Private Pensions:

Additional Changes Could Improve Employee Benefit Plan Financial Reporting

GAO-10-54: Published: Nov 5, 2009. Publicly Released: Dec 7, 2009.

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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:

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  • 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 published its final rule expanding Schedule C reporting of service provider indirect compensation, in November 2007. In addition, Labor published a final regulation in October 2010, under ERISA section 404, establishing a fiduciary obligation to provide fee and other investment-related information, including a comparative chart, to pension plan participants and beneficiaries responsible for directing the investment of assets held in their individual accounts. Furthermore, in February 2012, the Department published a final regulation under section 408(b)(2) of ERISA, that requires covered service providers, such as recordkeepers and brokers, to disclose to pension plan sponsors the services they provide, information on direct and indirect compensation they will receive, and, for certain covered service providers, information regarding certain expenses associated with plan investment options. Labor also stated that it will, as part of its ongoing review of the Form 5500 and annual reporting requirements, continue to consider improvements to the reporting of plan service provider information. For example, now that the 408(b)(2) rule is published in final form, Labor says it will be able to review the Schedule C reporting requirements to determine if there are areas, taking into account the differences in underlying purposes and scope, where it could improve the harmonization of the final 408(b)(2) service provider disclosures to plan fiduciaries and the plan fiduciary Schedule C annual Form 5500 reporting requirements. According to Labor, substantive changes in the Schedule C requirements would require appropriate notice and comment rulemaking.

    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 its revisions to the Schedule C were designed primarily to improve disclosure to plan administrators, rather than to create a government database for evaluating and comparing indirect compensation arrangements in the pension plan marketplace. In the case of indirect compensation charged against investment funds holding investments of many plans and other investors, no single method of allocating that compensation among investors would necessarily apply uniformly to all mutual funds, bank investment funds, insurance investment contracts, and other pooled investment vehicles. Reporting each plan's share of any given asset-based fee thus would not likely result in easily comparable data. The Department was also mindful of the fact that the Schedule C is filed by only large plans and that only service providers that receive $5,000 or more in compensation are covered. Thus, the fee information on Schedule C is by definition an incomplete data field. The Department concluded that some of the concerns regarding the burden and complexity of allocating fees charged against plan assets in investment funds could be addressed by establishing a separate reporting rule that relied on disclosures required by other regulations or business practices if those disclosures met the objectives underlying the Department's Schedule C proposal. The final Schedule C revisions thus included an alternative reporting option for "eligible indirect compensation." 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. Given the complexity of, and differences among, compensation and fee arrangements used by companies and individuals that provide services to pension plans and group health and other welfare plans, it would be difficult to establish through regulations a single annual reporting scheme for both large and small plans that would result in a comprehensive and uniform data collection for all forms and types of indirect compensation paid to or received by parties who provide services. With 408(b)(2) rule is published in final form, Labor will be able to review the Schedule C reporting requirements to determine if there are areas, taking into account the differences in underlying purposes and scope, for improving the harmonization of the final 408(b)(2) service provider disclosures to plan fiduciaries and the plan fiduciary Schedule C annual Form 5500 reporting requirements.

    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. Now that it has published a final 408(b)(2) rule, Labor stated that it will be able to review the Schedule C reporting requirements to determine if there are areas, taking into account the differences in underlying purposes and scope, where it could improve the harmonization of the final 408(b)(2) service provider disclosures to plan fiduciaries and the plan fiduciary Schedule C annual Form 5500 reporting requirements. According to Labor, substantive changes in the Schedule C requirements would require appropriate notice and comment rulemaking.

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