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Testimony: 

Before the Special Committee on Aging, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 2:00 p.m. EDT: 

Wednesday, October 28, 2009: 

401(K) Plans: 

Several Factors Can Diminish Retirement Savings, but Automatic 
Enrollment Shows Promise for Increasing Participation and Savings: 

Statement of Barbara D. Bovbjerg, Director: 

Education, Workforce, and Income Security: 

401(K) Plans: 

GAO-10-153T: 

GAO Highlights: 

Highlights of [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-10-
153T], a testimony to the Special Committee on Aging, U.S. Senate. 

Why GAO Did This Study: 

Over the past 25 years, the number of defined benefit (DB) plans has 
declined while the number of defined contribution (DC) plans has 
increased. Today, DC plans are the dominant type of employer-sponsored 
retirement plans, with more than 49 million U.S. workers participating 
in them. 401(k) plans currently cover over 85 percent of active DC plan 
participants and are the fastest growing type of employer-sponsored 
pension plan. Given these shifts in pension coverage, workers are 
increasingly relying on 401(k) plans for their pension income. 

Recently, policy makers have focused attention on the ability of 401(k) 
plans to provide participants with adequate retirement income and the 
challenges that arise as 401(k) plans become the predominant retirement 
savings plan for employees. As a result, GAO was asked to report on (1) 
challenges to building and maintaining of savings in 401(k) plans, and 
(2) recent measures to improve 401(k) participation and savings levels. 

What GAO Found: 

There are challenges to building and saving through 401(k) plans. While 
low participation rates may be due, in part, to the fact that some 
workers participate in DB plans, there is also a large portion of 
workers who do not have access to an employer-sponsored retirement 
plan, as well as some who do not enroll in such a plan when an employer 
offers it. We found that for those who did participate, their overall 
balances were low, particularly for low-income and older workers who 
either did not have the means to save or have not had the opportunity 
to save in 401(k)s for much of their working lifetimes. There are also 
challenges workers face in maintaining savings in 401(k) plans. For 
example, 401(k) leakage—actions participants take that reduce the 
savings they have accumulated, such as borrowing from the account, 
taking hardship withdrawals, or cashing out the account when they 
change jobs—continues to affect retirement savings and increases the 
risk that 401(k) plans may yield insufficient retirement income for 
individual participants. Further, various fees, such as investment and 
other hidden fees, can erode retirement savings and individuals may not 
be aware of their impact. 

Automatic enrollment of employees in 401(k) plans is one measure to 
increase participation rates and saving. Under automatic enrollment, 
which was encouraged by the Pension Protection Act of 2006 and recent 
regulatory changes, employers enroll workers into plans automatically 
unless they explicitly choose to opt out. Plan sponsors are 
increasingly adopting automatic enrollment policies, which can 
considerably increase participation rates, with some plans’ rates 
reaching as high as 95 percent. Employers can also set default 
contribution rates and investment funds. Though target-date funds are a 
common type of default investment fund, there are concerns about their 
risks, particularly for participants nearing retirement. 

Figure: Several Factors Can Help Create or Erode 401(k) Retirement 
Savings: 

[Refer to PDF for image: graphic of 401K figure] 

Source: GAO analysis. 

[End of figure] 

What GAO Recommends: 

GAO is not making new recommendations as part of this testimony. In a 
recent report on leakage—actions that reduce savings prior to 
retirement—we called for measures to improve the information 
participants receive about the disadvantages of early withdrawals, and 
for a change in law to permit continued contributions immediately after 
hardship withdrawals. 

View [hyperlink, http://www.gao.gov/products/GAO-10-153T] or key 
components.
For more information, contact Barbara D. Bovbjerg at (202) 512-7215 or 
bovbjergb@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss participation and savings in 
401(k) plans. While the percentage of U.S. workers participating in a 
pension plan has remained around 50 percent of the private-sector 
workforce, since the early 1980s pension coverage has seen a noticeable 
shift away from "traditional" defined benefit (DB) plans, in which 
workers typically accrue benefits based on years of service and 
earnings, toward defined contribution (DC) plans in which participants 
accumulate balances in personal accounts. Currently, there are more 
than 49 million U.S. workers participating in employer-sponsored DC 
plans. Further, 401(k) plans are the fastest growing type of employer- 
sponsored pension plan and currently cover over 85 percent of active DC 
plan participants. Given the decline of DB plans and the growth of 
401(k) plans, many workers are increasingly relying on 401(k) plans for 
their pension income. 

DC plans, including 401(k) plans, provide participants tax-deferred 
savings vehicles, portability, and the transparency of known account 
balances. However, they shift much of the responsibility of saving for 
retirement, and most of the risk, to employees. Under such plans, 
workers must contribute a portion of their pay and manage the 
investment of their plan assets throughout their lives. As 401(k) plans 
become an important source of workers' retirement income, policymakers 
are focusing on the adequacy of such plans for building and maintaining 
retirement savings. Overall issues, such as workers arriving at 
retirement with insufficient savings to support themselves, are a major 
concern, but other issues are beginning to require attention, such as 
participation levels in 401(k) plans and "leakage"--which occurs when 
participants tap into their savings before retirement. In addition, 
issues surrounding the fees charged to 401(k) plan participants 
continue to receive attention. Further, Congressional interest in 
automatic enrollment, including plan features associated with automatic 
enrollment, such as target-date funds (TDF), has called attention to 
options for expanding retirement plan coverage.[Footnote 1] 

My statement today is based on our body of work on 401(k) plans and 
retirement income security.[Footnote 2] My remarks focus on (1) 
challenges to building and maintaining savings in 401(k) plans and (2) 
recent measures to improve participation and savings levels. We 
conducted our work 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. 

In summary, there are various issues affecting workers' abilities to 
build and maintain savings in 401(k) plans. First, we found that 
participation in DC plans was low. While low participation rates may be 
due, in part, to the fact that many workers participate in DB plans, 
there are also some workers who do not have access to an employer- 
sponsored retirement plan or who do not take the actions required of 
them to enroll in such a plan. In addition, for those who do 
participate, savings levels are low. We found that low-income and older 
workers had particularly low savings balances, which is not surprising 
given the fact that older workers may not have had the opportunity to 
save in 401(k) plans for much of their working lifetimes and low-income 
workers may not have the means to save. However, the low savings levels 
become increasingly important as DC plans become an important source of 
retirement income. Second, leakage and fees can erode participants' 
retirement savings before retirement. Leakage can result in significant 
losses of potential income from the loss of compound interest as well 
as the financial penalties associated with early withdrawals. In 
addition, fees and conflicts of interest--such as undisclosed 
compensation arrangements between pension service providers--can also 
diminish retirement savings. Because the risk of investment is largely 
borne by the individual participant in a 401(k) plan, participants can 
be vulnerable to any decision, including those involving conflicts of 
interest, that could result in higher fees or other outcomes that can 
lower investment returns for participants. Recent changes in federal 
law, such as provisions explicitly permitting automatic enrollment in 
401(k) plans (unless a worker opts out), show promise for increasing 
401(k) participation and savings. However, there are concerns about 
some of the features associated with automatic enrollment, such as the 
common use of target-date funds as default investments. 

Background: 

Both DB and DC plans operate in a voluntary system with tax incentives 
for employers to offer a plan and for employees to participate. In the 
past, DC plans, such as 401(k) plans, were supplemental to DB plans. 
However, over the past several decades, there has been a shift in 
pension plan coverage; the number of DC plans has increased while the 
number of DB plans has declined. Today, DC plans are the dominant type 
of private-sector employee pension. Compared to DB plans, DC plans 
offer workers more control over their retirement asset management and 
greater portability over their retirement savings, but also shift much 
of the responsibility and certain risks onto workers. Workers generally 
must elect to participate in a plan and accumulate savings in their 
individual accounts by making regular contributions over their careers. 
Participants typically choose how to invest plan assets from a range of 
options provided under their plan and accordingly face investment risk. 
There are several different categories of DC plans, but most are types 
of cash or deferred arrangements in which employees can direct pre-tax 
dollars, along with any employer contributions, into an account, with 
any asset growth tax-deferred until withdrawal. 

One option available under some 401(k) plans is automatic enrollment, 
under which workers are enrolled in a 401(k) plan automatically, unless 
they explicitly choose to opt out. However, automatic enrollment has 
not been a traditional feature of 401(k) plans and, prior to 1998, plan 
sponsors feared that adopting automatic enrollment could lead to plan 
disqualification.[Footnote 3] In 1998, the Internal Revenue Service 
(IRS) addressed this issue by stating that a plan sponsor could 
automatically enroll newly hired employees and, in 2000, clarified that 
automatic enrollment is permissible for current employees who have not 
enrolled.[Footnote 4] Nonetheless, a number of considerations inhibited 
widespread adoption of automatic enrollment, including remaining 
concerns such as liability in the event that the employee's investments 
under the plan did not perform satisfactorily, and concerns about state 
laws that prohibit withholding employee pay without written employee 
consent. More recently, provisions of the Pension Protection Act of 
2006 (PPA) and subsequent regulations further facilitated the adoption 
of automatic enrollment by providing incentives for doing so and by 
protecting plans from fiduciary and legal liability if certain 
conditions are met.[Footnote 5] In September 2009, the Department of 
the Treasury announced IRS actions designed to further promote 
automatic enrollment and the use of automatic escalation 
policies.[Footnote 6] 

The Employee Retirement Income Security Act of 1974 (ERISA),[Footnote 
7] as amended, defines and sets certain standards for employee benefit 
plans, including 401(k) plans, sponsored by private-sector 
employers.[Footnote 8] ERISA establishes the responsibilities of 
employee benefit plan decision makers and the requirements for 
disclosing information about plans.[Footnote 9] ERISA requires that 
plan fiduciaries, which generally include the plan sponsor, carry out 
their responsibilities prudently and do so solely in the interest of 
the plan's participants and beneficiaries.[Footnote 10] The Department 
of Labor's (Labor) Employee Benefits Security Administration (EBSA) is 
the primary agency responsible for enforcing Title I of ERISA and 
thereby protecting private-sector pension plan participants and 
beneficiaries from the misuse or theft of pension assets.[Footnote 11] 
EBSA conducts civil and criminal investigations of plan fiduciaries and 
service providers to determine whether the provisions of ERISA or other 
relevant federal laws have been violated. In addition to Labor's 
oversight, the Securities and Exchange Commission (SEC) provides 
oversight for 401(k) investments. For example, the SEC, among other 
responsibilities, regulates registered securities including company 
stock and mutual funds under securities law. 

Low Participation and Saving Rates Affect the Building of 401(k) 
Savings While Other Factors Affect Participants Ability to Maintain 
Retirement Savings: 

Challenges to Building and Maintaining 401(k) Savings: 

One issue of concern with DC plans is that participation and saving 
rates have been low. In 2007, we reported that the majority of U.S. 
workers, in all age groups, did not participate in DC plans with their 
current employers. In fact, only about half of all workers participate 
in any type of employer-sponsored retirement plan at any given time. 
According to data from the Current Population Survey, about 48 percent 
of the total U.S. workforce was not covered by an employer-sponsored 
plan in 2007.[Footnote 12] About 40 percent worked for an employer that 
did not sponsor a plan, and about 8 percent did not participate in the 
plan that their employer sponsored. Certain segments of the working 
population have consistently had much lower rates of employment with 
employers sponsoring a plan, and lower participation rates than the 
working population overall, such as lower-income workers, younger 
workers, workers employed by smaller companies, and part-time workers 
who typically lack coverage compared to all full-time workers. 

According to our analysis of the 2004 Survey of Consumer Finances, only 
62 percent of workers were offered a retirement plan by their employer, 
and 84 percent of those offered a retirement plan participated. 
Participation rates were even lower for DC plan participants since only 
36 percent of working individuals participated in a DC plan with their 
current employers at the time of our report. Although our analysis 
focused on DC plans as a group, 401(k) plans make up the vast majority 
of DC plans. At the household level, participation rates were also low; 
only 42 percent of households had at least one member actively 
participating in a DC plan. Further, only 8 percent of workers in the 
lowest income quartile participated in DC plans offered by their 
current employer. [Footnote 13] 

Participation rates are low partly because not all employers offer a 
retirement plan, and even when employers offer such plans, workers may 
not participate. Some small employers are hesitant to sponsor 
retirement plans because of concerns about cost. In addition, DC 
participation rates for the U.S. workforce may be low because some 
employers sponsor a DB plan rather than a DC plan. When companies do 
sponsor employer plans, some workers may not be eligible to participate 
in their employers' plan because they have not met the plan's minimum 
participation requirements. In addition, workers may choose not to 
enroll, or delay enrolling, in a retirement plan for a number of 
reasons. For example, they may think--in some cases, incorrectly--they 
are not eligible. They may also believe they cannot afford to 
contribute to the plan and, for low-income workers, it may be difficult 
for them to contribute. Also, some may be focused on more immediate 
savings objectives, such as saving for a house. Many non-participants 
may not have made a specific decision, but rather fail to participate 
because of a tendency to procrastinate and follow the path that does 
not require an active decision. 

We also found that, for workers who participated in DC plans, plan 
savings were low. The median total DC account balance was $22,800 for 
individual workers with a current or former DC plan and $27,940 for 
households with a current or former DC plan. We reported that the 
account balances of lower-income and older workers were of particular 
concern. For example, workers in the lowest income quartile had a 
median total account balance of only $6,400. Older workers, 
particularly those who were less wealthy, also had limited retirement 
savings. For example, those aged 50 through 59 and at or below the 
median level of wealth had median total savings of only $13,800. The 
median total savings for all workers aged 50 through 59 was $43,200. 

We noted that the low level of retirement savings could be occurring 
for a couple of reasons. Workers who participated in a plan had modest 
overall balances in DC plans, suggesting a potentially small 
contribution toward retirement security for most plan participants and 
their households. For individuals nearing retirement age, total DC plan 
balances were also low, because DC plans were less common before the 
1980s and older workers likely would not have had access to these plans 
their whole careers. Given trends in coverage since the 1980s, older 
workers close to retirement age were more likely than younger ones to 
have accrued retirement benefits in a DB plan. In addition, older 
workers who rely on DC plans for retirement income may also not have 
time to substantially increase their total savings without extending 
their working careers, perhaps for several years.[Footnote 14] Further, 
the value of the income tax deferral on contributions is smaller for 
lower-income workers than for similarly situated higher-income workers, 
making participation less appealing for lower-income workers. 

401(k) Leakage Erodes Retirement Savings Levels: 

In addition to somewhat small savings contributions, 401(k) 
participants can take actions, such as taking loans, withdrawals, or 
lump-sum cashouts,[Footnote 15] that reduce the savings they have 
accumulated. This "leakage" continues to affect the retirement security 
of some participants. [Footnote 16] While participants may find 
features that allow access to 401(k) savings prior to retirement 
desirable, leakage can result in significant losses of retirement 
savings from the loss of compound interest as well as the financial 
penalties associated with early withdrawals. Current law limits 
participant access to 401(k) savings in order to preserve the favorable 
tax treatment for retirement savings and ensure that the savings are, 
in fact, being used to provide retirement income.[Footnote 17] 

The incidence and amount of the principal forms of leakage from 401(k) 
plans have remained relatively steady through the end of 2008. For 
example, we found that approximately 15 percent of 401(k) participants 
between the ages of 15 and 60 initiated at least one form of leakage in 
1998, 2003, and 2006, with loans being the most popular type of leakage 
in all 3 years. We also found that cashouts made when a worker changed 
jobs, at any age, resulted in the largest amounts of leakage and the 
greatest proportional loss in retirement savings.[Footnote 18] Further, 
we reported that while most firms informed participants about the short-
term costs of leakage, few informed them about the long-term costs. 

As we reported in August of 2009, experts identified three legal 
requirements that had likely reduced the overall incidence and amounts 
of leakage, and another provision that may have exacerbated the long- 
term effects of leakage. Specifically, experts noted that the 
requirements imposing a 10 percent tax penalty on most withdrawals 
taken before age 59˝, requiring participants to exhaust their plan's 
loan provisions before taking a hardship withdrawal and requiring plan 
sponsors to preserve the tax-deferred status of accounts with balances 
of more than $1,000 at job separation all helped reduce 401(k) 
leakage.[Footnote 19] However, experts also noted that the requirement 
for a 6-month suspension of all contributions to an account following a 
hardship withdrawal exacerbated the effects of leakage.[Footnote 20] 
Treasury officials told us that this provision is intended to serve as 
a test to ensure that the hardship is real and that the participants 
have no other assets available to address the hardship. However, a few 
outside experts believed that this provision deters hardship 
withdrawals and noted that it seems to contradict the goal of creating 
retirement income. One expert noted that the provision unnecessarily 
prevented participants who were able to continue making contributions 
from doing so. For example, an employed participant taking a withdrawal 
for a discrete, one-time purpose, such as paying for medical expenses, 
may otherwise be able to continue making contributions. In our August 
2009 report, we recommended that Congress consider changing the 
requirement for the 6-month contribution suspension following a 
hardship withdrawal. We also called for measures to provide 
participants with more information on the disadvantages of hardship 
withdrawals.[Footnote 21] 

Fees and Conflicts of Interests Can also Hinder Participants' Ability 
to Maintain Retirement Savings: 

Although participants may choose to take money out of their 401(k) 
plans, fees and other factors outside of participants' control can also 
diminish their ability to build their retirement savings. Participants 
often pay fees, such as investment fees and record-keeping fees, and 
these fees may significantly reduce retirement savings, even with 
steady contributions and without leakage. [Footnote 22] Investment 
fees, which are charged by companies managing mutual funds and other 
investment products for all services related to operating the fund, 
comprise the majority of fees in 401(k) plans and are typically borne 
by participants. Plan record-keeping fees generally account for the 
next largest portion of plan fees. These fees cover the cost of various 
administrative activities carried out to maintain participant accounts. 
Although plan sponsors often pay for record-keeping fees, participants 
bear them in a growing number of plans. We previously reported that 
participants can be unaware that they pay any fees at all for their 
401(k) investments.[Footnote 23] For example, investment and record- 
keeping fees are often charged indirectly by taking them out of 
investment returns prior to reporting those returns to participants. 
Consequently, more than 80 percent of 401(k) participants reported in a 
nationwide survey not knowing how much they pay in fees.[Footnote 24] 

The reduction to retirement savings resulting from fees is very 
sensitive to the size of the fees paid; even a seemingly small fee can 
have a large negative effect on savings in the long run. As shown in 
figure 1, an additional 1 percent annual charge for fees would 
significantly reduce an account balance at retirement. 

Figure 1: Effect of 1-Percentage Point Higher Annual Fee on a $20,000 
DC Plan Balance Invested over 20 Years: 

[Refer to PDF for image: double horizontal line graph] 

1; 
Accumulated account balance with 0.5 percent charge for fees: 21,300; 
Accumulated account balance with 1.5 percent charge for fees: 2,100. 

2; 
Accumulated account balance with 0.5 percent charge for fees: 22,685; 
Accumulated account balance with 1.5 percent charge for fees: 22,261. 

3; 
Accumulated account balance with 0.5 percent charge for fees: 24,159; 
Accumulated account balance with 1.5 percent charge for fees: 23,485. 

4; 
Accumulated account balance with 0.5 percent charge for fees: 25,729; 
Accumulated account balance with 1.5 percent charge for fees: 24,776. 

5; 
Accumulated account balance with 0.5 percent charge for fees: 27,402; 
Accumulated account balance with 1.5 percent charge for fees: 26,139. 

6; 
Accumulated account balance with 0.5 percent charge for fees: 29,183; 
Accumulated account balance with 1.5 percent charge for fees: 27,577. 

7; 
Accumulated account balance with 0.5 percent charge for fees: 31,080; 
Accumulated account balance with 1.5 percent charge for fees: 29,094. 

8; 
Accumulated account balance with 0.5 percent charge for fees: 33,100; 
Accumulated account balance with 1.5 percent charge for fees: 30,694. 

9; 
Accumulated account balance with 0.5 percent charge for fees: 35,251; 
Accumulated account balance with 1.5 percent charge for fees: 32,382. 

10; 
Accumulated account balance with 0.5 percent charge for fees: 37,543; 
Accumulated account balance with 1.5 percent charge for fees: 34,163. 

11; 
Accumulated account balance with 0.5 percent charge for fees: 39,983; 
Accumulated account balance with 1.5 percent charge for fees: 36,042. 

12; 
Accumulated account balance with 0.5 percent charge for fees: 42,582; 
Accumulated account balance with 1.5 percent charge for fees: 38,024. 

13; 
Accumulated account balance with 0.5 percent charge for fees: 45,350; 
Accumulated account balance with 1.5 percent charge for fees: 40,115. 

14; 
Accumulated account balance with 0.5 percent charge for fees: 48,297; 
Accumulated account balance with 1.5 percent charge for fees: 42,322. 

15; 
Accumulated account balance with 0.5 percent charge for fees: 51,437; 
Accumulated account balance with 1.5 percent charge for fees: 44,650. 

16; 
Accumulated account balance with 0.5 percent charge for fees: 54,780; 
Accumulated account balance with 1.5 percent charge for fees: 47,105. 

17; 
Accumulated account balance with 0.5 percent charge for fees: 58,341; 
Accumulated account balance with 1.5 percent charge for fees: 49,696. 

18; 
Accumulated account balance with 0.5 percent charge for fees: 62,133; 
Accumulated account balance with 1.5 percent charge for fees: 52,429. 

19; 
Accumulated account balance with 0.5 percent charge for fees: 66,172; 
Accumulated account balance with 1.5 percent charge for fees: 55,313. 

20; 
Accumulated account balance with 0.5 percent charge for fees: 70,473; 
Accumulated account balance with 1.5 percent charge for fees: 58,355. 

Source: GAO analysis. 

[End of figure] 

Although all 401(k) plans are required to provide disclosures on plan 
operations, participant accounts, and the plan's financial status, they 
are often not required to disclose the fees borne by individual 
participants. These disclosures are provided in a piecemeal fashion and 
do not provide a simple way for participants to compare plan investment 
options and their fees. Some documents that contain fee information are 
provided to participants automatically, whereas others, such as 
prospectuses or fund profiles, may require that participants seek them 
out. According to industry professionals, participants may not know to 
seek such documents.[Footnote 25] 

Most industry professionals agree that information about investment 
fees--such as the expense ratio, a fund's operating fees as a 
percentage of its assets--is fundamental for plan participants to 
compare their options. Participants also need to be aware of other 
types of fees--such as record-keeping fees and redemption fees or 
surrender charges imposed for changing and selling investments--to gain 
a more complete understanding of all the fees that can affect their 
account balances. Whether participants receive only basic expense ratio 
information or more detailed information on various fees, presenting 
the information in a clear, easily comparable format can help 
participants understand the content of disclosures. In our previous 
reports, we recommended that Congress consider requiring plan sponsors 
to disclose fee information on 401(k) investment options to 
participants, such as the expense ratios, and Congress has introduced 
several bills to address fee disclosures.[Footnote 26] 

SEC identified certain undisclosed arrangements in the business 
practices of pension consultants that the agency referred to as 
conflicts of interest and released a report in May 2005 that raised 
questions about whether some pension consultants are fully disclosing 
potential conflicts of interest that may affect the objectivity of the 
advice.[Footnote 27] The report highlighted concerns that compensation 
arrangements with brokers who sell mutual funds may provide incentives 
for pension consultants to recommend certain mutual funds to a 401(k) 
plan sponsor and create conflicts of interest that are not adequately 
disclosed to plan sponsors. Plan sponsors may not be aware of these 
arrangements and thus could select mutual funds recommended by the 
pension consultant over lower-cost alternatives. As a result, 
participants may have more limited investment options and may pay 
higher fees for these options than they otherwise would. 

Conflicts of interest among plan sponsors and plan service providers 
can also affect participants' retirement savings. In our prior work on 
conflicts of interest in DB plans, we found a statistical association 
between inadequate disclosure of potential conflicts of interest and 
lower investment returns for ongoing plans, suggesting the possible 
adverse financial effect of such nondisclosure. Specifically, we 
detected lower annual rates of return for those ongoing plans 
associated with consultants that had failed to disclose significant 
conflicts of interest. These lower rates generally ranged from a 
statistically significant 1.2 to 1.3 percentage points over the 2000 to 
2004 period.[Footnote 28] Although this work was done for DB plans, 
some of the same conflicts apply to DC plans as well. Problems may 
occur when companies providing services to a plan also receive 
compensation from other service providers. Without disclosing these 
arrangements, service providers may be steering plan sponsors toward 
investment products or services that may not be in the best interest of 
participants.[Footnote 29] 

Conflicts of interest may be especially hidden when there is a business 
arrangement between one 401(k) plan service provider and a third-party 
provider for services that they do not disclose to the plan sponsor. 
The problem with these business arrangements is that the plan sponsor 
will not know who is receiving the compensation and whether or not the 
compensation fairly represents the value of the service being rendered. 
Without that information, plan sponsors may not be able to identify 
potential conflicts of interest and fulfill their fiduciary duty. If 
the plan sponsors do not know that a third party is receiving these 
fees, they cannot monitor them, evaluate the worthiness of the 
compensation in view of services rendered, and take action as needed. 
Because the risk of 401(k) investments is largely borne by the 
individual participant, such hidden conflicts can affect participants 
directly by lowering investment returns. 

We previously recommended that Congress consider amending the law to 
explicitly require that 401(k) service providers disclose to plan 
sponsors the compensation that providers receive from other service 
providers. Although Congress has not changed the law, Labor has 
proposed regulations to expand fee and compensation disclosures to help 
address conflicts of interests.[Footnote 30] 

Automatic Enrollment, One Option for Increasing 401(k) Participation 
and Savings, Shows Promise: 

A recent change in law to facilitate automatic enrollment shows promise 
for increasing participation rates and savings. Under automatic 
enrollment, a worker is enrolled into the plan automatically, or by 
default, unless they explicitly choose to opt out. In addition, for 
participants who do not make their own choices, plan sponsors also 
establish default contribution rates--the portion of an employee's 
salary that will be deposited in the plan--and a default investment 
fund--the fund or other vehicle into which deferred savings will be 
invested. The Pension Protection Act of 2006 and recent regulatory 
changes have facilitated plan sponsors' adoption of automatic 
enrollment.[Footnote 31] In fact, plan sponsors have increasingly been 
adopting automatic enrollment policies in recent years. According to 
Fidelity Investments, the number of plans with automatic enrollment has 
increased from 1 percent in December 2004 to about 16 percent in March 
2009, with higher rates of adoption among larger plan sponsors. 
Fidelity Investments estimates that 47 percent of all 401(k) 
participants are in plans with automatic enrollment. Employers may also 
adopt an automatic escalation policy, another policy intended to 
increase retirement savings. Under automatic escalation, in the absence 
of an employee indicating otherwise, an employee's contribution rates 
would be automatically increased at periodic intervals, such as 
annually. For example, if the default contribution rate is 3 percent of 
pay, a plan sponsor may choose to increase an employee's rate of saving 
by 1 percent per year, up to some maximum, such as 6 percent. 

One of our recent reports found that automatic enrollment policies can 
result in considerably increased participation rates for plans adopting 
them, with some plans' participation rates increasing to as high as 95 
percent and that these high participation rates appeared to persist 
over time.[Footnote 32] Moreover, automatic enrollment had a 
significant effect on subgroups of workers with relatively low 
participation rates, such as lower-income and younger workers. For 
example, according to a 2007 Fidelity Investments study, only 30 
percent of workers aged 20 to 29 were participating in plans without 
automatic enrollment. In plans with automatic enrollment, the 
participation rate for workers in that age range was 77 percent, a 
difference of 47 percentage points. Automatic enrollment, through its 
default contribution rates and default investment vehicles, offers an 
easy way to start saving because participants do not need to decide how 
much to contribute and how to invest these contributions unless they 
are interested in doing so. However, current evidence is mixed with 
regard to the extent to which plan sponsors with automatic enrollment 
have also adopted automatic escalation policies. In addition, many plan 
sponsors have adopted relatively low default contribution rates. While 
the adoption rate for automatic enrollment shows promise, a lag in 
adoption of automatic escalation policies, in combination with low 
default contribution rates, could result in low saving rates for 
participants who do not increase contribution rates over time. 

Another recent GAO report offers additional evidence about the positive 
impact automatic enrollment could have on workers' savings levels at 
retirement. Specifically, we projected DC pension benefits for a 
stylized scenario where all employers that did not offer a pension plan 
were required to sponsor a DC plan with no employer contribution; that 
is, workers had universal access to a DC plan. When we coupled 
universal access with automatic enrollment, we found that approximately 
91 percent of workers would have DC savings at retirement. Further, we 
found that about 84 percent of workers in the lowest income quartile 
would have accumulated DC savings.[Footnote 33] 

In our work on automatic enrollment, we found that plan sponsors have 
overwhelmingly adopted TDFs as the default investment. TDFs allocate 
their investments among various asset classes and shift that allocation 
from equity investments to fixed-income and money market investments as 
a "target" retirement date approaches; this shift in asset allocation 
is commonly referred to as the fund's "glide path."[Footnote 34] Recent 
evidence suggests that participants who are automatically enrolled in 
plans with TDF defaults tend to have a high concentration of their 
savings in these funds. However, pension industry experts have raised 
questions about the risks of TDFs. For example, some TDFs designed for 
those expecting to retire in or around 2010 lost 25 percent or more in 
value following the 2008 stock market decline, leading some to question 
how plan sponsors evaluate, monitor, and use TDFs. GAO will be 
addressing a request from this committee to examine some of these 
concerns. 

Concluding Observations: 

DC plans, particularly 401(k) plans, have clearly overtaken DB plans as 
the principal retirement plan for U.S. workers and are likely to become 
the sole retirement savings plan for most current and future workers. 
Yet, 401(k) plans face major challenges, not least of which is the fact 
that many employers do not offer employer-sponsored 401(k) plans or any 
other type of plan to their workers. This lack of coverage, coupled 
with the fact that participants in 401(k) plans sometimes spend their 
savings prior to retirement or have their retirement savings eroded by 
fees, make it evident that, without some changes, a large number of 
people will retire with little or no retirement savings. 

Employers, workers, and the government all have to work together to 
ensure that 401(k) plans provide a meaningful contribution to 
retirement security. Employers have a role in first sponsoring 401(k) 
plans and then looking at ways to encourage participation, such as 
utilizing automatic enrollment and automatic escalation. Workers have a 
role to participate and save in 401(k) plans when they are given the 
opportunity to do so. In addition, both employers and workers have a 
role in preserving retirement savings. Government policy makers have an 
important role in setting the condition and the appropriate incentives 
that both encourage desired savings behavior but also protects 
participants. Recent government action that has helped enhance 
participation in 401(k) plans is a good first step. But action is still 
needed to improve disclosure on fees, especially those that are hidden, 
and measures need to be taken to discourage leakage. As this Committee 
and others move forward to address these issues, improvements may be 
made to 401(k) plans that can help assure that savings in such plans 
are an important part of individuals' secure retirement. 

Mr. Chairman, this completes my prepared statement. I would be happy to 
respond to any questions you or other Members of the Committee may have 
at this time. 

Contacts and Staff Acknowledgments: 

For further questions about this statement, please contact Barbara D. 
Bovbjerg at (202) 512-7215 or bovbjergb@gao.gov. Individuals making key 
contributions to this statement included Tamara Cross, David Lehrer, 
Joseph Applebaum, James Bennett, Jennifer Gregory, Angela Jacobs, 
Jessica Orr, and Craig Winslow. 

[End of section] 

Appendix I Selected GAO Reports and Testimonies Related to 401(K) 
Plans: 

Retirement Savings: Automatic Enrollment Shows Promise for Some 
Workers, but Proposals to Broaden Retirement Savings for Other Workers 
Could Face Challenges. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-10-31. Washington, D.C.: October 23, 2009. 

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

401(k) Plans: Policy Changes Could Reduce the Long-term Effects of 
Leakage on Workers' Retirement Savings. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-09-715. Washington, D.C.: August 
28, 2009. 

Private Pensions: Alternative Approaches Could Address Retirement Risks 
Faced by Workers but Pose Trade-offs. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-09-642. Washington, D.C.: July 
24, 2009. 

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

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

Private Pensions: GAO Survey of 401(k) Plan Sponsor Practices (GAO-08-
870SP, July 2008), an E-supplement to [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-774. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-08-870SP. Washington, D.C.: July 
16, 2008. 

Private Pensions: Low Defined Contribution Plan Savings May Pose 
Challenges to Retirement Security, Especially for Many Low-Income 
Workers. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-8. 
Washington, D.C.: November 29, 2007. 

Private Pensions: Information That Sponsors and Participants Need to 
Understand 401(k) Plan Fees. [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-222T. Washington, D.C.: October 30, 2007. 

Private Pensions: 401(k) Plan Participants and Sponsors Need Better 
Information on Fees. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
08-95T. Washington, D.C.: October 24, 2007. 

Employer-Sponsored Health and Retirement Benefits: Efforts to Control 
Employer Costs and the Implications for Workers. [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-07-355. Washington, D.C.: March 
30, 2007. 

Private Pensions: Increased Reliance on 401(k) Plans Calls for Better 
Information on Fees. [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-
07-530T. Washington, D.C.: March 6, 2007. 

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

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

[End of section] 

Footnotes: 

[1] Throughout this testimony, we consider a worker to be covered by an 
employer-sponsored plan if the employer offers a retirement plan, the 
worker is eligible to participate under the plan's rules and the worker 
chooses to participate in it. 

[2] For a list of the GAO reports and testimonies referenced in this 
testimony, see appendix I. 

[3] A plan must be considered "qualified" to obtain favorable tax 
treatment under federal law. One requirement for a qualified 401(k) 
plan is that participants must elect to have the employer provide an 
amount of salary to the employee in cash or to defer the amount of 
salary and deposit the amount in the employee's plan account. 

[4] Rev. Rul. 98-30, 1998-1 C.B. 1273. The IRS held that employer 
contributions made to a plan on an employee's behalf, in lieu of cash 
payment, are considered elective contributions, so long as the employee 
has an opportunity to receive cash instead and has not affirmatively 
expressed a desire to do so. In a subsequent ruling, the IRS determined 
that contributions made on behalf of either a newly hired or current 
employee in lieu of cash compensation were valid elective 
contributions. Rev. Rul. 00-8, 2000-1 C.B. 617. 

[5] Pub. L. No. 109-280 § 902, 120 Stat. 780, 1033-39 (codified at 26 
U.S.C. §§ 401(k)(13), 401(m)(12), 414(w) and 29 U.S.C. § 1144(e), and 
Automatic Contribution Arrangements, 74 Fed. Reg. 8,200 (Feb. 24, 
2009). 

[6] Rev. Rul.2009-30, 2009-39 I.R.B. 391 (demonstrating ways 401(k) 
plan sponsors can include automatic contribution increases in plans) 
and Notice 2009-65, 2009-39 I.R.B. 413 (providing sample automatic 
enrollment plan language 401(k) plan sponsors can adopt with automatic 
IRS approval). 

[7] Pub. L. No. 930-406, 88 Stat. 829. 

[8] 26 U.S.C. § 401(k). 

[9] 29 U.S.C. § 1021. 

[10] 29 U.S.C. § 1104. For example, any person who makes investment 
decisions with respect to a qualified employee benefit plan's assets is 
a fiduciary. The duties the person performs for the plan rather than 
their title or office determines whether this person is a plan 
fiduciary. 29 U.S.C. § 1002(21)(A). 

[11] EBSA shares responsibility for enforcing ERISA with the Internal 
Revenue Services and the Pension Benefit Guarantee Corporation. 

[12] The Current Population Survey is a monthly survey conducted by the 
U.S. Census Bureau among a nationally representative sample of 
approximately 100,000 households, primarily in order to estimate the 
rates of employment and unemployment. During March of each year, the 
survey includes supplemental questions about retirement plan 
participation and other financial matters. 

[13] See GAO, Private Pensions: Low Defined Contribution Plan Savings 
May Pose Challenges to Retirement Security, Especially for Many Low- 
Income Workers, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-8] 
(Washington, D.C.: Nov. 29, 2007). 

[14] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-8]. 

[15] We use the term "cashout" to refer to a lump-sum distribution made 
to an employee at job separation. 

[16] In this testimony, we use a standard definition of leakage--that 
is, participants tapping into their accrued retirement savings-- 
typically through loans, withdrawals, and lump-sum cashouts--prior to 
retirement. We do not take into account other events that could 
adversely affect participant balances, such as participants not taking 
advantage of the full employer matching contribution or participants 
contributing less than the annual federal limit. 

[17] 26 U.S.C. § 401(k)(2)(b). 

[18] See GAO, 401(k) Plans: Policy Changes Could Reduce the Long-term 
Effects of Leakage on Workers Retirement Savings, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-09-715] (Washington, D.C.: Aug. 
28, 2009). 

[19] 26 U.S.C. § 72(t), 26 C.F.R. § 1.401(k)-1(d)(3)(iv)(E)(1), and 26 
U.S.C. § 401(a)(31). 

[20] 26 C.F.R. § 1.401(k)-1(d)(3)(iv)(E)(2). 

[21] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-715]. 

[22] Investment fees pay for: selecting a mutual fund's portfolio of 
securities and managing the fund; marketing the fund and compensating 
brokers who sell the fund; and providing other share-holder services 
such as distributing the fund prospectus. As participants accrue 
earnings on their investments, they also pay a number of fees, 
including expenses, commissions, or other charges associated with 
operating a 401(k) plan. Record-keeping fees cover a variety of 
activities such as enrolling plan participants, processing participant 
funds selections, preparing and mailing account statements, and other 
related administration activities. Unlike investment fees, plan record- 
keeping fees typically apply to the entire 401(k) plan rather than the 
individual investment options. 

[23] See 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/cgi-bin/getrpt?GAO-07-21] (Washington, 
D.C.: Nov. 16, 2006). 

[24] AARP Public Policy Institute, "Pension Participant Knowledge About 
Plan Fees," Data Digest (November 2004). 

[25] See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-21]. 

[26] H.R. 1984, H.R. 2989, and S. 401, 111TH Cong. (2009). 

[27] Plan sponsors pay pension consultants to give them advice on 
matters such as selecting investment options for the plan and 
monitoring their performance and selecting other service providers, 
such as custodians, administrators, and broker-dealers. Office of 
Compliance Inspections and Examinations, Staff Report Concerning 
Examinations of Select Pension Consultants (U.S. Securities and 
Exchange Commission: May 16, 2005). 

[28] See GAO, Private Pensions: Conflicts of Interest Can Affect 
Defined Benefit and Defined Contribution Plans, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-09-503T] (Washington, D.C.: Mar. 
24, 2009). 

[29] In addition, plan sponsors, being unaware, are often unable to 
report information about these arrangements to Labor on Form 5500 
Schedule C. See [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-
21]. 

[30] Labor published a notice of proposed rulemaking (NPRM) on July 23, 
2008 (73 Fed. Reg. 43,014) but the regulation has not yet been 
finalized. 

[31] Pub. L. No. 109-280 § 902, 120 Stat. 780, 1033-39 (codified at 26 
U.S.C. §§ 401(k)(13), 401(m)(12), 414(w) and 29 U.S.C. § 1144(e), and 
Automatic Contribution Arrangements, 74 Fed. Reg. 8,200 (Feb. 24, 
2009). 

[32] See GAO, Retirement Savings: Automatic Enrollment Shows Promise 
for Some Workers, but Proposals to Broaden Retirement Savings for Other 
Workers Could Face Challenges, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-10-31] (Washington, D.C.: Oct. 23, 2009). 

[33] See GAO, Private Pensions: Alternative Approaches Could Address 
Retirement Risks Faced by Workers but Pose Trade-offs, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-09-642] (Washington, D.C.: July 
24, 2009). 

[34] For example, a TDF could be designed for workers expecting to 
retire many years in the future and would typically have a much greater 
allocation to equities and a lesser allocation to fixed-income 
investments. As the workers near retirement age, the allocations would 
shift, resulting in a greater allocation to fixed-income investments. 

[End of section] 

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