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entitled 'Private Pensions: Information That Sponsors and Participants 
Need to Understand 401(k) Plan Fees' which was released on October 30, 
2007. 

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Testimony before the Committee on Ways and Means, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Tuesday, October 30, 2007: 

Private Pensions: 

Information That Sponsors and Participants Need to Understand 401(k) 
Plan Fees: 

Statement of Barbara D. Bovbjerg, Director: 

Education, Workforce, and Income Security Issues: 

GAO-08-222T: 

GAO Highlights: 

Highlights of GAO-08-222T, a testimony before the Committee on Ways and 
Means, House of Representatives 

Why GAO Did This Study: 

Employers are increasingly moving away from traditional pension plans 
to what has become the most dominant and fastest growing type of plan, 
the 401(k). For 401(k) plan sponsors, understanding the fees being 
charged helps fulfill their fiduciary responsibility to act in the best 
interest of plan participants. Participants should consider fees as 
well as the historical performance and investment risk for each plan 
option when investing in a 401(k) plan because fees can significantly 
decrease retirement savings over the course of a career. 

GAO’s prior work found that information on 401(k) fees is limited. GAO 
previously made recommendations to both Congress and the Department of 
Labor (Labor) on ways to improve the disclosure of fee information to 
plan participants and sponsors and reporting of fee information by 
sponsors to Labor. Both Labor and Congress now have efforts under way 
to ensure that both participants and sponsors receive the necessary fee 
information to make informed decisions. These efforts on the subject 
have generated significant debate. This testimony provides information 
on 401(k) plan fees that (1) sponsors need to carry out their 
responsibilities to the plan and (2) plan participants need to make 
informed investment decisions. To complete this statement, GAO relied 
on previous work and additional information from Labor and industry 
professionals regarding information about plan fees. 

What GAO Found: 

Information on 401(k) plan fee disclosure serves different functions 
for plan sponsors and participants. Plan sponsors need to understand a 
broad range of information on expenses associated with their plans to 
fulfill their fiduciary responsibilities. Sponsors need information on 
expenses associated with the investment options that they offer to 
participants and the providers they hire to perform plan services. Such 
information would help them meet their fiduciary duty to determine if 
expenses are reasonable for the services provided. In addition, 
sponsors also need to understand the implication of certain business 
arrangements between service providers, such as revenue sharing. 
Despite some disagreements about how much information is needed, 
industry professionals have made various suggestions to help plan 
sponsors collect meaningful information on expenses. Labor has also 
undertaken a number of activities related to the information on plan 
fees that sponsors should consider. 

Participants need fee information to make informed decisions about 
their investments—primarily, whether to contribute to the plan and how 
to allocate their contributions among the investment options the plan 
sponsor has selected. However, many participants are not aware that 
they pay any fees, and those who are may not know how much they are 
paying. Most industry professionals agree that information about an 
investment option’s relative risk, its historic performance, and the 
associated fees is fundamental for plan participants. Some industry 
professionals also believe that other fees that are also charged to 
participants should be understood, so that participants can clearly see 
the effect these fees can have on their account balances. 

Figure: Participants' Response to Survey Questions on Awareness of 
Fees: Do you know how much in fees and expenses you are paying for your 
401(k) plan? 

This is a pie chart showing the percentage of people surveyed who knew 
how much they were paying in fees and expenses for their 401(k) plan. 
83% were not aware, and 17% were aware of how much they were paying. 

[See PDF for image] 

Source: AARP's Survey of 4019k) Participants' Awareness and 
Understanding of Fees, developed and deployed by Knowledge Networks, 
July 2007. 

[End of figure] 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-222T]. 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 discuss the information that sponsors and participants 
need to better understand the fees associated with their 401(k) plans. 
Named after section 401(k) of the Internal Revenue Code, 401(k) plans 
are private sector pension plans that typically allow workers to save 
for retirement by diverting a portion of their pretax income into an 
investment account that can grow tax-free until withdrawn in 
retirement. Over the past two decades there has been a noticeable shift 
in the types of plans employers are offering employees. Employers are 
increasingly moving away from traditional defined benefit plans to what 
has become the most dominant and fastest growing type of defined 
contribution plan, the 401(k).[Footnote 1] As workers accrue earnings 
on their investments, they also pay a number of fees, including 
expenses, commissions, or other charges associated with a 401(k) plan. 

For plan sponsors, understanding their expenses helps fulfill their 
fiduciary responsibility to act in the best interest of plan 
participants. Given this responsibility and the potentially large 
impact on an individual's account balance over time, it is important 
that both plan sponsors, typically the employer, and participants, as 
investors, receive and understand the fee information necessary to make 
informed decisions. Even a small fee deducted from a worker's assets 
today could represent a large amount of money years later had it 
remained in the account to be reinvested. The Department of Labor 
(Labor) is currently finalizing regulations on the disclosure of fees 
to participants, and several bills have been introduced to improve such 
disclosure. These efforts have generated debate about the type of fee 
information sponsors and participants may need, and the amount and 
format of fee information that should be disclosed. As Congress 
considers these issues, you asked us to describe information sponsors 
and participants need about fees. My remarks today will focus on the 
information on fees that (1) sponsors need to carry out their 
responsibilities to the plan and (2) plan participants need to make 
informed investment decisions. 

To describe the fee information needed by 401(k) plan sponsors and 
participants, we relied on our previous work that examined the types of 
fees associated with 401(k) plans and who pays these fees, how 
information is disclosed to sponsors and participants, and Labor's 
oversight of fees.[Footnote 2] We also used information from Labor and 
from industry professionals on the subject of fee disclosure to plan 
sponsors. We conducted our review in October 2007 in accordance with 
generally accepted government auditing standards. 

In summary, plan sponsors need to understand a broad range of 
information on expenses associated with their 401(k) plans to fulfill 
their fiduciary responsibilities. For example, sponsors need 
information on expenses associated with the investment options that 
they offer to participants and the providers they hire to perform plan 
services. Such information would help them meet their fiduciary duty to 
determine if expenses are reasonable for the services provided. In 
addition, sponsors need to understand the implication of certain 
business arrangements between service providers, such as revenue 
sharing. While industry professionals might agree about some of the 
information that sponsors need, they disagree about how much 
information is needed about individual expense components when a 
package of plan services, known as a "bundled" arrangement, is sold to 
a sponsor for a single price. Despite this disagreement, industry 
professionals have made various suggestions to help plan sponsors 
collect meaningful information on expenses. Labor has also undertaken a 
number of activities related to the information on plan expenses that 
sponsors should consider. 

Participants need fee information to make informed decisions about 
their investments--primarily, whether to contribute to the plan and how 
to allocate their contributions among the investment options the plan 
sponsor has selected. To make informed decisions, participants need to 
be made aware of an investment option's relative risk, its historic 
performance, and the fees they pay. However, many participants are not 
aware that they pay any fees, and of those who are, most may not know 
how much they are paying. 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. Some industry professionals also believe that other fees 
that are also charged to participants should be understood so that 
participants can clearly see the effect these fees can have on their 
account balances. 

Background: 

Roughly half of all workers participate in an employer-sponsored 
retirement, or pension, plan. Private sector pension plans are 
classified as either defined benefit or defined contribution plans. 
Defined benefit plans promise to provide, generally, a fixed level of 
monthly retirement income that is based on salary, years of service, 
and age at retirement, regardless of how the plan's investments 
perform. In contrast, benefits from defined contribution plans are 
based on the contributions to and the performance of the investments in 
individual accounts, which may fluctuate in value. 

The Employee Retirement Income Security Act of 1974 (ERISA) [Footnote 
3] establishes the responsibilities of employee benefit plan decision 
makers and the requirements for disclosing and reporting plan fees. 
Typically, the plan sponsor is a fiduciary.[Footnote 4] A plan 
fiduciary includes a person who has discretionary authority or control 
over plan management or any authority or control over the management or 
disposition of plan assets.[Footnote 5] ERISA requires that plan 
sponsors responsible for managing employee benefit plans carry out 
their plan responsibilities prudently and solely in the interest of the 
plan's participants and beneficiaries. Plan sponsors, as fiduciaries, 
are required to act on behalf of plan participants and their 
beneficiaries. These responsibilities include: 

* selecting and monitoring service providers to the plan, 

* reporting plan information to the government and to participants, 

* adhering to the plan's investment policy statement and other plan 
documents (unless inconsistent with ERISA), 

* identifying parties-in-interest to the plan and taking steps to 
monitor transactions with them, 

* selecting investment options the plan will offer and diversifying 
plan investments, and: 

* ensuring that the services provided to their plan are necessary and 
that the cost of those services is reasonable. 

Plan sponsors may receive some information on an investment option's 
expenses that includes management fees, distribution and/or service 
fees, and certain other fees, such as accounting and legal fees. These 
fees are usually disclosed in the fund's prospectus or fund profile. To 
better enable the agency to effectively oversee 401(k) plan fees, we 
recommended in November 2006 that the Secretary of Labor should require 
plan sponsors to report to Labor 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. 

In addition to receiving information about investment fees, sponsors 
may receive information about expenses for administration and other 
aspects of plan operations. Sponsors can also have providers fill out 
the Form 5500, which ultimately gets filed with Labor,[Footnote 6] and 
includes information about the financial condition and operation of 
their plans. Generally, information on 401(k) expenses is reported on 
two sections of the Form 5500, Schedule A and Schedule C.[Footnote 7] 
However, our November 2006 study reported that the form is of little 
use to plan sponsors and others in terms of understanding the cost of a 
plan.[Footnote 8] 

While plan sponsors may receive information on investment and other 
fees, they may not be receiving information on certain relevant 
business arrangements. In November 2006, we reported that several 
opportunities exist for such business arrangements to go undisclosed, 
given the various parties involved in creating and administering 401(k) 
plans. Problems may occur when pension consultants or other companies 
providing services to a plan also receive compensation from other 
service providers. Service providers may be steering plan sponsors 
toward investment products or services in which they have a direct 
business interest themselves without disclosing such arrangements. In 
addition, plan sponsors, being unaware, are often unable to report 
information about these arrangements to Labor on Form 5500 Schedule C. 
Our November 2006 report also recommended that Congress consider 
amending ERISA to require that service providers disclose to plan 
sponsors the compensation that providers receive from other service 
providers. 

In our prior report on 401(k) fees, we found that the fee information 
that ERISA requires 401(k) plan sponsors to disclose is limited and 
does not provide participants with an easy way to compare investment 
options. All 401(k) plans are required to provide disclosures on plan 
operations, participant accounts, and the plan's financial status. 
Although they often contain some information on fees, these documents 
are not required to disclose the fees borne by individual participants. 
Overall, we found that the information currently provided to 
participants does not provide a simple way for them to compare plan 
investment options and their fees, and are provided to participants in 
a piecemeal fashion. 

Additional fee disclosures are required for certain--but not all--plans 
in which participants direct their investments. ERISA requires 
disclosure of fee information to participants where plan sponsors seek 
liability protection from investment losses resulting from 
participants' investment decisions. Such plans--known as 404(c) plans-
-are required to provide participants with a broad range of investment 
alternatives, descriptions of the risks and historical performance of 
such investment alternatives, and information about any transaction 
fees and expenses in connection with buying or selling interests in 
such alternatives.[Footnote 9] Upon request, 404(c) plans must also 
provide participants with, among other information, the expense ratio 
for each investment option. Plan sponsors may voluntarily provide 
participants with more information on fees than ERISA requires, 
according to industry professionals. For example, plan sponsors that do 
not elect to be 404(c) often distribute prospectuses or fund profiles 
when employees become eligible for the plan, just as 404(c) sponsors 
do. Still, absent requirements to do so, some plan sponsors may not 
identify all the fees participants pay. 

Some participants may be able to make comparisons across investment 
options by piecing together the fees that they pay, but doing so 
requires an awareness of fees that most participants do not have. 
Assessing fees across investment options can be difficult for 
participants because the data are typically not presented in a single 
document that facilitates comparison. However, most 401(k) investment 
options have expense ratios that are provided in prospectuses or fund 
profiles and can be compared; based on industry data, expenses for the 
majority of 401(k) assets, which are in investment options such as 
mutual funds, can be expressed as an expense ratio. 

Sponsors Must Consider a Broad Range of Information to Fulfill Their 
Fiduciary Responsibilities: 

Plan sponsors, as fiduciaries, must consider plan fee information 
related to a broad range of functions. According to Labor, ERISA 
requires that sponsors evaluate fee information associated with the 
investment options offered to participants and the providers they hire 
to perform plan services and consider the reasonableness of the 
expenses charged by the various providers of services to the plan. In 
addition, the sponsor must understand information concerning certain 
arrangements, such as when a service provider receives some share of 
its revenue from a third party. While industry professionals might 
agree about some of the information that sponsors need, they disagree 
about how much information is needed about individual expense 
components when a package of plan services, known as a bundled 
arrangement, is sold to a sponsor for a single price. Some pension plan 
associations and practitioners have made various suggestions to help 
plan sponsors collect meaningful information on expenses. Labor has 
also undertaken a number of activities related to the information on 
plan expenses that sponsors should consider. 

Sponsors Need Information to Evaluate Fees and Expenses Associated with 
Investment Options and Plan Services: 

In order to carry out their duties, plan sponsors have an obligation 
under ERISA to prudently select and monitor plan investment options 
made available to the plan's participants and beneficiaries and the 
persons providing services to the plan. Understanding and evaluating 
the fees and expenses associated with a plan's investments and services 
are an important part of a fiduciary's responsibility. Plan sponsors 
need to monitor the fees and expenses associated with the plan's 
investment options and the services provided by outside vendors, 
including any revenue sharing arrangements, to determine whether the 
expenses continue to be reasonable for the services provided. 

Industry experts have suggested that plan sponsors be required to 
obtain complete information about investment options before adding them 
to the plan's menu and obtain information concerning arrangements where 
a service provider receives some share of its revenue from a third 
party. A number of associations recently put together a list of service-
and fee-related data elements they believe defined contribution plan 
sponsors and service providers should discuss when entering into 
agreements. The data elements include such information as payments 
received by plan service providers from affiliates in connection with 
services to the plan, float revenue,[Footnote 10] and investment- 
related consulting services. The list is meant as a reference tool for 
plan sponsors and providers to use to determine the extent to which a 
service provider receives compensation in connection with its services 
to the plan from other service providers or plan investment products 
(e.g., revenue sharing or finders' fees). According to the associations 
that formulated this tool, the information can aid plan sponsors to 
evaluate any potential conflicts of interest that may arise in how fees 
are allocated among service providers. 

In our prior work, we noted that plan sponsors may not have information 
on arrangements among service providers that, according to Labor 
officials, could steer plan sponsors toward offering investment options 
that benefit service providers but may not be in the best interest of 
participants. For example, the Securities and Exchange Commission (SEC) 
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 11] In 
addition, specific fees that are considered to be "hidden" may mask the 
existence of a conflict of interest. Hidden fees are usually related to 
business arrangements where one service provider to a 401(k) plan pays 
a third-party provider for services, such as record keeping, but does 
not disclose this compensation to the plan sponsor. The problem with 
hidden fees is not how much is being paid to the service provider, but 
with knowing what entity is receiving the compensation and whether or 
not the compensation fairly represents the value of the service being 
rendered. 

While there is general agreement that understanding the fees and 
expenses associated with a plan's services is an important part of a 
fiduciary's responsibility, pension professionals disagree about how 
much information is needed about the expense components of bundled fee 
arrangements. One representative speaking on behalf of five industry 
associations stated he did not believe that the requirement to 
"unbundle" bundled services and provide individual costs in many 
detailed categories was particularly helpful because the information 
provided would not be very meaningful and the costs of providing this 
information would ultimately be passed on to plan participants through 
higher administrative fees. He also raised concerns about how a service 
provider would disclose component costs for services that are not 
offered outside a bundled contract. In addition, he said that posting 
such information could force public disclosure of proprietary 
information regarding contracts between service providers and plan 
sponsors. Finally, he stated that as long as they are fully informed of 
the services being provided, many plan sponsors might prefer reviewing 
aggregate costs so that they can compare and evaluate whether the 
overall fees are reasonable without analyzing each itemized fee. 

On the other hand, a representative of another pension association 
contended that it is possible with very little cost to develop an 
allocation methodology to provide a reasonable breakdown of fees for 
plan services. He believes that not disclosing component pricing 
provides a competitive advantage, enabling bundled providers to tell 
plan sponsors that they can offer certain retirement plan services for 
free--when fees are deducted from investment returns--while unbundled 
providers are required to disclose the fees for the same services. He 
further stated that any disclosure requirements should apply uniformly 
to all service providers. In his view this would allow plan fiduciaries 
to assess the reasonableness of fees by comparison and thereby allow 
fiduciaries to determine whether certain services are needed, which 
could lead to lower fees. 

Plan Sponsors Need to Collect and Evaluate Meaningful Information on 
Expenses: 

Industry professionals have suggested that, before hiring a service 
provider or adding investment options to the plan's menu, plan sponsors 
should obtain complete fee information, including information 
concerning arrangements in which a service provider receives some share 
of its revenue from a third party. Pension plan associations and 
practitioners have made various suggestions to help plan sponsors 
collect meaningful information on expenses. 

In 2004 the ERISA Advisory Council on Employee Welfare and Pension 
Benefit Plans created a Working Group to study retirement plan 
investment management fees and expenses as they were currently reported 
to Labor.[Footnote 12] In addition to issues related to annual 
reporting, the Working Group was also interested in determining whether 
plan sponsors currently receive adequate data from the service 
providers in order to both understand and report fees. In its final 
report, the Working Group made the following recommendations, among 
others, in an effort to further educate plan sponsors and fiduciaries 
about plan fees:[Footnote 13] 

* Plan sponsors should avoid entering transactions with vendors who 
refuse to disclose the amount and sources of all fees and compensation 
received in connection with plan. 

* Plan sponsors should require plan providers to provide a detailed 
written analysis of all fees and compensation (whether directly or 
indirectly) to be received for its services to the plan prior to 
retention. 

* Plan sponsors should obtain all information on fees and expenses as 
well as revenue sharing arrangements with each investment option. Plan 
sponsors should also determine the availability of other mutual funds 
or share classes within a mutual fund with lower revenue sharing 
arrangements prior to selecting an investment option. 

* Plan sponsors should require vendors to provide annual written 
statements with respect to all compensation, both direct and indirect, 
received by the provider in connection with its services to the plan. 

* Plan sponsors need to be aware that with asset-based fees, fees can 
grow just as the size of the asset pool grows, regardless of whether 
any additional services are provided by the vendor, and as a result, 
asset-based fees should be monitored periodically. 

* Plan sponsors should calculate the total plan costs annually. 

More recently in 2007, one witness before the ERISA Advisory Council 
recommended further that plan sponsors should evaluate fees associated 
with three categories of services:[Footnote 14] 

* Net investment expenses would not only include investment expenses, 
such as the expense ratio of a mutual fund, but would also subtract any 
fees or commissions paid to a broker, consultant, or advisor for 
services in the categories below. 

* Administrative expenses would include specific charges for 
operational services, such as record keeping, administration, 
compliance, and communication, as well as revenue sharing or other 
payments from investments. 

* Advisory expenses would include amounts paid directly by the plan to 
consultants, advisors, or brokers, as well as indirect payments from 
sources such as investments or related companies. 

In addition, some industry professionals believe that plan sponsors, as 
they monitor investment alternatives, should review investment 
alternative results against appropriate benchmarks and compare their 
plans' options to competing funds with similar investment 
goals.[Footnote 15] A benchmark is used to compare specific investment 
results with that of the market or economy. Industry professionals also 
noted that although there are appropriate benchmarks for mutual funds, 
benchmarks are not as readily available for other types of investment 
products. According to one industry professional that we spoke with, 
plan sponsors do not have good benchmarks to assess the reasonableness 
of investment options' expense ratios. Only limited information is 
available, and a national database of funds and their expense ratios 
does not exist. He further stated that without such a source, selecting 
which funds constitute a meaningful comparison set is not an easy task, 
and may be open to interpretation. Disclosure encourages price 
competition, but in his opinion, because of the lack of available 
information, the 401(k) market is relatively ineffective at fostering 
price competition. 

Labor's Initiatives Related to 401(k) Plan Sponsors: 

Labor, in its comments on our November 2006 report, stated that the 
agency has proposed a number of changes to the Form 5500, including 
changes that would expand the information required to be reported on 
the Schedule C. The changes are intended to assist plan sponsors in 
assessing the reasonableness of compensation paid for services and 
potential conflicts of interest that might affect those services. 
According to testimony earlier this month from the Assistant Secretary 
of Labor, the agency will be issuing a final regulation requiring 
additional public disclosure of fee and expense information on the Form 
5500 within the next few weeks.[Footnote 16] This change will be 
helpful to plan sponsors as they look retrospectively at the preceding 
plan year. In addition, Labor was considering an amendment to its 
regulation under section 408(b)(2) of ERISA, expected to be issued this 
year. This amendment would help to ensure that plan sponsors have 
sufficient information on the compensation to be paid to the service 
provider and the revenue sharing compensation paid by the plan for the 
specific services and potential conflicts of interest that may exist on 
the part of the service provider. 

Labor's ERISA Advisory Council currently has a working group focusing 
on fiduciary responsibility and revenue sharing. One area of focus is 
what service providers should be required to provide when they enter 
into a revenue sharing or rebate arrangement. Labor also provides a 
model form on its Web site specifically designed to assist plan 
fiduciaries and service providers in exchanging complete disclosures 
concerning the costs involved in service arrangements. Other 
associations and entities continue to develop model fee disclosure 
forms for plan sponsors. 

We are currently conducting work in the area of 401(k) plan sponsor 
practices, identifying how plan sponsors decide which features to 
include in the plans they establish and how plan sponsors oversee plan 
operations. Part of our work will consider how plan sponsors monitor 
the fees charged to their plans. We expect to issue a report in 2008. 

Basic Fee Information Is Important for Participants to Make Informed 
Decisions: 

Before making informed decisions about their 401(k) plan investments, 
participants must first be made aware of the types of plan fees that 
they pay. For example, according to one nationwide survey, some 
participants do not even know that they pay plan fees. In 2006, we 
reported that investment fees constitute the majority of fees in 401(k) 
plans and are typically borne by participants. 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. 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 or 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 the disclosure. 

Participants May Not Be Aware of the Fee Information Needed to Make 
Informed Decisions: 

Currently, most participants are responsible for directing their 
investments among the choices offered by their 401(k) plans, but may 
not be aware of the different fees that they pay. According to industry 
professionals, participants are often unaware that they pay any fees 
associated with their 401(k) plan. In fact, studies have shown that 
401(k) participants often lack the most basic knowledge--that there are 
fees associated with their plan. When asked in a recent nationwide 
survey whether they pay any fees for the 401(k) plan, as figure 1 
shows, 65 percent of 401(k) participants responded that they do not pay 
fees.[Footnote 17] Seventeen percent said they do pay fees, and 18 
percent stated that they do not know. When this same group was asked 
how much they pay in fees, as shown in figure 2, 83 percent reported 
not knowing. 

Figure 1: Participants' Response to Survey Question on Awareness of 
Fees: Do you know whether you pay any fees for your 401(k) plan?: 

This figure is a pie chart showing the percentage of people who knew 
whether they were paying any fees for their 401 (k) plan. 65% said that 
they paid no fees. 18% did not know, and 17% paid fees. 

[See PDF for image] 

Source: AARP's Survey of 401(k) Participants' Awareness of 
Understanding of Fees, developed and deployed by Knowledge Networks, 
July 2007. 

[End of figure] 

Figure 2: Participants' Response to Survey Questions on Awareness of 
Fees: Do you know how much in fees and expenses you are paying for your 
401(k) plan? 

This figure is a pie chart showing the percentage of people surveyed 
who knew how much they were paying in fees and expenses for their 
401(k) plan. 83% were not aware, and 17% were aware of how much they 
were paying. 

[See PDF for image] 

Source: AARP's Survey of 4019k) Participants' Awareness and 
Understanding of Fees, developed and deployed by Knowledge Networks, 
July 2007. 

[End of figure] 

Participants Need Information on Investment Fees: 

Although it is clear that participants require fee information to make 
informed decisions, it is not so clear what fee information is most 
relevant. In 2006, we reported that investment fees constitute the 
majority of fees in 401(k) plans and are typically borne by 
participants. Investment fees are, for example, fees charged by 
companies that manage a mutual fund for all services related to 
operating the fund. These 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 shareholder 
services, such as distributing the fund prospectus.[Footnote 18] These 
fees are charged regardless of whether the mutual fund or other 
investment product, such as collective investment funds or group 
annuity contracts, is part of a 401(k) plan or purchased by individual 
investors in the retail market.[Footnote 19] As such, the fees are 
usually different for each investment option available to participants 
in a 401(k) plan. 

In our previous report, we recommended that Congress consider amending 
ERISA to require all sponsors of participant-directed plans to disclose 
fee information on 401(k) investment options to participants in a way 
that facilitates comparison among the options, such as via expense 
ratios.[Footnote 20] As mentioned earlier, there have been at least two 
bills recently introduced in Congress on the subject. Industry 
professionals have also suggested that comparing the expense ratio 
across investment options is the most effective way to compare options' 
fees. They generally agree that an expense ratio provides valuable 
information that participants need and can be used to compare 
investment options because it includes investment fees, which 
constitute most of the total fees borne by participants. According to 
an industry official, the disclosure of expense ratios might include a 
general description of how expense ratios vary depending on the type 
and style of investment. For example, investment options with 
relatively high fees, such as actively managed funds, tend to have 
larger expense ratios than funds that are not actively managed. Also, 
investment options that are only available to institutional investors 
tend to have lower expense ratios than other types of funds. 

Most of the investment options offered in 401(k) plans have expense 
ratios that can be compared, but this information is not always 
provided to participants. In addition, investment options other than 
mutual funds may not be required to produce prospectuses that include 
expense ratios, but according to industry professionals, most options 
have expense ratio equivalents that investment industry professionals 
can identify. 

Participants Also Need Information on Other Fees That Affect Their 
Account Balances: 

Industry professionals also believe that participants need information 
on other fees that are not included in the expense ratio but still 
affect their account balances. For example, annual fees or fees on a 
per transaction basis that can be deducted from account balances should 
be disclosed, such as administrative and record-keeping fees, 
participant loan origination fees, and annual loan charges.[Footnote 
21] 

In addition, industry professionals also recommended that certain 
investment-specific fees be disclosed, including: 

* redemption fees or sales charges--fees that may be imposed by the 
provider as a result of changing investments in a given period, 

* surrender charges--fees that may be imposed as a result of selling or 
withdrawing money from the investment within a given number of years 
after investing, and: 

* wrap fees--fees that are assessed on the total assets in a 
participant's account.[Footnote 22] 

Some industry professionals recommended that plan participants be 
provided information on their returns net of all fees so that they can 
clearly see what their investments have earned after fees. Others 
recommended that information be disclosed that explains how the 
investment and administrative costs of the plan affect their investment 
returns and their overall retirement savings in the plan. These 
officials believed that such information would help participants 
understand that fees are an important factor to consider when directing 
their investments. 

Whether participants are provided with basic expense ratio information 
or more detailed information on various fees, or both, providing the 
information in a clear, easily comparable format can assist 
participants in understanding the information disclosed. In our prior 
reports on helping the public understand Social Security information 
and on more effective disclosures for credit cards, we found that 
certain practices help people understand complicated 
information.[Footnote 23] These practices include: 

* language--writing information in clear language, 

* layout--using straightforward layout and graphics, 

* length--providing a short document, 

* comparability--making options easy to compare in a single document, 
and: 

* distribution--offering a choice of paper or electronic distribution. 

Labor's Initiatives Related to 401(k) Plan Participants: 

In our prior work, we noted that Labor is considering the development 
of a new rule regarding the fee information required to be furnished to 
participants under its section 404(c) regulation. According to Labor 
officials, they are attempting to identify the critical information on 
fees that plan sponsors should disclose to participants of 404(c) plans 
(but not all participant-directed plans) and the best way to do so. The 
initiative is intended to explore what steps might be taken to ensure 
that participants have the information they need about their plan and 
available investment options, without imposing additional costs, given 
that such costs are likely to be charged against the individual 
accounts of participants and affect their retirement savings. The 
officials are currently considering what fee information should be 
provided to participants and what format would enable participants to 
easily compare the fees across a plan's various investment options. 
Labor is also currently evaluating comments received from consumer 
groups, plan sponsors, service providers, and others as it develops its 
regulation. 

Labor also has ongoing efforts designed to help participants and plan 
sponsors understand the importance of plan fees and the effect of those 
fees on retirement savings. Labor has developed and makes available on 
its Web site a variety of educational materials specifically designed 
to help plan participants understand the complexities of the various 
fee and compensation arrangements involved in 401(k) plans. Its 
brochure titled A Look at 401(k) Plan Fees is targeted to participants 
and beneficiaries of 401(k) plans who are responsible for directing 
their own investments. 

Conclusions: 

Both 401(k) plan sponsors and participants need fee information in 
order to make the most informed decisions. For plan sponsors, requiring 
that certain information on fees be disclosed can help them understand 
what services they are paying for, who is benefiting, and whether their 
current arrangements are in the best interest of plan participants. 
Requiring plan sponsors to report more complete information to Labor on 
fees--including those paid out of plan assets by participants--would 
put the agency in a better position to effectively oversee 401(k) plans 
and, in doing so, to protect an increasing number of participants. The 
mere act of requiring such information may actually promote competition 
among the entities that provide services to plans and possibly reduce 
the fees service providers charge. 

For plan participants, given the voluminous amount of information that 
could be disclosed, determining the relevant information that 
participants most need is key. At a minimum, providing information such 
as expense ratios or other investment-specific fee information could be 
the place to start. Also, making sure that the information is 
accessible in terms of the language, layout, length, comparability, and 
distribution can ensure that participants actively utilize the 
information disclosed. As participants become more sophisticated or 
demand more information, decisions can then be made about the type and 
format of additional fee information. 

Mr. Chairman, this concludes 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 Acknowledgements: 

For further information regarding this testimony, please contact 
Barbara D. Bovbjerg, Director, Education, Workforce, and Income 
Security Issues, at (202) 512-7215 or bovbjergb@gao.gov. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this statement. Individuals making key 
contributions to this testimony include Tamara E. Cross, Assistant 
Director; Daniel F. Alspaugh; Monika R. Gomez; Matthew J. Saradjian; 
Susannah L. Compton; Craig H. Winslow; and Walter K. Vance. 

Footnotes: 

[1] Defined benefit plans, sometimes referred to as traditional pension 
plans, generally provide a fixed level of monthly retirement income 
that is based on salary, years of service, and age at retirement 
regardless of how the plan's investments perform. In contrast, benefits 
from defined contribution plans are based on the contributions to and 
the performance of the investments in individual accounts, which may 
fluctuate in value. 

[2] GAO, Private Pensions: Changes Needed to Provide 401(k) Plan 
Participants and the Department of Labor Better Information on Fees, 
GAO-07-21 (Washington, D.C.: Nov. 16, 2006). 

[3] 29 U.S.C. §§ 1001-1461. 

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

[5] 29 U.S.C. § 1002(21). 

[6] The Form 5500 includes information on the plan's sponsor, the 
features of the plan, and the number of participants. The form also 
provides more specific information, such as information about plan 
assets, liabilities, insurance, and financial transactions. Filing this 
form satisfies the requirement for the plan administrator to file 
annual reports concerning, among other things, the financial condition 
and operation of plans. Labor uses this form as a tool to monitor and 
enforce plan sponsors' responsibilities under ERISA. 

[7] Schedule A is used to report fees and commissions paid to brokers 
and sales agents for selling insurance products. Schedule C includes 
information on the fees paid directly to service providers for all 
other investment products, but excludes investment fees deducted from 
returns. Schedule C also identifies service providers with fees in 
excess of $5,000 by name. 

[8] Labor's ERISA Advisory Council Working Group on Plan Fees and 
Reporting on Form 5500 came to this conclusion, finding that only the 
fees that are billed explicitly and are paid from plan assets are 
deemed reportable. Many of the fees are associated with the individual 
investment options in the 401(k) plan, such as a mutual fund, and are 
deducted from investment returns and not reported to plan sponsors or 
on the Form 5500. 

[9] Section 404(c) of ERISA generally provides relief for plan 
fiduciaries of certain individual account plans, such as 401(k) plans, 
from liability for losses resulting from investment decisions made by 
plan participants and beneficiaries. 29 U.S.C. § 1104(c). Implementing 
regulations provide specifics for complying with section 404(c). 29 
C.F.R. § 2550.404c-1 (2007). 

[10] Float revenue is revenue earned from the short-term investment of 
plan assets. 

[11] U.S. Securities and Exchange Commission, Office of Compliance 
Inspections and Examinations, Staff Report Concerning Examinations of 
Select Pension Consultants, (Washington, D.C.: May 2005). 

[12] Section 512 of ERISA provides for the establishment of an Advisory 
Council on Employee Welfare and Pension Benefit Plans. The duties of 
the council are to advise the Secretary and submit recommendations 
regarding the Secretary's functions under ERISA. The council consists 
of 15 members appointed by the Secretary of Labor: Three members are 
representatives of employee organizations; three members are 
representatives of employers; there is one representative each from the 
fields of insurance, corporate trust, actuarial counseling, investment 
counseling, investment management, and accounting; and three members 
are representatives of the general public. 29 U.S.C. § 1142. 

[13] Final Report of the 2004 ERISA Advisory Council Working Group, 
Health and Welfare Form 5500 Requirements (Nov. 10, 2004). 

[14] Written Comments of C. Frederick Reish, Reish Luftman Reicher & 
Cohen, for Testimony before the 2007 U.S. Department of Labor Advisory 
Council on Employee Welfare and Pension Benefits Plans Working Group on 
Fiduciary Responsibilities Update and Revenue Sharing Practices, (Sept. 
20, 2007). 

[15] Although some industry professionals believe that participants 
should be provided comparative benchmarks for their investment options, 
not all industry professionals agreed. Most industry professionals we 
consulted believed that benchmarks would be more useful for plan 
sponsors than for participants. Since plan participants do not have any 
control over the investment options offered in a plan, industry 
professionals said that benchmarking is less useful to plan 
participants than plan sponsors, since plan sponsors use benchmarks in 
evaluating alternatives to their plans' investment options. 

[16] Statement of Bradford P. Campbell, Assistant Secretary of Labor, 
Before the Special Committee on Aging, U.S. Senate, Oct. 24, 2007. 

[17] AARP Knowledge Management, 401(k) Participants' Understanding and 
Awareness of Fees, (Washington, D.C.: July 2007). AARP commissioned a 
nationally representative survey of 1,584 401(k) plan participants age 
25 and older. The survey was fielded from June 8 through June 24, 2007, 
by Knowledge Networks of Menlo Park, California, to members of its 
nationally representative online panel. The overall sample was designed 
to be nationally representative of 401(k) plan participants age 25 and 
older. 

[18] Fees related to marketing and compensating brokers to sell the 
fund are known as 12b-1, or distribution fees, and are limited by the 
Financial Industry Regulatory Authority, the entity that succeeded the 
National Association of Securities Dealers Inc., to a maximum of 1 
percentage point of the total expense ratio per year. 

[19] Mutual funds that use brokers to sell shares may also impose a 
sales fee, or "load," when a fund is bought, transferred, or sold to 
compensate the broker. SEC does not limit the size of the sales load a 
fund may charge, but the Financial Industry Regulatory Authority does 
not permit exceeding 8.5 percent of the purchase price. A "front-end 
load" is incurred when a mutual fund is purchased and reduces the 
amount available to purchase fund shares. A "back-end load" is a fee 
that is charged when a mutual fund is sold or transferred. Back-end 
loads generally decrease over time in steps until they are eventually 
eliminated. 

[20] We found that it is hard for participants to make comparisons 
across investment options because they have to piece together the fees 
that they pay, and assessing fees across investment options can be 
difficult because data are not typically presented in a single document 
that facilitates comparison. 

[21] Plan record-keeping fees cover individual account maintenance for 
plan participants. They cover a variety of activities, such as 
enrolling participants, processing fund selections, preparing and 
mailing account statements, and other related administration 
activities. A loan origination fee is charged to a participant who 
elects to take a loan from the plan. The fee covers document 
preparation and loan processing expenses. Annual loan charges are 
imposed for account maintenance. 

[22] Wrap fees are for various expenses, such as sales commissions, 
administrative expenses, and/or recording keeping fees. However, wrap 
fees can also be assessed against specific investment options and/or at 
the plan level based on total plan assets. For example, a wrap fee may 
be assessed against a "low fee" investment option because the 
investment provider does not contribute toward the cost of plan record- 
keeping and administration. 

[23] GAO, Social Security Statements: Social Security Administration 
Should Better Evaluate Whether Workers Understand Their Statements, GAO-
05-192 (Washington, D.C.: Apr. 1, 2005); GAO, Social Security 
Administration: Longstanding Problems in SSA's Letters to the Public 
Need to Be Fixed, GAO/HEHS-00-179 (Washington, D.C.: Sept. 26, 2000); 
GAO, Credit Cards: Increased Complexity in Rates and Fees Heightens 
Need for More Effective Disclosures to Consumers, GAO-06-929 
(Washington, D.C.: Sept. 12, 2006); and GAO, SSA Benefit Statements: 
Well Received by the Public but Difficult to Comprehend, GAO/HEHS-97-19 
(Washington, D.C.: Dec. 5, 1996). 

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