests and solicited comments on 
possible actions to take to address this issue. We look forward to 
Labor's evaluation of whether or not it has the authority to address 
conflicts of interest related to the sale of financial products 
outside of the plan. If Labor determines that it does not have the 
authority to act in this area, it may be appropriate for Congress to 
consider possible legislative remedies. In the absence of any action 
to address this issue, participants may continue to be unaware when 
their plan's service provider stands to gain from the sale of IRA 
rollovers and other financial products outside of the plan. 

Labor also provided technical comments on the draft report, which we 
have incorporated where appropriate. 

As arranged with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days from the date of this letter. At that time, we will send 
copies to the Secretary of Labor, Secretary of the Treasury, and 
Chairman of the Securities and Exchange Commission. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-7215. Contact points for our Office of 
Congressional Relations and Office of Public Affairs may be found on 
the last page of this report. GAO staff that made major contributions 
to this report are listed in appendix V. 

Sincerely yours, 

Signed by: 

Charles A. Jeszeck, Director: 
Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Scope and Methodology: 

To determine the circumstances where conflicted investment advice may 
be provided to plan sponsors, we analyzed available research and 
documentation, including a report from the Securities and Exchange 
Commission (SEC), industry white papers, and documentation from the 
Department of Labor (Labor) and SEC cases pertaining to service 
provider conflicts of interest. We also interviewed industry 
professionals; pension consulting firms and other service providers; 
officials from Labor, SEC, the Department of the Treasury, the 
Financial Industry Regulatory Authority, and the Securities Industry 
and Financial Markets Association; and other relevant organizations. 
To determine how the fiduciary duty of the Employee Retirement Income 
Security Act of 1974 (ERISA) applies to investment advice provided to 
plan sponsors and the scope of ERISA's prohibited transactions rule, 
we reviewed relevant laws, including ERISA securities laws, 
regulations, and Labor advisory opinions, and interviewed industry 
professionals. As part of our research, we reviewed available 
information, including a report from Labor's Office of Inspector 
General, and conducted interviews with industry professionals and 
Labor officials to determine the extent to which advisers to plan 
sponsors are considered ERISA fiduciaries. 

To determine the circumstances where conflicted investment advice may 
be provided to plan participants, we reviewed available literature and 
interviewed industry professionals and plan service providers. 
Additionally, we reviewed relevant statutes, including ERISA and the 
Pension Protection Act of 2006 (PPA), as well as regulations 
promulgated by Labor to understand where applicable law draws the 
distinction between investment education and advice. To determine what 
is known about the extent to which plan participants have access to 
investment education and advice, and to identify the common formats 
for furnishing such information, we reviewed available data from 
industry studies and conducted a poll of plan sponsors and service 
providers, as described below: 

* We reviewed data from the Profit Sharing/401(k) Council of America's 
(PSCA) 2008 survey of retirement plans (published in 2009, but 
reflecting 2008 plan experience). The results of PSCA's 2008 survey 
are based on the experiences of 908 plans--including 28 profit-sharing 
plans, 607 401(k) plans, and 273 combination profit-sharing/401(k) 
plans--with 7.4 million participants. The plans that participated in 
PSCA's survey range in size from 1 participant to 5,000-plus 
participants. PSCA is a nonprofit association of 1,200 companies that 
sponsor defined contribution plans for 5 million employees. PSCA 
represents the interests of its members and offers assistance with 
profit-sharing and 401(k) plan design, administration, investment, 
compliance, and communication. 

* In addition to reviewing industry data to assess the availability of 
investment education and advice for plan participants, we created an 
online questionnaire in coordination with the Society of Human 
Resource Management (SHRM) and the Society of Professional Asset-
Managers and Record Keepers (SPARK). In the questionnaire, we asked 
plan sponsors that are members of SHRM and service providers that are 
members of SPARK whether investment education and advice are provided 
to plan participants, the format for delivering such information, and 
whether investment products and services unrelated to plans are 
marketed to participants. We implemented the Web-based questionnaire 
with SPARK members using our Web application, while SHRM implemented 
the questionnaire with its members using SHRM's Web application. SHRM 
and SPARK officials solicited responses from their members by 
distributing, to their members, our e-mail introducing the study, 
describing the question topics, and directing members to an Internet 
address for the questions. SHRM and SPARK officials also sent out 
periodic reminders about the questionnaire over several weeks between 
July 2010 and August 2010. SHRM distributed the introductory e-mail 
among 2,698 of its members, and SPARK distributed the e-mail among its 
board members, which included representatives from every SPARK member 
organization (over 250 companies). In total, 700 members--627 from 
SHRM and 73 from SPARK--responded to the questionnaire. The survey 
results are not representative of the general plan sponsor and service 
provider populations because our respondent population excludes plan 
sponsors that are not members of SHRM and service providers that are 
not members of SPARK. Because of the methodological limitations 
associated with deploying these questions, information obtained 
represents only the views of the respondents, not the overall 
population of 401(k) plan sponsors and service providers. In addition, 
we took steps in the development of the questions to minimize the 
variability of survey results. Prior to administering the 
questionnaire, the questions were reviewed by an independent survey 
expert in our methodology group and officials from SHRM and SPARK. We 
made changes to the content and format of the questionnaire based on 
reviewers' feedback. 

* To analyze the incidence of IRA rollovers among plan participants, a 
circumstance in which conflicted investment assistance may be provided 
to plan participants, we collected and analyzed industry data from 
three sources to determine the frequency with which plan participants 
are rolling plan funds into IRAs: 

- The Survey of Income and Program Participation (SIPP), which is a 
survey conducted by the U.S. Census Bureau. The main objective of the 
SIPP is to provide accurate and comprehensive information about the 
income and program participation of individuals and households in the 
United States. The SIPP is conducted on a continuous series of 
national panels, with durations from 2˝ to 4 years, with sample size 
ranging from approximately 14,000 to 36,700 interviewed households. 
The SIPP sample is a multistage-stratified sample of the U.S. 
civilian, noninstitutionalized population. We used data from the 2004 
topical module 7 survey and extracted survey responses to determine 
the percentage of survey respondents who took cash distributions from 
their retirement plans and rolled distributed funds into individual 
retirement accounts (IRA). In particular, we used variables EPREVLMP 
(for survey respondents who have ever received a lump-sum payment from 
a pension or retirement plan from a previous job, including any lump 
sums that may have been directly rolled over to another plan or to an 
IRA) and ELMPWHER, answer choice IRA (for survey respondents who 
rolled lump-sum payments into IRAs). The 2004 SIPP survey results are 
based on responses from people surveyed in different waves over a 2 ˝-
year period, with survey interviews lasting into 2006. Specifically, 
for wave 7, interviews were conducted from February 2006 to May 2006. 
Results are generalizable to the population at the time of survey. 

- The Investment Company Institute (ICI) is the national association 
of U.S. investment companies, and it works to promote public 
understanding of mutual funds and other investment companies. ICI 
publishes statistics on the U.S. retirement market every quarter as an 
information resource for mutual fund companies, the media, 
policymakers, and researchers. ICI combines data from its own mutual 
fund survey database and from other trade associations with data from 
the U.S. Department of Labor, the Federal Reserve Board, and the 
Internal Revenue Service (IRS) to compile detailed IRA asset 
information, including the portions of funds flowing into IRAs from 
rollovers and contributions. Total IRA market assets are derived from 
tabulations of total IRA assets provided by the IRS Statistics of 
Income Division for tax years 1989, 1993, 1996-2002, and 2004; with 
preliminary data provided for 2006 and 2007. Tabulations are based on 
a sample of IRS returns. GAO did not conduct any direct analysis of 
ICI data. 

- Three service providers that service defined contribution plans also 
compiled proprietary data on what happens to plan participants' 
defined contribution plan funds when participants terminated their 
retirement plans. Results from service provider 1 were based on 
976,600 terminated participants in the provider's defined contribution 
retirement plan services from March 1, 2005, through May 31, 2010. 
Results from service provider 2 were based on 9,790 terminated 
participants in the provider's retirement plan services 401(k) plans 
from January 1, 2008, through March 31, 2009. Results from service 
provider 3 were based on participants with termination dates in 2008. 
The universe consisted of more than 3 million participants from more 
than 2,200 plans. In addition, the proprietary data from plan service 
providers are not generalizable to the universe of retirement plan 
participants. However, the results are consistent with and corroborate 
each other. 

We assessed the reliability of the data we present and found the data 
to be sufficiently reliable as used in this report. 

To describe the steps that Labor has taken to address conflicts of 
interest, we reviewed documentation of Labor's enforcement activities 
related to conflicted investment advice practices. We also reviewed 
past GAO and Labor Inspector General reports and interviewed Labor 
officials to evaluate the adequacy of Labor's enforcement efforts to 
prevent conflicted investment advice. In addition, we reviewed 
documentation from Labor and industry participants related to three 
recent or soon-to-be-released Labor regulations: (1) a proposed rule 
amending the definition of ERISA fiduciary duty regarding investment 
advice (published in October 2010), which would amend the regulatory 
definition of the fiduciary duty for plan investment advisers to 
include pension consultants and other plan advisers who do not fall 
under the current regulatory definition; (2) an interim final rule 
regarding service provider disclosures of direct and indirect 
compensation to plan sponsors (issued in July 2010); and (3) PPA 
eligible investment advice arrangements (issued in March 2010), which 
fall under a statutory exemption to the ERISA prohibited transactions 
rule. Finally, we interviewed Labor officials to discuss the scope of 
each regulation and key features that may mitigate conflicts of 
interest. 

We conducted our review from January 2010 through January 2011 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Common Formats for Delivering Investment Education and 
Advice: 

Investment education and advice may be provided to participants in 
different formats, most commonly through brochures or other written 
materials and computer modeling. Other formats for providing education 
or advice include one-on-one sessions with service providers and 
seminars and workshops. A number of studies have been conducted about 
the availability of investment assistance for participants; however, 
these studies do not always discern whether participants are provided 
investment education or advice.[Footnote 101] According to a poll of 
401(k) plan sponsors and service providers that we conducted in 
coordination with SHRM and SPARK, investment education is more 
commonly offered than investment advice, although many respondents 
offered both.[Footnote 102] As shown in figure 6, of the 475 SHRM 
respondents who sponsored a 401(k) plan, 380 provided investment 
education and 215 provided investment advice. Of these respondents, 
202 provided both education and advice. Among respondents, brochures 
or other written materials were the most commonly used formats for 
delivering education and advice. Computer modeling, including Web-
based tools, was the second most common method of delivery reported. 
Industry research by an organization of 401(k) and profit-sharing 
plans yielded similar results, with 51.8 percent of plans providing 
investment advice to plan participants and with 28.3 percent of 
participants using advice when it was offered.[Footnote 103] Among 
plans providing investment advice, the most common methods of delivery 
are one-on-one counseling sessions, Internet providers (including 
those with computer modeling programs), and telephone hotlines. 
[Footnote 104] Industry survey results also indicate that smaller 
plans with fewer than 50 participants are more likely to use one-on-
one counseling sessions, while larger plans of 5,000-plus participants 
tend to use Internet providers.[Footnote 105] 

Figure 6: GAO Poll Results from SHRM Respondents: 

[Refer to PDF for image: horizontal bar graph] 

Number of respondents: 

Sponsor a 401(k) plan: 
Education activities: 
Yes: 475; 
No: 78; 
No answer: 74. 

Provide investment education: 
Education activities: 
Yes: 380; 
No: 28; 
No answer: 219. 

Provide investment advice: 
Advice activities: 
Yes: 215; 
No: 155; 
No answer: 257. 

Use brochures or other written materials: 
Education activities: 
Yes: 359; 
No: 4; 
No answer: 264; 
Advice activities: 
Yes: 166; 
No: 30; 
No answer: 431. 

Use computer modeling, including Web-based tools: 
Education activities: 
Yes: 316; 
No: 26; 
No answer: 285; 
Advice activities: 
Yes: 158; 
No: 26; 
No answer: 433. 

Use call centers and/or help desks: 
Education activities: 
Yes: 303; 
No: 38; 
No answer: 286; 
Advice activities: 
Yes: 145; 
No: 45; 
No answer: 437. 

Use group seminar: 
Education activities: 
Yes: 284; 
No: 58; 
No answer: 285; 
Advice activities: 
Yes: 108; 
No: 73; 
No answer: 446. 

Use one-on-one sessions: 
Education activities: 
Yes: 207; 
No: 112; 
No answer: 308; 
Advice activities: 
Yes: 140; 
No: 46; 
No answer: 441. 

Use managed accounts: 
Advice activities: 
Yes: 135; 
No: 40; 
No answer: 452. 

Source: GAO analysis of GAO questionnaire. 

[End of figure] 

[End of section] 

Appendix III: Types of Computer Model Advice Arrangements: 

Computer models can be used to render investment advice to 
participants in three different arrangements: (1) the direct service 
arrangement, (2) the SunAmerica arrangement, and (3) the PPA computer 
model arrangements. As shown in figure 7, the direct service 
arrangement is utilized when a plan sponsor contracts directly with an 
independent advisory firm, which develops a computer model that 
renders advice to plan participants. The independent advisory firm 
should not be affiliated with any investment fund or accept payments 
from funds that its model recommends as investment options. 
Accordingly, the firm should operate without a vested interest in its 
recommendations and not incur any conflicts of interest. 

Figure 7: The Direct Service Model Advice Arrangement: 

[Refer to PDF for image: illustration] 

The direct service model: 

Plan sponsor: 
May contract with: 
Third-party advice provider (independent fiduciary); 
who advises: 
Plan participant. 

Source: GAO analysis of information from industry practitioners. 

[End of figure] 

For advice arrangements where providers offer their own investment 
funds and thus have a conflict of interest, Labor has set forth 
specific requirements under which these providers may offer investment 
advice. As shown in figure 8, the SunAmerica arrangement allows the 
service provider to contract with an independent advisory firm to 
develop and administer a computer model to provide investment advice. 
Because the primary service provider may have a conflict of interest 
for certain investment options offered to participants, Labor requires 
that, among other things, the independent financial expert--who is not 
the primary service provider--develop and maintain the computer model 
that renders advice to participants solely in the interest of plan 
participants. 

Figure 8: The SunAmerica Advice Arrangement: 

[Refer to PDF for image: illustration] 

The SunAmerica model: 

Plan sponsor: 
may contract with: 
Primary service provider; 
who contracts with: 
Third-party advice provider (independent fiduciary); 
who advises: 
Plan participant. 

Legal basis for model: In December 2001, Labor issued an advisory 
opinion (2001-09A), in response to a request by SunAmerica Retirement 
Markets Inc., asking if a retirement plan provider could hire an 
independent third party to provide participants in a 401(k) plan with 
investment advice using asset allocation models. 

Labor, in the advisory opinion, specified that such advice 
arrangements were allowed as long as: 

* the asset allocation model is developed and maintained by an 
independent financial expert. 

* the independent financial expert develops the asset allocation model 
solely in the interest of participants. 

* participants are free to use or disregard any investment advice 
generated by the model 

GAO analysis of information from industry practitioners and Labor's 
advisory opinion. 

[End of figure] 

As shown in figure 9, the PPA computer model arrangement, on the other 
hand, allows the service provider to develop the computer model in-
house, subject to certain requirements the PPA has established to 
address the service provider's conflict of interest.[Footnote 106] 

[Refer to PDF for image] 

[End of figure] 

Figure 9: The PPA Computer Model Advice Arrangement: 

[Refer to PDF for image: illustration] 

The PPA computer model: 

Plan sponsor: 
may contract with: 
Primary service provider; 
who directly advises; 
Plan participant. 

Legal basis for model: The Pension Protection Act (PPA) of 2006 
provided two eligible investment advice arrangements (EIAAs), in the 
form of statutory exemptions from ERISA’s prohibited transaction 
rules, for fiduciaries who might otherwise have conflicts of interests 
when rendering investment advice. 

* The PPA computer-model arrangement allows advice to be provided to 
participants or beneficiaries using a computer model that, among other 
things, is certified by an eligible investment expert and audited 
annually by an independent auditor. 

* The PPA fee-leveling arrangement allows advice to be provided to 
participants or beneficiaries by an adviser whose compensation does 
not vary depending on the basis of any investment option selected by 
plan participants or beneficiaries. Labor has stated that such 
requirement do not extend to fiduciaries’ affiliates. 

PPA provisions set forth compliance requirements for both of these 
arrangements. In addition, Labor is finalizing proposed regulations 
pursuant to the PPA to outline additional technical requirements for 
PPA EIAAs (75 Fed. Reg. 9360-70 (March 2, 2010)). 

GAO analysis of information from industry practitioners and Labor's 
proposed regulation. 

[End of figure] 

Labor has proposed regulations that would allow a primary service 
provider to develop and maintain the computer model that renders 
advice to participants if, among other things, the model has been 
certified by an independent financial expert and undergoes annual 
audits. Therefore, unlike the direct service or SunAmerica 
arrangements, where an independent advice provider is the creator of a 
computer model that renders advice to participants, the PPA computer 
model arrangement bypasses the independent advice provider and allows 
the primary service provider to create the computer model that renders 
advice to participants. In addition to permitting the use of the 
computer modeling advice arrangement, the PPA also permits a level fee 
advice arrangement, which allows a provider who may otherwise have a 
conflict of interest--such as a provider whose proprietary funds are 
part of a plan's investment lineup--to furnish investment advice to 
participants. Specifically, Labor's proposed regulations specify that 
a provider may furnish advice to participants if the provider's fees 
do not vary depending on participants' investment decisions. A Labor 
publication indicates that the level fee requirement applies to the 
service providers' representatives and their employers, but not their 
affiliates.[Footnote 107] 

[End of section] 

Appendix IV: Comments from the Department of Labor: 

U.S. Department of Labor: 
Assistant Secretary for	Employee Benefits Security Administration: 
Washington, D.C. 20210: 

January 4, 2011: 

Mr. Charles A. Jeszeck: 
Director, Education, Workforce, and Income Security Issues: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Jeszeck: 

Thank you for the opportunity to review the Government Accountability 
Office's (GAO) draft report entitled "Improved Regulation Could Better 
Protect Participants from Conflicts of Interest." 

The draft report points to various conflicts of interest that can 
arise in the benefits area, acknowledges certain steps the Department 
has taken, through both enforcement and regulation, to mitigate such 
conflicts, and recommends that the Department take certain additional 
steps. The report does not attempt to assess the prevalence of 
conflicts, the degree of harm that results from them, the degree to 
which its recommendations would mitigate conflicts or avert harms, nor 
the costs attendant to its recommendations. 

The Department believes efforts to mitigate conflicts must weigh the 
potential harms from conflicts against the costs and benefits such 
efforts will yield for participants. The Department's efforts also 
must fall within its authority. 

With respect to the specific recommendations for executive action, we 
submit the following. 

GAO recommendation: Amend and finalize proposed regulations to change 
the definition of a fiduciary for purposes of investment advice. 
Specifically, the Secretary should amend the proposed regulations to 
require that service providers' written disclosures specifying that 
they are not undertaking to provide impartial investment advice, be 
provided to the plan sponsor in a consistent and prominent manner. 

The Department cannot agree to any specific recommendation in advance 
of its completing consideration of all the public comments received on 
the proposed regulation. We note, however, that the specific 
recommendation appears to be consistent with the goals of the 
Department's proposed regulation, i.e., to ensure that plan 
fiduciaries can distinguish sales pitches from impartial advice. See 
paragraphs (c)(2)(i) and (ii)(B) and (C) of § 2510.3-21 of the 
proposed regulation (75 FR 65263, October 22, 2010) for the 
requirements specifically addressing this issue. 

GAO recommendation: Amend and finalize interim final regulations 
regarding disclosure of service providers' direct and indirect 
compensation from plan investments and fiduciary status to require 
that information be provided in a consistent and summary format. 

The Department cannot agree to any specific recommendation in advance 
of its completing consideration of all the public comments received on 
the interim-final regulation. Nonetheless, we wish to note our 
disagreement with GAO's conclusion that absent a requirement to 
provide consistent summaries, disclosures under the interim final rule 
"will not be effective" nor will plan sponsors be able to make 
"meaningful comparisons between different funds and providers." To the 
contrary, the. Department believes that the regulation represents a 
significant step forward in ensuring that plan fiduciaries receive the 
information necessary to assess the reasonableness of compensation to 
be paid for services and potential conflicts of interest that might 
affect the quality of those services. Having said that, the Department 
currently is assessing the advisability of requiring a summary 
disclosure or similar tool to assist plan fiduciaries with the 
information they receive from service providers. In issuing its 
interim final rule under ERISA Section 408(b)(2) the Department 
requested comment on the costs and benefits of such a requirement. The 
Department would welcome any information GAO can provide on such costs 
and benefits. In particular, is there a particular disclosure format 
that can be demonstrated to deliver benefits that justify its cost? 

GAO recommendation: Evaluate and revise Labor's interpretive bulletin 
on investment education, which is important in helping participants 
and beneficiaries make investment decisions. Specifically, in light of 
current practices, the Secretary should revise current standards which 
permit a service provider to highlight certain investment 
alternatives, such as proprietary funds, which may result in greater 
revenue to the service provider, in educational materials. Labor could 
consider a variety of steps to address this potential conflict of 
interest, such as requiring service providers to disclose that they 
may have a financial interest in the options highlighted or 
prohibiting them from using proprietary funds as examples. 

The Department cannot agree to any specific recommendations because it 
has not yet completed its review of whether or to what extent the 
Interpretive Bulletin should be modified. In its consideration of 
these issues, however, it is worthwhile to ask to what extent 
participants treat examples as they would advice, to what extent such 
behavior is harmful, and to what extent such behavior would be 
reduced, and attendant harm averted, by disclosure of potential 
conflicts. It is likewise worthwhile to consider whether stricter 
rules for education could adversely affect its availability or 
utility. The Department will consider whether, in light of the 
foregoing questions, GAO's recommendation would be likely to help 
participants make better choices. The Department also notes that 
currently, where specific investment options are used to populate an 
investment education tool, Interpretive Bulletin 96-1 (29 CFR § 
2509.96-1) seeks to limit the potential for abuse by providing, inter 
alia, that the model has to be 1) based on generally accepted 
investment theories, 2) accompanied by all the material facts and 
assumptions on which it is based, 3) accompanied by a statement that 
other investment alternatives having similar risks and return 
characteristics may be available under the plan and identifying where 
information on those alternatives may be obtained, and 4) accompanied 
by a statement indicating that, in applying particular asset 
allocation models to their individual situations, participants or 
beneficiaries should consider their other assets, income and 
investments. 

GAO recommendation: Require that service providers, when assisting 
participants with the purchase of investment products outside of their 
plan, disclose in a consistent and prominent manner, either before or 
at the point of sale, any financial interests they may have in the
outcomes of such transactions and inform participants as to whether 
their assistance is subject to ERISA fiduciary standards. 

The Department cannot agree to any specific recommendation in advance 
of its completing consideration of all the public comments received on 
the proposed amendments to the fiduciary definition regulation. As the 
GAO is aware, the Department invited comment on issues related to the 
GAO's recommendation. We note, however, that the report does not 
explain how this recommendation fits within the Department's authority 
or the degree to which some of the recommended disclosures may already 
be required independent of ERISA. The Department will evaluate these 
questions. 

Again, thank you for the opportunity to review the draft report. 
Should you or your staff have any questions concerning the statements 
or requests contained herein, please do not hesitate to contact us. 

Sincerely, 

Signed by: 

Phyllis C. Borzi: 
Assistant Secretary: 

[End of section] 

Appendix V: GAO Contacts and Acknowledgments: 

GAO Contact: 

Charlie Jeszeck (202) 512-7215: 

Acknowledgments: 

In addition to the contact named above, Tamara Cross, Assistant 
Director; Sharon Hermes, Analyst-in-Charge; Jessica Gray; and Kun-Fang 
Lee made important contributions throughout this report. 

Susan Baker, James Bennett, Susan Bernstein, Rachel DeMarcus, Cody 
Goebel, Ying Long, Sheila McCoy, Karen O'Conor, Roger Thomas, and 
Walter Vance also provided key support. 

[End of section] 

Related GAO Products: 

Private Pensions: Changes Needed to Provide 401(k) Plan Participants 
and the Department of Labor Better Information on Fees. [hyperlink, 
http://www.gao.gov/products/GAO-07-21]. Washington, D.C.: November 16, 
2006. 

Employee Benefits Security Administration: Enforcement Improvements 
Made but Additional Actions Could Further Enhance Pension Plan 
Oversight. [hyperlink, http://www.gao.gov/products/GAO-07-22]. 
Washington, D.C.: January 18, 2007. 

Defined Benefit Pensions: Conflicts of Interest Involving High Risk or 
Terminated Plans Pose Enforcement Challenges. [hyperlink, 
http://www.gao.gov/products/GAO-07-703]. Washington, D.C.: June 28, 
2007. 

Private Pensions: Fulfilling Fiduciary Obligations Can Present 
Challenges for 401(k) Plan Sponsors. [hyperlink, 
http://www.gao.gov/products/GAO-08-774]. Washington, D.C.: July 16, 
2008. 

Private Pensions: Conflicts of Interest Can Affect Defined Benefit and 
Defined Contribution Plans. [hyperlink, 
http://www.gao.gov/products/GAO-09-503T]. Washington, D.C.: March 24, 
2009. 

Retirement Savings: Better Information and Sponsor Guidance Could 
Improve Oversight and Reduce Fees for Participants. [hyperlink, 
http://www.gao.gov/products/GAO-09-641]. Washington, D.C.: September 
4, 2009. 

Defined Contribution Plans: Key Information on Target Date Funds as 
Default Investments Should be Provided to Plan Sponsors and 
Participants. [hyperlink, http://www.gao.gov/products/GAO-11-118]. 
Washington, D.C.: January 25, 2011. 

[End of section] 

Footnotes: 

[1] A plan sponsor, often the employer offering a 401(k) plan, hires 
companies to provide a number of services necessary to operate a plan. 
Services can include fund management (i.e., selecting and managing the 
securities included in a mutual fund), consulting and investment 
advice (i.e., selecting vendors for investment options or other 
services, such as record keeping), record keeping (i.e., tracking 
individual account contributions), custodial or trustee services for 
plan assets (i.e., hold the plan assets in a bank), and telephone or 
Web-based customer services for participants. 

[2] GAO, Private Pensions: Changes Needed to Provide 401(k) Plan 
Participants and the Department of Labor Better Information on Fees, 
[hyperlink, http://www.gao.gov/products/GAO-07-21] (Washington, D.C.: 
Nov. 16, 2006). 

[3] U.S. Bureau of Labor Statistics. National Compensation Survey of 
Employee Benefits in the United States, March 2009. Percentages can be 
attributed to the overall private industry workforce, not just those 
of private industry employees with access to defined contribution 
plans. 

[4] See Investment Company Institute, FAQs & Resource Centers: 
"Frequently Asked Questions about 401(k) Plans," at [hyperlink, 
http://www.ici.org/faqs/faqs_401k]. A worker that actively 
participated in a 401(k) plan may participate in more than one DC plan 
and also might participate in a DB plan in addition to his or her 
401(k) plan. 

[5] See Alicia H. Munnell et al., Investment Returns: Defined Benefit 
vs. 401(k) Plans. (Chestnut Hill, Mass. 2006); Watson Wyatt, "Defined 
Benefit vs. 401(k0 Plans: Investment Returns for 2003-2006," at 
[hyperlink, 
http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=191
48]; and Waring and Siegal, "Wake Up and Smell the Coffee! DC Plans 
Aren't Working: Here's How to Fix Them," Journal of Investing (Winter 
2007). 

[6] See, e.g., Annamaria Lusardi and O. S. Mitchell, Working Paper: 
"Financial Literacy and Planning: Implications for Retirement 
Wellbeing," University of Pennsylvania, Wharton School of Business, 
Pension Research Council (October 2006); Annamaria Lusardi and O. S. 
Mitchell, "Baby Boomer Retirement Security: The Roles of Planning, 
Financial Literacy, and Housing Wealth," 54 J, Monetary Economics 205, 
205-24 (2007); Annamaria Lusardi, "Household Savings Behavior: The 
Role of Financial Literacy, Information, and Financial Education 
Programs," Policymaking Insights from Behavioral Economics (Dartmouth 
College and NBER 2008); A. Hung, et al., Working Paper: "Building Up, 
Spending Down: Financial Literacy, Retirement Savings Management, and 
Decumulation," RAND Corporation (2009); "Bridging the Gap Between 
Employers' and Workers' Understanding of 401(k) Fees," TransAmerica 
Center for Retirement Studies (July 2010). 

[7] Lusardi, "Household Savings Behavior: The Role of Financial 
Literacy, Information, and Financial Education Programs," 2. 

[8] TransAmerica Center for Retirement Studies, "Bridging the Gap 
Between Employers' and Workers' Understanding of 401(k) Fees," 10. 

[9] 29 C.F.R. § 2509.96-1(d). 

[10] SEC Office of Compliance Inspections and Examinations, Staff 
Report Concerning Examinations of Select Pension Consultants 
(Washington, D.C.: May 16, 2005). 

[11] GAO, Defined Benefit Pensions: Conflicts of Interest Involving 
High Risk or Terminated Plans Pose Enforcement Challenges, [hyperlink, 
http://www.gao.gov/products/GAO-07-703] (Washington, D.C.: June 28, 
2007). 

[12] According to the SEC report, the pension consultants examined 
represented a cross section of the pension consultant community and 
varied in size (measured in terms of the number and size of their 
pension plan clients) and the type of products and services they 
offered. About half of the pension consultants examined were among the 
largest pension consulting service providers, measured in terms of the 
assets of the plans they advise. The remainder of the sample consisted 
of medium and smaller consultants. Since the consultants were not 
selected randomly, this sample cannot be generalized to the population 
of pension consultants. See, also [hyperlink, 
http://www.gao.gov/products/GAO-07-703]. GAO worked with SEC to obtain 
data to conduct a statistical analysis of rates of return associated 
with the consultants examined in SEC's study, including the 13 
consultants identified by the SEC as having undisclosed conflicts of 
interest. 

[13] In addition, the law states that a person acts as a fiduciary 
when he or she exercises any discretionary control or authority over 
plan management or any authority or control over plan assets, or has 
any discretionary authority or responsibility in the administration of 
a plan. 29 U.S.C. § 1002(21)(A). 

[14] On October 22, 2010, EBSA proposed regulations that would 
eliminate the five-part test described here. These regulations, which 
would encompass certain advisory relationships not currently covered 
under the five-part test, have not been finalized, and as a result, 
the five-part test was in effect when our work was conducted and the 
regulations are still in effect as of the issuance date of this 
report. Definition of the Term "Fiduciary," 75 Fed. Reg. 65,263 
(October 22, 2010)(to be codified at 29 C.F.R. pt. 2510). 

[15] 29 C.F.R § 2510.3-21(c). 

[16] ERISA's prudent man standard of care is articulated by the 
requirement that a fiduciary shall discharge his duties with respect 
to a plan solely in the interest of the participants and beneficiaries 
and for the exclusive purpose of providing benefits to participants 
and their beneficiaries and defraying reasonable expenses of 
administering the plan. In addition, the fiduciary is required to act 
with the care, skill, prudence, and diligence under the circumstances 
then prevailing that a prudent man acting in a like capacity and 
familiar with such matters would use in the conduct of an enterprise 
of a like character and with like aims. Furthermore, the fiduciary is 
to diversify the investments of the plan so as to minimize the risk of 
large losses, unless under the circumstances it is clearly not prudent 
to do so, and act in accordance with the documents and instruments 
governing the plan insofar as such documents and instruments are 
consistent with the provisions of Title I and Title IV of ERISA. 29 
U.S.C. § 1104(a)(1). 

[17] 29 U.S.C. § 1106. There are two main categories of prohibited 
transactions: (1) transactions between a plan and a party in interest 
and (2) fiduciary self-dealing. ERISA also provides, however, a number 
of detailed exemptions to these prohibitions and permits Labor to 
establish administrative exemptions as well. 29 U.S.C. § 1108. 

[18] Under self-dealing prohibited transaction rules, fiduciaries are 
prohibited from (1) dealing with plan assets for his or her own 
interest or for his or her own account, (2) acting adverse to the plan 
in a transaction involving the plan, and (3) receiving consideration 
from a party dealing with the plan in a transaction involving plan 
assets. 29 U.S.C. § 1106(b). 

[19] The preamble to the interim final regulations of July 16, 2010 
under 29 C.F.R. § 2550.408b-2 provide that "[t]he Department notes, 
however, that…ERISA § 404(a) continues to obligate fiduciaries to 
obtain and consider information relating to the cost of plan services 
and potential conflicts of interest presented by such service 
arrangements." Reasonable Contract or Arrangement Under Section 
408(b)(2)--Fee Disclosure; Interim Final Rule, 75 Fed. Reg. 41,600 
(July 16, 2010) (to be codified at 29 C.F.R. pt. 2550). To provide 
plan sponsors and other fiduciaries with sufficient information to 
determine that plan expenses are reasonable and identify potential 
conflicts of interest, EBSA issued interim final regulations on July 
16, 2010, that require service providers to disclose direct and 
indirect compensation to plan fiduciaries. 29 C.F.R. § 2550.408(b)(2) 
(2010). 

[20] 29 U.S.C. § 1109. 

[21] Harris Trust & Savings Bank v. Salomon Smith Barney, Inc., 530 
U.S. 238 (2000). 

[22] 15 U.S.C. §§ 80b-1 et seq. Under current law, most investment 
advisers must have a minimum of $25 million in assets under management 
in order to register with SEC. However, current rules under the 
Advisers Act require pension consultants to plans having an aggregate 
value of at least $50 million to register with the commission (Rule 
203A-2(b)). The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Pub. L. No. 111-203, § 410, 124 Stat. 1376, 1576 (2010), raised 
the threshold requirement for SEC registration to $100 million for 
most investment advisers, and SEC has proposed to raise the threshold 
for pension consultants to $200 million (in plan assets). 75 Fed. Reg. 
7,7052 (Dec. 10, 2010). 

[23] Investment advisers use Form ADV under the Advisers Act to 
register with SEC or state securities authorities or to amend those 
registrations. SEC adopted amendments to Form ADV that were effective 
October 12, 2010, requiring a narrative brochure written in plain 
English. Part 1 of Form ADV provides regulators with information 
necessary to process registration and manage their regulatory and 
examination programs. See Amendments to Form ADV, 75 Fed. Reg. 49,234 
(August 12, 2010) (to be codified at 17 C.F.R. pt. 275 and 279). 

[24] 15 U.S.C. §§ 78a et seq. Broker-dealers are regulated by FINRA 
and by SEC under the federal securities laws and FINRA rules. 

[25] The major securities industry self-regulatory organizations 
(SRO), such as FINRA, impose suitability rules that members must 
follow. For example, under National Association of Securities Dealers 
(NASD) Conduct Rule 2310, a FINRA member making an investment 
recommendation to a customer must have grounds for believing that the 
recommendation is suitable for that customer's financial situation and 
needs. In August 2010, FINRA proposed new consolidated rules governing 
the suitability obligations and know-your-customer obligations of its 
members. The new rules retain the core features of the current rules, 
while modifying both rules to strengthen and clarify them. On November 
17, 2010, SEC approved the rule changes with slight modifications. See 
Securities Exchange Act Release No. 63325. 75 Fed. Reg. 71,479 (Nov. 
23, 2010). The new rules are effective on October 7, 2011. 

[26] See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 
1302 (2d Cir. 2002) (broker-dealer "is obliged to give honest and 
complete information when recommending a purchase or sale"); Vucinich 
v. Paine, Webber, Jackson & Curtis, Inc., 803 F.2d 454, 459-61 (9th 
Cir. 1986) (vacating directed verdict for broker-dealer where evidence 
showed broker-dealer may have violated Exchange Act by failing to 
disclose material facts relating to risk to his unsophisticated 
customer and may effectively have exercised control over account); SEC 
v. R.A. Holman & Co., 366 F.2d 456, 458 (2d Cir. 1966) (salespersons 
failed to disclose that company had significant losses). 

[27] See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 
(2d Cir. 1970); SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); 
In re Richmark Capital Corp., Exch. Act Release No. 48758 (Nov. 7, 
2003) (SEC opinion) ("When a securities dealer recommends stock to a 
customer, it is not only obligated to avoid affirmative misstatements, 
but also must disclose material adverse facts of which it is aware. 
That includes disclosure of 'adverse interests' such as 'economic self 
interest' that could have influenced its recommendation.")(citations 
omitted). 

[28] Letter from Marc Menchel, Executive Vice President and General 
Counsel, FINRA, to Elizabeth M. Murphy, Secretary, SEC 4 (Aug. 25, 
2010), available at [hyperlink, 
http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/indus
try/p121983.pdf]. See, also, GAO, Consumer Finance: Regulatory 
Coverage Generally Exists for Financial Planners, but Consumer 
Protection Issues Remain, [hyperlink, 
http://www.gao.gov/products/GAO-11-235] (Washington, D.C.: January 
2011). 

[29] SEC, Study on Investment Advisers and Broker-Dealers (Washington, 
D.C.: January 2011). 

[30] Pub. L. No. 111-203, § 913, 124 Stat. 1376, 1824 (2010). A retail 
customer is defined as a natural person, or the legal representative 
of a natural person, who receives personalized investment advice from 
a broker, dealer, or investment adviser and uses the advice primarily 
for personal, family, or household purposes. 

[31] SEC, Study on Investment Advisers and Broker-Dealers (Washington, 
D.C.: January 2011). Dodd-Frank requires that any rules that SEC 
proposes under the uniform fiduciary standard would be no less 
stringent than the standard applicable to investment advisers under 
section 206(1) and (2) of the Advisers Act when providing personalized 
investment advice about securities. 

[32] As noted by the 2007 ERISA Advisory Council's Working Group on 
Fiduciary Responsibilities and Revenue Sharing Practices, "revenue 
sharing" is a broad term that has a variety of interpretations by 
industry stakeholders. For example, in the context of investment 
companies, revenue sharing generally refers to payments by a company's 
investment adviser, typically to a broker-dealer or other party 
distributing the company's shares. See SEC, Mutual Fund Distribution 
Fees; Confirmations, 75 Fed. Reg. 47,064 (August 4, 2010). For 
purposes of our report, we consider revenue sharing to be payments 
made from one service provider to another in connection with services 
provided to the plan. In its report, the Working Group recommended 
that Labor develop definitions of revenue sharing-related terms 
designed to assist benefit plan sponsors, fiduciaries, service 
providers, and participants. To date Labor has not acted on this 
recommendation. 

[33] GAO, Private Pensions: Conflicts of Interest Can Affect Defined 
Benefit and Defined Contribution Plans, [hyperlink, 
http://www.gao.gov/products/GAO-09-503T] (Washington, D.C.: Mar. 24, 
2009). In the Frost Advisory Opinion 97-15A, regarding ERISA section 
406(b)(1) and (3), Labor specifies that revenue-sharing payments 
should be fully disclosed to the plan and used to offset expenses on a 
dollar-for-dollar basis or else rebated to the plan if the revenue-
sharing payments are made to benefit the fiduciary with discretion 
over the plan or participant investment or a person in whom the 
fiduciary would have an interest. 

[34] Many mutual funds offer different classes of shares. While each 
share class in a fund invests in the same pool of securities, the 
share classes can vary in the shareholder services and fees charged. 
Consequently, different share classes of the same fund can have 
different net returns. 

[35] In the Matter of Callan Associates, Order Instituting 
Administrative And Cease-And-Desist Proceedings, Advisers Act Release 
No. 2650 (September 19, 2007). Following the SEC investigation, the 
service provider revised its disclosures to include the compensation 
contingent from the brokerage firm. In addition, SEC ordered the 
respondent to cease and desist from committing or causing any 
violations and any future violations of section 207 of the Advisers 
Act. 

[36] Under a safe harbor provision in section 28(e) of the Securities 
Exchange Act of 1934, advisers are permitted to pay more than the 
lowest available commission rate for security transactions in return 
for research and brokerage services and not be in breach of their 
fiduciary duty. 15 U.S.C. § 78bb(e). In order to be protected against 
a claim of breach of fiduciary duty under this safe harbor provision, 
the adviser must make a good faith determination that the amount of 
commission paid is reasonable in relation to the value of the 
brokerage and research services provided by the broker-dealer. 

[37] Commission revenues can be used to pay fees of other service 
providers through a directed brokerage arrangement, also referred to 
as "commission recapture." In a directed brokerage arrangement, the 
plan directs the fund manager to use a specified broker-dealer, which 
will then rebate all or a portion of the commission revenues to the 
plan or pay the fees of another service provider, such as the 
investment adviser. 

[38] See SEC, Staff Report Concerning Examinations of Select Pension 
Consultants (Washington, D.C.: May 16, 2005), 4. SEC officials told us 
the issues identified in their review of pension consultants were 
resolved through remediation. 

[39] As mentioned previously, on October 22, 2010, EBSA published 
proposed regulations that would eliminate the current five-part test 
and establish a new definition to be used to determine whether a 
service provider is a fiduciary. In the preamble to the proposed 
regulations, EBSA acknowledge that the five-part test, which has not 
been updated since its promulgation in 1975, "significantly narrows" 
the plain language of the statutory definition of fiduciary. 75 Fed. 
Reg. 65,263, 65,264. 

[40] U.S. Department of Labor, Office of Inspector General, EBSA Needs 
to Do More to Protect Retirement Plan Assets from Conflicts of 
Interest, Report No. 09-10-001-12-121, September 30, 2010. 

[41] Information from EBSA generally confirms that this practice is 
occurring to some degree. Specifically, EBSA has acknowledged that its 
recent enforcement activities indicate that there are a variety of 
circumstances, outside those described in the five-part test, under 
which plan fiduciaries seek out impartial assistance and expertise of 
persons such as consultants and other advisers for advice on 
investment-related matters. According to EBSA, these persons 
significantly influence the decisions of plan fiduciaries and have a 
considerable impact on investments; however, if these advisers are not 
fiduciaries under ERISA (as they are often not under the current five- 
part test), they often operate with conflicts of interest that they do 
not disclose to plan fiduciaries who expect impartiality. EBSA notes 
further that "the current test ... makes it easy for consultants to 
structure their actions to avoid fiduciary status." 75 Fed. Reg. 
65,263, 65,265, 65,271. 

[42] 15 U.S.C. § 80b-1 et seq., Rule 204-3, and Form ADV. 

[43] However, Labor issued interim final regulation due to take effect 
in July 2011 that will require certain service providers to disclose 
information to assist plan fiduciaries in assessing the reasonableness 
of contracts or arrangements, including the reasonableness of the 
service providers' compensation and potential conflicts of interest, 
that may affect the service providers' performance. 75 Fed. Reg. 
41,600. 

[44] 29 U.S.C. § 1102(a) and GAO, Private Pensions: Fulfilling 
Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors, 
[hyperlink, http://www.gao.gov/products/GAO-08-774] (Washington, D.C.: 
July 16, 2008). 

[45] A service provider may be a fiduciary for purposes of some 
services it provides to a plan, but not others. For example, a service 
provider may be an ERISA fiduciary by virtue of having responsibility 
for the administration of a plan, but the same company may not be an 
ERISA fiduciary when providing investment assistance that does not 
meet the five-part test. 

[46] EBSA's interim final regulations scheduled to take effect in July 
2011 require certain service providers to disclose to plan sponsors 
whether they reasonably expect to provide services as a fiduciary 
under their contract or arrangement with the plan. See proposed 29 
C.F.R. § 2550.408b-2(c)(1)(iv)(B), 75 Fed. Reg. 41,600, 41,635. 

[47] [hyperlink, http://www.gao.gov/products/GAO-08-774]. 

[48] The preamble to EBSA's proposed regulations of October 22, 2010, 
notes that the five-part test applies even to persons who represent 
themselves to the plan as fiduciaries in rendering advice. The 
preamble explains that a consultant could hold itself out as a plan 
fiduciary in a written contract with the plan, render investment 
advice for a fee, and still evade fiduciary status by structuring its 
activities to avoid meeting some element of the five-part test. 75 
Fed. Reg. 65,263, 65,271. 

[49] Broker-dealers are subject to a system of regulations. They 
generally are required to make recommendations that are consistent 
with the interests of their customers and generally must disclose 
material conflicts of interest to their customers when making 
recommendations. As noted above, Dodd-Frank gives SEC the authority to 
issue regulations harmonizing the standards of conduct required of 
investment advisers and broker-dealers when providing personalized 
investment advice about securities to retail clients and other such 
customers as SEC may provide by rule. If SEC promulgates such rules, 
broker-dealers and investment advisers would be required to act in the 
best interests of their customers without regard to their own 
financial or other interests, and disclose material conflicts of 
interest. The rules shall also provide that such standard of conduct 
shall be no less stringent than the standard applicable to investment 
advisers under Sections 206(1) and (2) of the Advisers Act. 

[50] 75 Fed. Reg. 41,600, 41,603. 

[51] Frost Advisory Opinion 97-15A and ERISA § 406(b)(3). In addition, 
Labor proposed interim final regulations in July 2010 to require 
service providers report sources of direct and indirect compensation 
to plan sponsors. These regulations are scheduled to become effective 
in July 2011. 

[52] SEC and Labor, Selecting and Monitoring Pension Consultants: Tips 
for Plan Fiduciaries, [hyperlink, 
http://www.sec.gov/investor/pubs/sponsortips.htm], June 2005. 

[53] In one case, the 401(k) plan sponsor was found to have breached 
its fiduciary duty of prudence by choosing to offer investments in the 
retail share class rather than the institutional share class of 
certain funds, which engaged in revenue sharing. Tibble v. Edison 
Int'l, 2010 WL 2757153 (C.D. Cal. July 8, 2010). 

[54] [hyperlink, http://www.gao.gov/products/GAO-07-703]. In this 
report on DB plans, we found lower annual rates of return for ongoing 
plans associated with pension consultants who had failed to disclose 
significant conflicts of interest, with lower rates generally ranging 
from a statistically significant 1.2 to 1.3 percentage points over the 
2000 to 2004 period. Although this negative association between the 
presence of a conflict of interest and investment returns is 
consistent with what industry experts told us, limitations of this 
analysis did not allow us to establish causality. 

[55] Department of Labor, A Look at 401(k) Plan Fees, [hyperlink, 
http://www.dol.gov/ebsa/publications/401k_employee.html]. [hyperlink, 
http://www.gao.gov/products/GAO-07-21]. Janet Rubenstein and Jeff 
Marzinsky, A 401(k) Plan that Works--the "Bundled Unbundled" Solution, 
Milliman White Paper, February 21, 2007. Over a 35-year time horizon, 
EBSA estimates that a 1 percentage point increase in fees reduces 
final savings by 28 percent. Over a 20-year time horizon, GAO 
estimates that a 1 percentage point increase in fees reduces final 
savings by 17 percent. Over a 40-year time horizon, Rubenstein and 
Marzinsky estimate that a 1 percentage point increase in fees reduces 
final savings by 26 percent. In addition, a study by the Center for 
Retirement Research estimates that a 0.7 percentage point fee reduces 
final savings by more than 12.5 percent over a 30-year time horizon. 
See Richard W. Kopcke, Francis M. Vitagliano, and Zhenya S. 
Karamcheva, Reducing Costs of 401(k) Plans with ETFs and Commingled 
Trusts, Center for Retirement Research at Boston College, July 2010. 

[56] The various formats used for furnishing investment education and 
advice are described in appendix II. The various types of computer 
models used to dispense investment advice are described in appendix 
III. 

[57] 29 U.S.C. §§ 1002(21)(A)(ii). See also 29 C.F.R. § 2509.96-1 
concerning constraints involving participant education. 

[58] 29 C.F.R. § 2509.96-1(d)(3)(iii). 

[59] A service provider who may otherwise have a conflict of interest 
may furnish investment advice using either the SunAmerica arrangement 
(EBSA Advisory Opinion 2001-09A), which requires a provider to 
contract with an independent advice provider to furnish advice, or the 
PPA computer model arrangement, which allows a provider to furnish 
advice in-house if the provider can meet specific compliance 
requirements See appendix III for more information on the advice 
arrangements. 

[60] The PPA arrangement, which allows the fiduciary adviser to design 
the computer model, requires the model to undergo annual audits. By 
contrast, the SunAmerica arrangement relies upon an independent 
financial expert to develop the computer model and does not require 
the model to undergo annual audits. 

[61] See, e.g., Hewitt Associates. Trends and Experience in 401(k) 
Plans. (Hewitt Associates LLC, 2009); Hewitt Associates, Help in 
Defined Contribution Plans: Is It Working and for Whom? (Hewitt 
Associates LLC, 2010); Annamaria Lusardi, "Household Savings Behavior: 
The Role of Literacy, Information, and Financial Education Programs." 
(Dartmouth College and NBER 2008). 

[62] Because of methodological limitations associated with the polls 
with SHRM and SPARK, results from these polls represent only the views 
of the poll respondents. Please see appendix I for further details 
regarding our methodology. 

[63] A former employee with a retirement plan account balance of 
$5,000 or more may keep funds in the existing plan after leaving a 
job. See 29 U.S.C. § 1053(e)(1) and 26 U.S.C. § 411(a)(11)(A). 

[64] From 1998 to 2007, rollovers into IRAs constituted $2.25 trillion 
of the $2.69 trillion in total funds flowing into IRAs. As of year end 
2009, an estimated $4.2 trillion of total U.S. retirement assets was 
held in IRAs, while $4.1 trillion was held in DC plans (including 
401(k)s). See Investment Company Institute, "The U.S. Retirement 
Market, 2009," Research Fundamentals, Vol. 19, No. 3, 3 (May 2010). 

[65] The 2004 SIPP surveyed sampled U.S. households (with sample sizes 
ranging from approximately 14,000 to 36,700 households) in different 
waves over a 2.5-year period, with interviews lasting into 2006. About 
7 million (7,055,207) survey respondents received a lump-sum 
distribution of their plan funds from a previous employer. Of these, 
about 69 percent--or 4,868,093 survey respondents--rolled over their 
funds into an IRA. See United States Department of Commerce. Bureau of 
the Census, 2005-11-02, "Survey of Income and Program Participation 
(SIPP) [2004 Panel, Wave 7]. 

[66] EBSA Advisory Opinion 2005-23A (December 7, 2005). 

[67] In its preamble to the proposed new definition of fiduciary, the 
department noted that as a general matter, a recommendation to a plan 
participant to take an otherwise permissible distribution does not 
constitute investment advice within the meaning of the current 
regulation, when that advice is combined with a recommendation as to 
how the distribution should be invested. However, the department 
further notes that concerns have been expressed that as a result of 
that position, plan participants may not be adequately protected from 
advisers who provide distribution recommendations that subordinate 
participants' interests to the advisers' own interests. The department 
then solicited comments on whether and to what extent the final 
regulation should define the provision of investment advice to 
encompass recommendations related to taking a plan distribution. 75 
Fed. Reg. 65,263, 65,266. 

[68] GAO, Retirement Savings: Better Information and Sponsor Guidance 
Could Improve Oversight and Reduce Fees for Participants, [hyperlink, 
http://www.gao.gov/products/GAO-09-641] (Washington, D.C.: Sept. 4, 
2009). 

[69] Investment Advice--Participants and Beneficiaries, 75 Fed. Reg. 
9,360 (March 2, 2010) (to be codified at 29 C.F.R. pt. 2550). 

[70] Notice to Participants of Consequences of Failing to Defer 
Receipt of Qualified Retirement Plan Distributions; Expansion of 
Applicable Election Period for Notices, 73 Fed. Reg. 59,575 (October 
9, 2008) (to be codified at 26 C.F.R. pt. 1). Section 1102(b)(1) of 
the Pension Protection Act of 2006 instructs the Secretary of the 
Treasury to provide a description to participants of the consequences 
of taking a distribution. 

[71] This applies to EBSA's civil investigations. For EBSA's criminal 
investigations, however, the subject of the investigation need not be 
an ERISA fiduciary because an allegation of fraud is sufficient to 
trigger EBSA's jurisdiction. 

[72] [hyperlink, http://www.gao.gov/products/GAO-07-703]. 

[73] 29 C.F.R. § 2510.3-21. 

[74] As we reported in 2007, given EBSA's other enforcement 
responsibilities, EBSA officials told us that they concentrate on a 
relatively small number of these conflict of interest cases because 
they are so complex. GAO-07-703. 

[75] However, the department's new proposal to modify the definition 
of fiduciary should provide some relief from the problems previously 
associated with the five-part test. In its proposed rulemaking, EBSA 
explained that it is appropriate to update the "investment advice" 
definition to better ensure that persons, in fact, providing 
investment advice to plan fiduciaries and/or plan participants and 
beneficiaries are subject to ERISA's standards of fiduciary conduct. 
75 Fed. Reg. 65,263, 65,265. 

[76] While only 16 CAP cases have been closed, 7 of the open CAP cases 
involve an ongoing criminal investigation or an investigation related 
to a currently open ongoing criminal investigation. 

[77] SEC, Office of Compliance Inspections and Examinations, Staff 
Report Concerning Examinations of Select Pension Consultants 
(Washington, D.C.: May 16, 2005). 

[78] Labor OIG-Office of Audit, EBSA Needs To Do More To Protect 
Retirement Plan Assets From Conflicts Of Interest, 09-10-001-12-121 
(Washington, D.C.: Sept. 30, 2010). There is a difference between 
fiduciary requirements specified by ERISA and requirements specified 
by the Advisers Act. Because of this difference, EBSA and SEC were 
able to take different measures to resolve the conflicts of interest 
found for these 13 consultants. In accordance with the Advisers Act, 
the problems identified by SEC were resolved through remediation and 
SEC enforcement efforts. As a result, SEC reported that many of these 
consultants took corrective action--changed policies and procedures to 
insulate their advisory activities from other activities, improved 
disclosure of conflicts of interest, and prevented conflicts of 
interest in certain respects. 

[79] GAO, Employee Benefits Security Administration: Enforcement 
Improvements Made but Additional Actions Could Further Enhance Pension 
Plan Oversight, [hyperlink, http://www.gao.gov/products/GAO-07-22] 
(Washington, D.C.: Jan. 18, 2007). As we previously reported, a 
compliance examination program, in part, is designed to establish a 
presence by regularly reviewing entities' operations, thereby likely 
creating a deterrent to noncompliance. Implementing such routine 
compliance examinations may displace some resources currently 
dedicated to enforcement efforts, but would provide an evidence-driven 
method for evaluating the success of those enforcement efforts. 

[80] Advisory Opinion 2001-09A (2001). 

[81] 75 Fed. Reg. 9,360. 

[82] SEC, Staff Report Concerning Examinations of Select Pension 
Consultants (Washington, D.C.: May 16, 2005). According to EBSA 
officials, EBSA has fostered relationships with SEC at local levels to 
obtain future referrals. 

[83] EBSA published final regulations on October 20, 2010, to improve 
participant fee disclosure. While these disclosures will provide 
information about the performance and fees of different investment 
options available within the plan, it does not include complete 
information on compensation to service providers. Fiduciary 
Requirements for Disclosure in Participant-Directed Individual Account 
Plans; Final Rule, 75 Fed. Reg. 64,910 (October 20, 2010) (codified at 
29 C.F.R. § 2550.404a-5). 

[84] According to EBSA, several cases have also been referred to the 
Office of the Solicitor General for further action. 

[85] [hyperlink, http://www.gao.gov/products/GAO-07-22]. 

[86] 75 Fed. Reg. 65,263. 

[87] In the preamble to the proposed regulations, EBSA acknowledges 
that the five-part test takes a narrow approach to fiduciary status 
that "sharply limits" its ability to protect plans and their 
participants and beneficiaries from conflicts of interest that may 
arise from the diverse and complex fee practices existing in today's 
retirement plan services market and to devise effective remedies for 
misconduct when it occurs. Accordingly, the new proposed regulations 
are intended to more broadly define the circumstances under which a 
person is considered a fiduciary by reason of giving investment advice 
to a plan or its participants. 75 Fed. Reg. 65,263, 65,271. 

[88] See proposed 29 C.F.R. § 2510.3-21(c), 75 Fed. Reg. 65,263, 
65,277. 

[89] See proposed 29 C.F.R. § 2510.3-21(c)(2)(ii)(B), 75 Fed. Reg. 
65,263, 65,277. 

[90] 75 Fed. Reg. 41,600. 

[91] A covered plan is a pension plan--all ERISA-governed retirement 
plans, including 403(b) arrangements--but does not include Simplified 
Employee Pension IRAs, Savings Incentive Match Plan for Employees 
IRAs, or IRAs. 

[92] A covered service provider is a service provider that enters into 
an arrangement with a plan and reasonably expects to receive $1,000 or 
more in compensation, direct or indirect, in connection with the 
services described in the regulation. The interim final rule specifies 
that covered service providers include some service providers acting 
as ERISA fiduciaries and some service providers who may not be ERISA 
fiduciaries. 

[93] ERISA § 408(b)(2) and Code § 4975(d)(2) state that services by 
providers are prohibited unless (1) the contract or arrangement is 
reasonable, (2) the services are necessary for the plan, and (3) no 
more than reasonable compensation is paid. The regulations provide 
specific definitions for plans and service providers that are covered 
under the revised section 408(b)(2). 

[94] See proposed 29 C.F.R. § 2550.408b-2(c)(1)(iv)(B), 75 Fed. Reg. 
41,600, 41,635. 

[95] EBSA notes that this change to the regulations would permit its 
investigators and attorneys to focus their efforts on the adviser's 
conduct rather than meeting the evidentiary requirements to prove all 
elements of the current five-part test are satisfied and would enhance 
its ability to redress service provider abuses that currently exist in 
the market. 75 Fed. Reg. 65,263, 65,272. 

[96] These disclosures must be made in writing and in advance of the 
date the arrangement is entered into, and extended or renewed, and any 
changes to this information must be disclosed as soon as is 
practicable, but not later than 60 days from the date on which the 
service provider is informed of the changes. 

[97] In the preamble to the interim final regulations, EBSA noted that 
it is persuaded that plan fiduciaries may benefit from increased 
uniformity in the way that information is presented to them. However, 
EBSA explained that it does not want to unnecessarily increase the 
cost and burden for service providers to furnish information, 
especially because such costs may be passed along to plan participants 
and beneficiaries, unless it is clear that the benefit to fiduciaries 
outweighs such costs and burdens. EBSA requested comments addressing 
(1) the likely cost and burden to service providers of complying with 
a requirement that information be disclosed in a particular format, 
(2) the anticipated benefits to plan fiduciaries of including a 
summary disclosure statement, and (3) how to most effectively 
construct the requirement for a summary disclosure statement to ensure 
both its feasibility and its usefulness. The comment period closed on 
August 30, 2010, and the department has not yet issued final 
regulations. 75 Fed. Reg. 41,600, 41,607. 

[98] The interim final regulations only apply to employer-sponsored 
plans under ERISA, not to IRAs. 

[99] 75 Fed. Reg. 64,910 (October 20, 2010). 

[100] Under the proposal, two eligible investment arrangements are 
available in the form of statutory exemptions from the prohibited 
transaction rules. These rules would normally prohibit a fiduciary who 
might otherwise be a party in interest from furnishing investment 
advice to the plan or its participants. These two arrangements are (1) 
a computer model arrangement, where advice is rendered that, among 
other requirements, must be certified by an eligible investment expert 
and audited annually by an independent auditor, and (2) advice may be 
rendered by an adviser whose compensation does not vary based on the 
option selected by the plan participant. 75 Fed. Reg. 9,360. 

[101] See, e.g., Hewitt Associates. Trends and Experience in 401(k) 
Plans. (Hewitt Associates LLC, 2009); Hewitt Associates, Help in 
Defined Contribution Plans: Is It Working and for Whom? (Hewitt 
Associates LLC, 2010); Annamaria Lusardi, "Household Savings Behavior: 
The Role of Literacy, Information, and Financial Education Programs." 
(Dartmouth College and NBER 2008). 

[102] Because of methodological limitations associated with the polls 
with SHRM and SPARK, results from these polls represent only the views 
of the poll respondents. Please see appendix I for further details 
regarding our methodology. 

[103] The 52nd annual survey of profit-sharing and 401(k) plans for 
2008 by PSCA. The survey was published in 2009, but reflects 2008 plan 
experience. The survey was based on results from 908 plans--28 profit- 
sharing plans, 607 401(k) plans, and 273 combination profit-sharing 
and 401(k) plans--with 7.4 million participants. 

[104] Among plans that participated in PSCA's annual survey in 2008, 
58 percent of plans used one-on-one counseling sessions to deliver 
advice, 44 percent of plans used Internet providers to deliver advice, 
and 31.9 percent of plans used telephone hotlines to deliver advice. 

[105] Among plans that participated in PSCA's annual survey in 2008, 
82.7 percent of plans with fewer than 50 participants use one-on-one 
counseling sessions to deliver advice, while 73.9 percent of larger 
plans with 5,000-plus participants use Internet providers to deliver 
advice. 

[106] EBSA officials anticipate finalizing proposed regulations for 
the PPA sometime during May 2011. 

[107] Department of Labor, Field Assistance Bulletin No. 2007-01 
(February 2, 2007). 

[End of section] 

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