Private Pensions:

Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees

GAO-07-21: Published: Nov 16, 2006. Publicly Released: Nov 30, 2006.

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American workers are increasingly relying on 401(k) plans, which allow pre-tax contributions to individual accounts, for their retirement income. As workers accrue earnings on their investments, they also pay a number of fees that may significantly decrease their retirement savings. Because of concerns about the effects of fees on participants' retirement savings, GAO examined (1) the types of fees associated with 401(k) plans and who pays these fees, (2) how information on fees is disclosed to plan participants, and (3) how the Department of Labor (Labor) oversees plan fees and certain business arrangements. GAO reviewed industry surveys on fees and interviewed Labor officials and pension professionals about disclosure and reporting practices.

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. The information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options. The Employee Retirement Income Security Act of 1974 (ERISA) requires that plan sponsors provide participants with certain disclosure documents, but these documents are not required to contain information on fees borne by individual participants. Additional fee disclosures are required for certain--but not all--plans in which participants direct their investments. These disclosures are provided to participants in a piecemeal fashion and do not provide a simple way for participants to compare plan investment options and their fees. Labor has authority under ERISA to oversee 401(k) plan fees and certain types of business arrangements that could affect fees, but lacks the information it needs to provide effective oversight. Labor collects information on fees from plan sponsors, investigates participants' complaints or referrals from other agencies on questionable 401(k) plan practices, and conducts outreach to educate plan sponsors about their responsibilities. However, the information reported to Labor does not include all fees charged to 401(k) plans and therefore has limited use for effective oversight and for identifying undisclosed business arrangements among service providers. Without disclosing these arrangements, service providers may steer plan sponsors toward investment products or services that may not be in the best interest of participants and may cause them to pay higher fees. Labor has several initiatives underway to improve the information it has on fees and the various business arrangements among service providers.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Congress has considered this recommendation. In 2007, GAO testified on our work on 401(k) fees at hearings held by three committees: House Committee on Education and Labor, Senate Special Committee on Aging, and House Committee on Ways and Means. Each of these committees introduced bills, H.R. 3185, S. 2473, and H.R. 3764, to amend the Employee Retirement Income Security Act (ERISA) of 1974. The bills contained various provisions that would require special reporting and disclosure rules for 401(k) plans, to require plan sponsors to disclose to participants a fee menu, including percentage of fee assessed against amounts invested (expense ratio) and other information, including information on historical return and level of investment risk, for each investment option offered under the plan. In addition, in the 112th Congress, the House Education and the Workforce Committee is introducing a bill to improve fee disclosures to participants in a way that facilitates comparison among the options, as our recommendation advises.

    Matter: To ensure that participants have a tool to make informed comparisons and decisions among plan investment options, Congress may wish to consider amending ERISA to require all sponsors of participant-directed plans to disclose fee information of 401(k) investment options to participants in a way that facilitates comparison among the options. This information could be provided via expense ratios and be communicated annually in a single document alongside other key information about the investment options such as historical performance and risk. Providing such a disclosure to participants who are responsible for directing their 401(k) investments would ensure that they have another important tool to make informed comparisons and investment decisions among the plan's options.

  2. Status: Closed - Implemented

    Comments: In 2007, GAO testified on our work on 401(k) fees at hearings held by three committees: House Committee on Education and Labor, Senate Special Committee on Aging, and House Committee on Ways and Means. Each of these committees also introduced bills, H.R. 3185, S. 2473, and H.R. 3764, that would amend the Employee Retirement Income Security Act of 1974. Both House bills contained provisions that would require special reporting and disclosure rules for 401(k) plans to prohibit plan sponsors from entering into a contract for plan services without first obtaining a written statement of who will be performing plan services under the contract and a description and annual cost estimate of such services, including all components of total cost paid to affiliated or third-party service providers under the contract. In addition, the Congress has considered this issue and asked GAO for further investigation.

    Matter: To allow plan sponsors, and ultimately Labor, to provide better oversight of fees and certain business arrangements among service providers, Congress may wish to consider amending ERISA to explicitly require that 401(k) service providers disclose to plan sponsors the compensation that providers receive from other service providers.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: In 2010, Labor pursued two regulatory initiatives focusing on better disclosure of plan and investment-related fee and expense information. The first regulation, under ERISA section 408(b)(2), is designed to ensure that service providers furnish that information necessary for a plan fiduciary to assess the reasonableness of the compensation - direct and indirect - being paid for the services rendered and to assess potential conflicts of interest that may impact a service provider's ability to provide the required plan services. The regulation was published in interim-final form on July 16, 2010 for comment. As of 2011, the regulation is undergoing additional review. Its effective date has been extended to April 1, 2012. The second regulation, under ERISA section 404, is designed to ensure that plan participants and beneficiaries are furnished the information necessary to assess plan administrative and investment functions and the related costs. This regulation was reviewed by OMB and issued as a final rule in 2010. Labor is adopting a 60-day transition period for the participant level fee disclosure rule, that is tied to the effective date of the 408(b)(2) regulation.

    Recommendation: To better enable the agency to effectively oversee 401(k) plan fees, the Secretary of Labor should require plan sponsors to report a summary of all fees that are paid out of plan assets or by participants. This summary should list fees by type, particularly investment fees that are being indirectly incurred by participants.

    Agency Affected: Department of Labor

 

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