Private Pensions:

Additional Changes Could Improve Employee Benefit Plan Financial Reporting

GAO-10-54, Nov 5, 2009

Additional Materials:

Contact:

Barbara D. Bovbjerg
(202) 512-5491
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

The Department of Labor (Labor) collects information on fees charged to 401(k) plans primarily through its Form 5500. Labor issued final regulations in November 2007, making changes to, among other things, Schedule C of the Form 5500. Labor put emphasis on reporting the indirect compensation paid to service providers and between service providers, in an effort to capture all of the costs that plan sponsors incur. Congress and others are concerned that Labor's rules could result in duplicative and confusing reporting. Given these concerns, Government Accountability Office (GAO) was asked to examine the new requirements and determine whether Labor's new requirements will provide (1) clear and understandable guidance to plan sponsors and (2) useful information to Labor and others. GAO analyzed Labor's regulations and interviewed Labor and other officials about disclosure and reporting practices.

Sponsors and service providers report confusion over Labor's new reporting requirements for the Form 5500 Schedule C and over how plan expenses are defined. Specifically, they have questions regarding the distinction between eligible and ineligible indirect compensation, that is, which types of indirect compensation must be reported on the Form 5500 (compensation that qualifies as "eligible" does not have to be reported). Labor's guidance on its Web site thus far has been limited, and, according to sponsors and service providers GAO spoke with, has raised additional questions that remain unanswered. Specifically, Labor has not provided sufficient guidance for sponsors and providers to accurately determine what elements of compensation qualify as eligible indirect compensation (fees or expense reimbursements charged to investment funds and reflected in the value of the investment). Therefore, interpretations have been left up to sponsors and providers and may result in a range of reporting practices, causing Labor to receive inconsistent and incomplete data. In addition to the new Form 5500 requirements, Labor has proposed another regulation on service provider fee disclosure (its 408(b)(2) regulation), but it has not yet been finalized. Sponsors and service providers GAO talked with stressed the importance of coordinating this initiative with the new Form 5500 requirements. Doing so may reduce the burden and the cost to service providers of making changes to their data gathering and reporting systems and clarify for plan sponsors the information they need to understand and compare the fees charged by various service providers. In GAO's discussions with Labor officials, they agreed that there was a need to coordinate the two regulations, and said that although they are working to finalize the proposed 408(b)(2) regulation, it is uncertain when it will be published. Labor officials told GAO that they do not have specific plans for using the data received as a result of the new Form 5500 requirements and will wait to see what information is reported before deciding what to do with the data. Although Labor's new requirements are meant to ensure that plan sponsors obtain the information they need to assess the compensation paid to service providers for services rendered to the plan, the Form 5500 may not provide useful information to Labor and others. Because plan sponsors are likely to report indirect compensation in varying formats, it is unclear how Labor will be able to compare such data across plans. In addition, GAO previously reported that the information provided to Labor on the Form 5500 has limited use for effectively overseeing fees paid by 401(k) plans because it does not explicitly list all of the fees paid from plan assets, yet these types of fees comprise the majority of fees in 401(k) plans. For example, plan sponsors are not required to explicitly report asset-based fees that are netted from an investment fund's performance, even though they receive this information for each of the mutual funds they offer in the 401(k) plan. Thus, despite the changes to the Form 5500, the new information provided may not be very useful to Labor, plan sponsors, and others.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To minimize the possibility that inconsistent and incomparable information will be reported on the Schedule C and to ensure that the data collected results in meaningful information for Labor, sponsors, and participants, the Secretary of Labor should provide additional guidance regarding the reporting of indirect compensation and require that all indirect compensation be disclosed on the Schedule C.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor stated that it is committed to providing guidance necessary to the smooth implementation of the new reporting requirements, including the new Schedule C requirements. It has already engaged in substantial outreach on the new reporting requirements. In addition to publishing two sets of Frequently Asked Questions in the 2009 Schedule C, Labor has participated in many public programs and seminars and is also offering a series of free webcasts on the new reporting requirements. It will continue its outreach efforts, as well as update educational materials and publish additional Schedule C guidance.

    Recommendation: Furthermore, consistent with our previous recommendation, to ensure comparable disclosure among all types of service providers and ensure that all investment products' fees are fairly disclosed, the Secretary of Labor should require asset-based fees that are netted from an investment fund's performance (and, as such, are not paid with plan assets) be explicitly reported on the Form 5500.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor reported that it had originally proposed that all indirect compensation charged against a plan's investments be required to be reported on the Schedule C, without providing an alternative reporting option. However, Labor provided an alternative reporting option for eligible indirect compensation to plan fiduciaries on the basis of comments received on the proposed rule. In the case of asset-based charges against plan investments, the alternative reporting option in the final rule requires the plan to identify on the Schedule C the person from which the administrator receives certain required disclosures regarding that compensation. Labor stated that this alternative reporting option would provide the agency with enough information to engage in effective oversight activities. Labor also stated that once Schedule C reporting begins (for most plans, July 2010 and later), it will be able to evaluate the data it receives, taking into consideration our recommendation. Although Labor noted that its eligible indirect compensation reporting requirements are intended to help ensure fiduciaries are collecting information and evaluating service provider indirect compensation, GAO believes it is also important for the indirect compensation information to be reported to Labor and that Labor will not receive enough information to engage in effective oversight activities. In 2010, the Department stated that it wants to avoid using the Schedule C to accomplish fee disclosure objectives better dealt with in the 408(b)(2) fiduciary disclosure regulation or the participant level fee disclosure regulation, but it will continue to consider ways to enhance service provider fee reporting to optimize the data available to Department and other enforcement agencies and research entities.

    Recommendation: To reduce the potential for additional costs and burden being placed on service providers, the Secretary of Labor should coordinate the implementation of the Form 5500 revisions with the publication of its final 408(b)(2) regulations, since the two initiatives are closely related.

    Agency Affected: Department of Labor

    Status: Open

    Comments: Labor agreed with this recommendation and pledged to coordinate the initiatives. It published an interim final rule enhancing required disclosure from certain pension plan service providers to plan fiduciaries as part of a "reasonable" contract or arrangement for services under ERISA section 408(b)(2) in July 2010. As originally published, the effective date for the interim final 408(b)(2) regulation was July 16, 2011, as to both new and existing contracts or arrangements between covered plans and covered service providers. The Department further delayed the effective date for the interim final fiduciary-level fee disclosure rule published on July 16, 2010 (75 FR 41600) from July 16, 2011 to April 1, 2012. As the GAO report noted, the Schedule C revisions are an integral part of Labor's multifaceted initiative to improve the quality and comprehensibility of service provider fee and compensation information.