401(k) Plans:

Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees

GAO-12-325: Published: Apr 24, 2012. Publicly Released: May 23, 2012.

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What GAO Found

Plan sponsors and participants paid a range of fees for services, though smaller plans typically paid higher fees as a percentage of plan assets. For example, the average amount sponsors of small plans reported paying for recordkeeping and administrative services was 1.33 percent of assets annually, compared with 0.15 percent paid by sponsors of large plans. Larger plans were more likely to pass recordkeeping fees along to participants, but when fees were passed along to participants in small plans, those in large plans paid lower fees than those in small plans. Participants also paid for investment and plan consulting fees—through fees deducted from their plan assets—in more instances than sponsors.

GAO’s survey and review of plan documents showed that some sponsors faced challenges in understanding the fees they and their participants were charged. Some sponsors did not know if their providers used complex fee arrangements, such as revenue sharing, or if their plans paid certain fees under an insurance contract, such as a group annuity contract. In addition, some sponsors reported knowing about arrangements, but did not fully understand how these fees were charged. For example, one relatively large plan underestimated recordkeeping fees by more than $58,000, because the sponsor did not include the fees charged to participants’ accounts under its revenue sharing arrangement.

The Department of Labor (Labor) has taken several actions to help sponsors understand and monitor fees charged by service providers. For example, Labor disseminates a number of publications and resources, including a 401(k) fees checklist that is available to sponsors on its website to help them better understand plan fees. However, according to GAO’s survey results, more than an estimated 90 percent of sponsors either did not know about or have not used Labor’s resources to compare and assess plan fees. Additionally, sponsors have access to the plan information of others, including some fees paid, through the Form 5500, but GAO’s survey also shows that the information is not being used by sponsors. Finally, although Labor has recently taken on regulatory initiatives to enhance fee disclosures to sponsors, their effect remains to be seen. For example, Labor is in the process of revising a proposed change to the definition of the term “fiduciary,” which may allow Labor to oversee a broader range of plan investment advisers. However, Labor’s authority over other types of providers, who have considerable influence over sponsors and may charge sponsors and their plan participants excessive fees, is limited.

The Department of Labor (Labor) has taken several actions to help sponsors understand and monitor fees charged by service providers. For example, Labor disseminates a number of publications and resources, including a 401(k) fees checklist that is available to sponsors on its website to help them better understand plan fees. However, according to GAO’s survey results, more than an estimated 90 percent of sponsors either did not know about or have not used Labor’s resources to compare and assess plan fees. Additionally, sponsors have access to the plan information of others, including some fees paid, through the Form 5500, but GAO’s survey also shows that the information is not being used by sponsors. Finally, although Labor has recently taken on regulatory initiatives to enhance fee disclosures to sponsors, their effect remains to be seen. For example, Labor is in the process of revising a proposed change to the definition of the term “fiduciary,” which may allow Labor to oversee a broader range of plan investment advisers. However, Labor’s authority over other types of providers, who have considerable influence over sponsors and may charge sponsors and their plan participants excessive fees, is limited.

Why GAO Did This Study

Studies have been conducted to better understand the fees 401(k) plan sponsors and their participants pay. However, these studies focus on larger plans. Thus, uncertainty remains about the amounts paid by small and medium-sized plans and the level of knowledge and expertise these sponsors have to assess the fees charged by service providers.

GAO addressed the following related to small, medium-sized, and large plans: (1) amounts plan sponsors and participants pay for services, (2) challenges sponsors face in understanding how fees are charged, and (3) actions Labor has taken to help sponsors better understand and monitor the fees charged by service providers. GAO reviewed relevant federal laws, regulations, and retirement research, and interviewed federal officials and industry experts. GAO also conducted a survey of 1,000 401(k) plans to collect information about fees paid for plan services. The response rate allowed GAO to generalize to the population of 401(k) plans for most of the survey questions. The survey instrument and most results can be viewed at GAO-12-550SP.

What GAO Recommends

GAO recommends that Labor develop and implement more proactive approaches to sponsor educational outreach, improve public access to annual Form 5500 data, and examine the definition of a fiduciary to determine if it captures the current relationship between sponsors and providers. In response, Labor generally agreed with the findings and will explore ways to implement these recommendations.

To view the e-supplement online, click on GAO-12-550SP. For more information, contact Charlie Jeszeck at (202) 512-7215 or jeszeckc@gao.gov.

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 help strengthen Labor's ability to oversee 401(k) plans, we recommend that in addition to Labor's ongoing efforts, Labor should evaluate whether individuals and service providers who exert significant control over the plan should be considered the Employee Retirement Income Security Act of 1974 (ERISA) fiduciaries.

    Agency Affected: Department of Labor

    Status: Open

    Comments: The Department of Labor (Labor) agreed with this recommendation, noting that this regulatory initiative continues to be a high priority as evidenced by recent efforts to update its rule defining the persons who are investment advice fiduciaries under ERISA. The agency plans to craft a clear and workable regulation that provides the strongest possible protections to individuals as well as to plan sponsors who offer retirement plans for their workers. As of October 2012, a new proposed rule had not yet been issued.

    Recommendation: To help sponsors better understand and monitor plan fees, including those paid by participants, Labor should enhance web access to publicly available fee information it collects on the annual Form 5500 to provide sponsors with information to compare and assess fees charged by service providers, such as building in the ability to search for and create customized reports of plans with similar features or providers for the purpose of benchmarking. It should also consider developing and posting key information, such as a data dictionary, about the publicly available Form 5500 datasets on its website, similar to the information distributed about the Form 5500 research files.

    Agency Affected: Department of Labor

    Status: Open

    Comments: The Department of Labor (Labor) shares our interest in making the data collected by the Form 5500 accessible to the public. Regarding better web access to facilitate sponsors' ability to compare and benchmark fees, Labor noted that a web tool for these purposes would have a limited effectiveness because of inherent limitations to the Form 5500 data. GAO's report acknowledges limitations, however, we continue to believe that the fee information collected could help sponsors monitor and compare fees. Labor believes that its new fee disclosure regulations will be a better tool for expanding transparency and encouraging informed comparison shopping by plan fiduciaries. The effects of these regulations remain unclear.

    Recommendation: In order to help plan sponsors better understand how fees are charged to their plans and to help them make well-informed decisions, the Secretary of Labor should develop and implement alternative approaches to Labor's plan sponsor outreach and education initiatives that actively engage sponsors and allow the agency to track sponsor engagement. Such actions could include e-mailing sponsors about new regulations, guidance, and tools available on its website, and then monitoring website traffic and publication downloads to determine whether such initiatives are reaching their targeted audience.

    Agency Affected: Department of Labor

    Status: Open

    Comments: The Department of Labor (Labor) generally agreed with our recommendations. Labor noted that helping plan sponsors and participants obtain objective services at a fair price by enhancing the transparency of plan fees has been one of its highest priorities in recent years. Specifically, Labor cited the completion of three regulatory initiatives (1) a regulation regarding the disclosure of service provider fee and revenue sharing arrangements, (2) disclosure of plan and investment-related information to participants and beneficiaries in 401(k)-type plans, and (3) changes to the information large plans must report about service provider compensation on the Form 5500 designed to augment and improve the disclosure of plan fee information at all levels. Two of these regulations had not been implemented during GAO's review, and their effectiveness remains to be seen. The third regulation provided plan sponsors more useful information about their provider's compensation, but it did not help many sponsors negotiate plan fees or make comparisons of fees charged by other service providers. In addition, in May 2012, Labor's Employee Benefits Security Administration began distributing a new biweekly newsletter by email as a way to share tools and resources, such as educational materials about retirement plans, notices about public events, and updates about policies that protect retirement savings.

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