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entitled 'Retirement Savings: Better Information and Sponsor Guidance
Could Improve Oversight and Reduce Fees for Participants' which was
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Report to the Chairman, Committee on Ways and Means, House of
Representatives:
United States Government Accountability Office:
GAO:
September 2009:
Retirement Savings:
Better Information and Sponsor Guidance Could Improve Oversight and
Reduce Fees for Participants:
GAO-09-641:
GAO Highlights:
Highlights of GAO-09-641, a report to the Chairman, Committee on Ways
and Means, House of Representatives.
Why GAO Did This Study:
American workers increasingly rely on defined contribution (DC) plans
like 401(k) plans and individual retirement accounts (IRA) for
retirement income. Together with other DC plans—401(a), 403(b), and 457
plans—these accounts hold about $7.1 trillion. As workers accrue
earnings on their investments, they also pay a number of fees that may
significantly decrease retirement savings over the course of a career.
GAO examined: (1) the types of fees charged to participants and
investments of various DC plans; (2) how DC plan sponsor actions affect
participant fees; (3) how fee disclosure requirements vary; and (4) the
effectiveness of DC plan oversight. GAO reviewed laws and regulations
and consulted with experts, federal officials, service providers, and
six plan sponsors.
What GAO Found:
Participants in DC plans and IRAs generally pay the same types of fees,
regardless of the plan in which they are enrolled, such as investment
management fees. However, participants in some plans are more likely to
invest in products that may have higher fees. For example, we found
that participants in 403(b) plans and individual IRAs are more likely
to invest in products like individual variable annuities or retail
mutual funds, which frequently charge more than other investments.
According to experts, one reason for the different investments is that
many 403(b) plan sponsors do not make group products available to
participants.
DC plan sponsors generally take certain actions that decrease
participants’ fees. Sponsors can help reduce participants’ fees by, for
example, offering cheaper investment products in which participants may
choose to invest, like low-cost mutual funds. Sponsors may also pool
assets to obtain pricing advantages. 401(k) and 401(a) plan sponsors
frequently pool participants’ assets to realize lower fees in mutual
funds, but sponsors of 403(b) plans often do not. Instead, many 403(b)
plan sponsors keep sponsor involvement to a minimum, which limits the
opportunities to pool assets and decrease fees.
Fee disclosure requirements vary depending on plan regulations and
investment regulations. Sponsors of plans subject to Title I of the
Employee Retirement Income Security Act of 1974 (ERISA)—which was
enacted in part to protect the interests of employee benefit plan
participants—are required to disclose certain documents to
participants, which may or may not describe fees. For plans not subject
to these laws, such as state and local government plans, some states
impose disclosure requirements, and some do not. Fee disclosure
requirements also vary based on the type of investment product in which
participants invest. The Securities and Exchange Commission regulates
some investment products, like mutual funds, while others are regulated
by states’ insurance agencies. Because different regulators require
different disclosures, participants in DC plans and IRAs can invest in
similar products but receive different information on fees.
Labor oversees disclosure for participants of certain DC plans, while
IRS oversees tax laws that underlie all DC plans, but both lack
information that could strengthen oversight. Labor is responsible for
enforcing requirements for disclosure—which may include fees—and the
requirement that fiduciaries for some plans must ensure reasonable
fees, and has proposed regulations to improve fee disclosure. However,
Labor does not have the specific authority to collect information to
help ensure that sponsors of certain 403(b) plans continue to protect
participants’ interests. While IRS does not oversee fees or fee
disclosure, IRS oversees DC plans’ compliance with the tax code. IRS
does not collect information to easily enforce 457(b) plans’
contribution limits and detect violations that may reduce federal tax
revenue. In addition, IRS and other regulators do not routinely share
information with one another to use resources effectively and help
enforce a rule requiring reasonable fees.
What GAO Recommends:
Congress should consider (1) amending ERISA to require sponsors to
disclose fee information to facilitate comparisons, and (2) giving the
Department of Labor (Labor) specific authority over certain plans.
Also, GAO recommends that the Internal Revenue Service (IRS) develop
guidance on sponsor involvement, collect additional data on 457(b)
plans, and share more information with financial regulators. Labor and
IRS agreed with our recommendations, although IRS stated that it will
continue sharing information with regulators using its current methods.
View [hyperlink, http://www.gao.gov/products/GAO-09-641] or key
components. For more information, contact Barbara Bovbjerg at (202) 512-
7215 or bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Background:
Participants in Different Plans and IRAs Pay the Same Types of Fees,
but Investment Choices Can Affect Fee Amounts:
Certain Sponsor Actions Decrease Participants' Fees, but Some Sponsors
Take Fewer Actions than Others:
Participants Receive Different Fee Information Depending on ERISA
Coverage and Regulator, Limiting Participants' Ability to Compare
Investment Options:
Oversight of Fees and DC Plans Will Likely Improve with Recent
Regulations, but IRS and Labor Still Lack Information That Could
Strengthen Oversight:
Conclusions:
Matters for Congressional Consideration:
Recommendations:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Internal Revenue Service:
Appendix III: Comments from the Department of Labor:
Appendix IV: Characteristics of DC Plans and IRAs:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Employers Eligible to Establish DC Plans and IRAs:
Table 2: Estimated Number of DC Plans and Participants, 2007:
Table 3: Tax-Deferred Contribution Limits for DC Plans, 2009:
Table 4: Opportunities for Rollovers and Transfers of Assets among
Plans and IRAs:
Table 5: Regulators That Oversee DC Plans by Type of Employer:
Table 6: Fees Associated with Three Common Investment Products:
Table 7: Administrative Fees Associated with Plans:
Table 8: Required Disclosure Documents to All Participants in Plans
Subject to Title I of ERISA:
Table 9: Required Fee Disclosure Information, by Regulator:
Table 10: Estimated Total Assets for DC Plans and IRAs, 2008:
Table 11: Estimated Contributions to DC Plans, 2007:
Table 12: Estimated Contributions to Individual IRA Accounts, SEP, and
SIMPLE Accounts, 2006:
Table 13: Estimated Number of Individual IRA Account Owners and
Individuals Contributing to Employer-Sponsored IRAs, 2006:
Figures:
Figure 1: Effect of a 1-Percentage Point in Higher Annual Fees on a
$20,000 DC Plan Balance Invested over 20 Years:
Figure 2: Oversight of Fee Information Disclosed to Retirement Plan
Participants:
Figure 3: IRS Form W-2, Wage and Tax Statement, with Emphasis on Box
12, for Retirement Plan Contributions:
Figure 4: Form W-2 Instructions:
Abbreviations:
CIF: collective investment funds:
DB: defined benefit:
DC: defined contribution:
ERISA: Employee Retirement Income Security Act:
ESOP: employee stock ownership plan:
IRA: individual retirement account:
I.R.C.: Internal Revenue Code:
IRS: Internal Revenue Service:
Labor: Department of Labor:
MOU: memorandum of understanding:
NAIC: National Association of Insurance Commissioners:
OCC: Office of the Comptroller of the Currency:
RFP: request for proposal:
SEC: Securities and Exchange Commission:
SIMPLE: Savings Incentive Match Plan:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 4, 2009:
The Honorable Charles B. Rangel:
Chairman:
Committee on Ways and Means:
House of Representatives:
Dear Mr. Chairman:
American workers increasingly rely on 401(k) plans and individual
retirement accounts (IRA) for retirement income. Besides 401(k) plans,
lesser-known defined contribution (DC) plans--plans in which retirement
savings are based on contributions and the performance of the
investments in individual accounts--can provide opportunities for
employers and employees to make tax-deferred contributions to
retirement savings accounts. These other DC plans include 401(a),
[Footnote 1] 403(b), 457(b), and 457(f) plans. More than 49 million
U.S. workers participate in employer-sponsored DC retirement plans, and
50 million have IRAs. Together, these retirement savings accounts hold
about $7.1 trillion in assets.
In recent years, policymakers have focused on the oversight of 401(k)
plans and the fees charged to 401(k) plan participants. Fees are one of
many factors--such as the historical performance and investment risk
for each plan option--participants should consider when investing in a
retirement plan because fees can significantly decrease retirement
savings over the course of a career. In 2006, we reported that even a
small fee deducted from a worker's assets annually could represent a
large amount of money years later had it remained in the account to be
reinvested and that 401(k) plan participants do not always receive
information on the fees they are being charged.[Footnote 2] Given the
current economic environment, regulators, plan sponsors, and workers
have reason to be increasingly worried about the performance of their
retirement accounts.
The types of fees charged to participants of 401(k) plans have led to
questions about what types of fees are charged to participants in other
types of DC plans and IRAs and whether participants across DC plans are
getting the same information disclosed about fees to them. Similarly,
questions have also been raised about how other types of DC plans are
overseen. In light of the uncertainty about fees, disclosure to
participants, and oversight of these plans and IRAs, the Chairman of
the House Committee on Ways and Means asked GAO to examine other 401(a)
plans, 403(b) plans, 457 plans, and IRAs to address the following
questions: (1) How do the types of fees charged to participants and
investments of various DC plans differ? (2) How do DC plan sponsor
actions affect participants' fees? (3) How do fee disclosure
requirements vary? and (4) How effective is the oversight of DC plans?
To explain how the types of fees charged to participants and
investments in various DC plans differ, we consulted with a number of
academic, industry, and association experts and obtained fee
information from selected service providers. To determine how DC plan
sponsor actions affect participant fees, we consulted with industry
experts, as well as 11 service providers and 6 plan sponsors. To
outline how fee disclosure varies by plan, we interviewed staff from
relevant federal agencies, state insurance regulators, and national
experts. We also conducted structured interviews with 11 service
providers. To describe the effectiveness of DC plan oversight, we
interviewed regulators and reviewed documentation, laws, and
regulations.
We conducted this performance audit from June 2008 through September
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
Pension plans are classified either as defined benefit (DB) or as
defined contribution (DC) plans.[Footnote 3] The benefits participants
receive from DC plans are based on the amount of money in their
individual accounts. The funds in these accounts can fluctuate over
time as participants and employers make contributions and as the value
of the investments rises and falls.
Role of Employer and Participants in DC Plans:
Employers and participants both play roles in a DC plan. Employers
generally establish a plan, becoming the plan's "sponsor." Sponsors'
roles vary depending on how the sponsor chooses to operate the plan or
the type of plan. Some sponsors activities include:
* Contributing to participants' accounts;
* Deciding upon the investment options from which participants may
choose;
* Processing participants' contributions to send to investment service
providers;
* Keeping track of participants' investment choices, contributions, and
other record-keeping; and:
* Paying for the costs associated with maintaining the plan.
Participants' role in DC plans can also vary significantly depending on
how the sponsor operates the plan, and the type of plan. Some
participant activities include:
* Contributing to individual accounts;
* Choosing among investment options;
* Transferring assets to a different plan; and:
* Paying for costs associated with participating in the plan.
Different types of DC plans:
There are several types of DC plans, each one named for a section of
the Internal Revenue Code (I.R.C.):
* In "401(a) plans," participants qualify for an income tax deferral
under section 401(a) of the I.R.C. One type of 401(a) plan is a money
purchase plan. Sponsors of these plans are required to make specified
contributions to participants' accounts. Profit sharing plans can also
be created under section 401(a). These plans are similar to money
purchase plans, but sponsors can decide each year whether or not to
make a contribution.[Footnote 4]
* 401(k) plans are a type of 401(a) plan, typically a profit-sharing
plan. Both sponsors and participants are permitted pre-tax
contributions in 401(k) plans.
* 403(b) plans are similar to 401(k) plans, in that they typically
permit both sponsors and participants to make pre-tax contributions,
but are designed for public education entities and tax-exempt
organizations that operate under I.R.C. §501(c)(3). Participants in
these plans are generally limited to investing in annuity contracts
issued by insurance companies and custodial accounts invested in mutual
funds.[Footnote 5]
* 457(b) plans are also like 401(k) and 403(b) plans in that they
typically permit both sponsors and participants to make pre-tax
contributions. 457(b) plans can be one of two types. 457(b)
governmental plans are usually open to all employees at a state or
local government, and are similar to some other DC plans in that
contributions are set aside for the participants in a trust. In
contrast, 457(b) tax-exempt plans usually limit participation to a
group of managerial or highly compensated employees, and are unfunded.
That is, the amounts deferred must remain the sole property of the tax-
exempt sponsor, subject only to the claims of general creditors, until
the amounts are made available to the participant or beneficiary.
* 457(f) plans are typically designed for highly compensated employees.
457(f) plans are generally "unfunded;" that is, sponsors do not have to
set aside assets for participants. Instead, sponsors make a promise to
pay participants some amount at a later date.[Footnote 6]
In addition to DC plans, individuals can save for retirement in
traditional IRAs, and employer-sponsored IRAs--Savings Incentive Match
Plans for Employees (SIMPLE) and Simplified Employee Pension (SEP).
Traditional IRAs allow eligible individuals to make tax-deductible
contributions and accumulate tax-deferred investment earnings.
Distributions from these accounts are generally subject to tax.
[Footnote 7] Another type of individual IRA, the Roth IRA, allows
eligible individuals to make after-tax contributions; distributions are
then generally tax-free. SIMPLE IRAs allow small employers to either
match participating employee contributions or to contribute a fixed
percentage of all eligible employees' pay.[Footnote 8] SEP IRAs allow
employers of any size to make voluntary tax deductible contributions
into traditional IRAs for themselves and their employees. Contributions
to all IRAs may not exceed certain limits.
As shown in table 1, different types of employers are eligible to
establish various types of DC plans and IRAs. For example, all types of
employers can establish a 401(a) plan or an employer-sponsored IRA, but
only state and local governments can establish a 457(b) governmental
plan.
Table 1: Employers Eligible to Establish DC Plans and IRAs:
401(a):
Private company: Yes;
Tax-exempt organization: Yes;
Church: Yes;
Public education entity (school district): Yes;
State and local governments: Yes.
401(k):
Private company: Yes;
Tax-exempt organization: Yes;
Church: Yes;
Public education entity (school district): No;
State and local governments: No[B].
403(b):
Private company: No;
Tax-exempt organization: Yes[A];
Church: Yes;
Public education entity (school district): Yes;
State and local governments: No, except public education entities.
457(b) governmental:
Private company: No;
Tax-exempt organization: No;
Church: No;
Public education entity (school district): Yes;
State and local governments: Yes.
457(b) Tax-exempt:
Private company: No;
Tax-exempt organization: Yes;
Church: No[C];
Public education entity (school district): No;
State and local governments: No.
457(f):
Private company: No;
Tax-exempt organization: Yes;
Church: No;
Public education entity (school district): Yes;
State and local governments: Yes.
Employer-sponsored IRA:
Private company: Yes;
Tax-exempt organization: Yes;
Church: Yes;
Public education entity (school district): Yes;
State and local governments: Yes.
Traditional IRA:
Private company: N/A;
Tax-exempt organization: N/A;
Church: N/A;
Public education entity (school district): N/A;
State and local governments: N/A.
Source: IRS, GAO analysis.
[A] Only tax-exempt organizations that operate under I.R.C. §501(c)(3)
are eligible to establish a 403(b) plan.
[B] The Tax Reform Act of 1986 prohibited state and local governments
from establishing new 401(k) plans. However, 401(k) plans established
by state and local governments before May 6, 1986, were
"grandfathered," and therefore permitted to maintain their plan as a
401(k) plan and are not subject to Title I of ERISA.
[C] Church plans that include employees may have 457(b) tax-exempt
plans.
[End of table]
DC plans and IRAs are important vehicles for Americans' retirement
savings. As shown in table 2, DC plans have about 47 million
participants. Among DC plans, 401(k) plans have the most participants
with approximately 37 million. Together, DC plans and IRAs held about
$6.7 trillion in assets at the end of 2008. Participation in plans has
increased over time; in 2005, the most recent year for which data is
available, about 33 percent of workers participated in a DC plan and
about 23 percent had an IRA account, while 12 percent participated in
both. For more information on contributions and assets in DC plans and
IRAs, as well as information on IRA account holders, see appendix IV.
Table 2: Estimated Number of DC Plans and Participants, 2007:
401(k);
Number of plans (thousands): 624;
Number of participants (thousands): 37,492.
403(b);
Number of plans (thousands): 88;
Number of participants (thousands): 6,521.
457(b) governmental and tax-exempt;
Number of plans (thousands): 30;
Number of participants (thousands): 3,476.
Source: IRS.
Note: Data on 401(a) plans and 457(f) plans are not available. The data
in this table come from a database taken from annual Form W-2 filings.
The data are estimated and should not be compared to the data in other
tables. In addition, these estimates differ from estimates generated
from annual filings compiled by Labor because the collection methods
are different.
[End of table]
Contribution Limits:
DC plans that permit participants to defer income have varying limits
on the amount participants can defer annually. For example, in 2009,
the contributions on which participants can defer income taxes are
limited to $16,500 for 401(k) and 403(b) plans, as shown in table 3.
Contributions from 401(k) plan and 403(b) plan participants and
sponsors together may not exceed the lesser of 100 percent of
compensation or $49,000. For 457(b) plans, deferrals cannot exceed
$16,500 in 2009.[Footnote 9]
Table 3: Tax-Deferred Contribution Limits for DC Plans, 2009:
401(a):
Individual contribution limit: N/A;
Sponsor contribution limit: N/A;
Sponsor and participant together contribution limit: The lesser of 100%
of compensation or $49,000.
401(k):
Individual contribution limit: Up to $16,500;
Sponsor contribution limit: N/A;
Sponsor and participant together contribution limit: The lesser of 100%
of compensation or $49,000.
403(b):
Individual contribution limit: Up to $16,500;
Sponsor contribution limit: N/A;
Sponsor and participant together contribution limit: The lesser of 100%
of compensation or $49,000.
457(b) Governmental:
Individual contribution limit: N/A;
Sponsor contribution limit: N/A;
Sponsor and participant together contribution limit: The lesser 100% of
compensation or $16,500.
457(b) Tax-exempt:
Individual contribution limit: N/A;
Sponsor contribution limit: N/A;
Sponsor and participant together contribution limit: The lesser 100% of
compensation or of $16,500.
457(f):
Individual contribution limit: Unlimited;
Sponsor contribution limit: Unlimited;
Sponsor and participant together contribution limit: Unlimited.
Employer-sponsored IRA;
Individual contribution limit: SIMPLE: Up to $11,500; SEP: N/A;
Sponsor contribution limit: SIMPLE: Either 100 percent match of
employee contributions up to 3 percent of employee compensation; or
contribute 2 percent of each eligible employee's compensation[A]; SEP:
Up to 25% of employee's annual compensation, not to exceed $49,000;
Sponsor and participant together contribution limit: SIMPLE: N/A; SEP:
N/A.
Traditional IRAs[B];
Individual contribution limit: Up to $5,000;
Sponsor contribution limit: N/A;
Sponsor and participant together contribution limit: N/A.
Source: IRS.
[A] SIMPLE sponsors must choose to meet either of the two contribution
criteria. However, employers choosing the first option are permitted to
reduce the match to as low as 1 percent of compensation in any 2 of 5
years.
[B] Yearly contribution amounts are subject to limits based on income,
pension coverage, and filing status.
[End of table]
Rollover and Transfer Options:
Most DC plans permit participants to move their assets out of their
current plan under certain circumstances without being subject to
income tax. Participants in most plans may "roll over" their assets
into an IRA or into another type of plan without being subject to
income taxes if they follow certain rules. Rollovers can occur when
participants experience certain specified events--such as leaving their
job or death--when their assets would otherwise be distributed. As
shown in table 4, participants in 401(a), 401(k), 403(b), and 457(b)
governmental plans may roll over their assets to any of these same
types of plans or to IRAs. In contrast, participants in 457(b) tax-
exempt and 457(f) plans may not roll over their assets into other plans
or IRAs.
Participants may also "transfer" their assets to other similar plans
under certain conditions. Transferred assets are also not subject to
income tax. For 403(b) and 457(b) governmental plans, participants may
transfer their assets to another like plan, if the plan sponsor accepts
such transfers, as shown in table 4. Participants in 457(b) tax-exempt
and 457(f) plans generally have no assets.[Footnote 10]
Table 4: Opportunities for Rollovers and Transfers of Assets among
Plans and IRAs:
401(a):
Rollovers: 401(a), 403(b) annuities, 401(k), 457(b) governmental, and
IRAs;
Plan-to-Plan Transfers: Other 401(a) or 401(k) plans.
401(k):
Rollovers: 401(a), 403(b) annuities, 401(k), 457(b) governmental, and
IRAs;
Plan-to-Plan Transfers: Other 401(a) or 401(k) plans.
403(b):
Rollovers: 401(a), 403(b) annuities, 401(k), 457(b) governmental, and
IRAs;
Plan-to-Plan Transfers: Other 403(b) plans.
457(b) governmental:
Rollovers: 401(a), 403(b) annuities, 401(k), 457(b) governmental, and
IRAs;
Plan-to-Plan Transfers: Other 457(b) governmental plans.
457(b) tax-exempt:
Rollovers: No;
Plan-to-Plan Transfers: N/A[A].
457(f):
Rollovers: No;
Plan-to-Plan Transfers: N/A.
Traditional IRA:
Rollovers: 401(a), 403(b) annuities, 401(k), 457(b) governmental, and
IRAs;
Plan-to-Plan Transfers: Other IRAs.
Source: IRS.
[A] Participants in 457(b) tax-exempt plans may transfer their assets
to other 457(b) tax-exempt plans. However, these plans are generally
unfunded; therefore, they have no assets to transfer.
[End of table]
Oversight of DC plans and IRAs:
All DC plans and IRAs are subject to various provisions of the Employee
Retirement Income Security Act of 1974 (ERISA), which was generally
enacted to protect the interests of employee benefit plan participants
and their beneficiaries. ERISA sets minimum standards for most pension
plans in private industry to protect participants.
Title I of ERISA, which is generally enforced by the Department of
Labor (Labor), establishes guidelines that help protect participants.
For example, Title I of ERISA requires sponsors to disclose to
participants certain information concerning the plan. Title I also
establishes standards of conduct for plan fiduciaries, which are
usually plan sponsors but can also include other service
providers.[Footnote 11] Fiduciaries must act for the exclusive benefit
of plan participants and beneficiaries, rather than for their own or
another party's gain. This means that fiduciaries must avoid conflicts
of interest and act prudently.
Some DC plans are not subject to Title I of ERISA and thus are not
overseen by Labor.
* Plans that are sponsored by state and local governments are not
subject to Title I of ERISA.
* Labor defined a "safe harbor" for 403(b) plans sponsored by tax-
exempt organizations. Sponsors that follow the safe harbor guidelines
are not considered subject to Title I of ERISA because the plan is
considered not to have been "established or maintained by an employer."
Sponsors of these plans must restrict their involvement in the plan to
certain actions, or they will become subject to Title I of ERISA.
* Plans that are designed for highly compensated executives are
generally excluded from certain parts of Title I of ERISA.
* Certain religious organizations may establish different kinds of
retirement plans, but they are generally exempt from Title I of ERISA.
[Footnote 12]
Regardless of whether or not plans are subject to Title I of ERISA, all
DC plans are subject to the I.R.C. and are overseen by IRS. The I.R.C.
contains rules to qualify plans for tax deferrals and deductions, such
as generally requiring plans to cover rank-and-file workers, not only
highly-compensated employees.[Footnote 13] The IRS enforces these
provisions.
State and local governments can also play a role in overseeing DC
plans. State and local governments may establish ERISA-like laws for
state and local government plans. For example, some state governments
require that certain plan sponsors adhere to standards of conduct for
fiduciaries. 5 outlines how different DC plans are overseen by Labor,
IRS, and state and local governments.
IRS and Labor share responsibility for overseeing IRAs. IRS has primary
responsibility for tax rules governing how to establish and maintain
any IRA. Labor has sole responsibility for overseeing ERISA's fiduciary
standards for employer-sponsored IRAs. Unlike employer-sponsored IRAs,
individual IRAs are not subject to Title I of ERISA and are generally
not overseen by Labor.[Footnote 14]
Table 5: Regulators That Oversee DC Plans by Type of Employer:
IRS:
Subject to Title I of ERISA: Private companies: Yes;
Subject to Title I of ERISA: Tax-exempt organizations: Yes;
Not subject to Title I of ERISA: State and local governments: Yes;
Not subject to Title I of ERISA: Churches: Yes;
Not subject to Title I of ERISA: Tax-exempt organizations under Labor's
403(b) safe harbor: Yes.
Labor:
Subject to Title I of ERISA: Private companies: Yes;
Subject to Title I of ERISA: Tax-exempt organizations: Yes[A];
Not subject to Title I of ERISA: State and local governments: No;
Not subject to Title I of ERISA: Churches: No;
Not subject to Title I of ERISA: Tax-exempt organizations under Labor's
403(b) safe harbor: No.
State and local governments:
Subject to Title I of ERISA: Private companies: No;
Subject to Title I of ERISA: Tax-exempt organizations: No;
Not subject to Title I of ERISA: State and local governments: Yes;
Not subject to Title I of ERISA: Churches: No[B];
Not subject to Title I of ERISA: Tax-exempt organizations under Labor's
403(b) safe harbor: No[B].
Source: GAO analysis.
[A] Tax-exempt sponsors of 457(b) plans and 457(f) plans designed for
highly-compensated employees are exempt from most of ERISA's
requirements such as participation and fiduciary responsibility. These
plans are subject to a few provisions of Title I of ERISA relating to
reporting, disclosure, administration, and enforcement.
[B] Some states may have laws that affect aspects of these plans, such
as contract remedies.
[End of table]
Different regulators oversee different investment options available to
DC plans and IRAs:
DC plans and IRAs hold assets in a range of investments, which, in
turn, are regulated by different entities.
* Mutual Funds. A mutual fund is a pooled investment in a portfolio of
securities, managed by a professional investment advisor. Investors buy
shares in the fund, which represents an indirect ownership interest in
the fund's securities. Types of mutual funds include: stock or equity,
bond or fixed-income, and money market. Mutual funds are sold in
different "share classes" that each offer the same gross returns, but
with different fee structures that result in different net returns. For
example, in one share class, mutual fund shareholders may pay a "sales
charge" when they purchase shares, while in another share class, they
may pay a recurring charge deducted from fund assets to cover marketing
costs. Mutual funds are generally regulated by the Securities and
Exchange Commission (SEC), which requires funds to disclose fees and to
inform investors of products' potential risks.
* Annuities. An annuity is a contract between a plan participant or
sponsor and an insurance company, under which the participant makes a
lump-sum payment or a series of payments and the insurance company
provides a payout for an agreed-upon span of time. Annuities may be
purchased for groups or for individuals and can be fixed or variable.
Fixed annuities guarantee a minimum interest rate on assets while the
account is growing and also guarantee periodic payments after the
annuity is claimed. Variable annuities are also insurance products and
also guarantee periodic payments to participants. However, the amount
of those payments depends in part on the value of the investments that
underlie the account, which are typically mutual funds. States regulate
insurance companies that provide fixed annuities. State regulators
generally supervise insurance sales and marketing practices and policy
terms and conditions to ensure that consumers are treated fairly when
they purchase insurance products and file claims. For variable
annuities, state agencies generally regulate the insurance contract
that "wraps" around the investment options. If the underlying
investment options are registered securities, the investments are
regulated by SEC. Also, if variable annuities are sold to participants
within certain retirement plans, the contracts are also regulated by
SEC.[Footnote 15]
* Collective investment funds (CIF). CIFs are trusts managed by a bank
or trust company that pool investments of retirement plans or other
large institutional investors. These products are typically not
available to individual investors. The federal agencies charged with
oversight of banks regulate CIFs and other bank investment products,
primarily the Federal Reserve Board, Office of the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation.
Fees charged to participants in DC plans and IRAs:
As participants in DC plans and IRAs accrue earnings on their
investments, they also pay a number of fees, including expenses,
commissions, or other charges associated with investments and plan
operation. Fees are one of many factors participants should consider
when choosing among the investment options a plan offers because fees
can significantly decrease retirement savings over the course of a
career. Even a small fee deducted from a participant's assets annually
could represent a large amount of money years later had it remained in
the account to be reinvested.
Participants and sponsors pay investment fees charged by companies that
manage mutual funds or other investment products for all services
related to operating the fund. For example, a management fee covers the
cost of selecting a mutual fund's portfolio of securities and managing
the fund. After investment fees, administrative fees generally account
for the next largest portion of plan fees. These fees cover the cost of
operating the plan, such as keeping records of all participants'
contributions and transactions.
The amount of fees charged to participants for investments may depend
on whether the plan invests in products that are "institutional" or
"retail." Generally, "institutional" investments are only sold to
investors with large pools of assets and charge lower fees than retail
products sold by the same service provider. "Retail" investments are
available to any individual, and typically have higher fees. For
example, individual investors typically purchase retail mutual funds,
whereas large groups of investors, like certain DC plans, can pool
their assets to purchase the same mutual funds with a volume discount
depending on the size of the asset pool.
Service providers charge fees for administering investment and
administrative services to plans in two ways. Under a "bundled"
arrangement, the sponsor hires one company that provides the full range
of services directly or through subcontracts. A bundled service
provider may, for example, provide all record-keeping and investment
services, as well as communications with participants. Under an
"unbundled" arrangement, the sponsor uses a combination of service
providers. Sponsors can also provide some of the administrative
services themselves, such as record-keeping, but can only charge fees
for charges the sponsor incurred directly.
Participants in Different Plans and IRAs Pay the Same Types of Fees,
but Investment Choices Can Affect Fee Amounts:
Participants Generally Pay the Same Types of Fees, Regardless of the DC
Plan:
Service providers told us that plan participants generally pay the same
types of fees regardless of the DC plan in which they are enrolled.
Several of the service providers we interviewed, who serve all types of
DC plans, reported that they charge the same types of fees to
participants of all different DC plans. For example, representatives of
a company that services both 401(a) plans and 403(b) plans told us that
participants in both plans pay investment management and record-keeping
fees, as shown in table 6 and table 7.[Footnote 16]
Table 6: Fees Associated with Three Common Investment Products:
Fee description: All-inclusive annual fee imposed on the value of total
assets in an account;
Fixed annuity: N/A;
Variable annuity: Wrap fee;
Mutual fund: N/A.
Fee description: Fee charged upon investing that reduces the initial
investment;
Fixed annuity: N/A;
Variable annuity: Sales load;
Mutual fund: Sales charge or sales load.
Fee description: Fee charged upon redemption or when the product is
sold, or when the contract is ended;
Fixed annuity: Surrender or withdrawal charges;
Variable annuity: Deferred sales load or surrender fee;
Mutual fund: Deferred sales charge or deferred sales load or redemption
fee.
Fee description: Fee charged for any exchange or transfer of interest
from the fund to another fund or to another investment company;
Fixed annuity: N/A;
Variable annuity: Exchange fee;
Mutual fund: Exchange fee.
Fee description: Flat dollar amount that includes any contract,
account, or similar fee imposed on contract-owner accounts on any
recurring basis;
Fixed annuity: Contract fee;
Variable annuity: Contract fee;
Mutual fund: Account fee.
Fee description: Fee to compensate the insurance company for various
risks it assumes under the annuity contract;
Fixed annuity: N/A;
Variable annuity: Mortality and expense risk fee;
Mutual fund: N/A.
Fee description: A fee that is charged by an advisor, often a pension
consultant, hired to help the plan sponsor select funds for the plan
and to monitor investments;
Fixed annuity: N/A;
Variable annuity: Investment consulting fee;
Mutual fund: Investment consulting fee.
Fee description: A fee to cover the cost of selecting a mutual fund's
portfolio of securities and managing the fund;
Fixed annuity: N/A;
Variable annuity: Management fee;
Mutual fund: Management fee.
Fee description: Fee for servicing of the accounts, such as providing
statements, reports, dispersing dividends, as well as custodial
services;
Fixed annuity: N/A;
Variable annuity: Administrative fee;
Mutual fund: Administrative fee.
Fee description: Fee related to marketing and compensating brokers to
sell the fund;
Fixed annuity: N/A;
Variable annuity: Distribution (12b-1 fee);
Mutual fund: Distribution (12b-1 fee).
Fee description: A charge deducted from each premium paid;
Fixed annuity: Percentage of premium charge;
Variable annuity: N/A;
Mutual fund: N/A.
Source: GAO analysis.
[End of table]
Arrangements between DC plan sponsors and service providers may affect
the types of fees charged. Sponsors can choose different service
arrangements that may carry different types of fees, particularly
bundled or unbundled services. Sponsors that choose a bundled
arrangement may pay a smaller number of separate fees because service
providers charge a consolidated fee for all services. For example,
sponsors that hire a single service provider for all administrative
services may pay a single fee for record-keeping, legal services, and
accounting, while sponsors that have unbundled arrangements may be
charged separate fees for each service. As shown in table 7, a range of
administrative fees can be charged in unbundled arrangements.
Table 7: Administrative Fees Associated with Plans:
Fee type: Record-keeping fee;
Fee description: A fee that is usually charged by a service provider to
set up and maintain the plan. This fee can cover a variety of
activities such as enrolling plan participants, processing participant
fund selections, preparing and mailing account statements, and other
related administration activities.
Fee type: Communication fee;
Fee description: A fee to cover the cost of educating participants
about the plan such as providing participants with access to toll-free
phone services, Internet service, and ongoing educational seminars.
Fee type: Custodial or trustee fee;
Fee description: A fee that is charged by an individual, bank, or trust
company to securely maintain plan assets.
Fee type: Audit fee;
Fee description: A fee that is imposed by a service provider in
connection with the annual audit that is required of ERISA-covered
plans with more than 100 participants.
Fee type: Legal fee;
Fee description: A fee that is charged by an attorney or law firm to
provide legal support for administrative activities, such as ensuring
the plan is in compliance with ERISA (by preparing forms like the Form
5500 or nondiscrimination testing) or representing the plan in a
divorce settlement.
Fee type: Transactional fees;
Fee description: Fees charged on an individual basis such as loan
origination, loan maintenance, and distribution fees.
Source: GAO analysis.
[End of table]
Service providers also told us that traditional IRA account owners
generally pay the same types of investment fees as DC plan
participants. IRA account owners pay the same fees for investment
products that any individual investor would pay, like sales loads or
surrender charges. Investment service providers can charge IRA account
owners a trustee fee to cover the administrative costs of managing the
account, similar to a record-keeping fee or a custodial fee. Individual
IRA account owners are not generally charged fees associated with plan
compliance, like fees to cover the costs of ERISA-required annual
reports.
Participants in 403(b) Plans and IRAs More Often Invest in Products
That Can Have Higher Fees Than Participants in Other DC Plans:
403(b) plan participants and IRA account owners are more likely than
participants in other DC plans to invest in products that can have
higher fees than other products, such as variable annuities. Experts we
interviewed said that variable annuities generally have higher fees
than other products such as mutual funds because variable annuities
charge investment fees as well as fees associated with the insurance
portion of the product to cover the risk associated with providing
certain guarantees, such as annuity rights or death benefits. As shown
in table 6, variable annuity service providers typically charge fees
for the underlying mutual funds, and they also often charge "mortality
and expense" fees to cover the risk associated with providing
guaranteed payments and minimum death benefits. In contrast, equities,
and mutual funds have no such insurance guarantees; therefore,
investing in these products can result in lower fees.
In addition, 403(b) plan participants invest in individual investment
products and mutual funds more often than participants in other plans,
according to industry experts; these individual products generally have
higher fees than group products. Employers may choose to have their
403(b) plans invest in group or individual annuities. Individual
annuities represent a contract between a single participant and the
service provider. The terms, fees, and record-keeping for each contract
are established separately for each participant. In contrast, when
participants enter the group annuity, they enter into the prearranged
contract established by the plan sponsor. The sponsor can negotiate
with the annuity service provider for lower fees and choose the options
to be made available to participants. Similarly, retail mutual funds
are available to investors with relatively low assets and usually have
higher fees, whereas institutional mutual funds under the same service
provider often have lower fees because investors with large pools of
assets can obtain pricing advantages.
Experts told us that 403(b) plan participants may invest in individual
annuities and mutual funds more often than participants in other plans
for several reasons. First, according to Labor, 403(b) plans are
different from other types of DC plans because individuals often have a
more central role in choosing investment options. Like IRAs, many
403(b) plans operate with a one-to-one relationship between each
participant and service provider. For example, the sponsors of some
403(b) plans simply send participants' contributions to the designated
financial service provider.
Participants in 403(b) plans also tend to invest in individual variable
annuities because more annuity providers market directly to 403(b) plan
participants than mutual fund providers. Experts we interviewed told us
that annuity sales staff commonly visit school districts and market
directly to participants, while mutual fund sales staff rarely do so.
Furthermore, 403(b) plan participants may choose annuities more often
than other investment options because some states have laws in place
that facilitate the marketing of annuity products. According to
experts, states with certain laws generally require sponsors of public
school 403(b) plans to permit any service provider that meets certain
criteria the opportunity to receive contributions. According to one
expert, there are at least a handful of such states, including
California and Texas. Sponsors of public school 403(b) plans in
California and Texas generally cannot limit the number of options
available to participants, but instead must permit qualified service
providers to be included as an option to participants. According to
experts we interviewed, annuity service providers tend to be the most
frequently listed among the plan options.
Like 403(b) plan participants, individual IRA account owners are more
likely to invest in "retail" products than participants in other DC
plans. IRA account assets are usually too low to be eligible for
products typically reserved for high-volume clients, like collective
investment funds, which generally have lower fees. In fact, one expert
explained that it is common for individuals rolling over their assets
from a DC plan into an IRA to see an increase in investment fees. This
change occurs because individuals no longer have the group's bargaining
power to obtain lower-cost investment products.
In contrast to participants in 403(b) plans and IRAs, participants in
401(a), 401(k), and 457(b) governmental plans are more likely to invest
in institutional mutual funds or group annuity products than retail
mutual funds or individual annuities. Sponsors of 401(a), 401(k), and
457(b) governmental plans often pool assets and are able to purchase
institutional products. Sponsors of 457(b) governmental plans also more
frequently pool assets to invest in group annuity products, which can
have lower fees than individual annuity products.[Footnote 17]
Certain Sponsor Actions Decrease Participants' Fees, but Some Sponsors
Take Fewer Actions than Others:
Certain Sponsors' Actions Decrease DC Plan Participants' Fees:
A plan sponsor can take several actions to decrease DC plan
participants' fees. One way sponsors can help reduce participants' fees
is by offering relatively low-cost investment products in which to
invest. For example, sponsors can offer low-cost mutual funds in
addition to offering other products. Sponsors can also decrease
participants' fees by offering them the mutual fund share class that
gives participants an opportunity to pay lower fees. Because each share
class has the same gross return but different fee structures, sponsors
of certain plans can evaluate the options to offer the share class most
likely to reduce participants' fees. For example, owners of A class
shares may pay fees when participants purchase shares, whereas owners
of B class shares may pay fees when participants sell shares. Unlike
owners of A and B class shares, owners of institutional class shares
may pay very low or no fees when participants buy or sell
shares.[Footnote 18]
Sponsors may also decrease fees charged to participants by combining or
pooling assets to access certain investment products, reduce fees, or
negotiate with service providers. For example:
* Some investment products are available only to large-size investors,
like collective investment funds. These "institutional" products often
have lower fees than other "retail" investments.
* Other investment products are available to all types of investors,
but offer lower fees for higher volume investments. For example, mutual
funds often provide "breakpoints"--the designated dollar amounts at
which management fees are reduced--for investors with higher volume.
* For annuity products, sponsors with pooled assets can negotiate terms
and fees for group variable annuities that individuals typically
cannot.
* Record-keeping service providers are likely to charge less per
participant for a group of participants than for individual
participants because pooling assets results in "economies of scale," or
efficiencies gained through higher volume.
Sponsors can also issue a request for proposal (RFP) to lower costs and
decrease fees charged to participants. In response to an RFP, vendors
submit bids describing their services and fees to the sponsor. Sponsors
may then choose vendors who meet their participants' needs and may
choose vendors with lower fees. For example, one expert told us that a
statewide plan reduced total participant fees significantly because
they issued an RFP and chose service providers with lower fees.
Some sponsors may take actions that increase fees, such as offering
optional features. For example, to provide participants with the option
of taking out a loan against plan assets, sponsors may incur compliance
and administrative costs associated with making sure loan amounts do
not exceed limits set by IRS. These costs can be passed on to
participants. Sponsors may also pass on higher investment costs to
participants if an investment option has additional features. For
example, service providers may charge an additional fee to give
participants the option to convert a 401(k) plan account balance into a
retirement annuity.
Lower fees benefit plan participants because they can significantly
increase long-term retirement savings. As shown in figure 1, even a
relatively small annual fee taken from a worker's assets represents a
large amount of money had it been reinvested over time. Fees are one of
many factors--such as the historical performance and risk for each
investment option--participants should consider in making their
investment decisions.
Figure 1: Effect of a 1-Percentage Point in Higher Annual Fees on a
$20,000 DC Plan Balance Invested over 20 Years:
[Refer to PDF for image: multiple line graph]
Year: 1;
Accumulated account balance with 0.5 percent charge for fees: $21,300;
Accumulated account balance with 1.5 percent charge for fees: $21,000.
Year: 2;
Accumulated account balance with 0.5 percent charge for fees: $22,685;
Accumulated account balance with 1.5 percent charge for fees: $22,261.
Year: 3;
Accumulated account balance with 0.5 percent charge for fees: $24,159;
Accumulated account balance with 1.5 percent charge for fees: $23,485.
Year: 4;
Accumulated account balance with 0.5 percent charge for fees: $25,729;
Accumulated account balance with 1.5 percent charge for fees: $24,776.
Year: 5;
Accumulated account balance with 0.5 percent charge for fees: $27,402;
Accumulated account balance with 1.5 percent charge for fees: $26,139.
Year: 6;
Accumulated account balance with 0.5 percent charge for fees: $29,183;
Accumulated account balance with 1.5 percent charge for fees: $27,577.
Year: 7;
Accumulated account balance with 0.5 percent charge for fees: $31,080;
Accumulated account balance with 1.5 percent charge for fees: $29,094.
Year: 8;
Accumulated account balance with 0.5 percent charge for fees: $33,100;
Accumulated account balance with 1.5 percent charge for fees: $30,694.
Year: 9;
Accumulated account balance with 0.5 percent charge for fees: $35,251;
Accumulated account balance with 1.5 percent charge for fees: $32,382.
Year: 10;
Accumulated account balance with 0.5 percent charge for fees: $37,543;
Accumulated account balance with 1.5 percent charge for fees: $34,163.
Year: 11;
Accumulated account balance with 0.5 percent charge for fees: $39,983;
Accumulated account balance with 1.5 percent charge for fees: $36,042.
Year: 12;
Accumulated account balance with 0.5 percent charge for fees: $42,582;
Accumulated account balance with 1.5 percent charge for fees: $38,024.
Year: 13;
Accumulated account balance with 0.5 percent charge for fees: $45,350;
Accumulated account balance with 1.5 percent charge for fees: $40,115.
Year: 14;
Accumulated account balance with 0.5 percent charge for fees: $48,297;
Accumulated account balance with 1.5 percent charge for fees: $42,322.
Year: 15;
Accumulated account balance with 0.5 percent charge for fees: $51,437;
Accumulated account balance with 1.5 percent charge for fees: $44,650.
Year: 16;
Accumulated account balance with 0.5 percent charge for fees: $54,780;
Accumulated account balance with 1.5 percent charge for fees: $47,105.
Year: 17;
Accumulated account balance with 0.5 percent charge for fees: $58,341;
Accumulated account balance with 1.5 percent charge for fees: $49,696.
Year: 18;
Accumulated account balance with 0.5 percent charge for fees: $62,133;
Accumulated account balance with 1.5 percent charge for fees: $52,429.
Year: 19;
Accumulated account balance with 0.5 percent charge for fees: $66,172;
Accumulated account balance with 1.5 percent charge for fees: $55,313.
Year: 20;
Accumulated account balance with 0.5 percent charge for fees: $70,473;
Accumulated account balance with 1.5 percent charge for fees: $58,355.
Source: GAO analysis.
[End of figure]
Some Plan Sponsors Take Fewer Actions to Decrease Fees Than Sponsors of
Other DC Plans:
DC plan experts told us that compared to 401(a), 401(k), and 457(b)
governmental plans, sponsors of 403(b) plans generally take fewer
actions to decrease fees for participants. The 403(b) plan sponsors
often establish a direct one-on-one relationship between the service
provider and the participant, which means sponsors' main responsibility
is to send contributions from employees' paychecks to investment
service providers. This one-on-one relationship between participant and
service provider keeps sponsors' involvement to a minimum, limiting the
ability to reduce fees.
Sponsors of some 403(b) plans often take fewer actions to decrease
participants' fees for at least two reasons, according to experts we
interviewed. First, many sponsors of 403(b) plans are public schools
and tax-exempt organizations, and experts told us they may not have the
resources to hire plan administrators who are retirement plan
specialists. Instead, the staff who administer these plans are often
responsible for payroll or other administration and may lack guidance
on ways sponsors can reduce participants' fees. Second, for many state
and local governments, 403(b) plans are a secondary retirement benefit
to a DB plan. Experts told us that sponsors may not feel as motivated
to play an active role in these plans since the 403(b) plan is
supplemental.
For some governmental 403(b) plans, sponsors' ability to decrease fees
for participants is limited by certain state laws. As we noted earlier,
one expert told us that a handful of states, including California and
Texas, have laws that limit state and local government 403(b) plan
sponsors' ability to narrow the list of service providers offered to
participants. Instead, sponsors must generally give any qualified
service provider a "payroll slot," or an opportunity for participants
to choose that service provider to receive contributions withdrawn from
their paycheck. These requirements limit sponsors' ability to pool
assets, negotiate with service providers, or conduct RFPs.
In contrast to 403(b) plans, other plans are often structured to
require more sponsor actions. First, with some exceptions, sponsors of
401(a), 401(k), and 457(b) governmental plans are generally required by
law to set participants' assets aside in a trust or other type of
entity established to hold participants assets. As a result, sponsors
are generally responsible for seeing to it that participants' funds are
accounted for, and the trust provides a pool of assets that facilitates
negotiating with service providers. Second, plans subject to Title I of
ERISA (including some 403(b) plans) are required to name fiduciaries
for their plans, and this role is often filled by plan sponsors or
service providers. The law requires fiduciaries to act in the sole
interest of participants and beneficiaries. In addition, Labor has
interpreted the law as requiring fiduciaries to assess the
reasonableness of fees charged to participants. Sponsors of plans not
subject to Title I of ERISA--like plans sponsored by state and local
governments--are not required to do so, unless state laws impose such
duties.
IRS's New 403(b) Regulations May Encourage Sponsor Action, but Its
Effect on Fees Is Unclear:
Some 403(b) plan sponsors may take more action as a result of the IRS's
403(b) regulations that generally became applicable in January 2009,
but the effect of this regulation on fees is unclear. Before these
regulations, many sponsors established a one-on-one relationship
between participants and service providers. IRS held participants
responsible for qualification requirements such as certifying that they
had not exceeded loan limitations. According to IRS officials, sponsors
often did not track all participants' assets. Instead, experts told us
that sponsors' main responsibility was sending contributions from
participants' paychecks to investment service providers. However, under
the new regulations, when participants want to exchange one 403(b)
contract for another 403(b) contract under the same plan, sponsors must
agree to share information about the participants with the service
provider of the new 403(b) contract.[Footnote 19] Plan sponsors have
other duties under the new regulations as well, such as maintaining a
plan document that outlines all the material provisions of the plan.
Given these changes, 403(b) plan experts disagree about the new
regulations' effect on fees charged to participants. Some experts
believe fees will increase because of additional compliance costs to
cover the expense of services like creating a plan document. To create
a plan document, sponsors may need more administrative and legal
assistance, the costs of which could be passed on to participants.
Other experts said the new requirements will lead to lower fees for
participants because they give sponsors an incentive to narrow the
range of investment options. One expert noted that the administrative
burdens of keeping track of all of participants' funds has induced
sponsors to reduce the number of investment service providers available
to participants to limit record-keeping activities.[Footnote 20] To
limit the number of service providers, sponsors are likely to conduct
RFPs and to consider costs in their decisions. Also, limiting service
providers may reduce the number of times participants transfer their
funds, reducing sales loads, surrender charges, or other fees
associated with buying and selling investment options.
Participants Receive Different Fee Information Depending on ERISA
Coverage and Regulator, Limiting Participants' Ability to Compare
Investment Options:
Participants Receive Different Fee Information Depending on ERISA
Coverage:
Participants in DC plans subject to Title I of ERISA receive different
fee disclosure documents than participants in non-Title I plans. ERISA
requires sponsors, including employers who sponsor SEP or SIMPLE IRAs,
to disclose certain documents to participants that may contain fee
information. Sponsors must provide all participants with a summary plan
description, account statements, and the summary annual report. As we
previously reported, these documents may, but are not required to,
disclose information on fees borne by individual participants, as shown
in table 8.[Footnote 21]
Table 8: Required Disclosure Documents to All Participants in Plans
Subject to Title I of ERISA:
Disclosure document: Summary plan description;
Document purpose: To explain to participants how the plan operates;
Information on fees: May contain information on how various fees such
as investment, record-keeping, and loan fees are charged to
participants, but not required by ERISA to do so.
Disclosure document: Account statement;
Document purpose: To show the account balance due to a participant;
Information on fees: Typically identifies fees, such as for loans,
which are directly attributable to an account during a specific period.
Also, may show investment and record-keeping fees, but not required by
ERISA to do so.
Disclosure document: Summary annual report;
Document purpose: To disclose the financial condition of the plan to
participants;
Information on fees: Contains total plan costs incurred by plan
participants during the year.
Source: GAO analysis.
[End of table]
As we found in our report on 401(k) plan fees, the fee information that
ERISA requires sponsors to disclose is limited and does not provide
participants with an easy comparison of fees for different investment
options.[Footnote 22] Disclosure documents may contain information on
the total fees charged to participants, but may not clearly list all
types of fees in a manner that facilitates comparison of investment
options. As a result, participants may pay more than they would if they
had clearer information.
For those plans not subject to Title I of ERISA, sponsors are not
federally required to disclose fee information at all, although state
laws may require them to do so. Experts told us that some, but not all,
states established ERISA-like laws that include fee disclosure
requirements. For example, Florida does not require all local
government sponsors to disclose fee information to participants. Also,
a retirement official in Minnesota told us that state law requires the
sponsor of a state 457(b) governmental plan to make participants aware
of fees that they pay, but statutes do not require similar fee
disclosure for school districts' 403(b) plans. Similarly, Florida
requires fee disclosure for state and local government 401(a) plans but
not for 403(b) plans. As a result, participants in different state and
local government plans within Florida may receive different information
about the fees they pay.
Experts and sponsors also told us that sponsors of plans not subject to
Title I of ERISA sometimes provide participants with information on
fees, even though they are not required to do so. For example, sponsors
may distribute prospectuses or fund profiles when employees become
eligible for the plan even though they are not required by ERISA or
state law to do so. DC plan experts told us that state and local
government sponsors do this because they are accustomed to
transparency, and because they feel responsible for helping their
participants understand fees.
Participants also Receive Different Fee Information Depending on the
Regulator:
Participants receive different fee information based on the regulator
of the product in which they invest. SEC regulates fee disclosure for
some retirement plan investment options, such as mutual funds, and
variable annuity products, and requires investment service providers to
disclose fees in a prospectus, a document that details investment
strategy and fees.[Footnote 23] SEC requires require that a prospectus
be provided to the purchaser of a security, such as a mutual fund. When
the sponsor of a DC plan purchases shares of a mutual fund for
participant accounts, the sponsor receives the prospectus. SEC
regulations do not govern plan sponsors and, therefore, do not require
sponsors to provide a prospectus to retirement plan participants.
We found that some service providers that are regulated by SEC give the
prospectus to both the sponsor and the participant when the purchaser
is the sponsor. Service providers also said they disclose fees in
various other documents because they feel it is the right thing to do.
For example, several service providers told us that their company makes
fee information available to participants on their Web site and on fact
sheets because they felt that transparency was constructive.
State insurance agencies also regulate fee disclosure for insurance
products and may require disclosures that list the fees that
participants pay. The National Association of Insurance Commissioners
(NAIC) developed model disclosure regulations, which each state can
choose to adopt. The regulations require that fixed annuity providers
list the specific dollar amounts or percentage charges with
explanations, as well as total amounts charged. According to NAIC, 27
states have adopted the NAIC Annuity Disclosure Model Regulation or
have related state activity.[Footnote 24] For example, one state
specifically requires insurers to give prospective purchasers a buyer's
guide to annuities and a contract summary as provided in the NAIC model
regulation.[Footnote 25]
However, other states have different fee disclosure requirements;
therefore participants in different states may receive different
information on fees. For example, while service providers must be
licensed by each state where it sells insurance products, at least one
state does not require specific fee disclosures to some participants.
[Footnote 26]
California and Texas have more stringent disclosure requirements than
the federal government. These states require specific disclosure of all
fees for service providers licensed to sell products to participants in
public 403(b) plans. California and Texas established online registries
with fees disclosed in a consistent format to facilitate comparison of
403(b) service providers' fees. Licensed service providers must submit
fees and other information to the registry to sell investment products
to participants in the states' school systems. Both states organize the
information from service providers to provide fee information in a
standardized format.
Service providers listed in California's registry must disclose all
direct and indirect fees charged to participants such as surrender
fees, management fees, and annual fees. For example, in California,
participants may compare fees of up to three similar investment
products at one time. California's Web site, [hyperlink,
www.403bcompare.com], allows any user to view and compare fees of
selected products from multiple vendors side by side. Similarly,
licensed service providers in Texas must disclose all fees they charge
in the online registry, including both investment and administrative
fees. These registries help sponsors and participants of 403(b) plans
compare service providers' fees and other characteristics, which may
facilitate choosing products with lower fees.
As shown in table 9, different regulators require different information
to be disclosed. As a result, DC plan participants and IRA account
owners may receive different information because of the entity that
regulates the plan or the investment product.[Footnote 27]
Table 9: Required Fee Disclosure Information, by Regulator:
Regulator: ERISA;
Required fee disclosure information: ERISA requires sponsors to provide
participants with summary plan description, account statement, summary
annual report, which may include information about fees such as
investment fees, record-keeping fees, and total plan costs.
Regulator: State and local governments;
Required fee disclosure information: For sponsors of public DC plans,
state and local government requirements vary. For example, one state
requires certain sponsors to provide a quarterly statement that lists
out all fees, while another state requires no fee disclosures for
certain plans.
Regulator: SEC;
Required fee disclosure information: The prospectus contains a fee
table with general fee information associated with the product, such as
the expense ratio, which explains total fees reported as a percentage
of the fund's assets. The prospectus does not contain certain fees
charged by the plan such as transactional fees.
Regulator: State insurance regulators;
Required fee disclosure information: States' insurance department
requirements vary. According to NAIC, some states have adopted NAIC's
model disclosure regulations, which requires specific dollar amounts or
percentage charges and fees listed with an explanation of how they
apply. States who have not adopted NAIC's model regulations may have
different disclosure requirements.
Source: GAO analysis.
[End of table]
Moreover, because of the different disclosure requirements,
participants in DC plans and IRAs can invest in similar products but
receive different information on fees. This may be confusing to
participants who want to compare fees of different investment products
to make an investment choice. For example, as shown in figure 2, under
ERISA, participants must receive a summary plan description, an account
statement, and a summary annual report, regardless of the product in
which they are invested. But a participant who is invested in the same
type of product in a plan not subject to Title I of ERISA may not
receive any information from either the service provider or the
sponsor. On the other hand, the participant may receive information
from both the service provider and the sponsor, but the fee information
may be in different formats, making it difficult for the participant to
compare investment products.
Figure 2: Oversight of Fee Information Disclosed to Retirement Plan
Participants:
[Refer to PDF for image: illustration]
SEC:
Service provider: Mutual fund or variable annuity for an individual:
Prospectus provided to IRA participant;
DC plan or employer-sponsored IRA sponsor: ERISA sponsor;
Provides the following to the IRA participant:
Summary plan description;
Account statement;
Summary annual report.
SEC:
Service provider: Mutual fund or variable annuity for a group:
Prospectus provided to IRA participant;
DC plan or employer-sponsored IRA sponsor: Non-ERISA sponsor:
Unclear what participants receive.
States:
Service provider: Fixed annuity;
Information required by states varies;
DC plan or employer-sponsored IRA sponsor: ERISA sponsor;
Provides the following to the IRA participant:
Summary plan description;
Account statement;
Summary annual report.
States:
Service provider: Fixed annuity;
Information required by states varies;
DC plan or employer-sponsored IRA sponsor: Non-ERISA sponsor:
Unclear what participants receive.
Sources: GAO; images, Art Explosion.
[End of figure]
Oversight of Fees and DC Plans Will Likely Improve with Recent
Regulations, but IRS and Labor Still Lack Information That Could
Strengthen Oversight:
Labor and IRS Oversee Fee Disclosure and DC Plans, and Recent
Regulations on Fee Disclosure and 403(b) Plans Are Likely to Improve
Oversight:
Labor is charged with overseeing the statutorily required disclosures--
which may include fee information--to participants of certain DC plans,
while IRS oversees tax laws that apply to all DC plans. Both have
recently issued or proposed regulations that are likely to improve
oversight. Under ERISA, Labor is responsible for enforcing the
requirements that plan fiduciaries ensure that fees paid with plan
assets are reasonable and for necessary services. Labor does this in a
number of ways, including collecting information on fees from plan
sponsors, investigating participants' complaints or referrals from
other agencies on questionable plan practices, and conducting outreach
to educate plan sponsors about their responsibilities. In addition,
Labor makes available a checklist with its annual filing instructions
to help plan sponsors follow ERISA requirements, such as providing
participants with certain documents like the summary plan description.
While the checklist is not submitted to Labor, agency officials stated
that it selects plans for investigation because of some indication that
an ERISA violation may have occurred or may be about to occur, a
process Labor calls "targeting." For example, we reported that Labor
targeted 3,400 cases for review in 2005 as a result of various source
leads, such as participant complaints, computer targeting, and other
agency referrals.[Footnote 28]
Labor proposed regulations in July 2008 to improve oversight of DC
plans subject to Title I of ERISA. These regulations are designed to
improve fee disclosure to participants by requiring sponsors to provide
participants with the actual amounts individuals were charged for
administrative services, on a quarterly basis.[Footnote 29] Sponsors
would be required to disclose investment fees at least annually to
participants in a chart or similar format to facilitate comparison of
fees among investment options. These regulations apply only to plans
subject to Title I of ERISA disclosure provisions, such as many 401(a),
401(k), some 403(b) plans, and some employer-sponsored IRAs. We have
previously suggested that Congress amend ERISA to require all sponsors
to disclose fees in a way that facilitates comparison among investment
options.[Footnote 30]
While IRS generally does not have responsibility for enforcing laws
regarding fees and fee disclosure for DC plans, IRS oversees DC plans'
compliance with the tax code. All DC plans allow a tax deduction or
deferral for plan sponsors or participants. IRS makes sure that
contributions are eligible for a tax deferral or deduction by analyzing
features of retirement plans. IRS issued final regulations in 2007 that
made significant changes to improve IRS oversight of all 403(b) plans.
The regulations require sponsors to maintain a plan document that
outlines the provisions of the plan, and manage the plan in accordance
with the document. While previously sponsors had to provide certain
information in writing, they were not generally required to maintain a
formal plan document.
Labor Lacks Specific Authority to Collect Information to Help Ensure
That Safe Harbor 403(b) Plans Protect Participants' Interests:
Labor lacks the specific authority to require sponsors of safe harbor
403(b) plans to submit information that would help ensure that
participants' interests are protected. Labor oversees many DC plans
sponsored by tax-exempt organizations that are subject to Title I of
ERISA. However, Labor has defined a safe harbor for certain 403(b)
plans that may operate outside of Title I. Under Labor's safe harbor
regulations, 403(b) plans are defined as not having been "established
or maintained by an employer" under ERISA if certain conditions are
met. For example, in order to remain under the safe harbor, sponsors
must generally limit their involvement in the plan.[Footnote 31] Plan
sponsors make the decision to operate their 403(b) plans under the safe
harbor, independent of Labor.
We found that Labor cannot identify safe harbor plans and therefore has
no assurance that it is able to systematically enforce laws for 403(b)
plans that may be operating outside of the safe harbor. Under ERISA, DC
plans are required to file an annual report with Labor.[Footnote 32]
However, Labor currently does not have the authority to require that
safe harbor plans provide similar information. Labor does have the
authority to investigate any 403(b) plan of a tax-exempt employer to
determine if the plan is covered by Title I of ERISA and may have
reason to target safe harbor 403(b) plans for enforcement actions
because sponsors may engage in activities that take them out from under
the safe harbor and make them subject to Title I. For example, sponsors
that act as fiduciaries are required to follow requirements that
protect participants' interests, such as seeking reasonable fees for
plan participants and avoiding conflicts of interest. However, Labor
has no way to systematically assess whether or not sponsors of 403(b)
safe harbor plans are acting as plan fiduciaries. As a result, Labor
cannot ensure that participants' interests are protected. Because Labor
is unable to identify safe harbor plans, it has no assurance that it is
able to include all 403(b) plans subject to Title I of ERISA in its
enforcement efforts.
Lack of Information Sharing between IRS and Financial Regulators Limits
Oversight of Service Providers:
IRS and financial regulators have not always shared information with
one another to use resources effectively and help enforce a rule
requiring reasonable fees. In our discussions with IRS officials, they
said that IRS agents who find evidence of legal violations are not
obligated to share information with financial regulators.[Footnote 33]
However, providing such information would help in overseeing service
providers of DC plans. Various service providers such as investment
companies and record-keepers work with DC plans and participants and
IRS agents are in a position to potentially find that some service
providers have violated financial regulations.
Currently, IRS is under no obligation to report service providers'
conduct to the proper financial regulators. No formal agreement is in
place--such as a memorandum of understanding (MOU)--to guide
coordination efforts, a practice we have identified as effective in
prior work.[Footnote 34] Financial regulators, such as the Federal
Reserve Board and SEC, have established an MOU to facilitate their
oversight of financial services firms. Without MOUs, IRS agents have no
obligation to report violations, and without such reporting the
potential for service providers withholding information from plan
participants increases. An MOU--and corresponding changes to agents'
guidance--could provide a means for agents to report violations, and
such reporting could reduce the likelihood of service providers
withholding information from plan participants. Such reporting could
also provide an additional means by which to enforce a rule requiring
reasonable fees.
IRS Does Not Collect Enough Information to Easily Enforce 457(b) Plans'
Contribution Limits:
IRS's does not collect enough information to easily enforce certain
limits on participants' contributions to 457(b) plans, which could lead
to excessive income tax deferrals. Some, but not all, DC plans have
"catch-up" provisions that allow older participants to defer additional
income. Older participants may wish to set aside more money than
younger participants as they near retirement. In 2009, participants age
50 and over in 401(k), 403(b), and 457(b) governmental plans are
permitted to contribute an additional $5,500 over the normal
contribution limit of $16,500. Participants age 50 and over in 457(b)
tax-exempt plans are not permitted to make additional catch-up
contributions.[Footnote 35]
Although there are two distinct types of 457(b) plans--governmental
plans and tax-exempt plans--IRS cannot easily differentiate between
participants in these plans to evaluate whether or not they are
appropriately complying with catch-up contribution limits. IRS
identifies plan participants in various retirement plans from
information provided on the W-2 form that reports income tax deferrals.
To identify a participant's contributions to a specific plan:
* Employers submit a Form W-2 for each participant in the plan,
reporting annual contributions to the retirement plan, among other
things.
* Form W-2 asks employers to identify the type of plan in which the
participant is enrolled by listing the code representing the plan in
box 12, along with the amount deferred, as shown in 3.
Figure 3: IRS Form W-2, Wage and Tax Statement, with Emphasis on Box
12, for Retirement Plan Contributions:
[Refer to PDF for image: illustration]
Box 12 indicates "See instructions for Box 12."
Source: IRS.
[End of figure]
The instructions for the W-2 form list a single letter code ("G"), to
represent deferrals to a 457(b) plan, as shown in figure 4.
Figure 4: Form W-2 Instructions:
[Refer to PDF for image: illustration]
G: Elective deferrals and employer contributions (including nonelective
deferrals) to a section 457(b) deferred compensation plan.
Source: IRS.
[End of figure]
We found that the W-2 code identifying 457(b) plans has not been
changed for several years, and therefore the IRS does not have enough
information to easily determine whether catch-up contributions are made
appropriately. In 2002, section 457 was amended, allowing 457(b)
governmental plan participants age 50 and over the opportunity to
contribute $5,500 in catch-up contributions. These contributions are
not permitted for participants of 457(b) tax-exempt plans. However, the
code on the W-2 form for these two plans remained the same.
Instead of relying on the W-2 form to systematically differentiate
between participants in the two types of 457(b) plans, IRS agents rely
on experience gained on the job to make distinctions. IRS agents
seeking to enforce the different 457(b) catch-up contributions rules
have to make a judgment to decide if the catch-up contributions are
permitted. IRS officials explained that efforts to link the participant
information to the type of sponsor is burdensome. IRS agents have to
confirm the type of organization that sponsored the plan and then
determine if the participant could make the extra contribution. For
example, one IRS agent told us that the agent could contact the plan
sponsor and ask for documentation of its tax-exempt or government
status.[Footnote 36]
As a result of IRS's inability to easily differentiate between 457(b)
plan participants, the federal government may be losing tax revenue.
For example, a 457(b) tax-exempt plan participant could erroneously
make a catch-up contribution. Normally, the participant's contributions
over the normal limit ($16,500) would be subject to income tax, for
which the highest income tax bracket was 35 percent in 2008. However,
if a participant made the maximum catch-up contribution of $5,500 and
did not pay income taxes, he or she would avoid paying 35 percent of
$5,500. The federal government would lose $1,925 in tax revenue for
that year.
Conclusions:
American workers participating in DC plans may not receive clear
information on the fees that they pay, even though relatively small
fees imposed annually can significantly affect retirement savings over
the course of a career. In our previous work, we suggested that
Congress consider amending the law to require fees to be disclosed to
participants in 401(k) plans in a way that facilitates comparison of
investment options, and our current work suggests that participants in
all types of plans could benefit from enhanced disclosure. Labor has
proposed regulations that address this concern, but we continue to
believe that a change in the law is necessary to ensure that improved
fee disclosure will be broadly available to all participants.
Although ERISA requires sponsors to disclose some fee information to
participants, disclosure requirements for plans not subject to Title I
of ERISA are less consistent. Depending on the service provider, the
sponsor, and the state, participants in these plans may receive fee
information from different entities, in different formats, or may
receive no fee information at all. Some states have taken approaches to
fee disclosures that are already helping participants to compare fees
across investments. These approaches may provide a model not only for
federal oversight, but also for other states as both works to enhance
disclosure of DC plan fees.
While sponsors of some plans often take actions such as pooling assets
to obtain pricing advantages, sponsors of 403(b) plans often do not. As
a result, participants in 403(b) plans can end up paying higher fees
than participants in other DC plans. If guidance were provided to all
sponsors of DC plans about what role they can have in reducing fees,
sponsors would be more likely to understand the actions they can take
to help participants ensure they have adequate retirement savings.
Given its responsibility to oversee plan fiduciaries, Labor has the
expertise to develop such guidance, but it does not have authority over
plans not subject to Title I of ERISA. IRS is in a better position to
reach out to all sponsors. Collaboration between IRS and Labor can
ensure that DC plans subject to Title I of ERISA and other plans are
reached.
Both Labor and IRS have particular responsibilities for overseeing DC
plans, and in Labor's case, making sure that plan sponsors ensure the
reasonableness of fees charged is an especially important
responsibility. However, steps must be taken to improve each agency's
oversight of DC plans to ensure that not only are DC plan participants'
retirement savings adequately safeguarded, but also that there is no
absence of oversight for entities involved in the DC plan market.
Therefore, while Labor is responsible for administering the statutory
provisions that safeguard the interests of participants, these
interests may be vulnerable if Labor does not have the specific
authority to require that all 403(b) plan sponsors that fall outside of
safe harbor rules systematically identify themselves. Without such
authority, Labor cannot easily identify sponsors who may be covered by
Title I of ERISA, which is designed in part to protect workers'
retirement savings. In addition, IRS has a role to play in ensuring
that the government receives the appropriate tax revenue. However, if
IRS cannot easily determine whether participants in certain plans are
improperly deferring income, then the federal government could be
missing tax revenue if participants exceed deferral limits. Finally,
encouraging regulators to share information on service providers'
violations they have found in the normal course of reviewing plans with
other regulators is likely to help ensure that all DC plan
participants' retirement savings are protected. With a formal
mechanism, such as an MOU, to share information with other regulators
when potential violations are found, regulators are less likely to miss
opportunities to enforce financial regulations designed to protect
investors. Such an MOU would be appropriate for limited occasions when
information on service providers can be shared without revealing
protected taxpayer information.
Matters for Congressional Consideration:
Congress should consider amending ERISA to require sponsors to disclose
fee information on each investment option in the plan to participants
in a consistent way that facilitates comparisons among the options not
only for 401(k) plans, as we have previously suggested, but for all DC
plans subject to Title I of ERISA. In addition, to help ensure
participants in all DC plans receive consistent fee disclosure,
Congress may wish to consider state approaches for fee disclosure to
participants in non-Title I plans as models for federal requirements
for ERISA plans.
Given the absence of direct oversight of safe harbor 403(b) plans,
Congress may wish to consider giving Labor the specific authority to
collect information to systematically monitor safe harbor plans, which
will allow Labor to determine whether any safe harbor 403(b) plans are
operating outside the safe harbor guidelines and are subject to Title I
of ERISA.
Recommendations:
To encourage plan sponsors to take actions that result in participants
paying lower fees, we recommend that the Commissioner of Internal
Revenue, together with the Secretary of Labor, provide guidance
designed for sponsors of all types of DC plans to suggest ways sponsors
can cost-effectively decrease participants' fees.
To be able to provide improved oversight and ensure participants are
not violating tax deferral limits, the Commissioner of the Internal
Revenue Service should collect information to allow them to easily
differentiate between types of 457 plans.
To help ensure that information about service providers' violations is
shared with financial regulators, we recommend that the Commissioner of
the Internal Revenue Service work with financial regulators to
establish a formal memorandum of understanding. Such a memorandum would
help instruct agents and would be appropriate for limited occasions
when information on service providers can be shared without revealing
protected taxpayer information. In addition, the agencies should
periodically review and update the memorandum, as appropriate.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Secretary of Labor, the
Secretary of the Treasury, and the Chairman of the Securities and
Exchange Commission. We obtained written comments from the Assistant
Secretary of Labor and from the Deputy Commissioner of the Internal
Revenue Service, which are reproduced in appendixes II and III.
Treasury, IRS, SEC, and Labor also provided technical comments, which
were incorporated in the report where appropriate.
Labor agreed with our recommendations. They noted that excessive fees
can undermine long-term retirement savings for plan participants and
described how two proposed regulations would give plan fiduciaries more
responsibility for understanding plan fees and improve fee disclosure
for participants. We agree that Labor's proposed regulations will
assist plans sponsors in understanding their responsibilities for plan
fees, but note that neither regulation has been made final. Labor also
noted that it has produced guidance for plan sponsors on a variety of
issues to help them understand their responsibilities under ERISA.
However, this guidance is often focused on 401(k) plans, whereas all
plans are likely to benefit from it.
IRS agreed with our recommendations to work with Labor to provide
guidance to sponsors of all types of plans to help reduce participants'
fees, as well as to collect enough information to distinguish between
different types of 457 plans. With regard to establishing an MOU to
facilitate information-sharing with financial regulators, IRS said that
it will cooperate in situations we described. However, IRS also said
that its method of doing so is sufficient. IRS described sharing
information with another federal regulator without the use of an MOU,
while complying with rules that protect the confidentiality of taxpayer
and tax return information. As noted, IRS has been diligent in
observing regulations protecting taxpayer information, and we agree
that carefully structured cooperation is important. However, we
continue to believe that an MOU is the best means for formally
articulating such cooperation especially given the variety of entities
involved in DC plan administration that cross regulatory boundaries.
Just as IRS has established MOUs with other federal agencies such as
Labor to share information, we believe that an MOU would be useful to
guide coordination efforts with financial regulators to ensure that IRS
agents know what is expected of them.
Unless you publicly announce its contents earlier, we plan no further
distribution until 30 days after the date of this report. At that time,
we will send copies of this report to the Secretary of the Treasury,
Commissioner of Internal Revenue, the Secretary of Labor, the Chairman
of the Securities and Exchange Commission; appropriate congressional
committees; and other interested parties. In addition, the report will
be available at no charge on GAO's Web site at [hyperlink,
http://www.gao.gov].
If you have any questions concerning this report, please contact me 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 report. GAO staff who made significant contributions to
this report are listed in appendix V.
Sincerely yours,
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of this report were to examine: (1) how the types of
fees charged to participants and investments of various defined
contribution (DC) plans differ; (2) how DC plan sponsor actions affect
participant fees; (3) how fee disclosure requirements vary; and (4) how
effective is the oversight of DC plans.
To identify total assets for DC plans and IRAs, we reviewed a report
that analyzed data from federal and private sources. We reviewed "The
U.S. Retirement Market, 2008," Research Fundamentals, vol. 18, no. 5
(Washington, D.C.: Investment Company Institute, June 2009). Total IRA
market assets are derived from tabulations of total IRA assets provided
by the IRS Statistics of Income (SOI) Division for tax years 1989,
1993, 1996-2002, and 2004. These tabulations are based on a sample of
IRS returns. Total assets for 401(k) plans, 403(b) plans, and 457 plans
are based on data from the Federal Reserve Board, the National
Association of Government Defined Contribution Administrators, and
American Council of Life Insurers. The Investment Company Institute
(ICI) is a national association of U.S. investment companies, including
mutual funds, closed-end funds, exchange-trade funds, and unit
investment trusts. Its research department collects and disseminates
industry statistics, and conducts research studies relating to issues
of public policy, economic and market developments, and shareholder
demographics.
We obtained different sets of data from the Internal Revenue Service
(IRS) on the general characteristics of DC plans, such as number of
plans.
* First, we obtained one set of data from IRS's Tax Exempt and
Government Entities Division (TEGE). The 401(k), 403(b), and 457(b)
plan and participant information was taken from a database that
compiles information from all W-2 documents submitted to IRS. The data
have some limitations. For 2007, this database collected W-2 forms from
92 percent all taxpayers who filed a W-2 that year. The other 8 percent
represent taxpayers who file their forms late or amend returns. IRS
also explained that some plans in which no individual made a
contribution in a single year may not be represented in the count, but
it is likely that few such plans exist. In addition, no data was
available for 401(a) plans, or 457(f) plans. Because we used the data
to illustrate the relative assets and contributions of DC plans, we
found it reliable for our purposes.
* We reviewed the IRS's Compliance Data Warehouse (CDW) Information
Returns Master File (IRMF) for tax year 2006. CDW is a widely used
database consisting of sensitive but unclassified taxpayer data from
various data sources. The IRMF we received was extracted on May 15,
2009. We assessed these data and determined that they were sufficiently
reliable for the purposes of this report.
* We also reviewed data from IRS's Statistics of Income (SOI)
individual files for tax year 2006. SOI is also a widely used database
consisting of a sample selected before audit of the income tax returns.
Since the estimates we provide using these data sources are based on
samples, they involve margins of error. Unless otherwise noted,
population estimates' margins of error do not exceed 3.54 percentage
points; contributions estimates' margins of error are a maximum of plus
or minus 4.1 percent. We assessed these data and determined that they
were sufficiently reliable for the purposes of this report.
To explain how the types of fees charged to participants and
investments of various DC plans differ, we interviewed 6 plan sponsors
and 11 investment service providers who interact with different DC
plans to understand how fees may vary among plans. We also consulted
with four legal experts on the differences among plans, as well as
associations representing different types of plan sponsors, and service
providers, and one union representing participants and sponsors. We
obtained guidance from IRS and Department of Labor (Labor) explaining
the features of each type of plan. We conducted a search of the
literature, including academic and industry sources. We compared plan
differences and similarities, and reviewed tax law and regulations on
deferred compensation plans.
To determine how DC plan sponsor actions affect participant fees, we
conducted a search of the literature, including GAO's prior work, and
consulted with several industry experts on retirement plans, as well as
associations representing different types of plan sponsors, and service
providers, and experts on investment products, such as regulators, and
researchers. We also consulted with representatives from 11 different
investment service providers and 6 plan sponsors.
To outline how fee disclosure requirements vary by plan, we conducted a
search of the literature, and reviewed the Employee Retirement Income
Security Act of 1974 (ERISA), other laws, and the Internal Revenue
Code. We reviewed disclosure laws in Florida and Minnesota to examine
if state laws outlined disclosure requirements for plans not subject to
ERISA. We also reviewed the requirements for California and Texas's Web
sites that provide fee disclosure information to certain participants.
We reviewed disclosure regulations related to retirement plans as well
as investment products to compare information required to be disclosed
across various DC plans and investment products.
We interviewed officials from the Securities and Exchange Commission
(SEC), Financial Industry Regulatory Authority, National Association of
Insurance Commissioners and state insurance regulators. We reviewed
model disclosure for annuity products and SEC requirements for product
disclosure. In addition, we interviewed and sought information from
investment services providers, such as insurance companies and mutual
funds providers, who interact with retirement plans to describe plan
fees and disclosure practices. We analyzed 11 service providers'
responses to structured questions on fees and disclosure. We consulted
with national experts, such as industry associations and experts.
To describe the effectiveness of DC plan oversight, we interviewed
officials from IRS and Labor to discuss plan oversight and topics
related to reporting and compliance. We reviewed Title I and II of
ERISA and reporting requirements associated with various DC plans. We
examined Form 5500 with selected schedules and reviewed secondary legal
documents such as W-2 forms, instructions, as well as guidance provided
by Labor on 403(b) plans and 457 plans.
We conducted this performance audit from June 2008 through September
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Internal Revenue Service:
Department of the Treasury:
Internal Revenue Service:
Washington, DC 20224:
August 19, 2009:
Ms. Barbara D. Bovbjerg:
Director, Education, Workforce and Income Security Issues:
U S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. Bovbjerg,
I reviewed your draft Government Accountability Office (GAO) report
titled "Better Information and Sponsor Guidance Could Improve Oversight
and Reduce Fees for Participants" (GAO-09-641).
The report makes an important contribution to the retirement
community's understanding of the types of fees charged to defined
contribution retirement plans and how those fees may vary depending on
factors such as plan size. As you have pointed out in earlier reports,
and reiterate in this one, fees have a direct impact on the account
balances of participants in defined contribution plans, and a resulting
impact on these individuals' retirement income. We agree that plan
sponsors, administrators, and advisors can benefit from clear
information about fees.
As you point out, the Department of Labor (DOL) has primary
responsibility for issues relating to fees charged by firms that
provide services to defined contribution plans The DOL, in its response
to this report, has outlined a program of regulation that it has
undertaken to address this issue.
The Employee Plans function of our Tax Exempt and Government Entities
Division has a wide-ranging customer education and outreach program
which communicates with plan participants, sponsors, administrators and
professional practitioners on matters of importance to the retirement
community. As part of this program, Employee Plans publishes two
quarterly electronic newsletters. "Employee Plan News" goes to 68,000
attorneys, accountants and actuaries who practice in the employee plans
area. "Retirement News for Employers," aimed at small businesses (that
tend to sponsor smaller-size defined contribution plans), goes to
50,000 subscribers. In each of these publications we feature a "DOL
Corner" which contains news and direct communications from the DOL.
Readers of our newsletters may link directly to DOL sources. These
resources are available to provide our retirement community audiences
with current information not only on tax-related matters, but also on
important DOL issues such as fees.
We look forward to working with the DOL on initiatives that will
advance the goal of educating the retirement community about fees, and
finding effective ways to reduce fees in order to boost retirees'
income.
Responses to your specific recommendations are enclosed. We appreciate
the continued and valuable support from you and your staff on this
issue. If you have any questions or would like to discuss this response
in more detail, please contact Sarah H. Ingram, Commissioner, Tax
Exempt and Government Entities Division, at (202) 283-2500.
Sincerely,
Signed by:
Linda E. Stiff:
Enclosure:
[End of letter]
Recommendation for the Commissioner:
Together with the Secretary of Labor, provide guidance designed for
sponsors of all types of defined contribution plans to suggest ways
sponsors can cost-effectively decrease participants' fees.
Response:
We would be pleased to consult with the Department of Labor (DOL) on
ways the sponsors can reduce participants' fee. As the DOL notes in its
letter to Government Accountability Office in response to this report,
it has undertaken the development of several regulatory projects
intended to provide "useful and straightforward fee disclosure guidance
in the near future." As the Secretary of Labor releases such guidance
we will use our customer education and outreach tools to help
disseminate it, including posting the guidance or advice, or links to
it, on the Internal Revenue Service's Employee Plans page.
Recommendation for the Commissioner:
To provide improved insight and ensure participants are not violating
tax-deferral limits, the Commissioner of Internal Revenue should
collect information to allow the Internal Revenue Service to easily
differentiate between 457 plans sponsored by governments and 457 plans
sponsored by tax-exempt entities.
Response:
The concern underlying this recommendation arises because participants
age 50 and above in 457(b) plans sponsored by a governmental unit may
make annual "catch-up" contributions in addition to the standard annual
contribution. However participants in 457(b) plans sponsored by tax-
exempt organizations may not make such "catch-up" contributions.
The Tax Exempt and Government Entities Division will explore ways to
effectively differentiate between the two kinds of section 457(b)
plans, including the possibility and amending the instructions for the
Form W-2 to add a letter code or codes that will distinguish between
governmental and tax-exempt section 457(b) plans.
Recommendation for the Commissioner:
To help ensure that information about service providers' violations is
shared with financial regulators, we recommend that the Commissioner of
Internal Revenue work with financial regulators to establish
a formal MOU. Such a MOU would help instruct agents and would be
appropriate for limited occasions when information on service providers
can be shared without revealing protected taxpayer information. In
addition, the agencies should periodically and update the MOU as
appropriate.
Response:
In our work with other federal agencies, we comply with section 6103 of
the Internal Revenue Code. This is an important provision that
addresses both the confidentially and the disclosure of tax returns and
return information. Acting carefully, we have been able to cooperate
with federal agencies in highly effective enforcement efforts while
fully respecting section 6103. A recent example is our partnership with
the Department of Justice and the Federal Trade Commission. In that
instance, we collectively moved against entities posing as tax-exempt
credit counseling organizations without using a memorandum of
understanding. We believe that the recommendation for a memorandum of
understanding with financial regulators is not a substitute for
carefully structured cooperation with these agencies, tailored to the
characteristics of the situation. We have found that such cooperation
is both effective and consistent with section 6203, and will engage in
that cooperation in the situations you described.
[End of section]
Appendix III: Comments from the Department of Labor:
U.S. Department of Labor:
Employee Benefits Security Administration:
Washington, DC 20210:
August 13, 2009:
Ms. Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Bovbjerg:
We base reviewed the Government Accountability Office's (GAO) draft
report entitled "Retirement Savings - Better Information and Sponsor
Guidance Could Improve Oversight and Reduce Fees for Participants" (GAO-
09-641) and the recommendation contained therein as it relates to the
Secretary of Labor.
Specifically, the GAO is recommending that the Secretary, together with
the Commissioner of the Internal Revenue Service, provide guidance
designed for sponsors of all types of defined contribution plans to
suggest ways sponsors can cost-effectively decrease participant fees.
The Department agrees with the GAO that excessive fees can undermine
the retirement security of plan participants. ERISA requires plan
fiduciaries, when selecting or monitoring service providers, to act
prudently and solely in the interest of the plan's participants and
beneficiaries. Fundamental to a plan fiduciary's ability to discharge
these obligations is the availability of information sufficient to
enable the plan fiduciary to make informed decisions about the services
and the reasonableness of the costs for those services. Similarly,
understanding what and how expenses affect participant accounts is of
critical importance to plan participants and beneficiaries in choosing
among investment choices.
While these principles may appear straight forward, the Department
recognizes that understanding and obtaining the information necessary
to make informed decisions about plan service providers, including
their compensation arrangements, may he challenging for many plan
sponsors. In recognition of this challenge, and consistent with the
recommendations of the GAO, the Department has undertaken the
development of a regulation that will not only assist plan sponsors in
understanding what information they need to make informed decisions
about their service providers, but will help assure that plan
fiduciaries are provided the needed information by their service
providers. Specifically, the Department proposed a regulation amending
the rule under section 408(h)(2) of ERISA to establish an affirmative
obligation on plan fiduciaries to obtain enumerated disclosures from
service providers and on plan service provider to furnish such
disclosures to plan fiduciaries. This information will enable plan
fiduciaries to understand the nature and scope of the services to he
provided, the cost of those services, taking into account revenue
sharing and other arrangements that may affect the cost of such
services, and potential conflicts of interest on the part of service
providers that may affect the quality of the services to be furnished
to the plan. This regulation was published in proposed form on December
13, 2007 (72 FR 70988) and a public hearing was held regarding the
proposal on March 31 and April 1, 2008. The Department currently is in
the process of reviewing the regulatory record, including public
comments, and plans to move forward in providing useful and
straightforward fee disclosure guidance in the near future.
We also wish to note that, independent of the regulation under section
408(b)(2) of ERISA focusing on fiduciary-level disclosures, the
Department is taking steps to improve the disclosure of fee and related
plan information to pension plan participants and beneficiaries. A
proposed rule was published in the Federal Register on July 23, 2008
(73 FR 43014). A component of the Department's proposal was a
requirement that participants and beneficiaries he furnished a chart or
similar document that would facilitate informed investment decisions by
the plan's participants and beneficiaries. The Department currently is
reviewing this regulation for purposes of adopting a final rule and
model disclosure chart.
In addition, and also consistent with the GAO's recommendation, the
Department maintains both educational materials and outreach events
designed to assist plan sponsors in understanding their
responsibilities under ERISA, including the selection and monitoring of
service providers. Examples of materials available on our website
include: "Meeting Your Fiduciary Responsibilities", "Understanding
Retirement Plan Fees And Expenses" and guides for selecting and
monitoring pension consultants, service providers and plan auditors.
Information concerning our educational programs also is available on
our website. The Department conducts numerous education and outreach
events each year. Both our educational materials and our educational
programs will be updated to reflect the new requirements of the section
408(b)(2) regulation. following its publication in the Federal
Register.
Finally, we note that the Department coordinates with the Department of
Treasury and the Internal Revenue Service on a wide variety of issues
of mutual interest, including the formulation of regulatory standards
and the delivery of public education programs. We believe plan sponsors
and other members of the regulated community benefit significantly from
such cooperative efforts.
As evidenced by the foregoing, the Department has been sensitive to
plan cost and related issues for sonic time. EBSA is committed to
protecting the employer-sponsored benefits of American workers,
retirees, and their families. We appreciate having had the opportunity
to review and comment on the draft report. Please do not hesitate to
contact us if you have questions concerning this response or if we can
be of further assistance.
Sincerely,
Signed by:
Phyllis C. Borzi:
Assistant Secretary:
[End of section]
Appendix IV: Characteristics of DC Plans and IRAs:
DC plans together have about the same amount of estimated assets as all
types of IRA accounts, as shown in table 10. At the end of 2008, assets
for DC plans were estimated at $3 billion, while for IRAs, total
estimated assets were about $3.6 billion. 401(k) plans have
significantly more assets than 403(b) plans or 457 plans.
Table 10: Estimated Total Assets for DC Plans and IRAs, 2008 (Dollars
in billions):
401(k):
Total assets: $2,350.
403(b):
Total assets: $572.
457(b) governmental and tax-exempt:
Total assets: $140.
Traditional IRAs:
Total assets: $3,221.
Roth IRAs:
Total assets: $165.
SEP[A]:
Total assets: $180.
SIMPLE:
Total assets: $44.
Source: ICI.
Note: Data on 401(a) and 457(f) plans are not available. Data in this
table are estimated and should not be compared to the data in other
tables.
[A] Asset estimates for SEP plans include figures for Salary Reduction-
SEP (SAR-SEP) plans. The Small Business Job Protection Act of 1996
prohibited the formation of new SAR-SEP IRAs after December 31, 1996.
[End of table]
Table 11 shows estimated contributions to different types of DC plans
in 2007. Participants and sponsors made significantly more
contributions to 401(k) plans than other types of DC plans.
Table 11: Estimated Contributions to DC Plans, 2007 (Dollars in
billions):
401(k):
Contributions: $165.
403(b):
Contributions: $28.
457(b) governmental and tax-exempt:
Contributions: $13.
Source: IRS.
Note: Data on 401(a) and 457(f) plans are not available. The data in
this table were provided by IRS and come from a database that contains
data taken from annual Form W-2 filings. The data are estimated and
should not be compared to the data in other tables. See appendix I for
further discussion of this issue.
[End of table]
Although table 10 shows that total assets for traditional IRAs are
significantly greater than assets for other types of IRAs, estimated
contributions for 2006 are less disparate, as shown in table 12.
Traditional IRAs often receive rollovers from DC plans; therefore their
assets are greater.
Table 12: Estimated Contributions to Individual IRA Accounts, SEP, and
SIMPLE Accounts, 2006 (Dollars in billions):
Traditional IRA;
Contributions: $18.
Roth IRA;
Contributions: $19.
SEP;
Contributions: $15.
SIMPLE;
Contributions: $9.
Source: IRS.
Note: This data came from IRS's Compliance Data Warehouse and IRS's
Statistics of Income. The data are estimated, and should not be
compared to the data in other tables. See appendix I for further
discussion of this issue.
[End of table]
Table 13 shows the estimated number of individuals who own IRA accounts
and contribute to employer-sponsored IRAs. Individual traditional and
Roth IRAs have significantly more account owners than participants in
employer-sponsored IRAs.
Table 13: Estimated Number of Individual IRA Account Owners and
Individuals Contributing to Employer-Sponsored IRAs, 2006:
Traditional IRA:
Number of account owners (thousands): 5,414.
Roth IRA:
Number of account owners (thousands): 6,843.
SEP:
Number of account owners (thousands): 1,559.
SIMPLE:
Number of account owners (thousands): 2,088.
Source: IRS.
Note: This data came from IRS's Compliance Data Warehouse and IRS's
Statistics of Income. The data are estimated and should not be compared
to the data in other tables. See appendix I for further discussion of
this issue.
[End of table]
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barbara D. Bovbjerg (202) 512-7215 or bovbjergb@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Tamara Cross, Assistant
Director; Anna Bonelli; Kenrick Isaac; William King; Jillena Roberts;
John W. Wheeler, Jr.; Jaime Allentuck; Susan Baker; Alex Galuten; Mimi
Nguyen; Jessica Orr; Walter Vance; and Najeema Washington made
important contributions to this report.
[End of section]
Footnotes:
[1] In this report, we refer to DC plans, besides 401(k) plans, that
qualify for a tax deferral under Internal Revenue Code section 401(a)
as "401(a) plans."
[2] GAO, Private Pensions: Changes Needed to Provide 401(k) Plan
Participants and the Department of Labor Better Information on Fees,
[hyperlink, http://www.gao.gov/products/GAO-07-21] (Washington, D.C.:
Nov. 16, 2006).
[3] Generally, DB plans promise to 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.
[4] Stock bonus plans, which are similar to profit sharing plans except
that sponsors' contributions generally take the form of stock in the
sponsors' company, also qualify under I.R.C. section 401(a). Employee
stock ownership plans (ESOP) can be a type of stock bonus plan.
[5] Churches may also establish 403(b) plans. Participants in church
plans have additional investment options.
[6] Both 457(f) and 457(b) plans of tax-exempt organizations are
sometimes referred to as "top hat" plans.
[7] Taxpayers ineligible for the deduction can make nondeductible
contributions to take advantage of the deferral on investment earnings.
Distributions are partially taxable. Distributions received before age
59½ are subject to an additional 10-percent income tax unless they meet
certain requirements or are used for specific purposes, including the
purchase of a first home or for higher education expenses.
[8] Employers must have 100 or fewer employees who earned $5,000 or
more during the preceding calendar year.
[9] 457(f) plans are generally different from other plans in that they
are unfunded and have no deferral limits. Unlike most plans, deferrals
are generally not required to be set in a retirement account or a
trust. Thus, the plan is "unfunded." Instead, participants and sponsors
can agree in advance how much individuals will receive from the sponsor
pending the fulfillment of certain terms, such as 5 years of service.
Until the terms are met, the assets must remain in the possession of
the employer and must be subject to a "substantial risk of forfeiture."
Otherwise, the assets generally become taxable in the year in which
there is no substantial risk of forfeiture.
[10] The ability to transfer or rollover assets is not affected by the
product in which assets are invested. For example, participants who are
invested in annuities and participants who are invested in mutual funds
will be subject to the same transfer and rollover rules and
limitations.
[11] Under ERISA, a person is generally a fiduciary with respect to a
plan, to the extent they exercise any discretionary authority or
control over plan management or any authority or control over the
management or disposition of plan assets, render investment advice
respecting plan money or property for a fee or other compensation (or
has the authority or responsibility to do so), or have discretionary
authority or responsibility for plan administration. 29 U.S.C. §
1002(21)(A).
[12] These "church plans" can be 401(a), 401(k), or 403(b) plans.
[13] State and local government plans are exempt from some of these
requirements.
[14] Labor and IRS also work together to oversee rules regarding IRA
prohibited transactions; generally, Labor has interpretive jurisdiction
and IRS has certain enforcement authority.
[15] This report does not discuss annuities that are purchased to pay
benefits when a pension plan is terminated or when an annuity is
purchased for a terminating participant as a distribution from the
plan.
[16] 401(a), 401(k), and 457(b) governmental plans generally require
that contributions to participants' accounts be set aside in a trust or
held in an insurance contract. Service providers establishing and
maintaining a trust to hold plan assets sometimes charge a trustee fee,
usually a relatively small fee to maintain the trust. Sponsors of
403(b) plans are not required to hold assets in a trust, but
participants investing in mutual funds must have custodial accounts.
Sponsors or participants are sometimes charged for these custodial
services, which are similar to charges for trustee services.
[17] Assets in 457(b) tax-exempt and 457(f) plans for highly
compensated executives do not have to be invested. These plans are
"unfunded;" that is, they are not set aside in an account for the
participant, so in some cases, assets may not be invested at all.
[18] Institutional shares are only sold to larger investors, including
401(k) plans.
[19] This includes information necessary for the contract to satisfy
various legal provisions, such as whether participant loans from plan
assets exceed certain limits.
[20] States with "any willing provider" laws are generally unable to
reduce the number of service providers available to participants.
[21] [hyperlink, http://www.gao.gov/products/GAO-07-21].
[22] [hyperlink, http://www.gao.gov/products/GAO-07-21].
[23] The prospectus also contains fund information such as the
investment objectives or goals, strategies for achieving those goals,
risks of investing in the fund, expenses, and past performance.
[24] According to NAIC, states can adopt the model in its entirety in a
uniform and substantially similar manner with minor variations in style
and format. Examples of related state activity include: an older
version of the NAIC model, portions of the NAIC model, legislation or
regulation derived from other sources, bulletins, and administrative
rulings.
[25] The buyers' guide describes fees that purchasers may or may not
pay and the disclosure document must list products' specific charges
and fees with an explanation of how they apply.
[26] Participants in some plans may invest in products not registered
with SEC or state insurance regulators, such as collective investment
funds (CIF), which are overseen by bank regulators. The Office of the
Comptroller of the Currency (OCC), for example, requires banks
administering a CIF to disclose fees and expenses in a written plan and
an annual financial report, in addition to other applicable state
requirements.
[27] For individual IRA account owners who invest in products for which
an amount is not guaranteed over a period of time, and the growth rate
cannot be reasonably projected, IRS generally requires the trustee of
an individual IRA to disclose each type of fee, and the amount of each
fee (based on hypothetical assumptions) to the account owner--including
trustee fees and other administrative fees--before the account is
opened.
[28] GAO, Employee Benefits Security Administration: Enforcement
Improvements Made but Additional Actions Could Further Enhance Pension
Plan Oversight, [hyperlink, http://www.gao.gov/products/GAO-07-22]
(Washington, D.C.: Jan. 18, 2007).
[29] These regulations are currently being reviewed by the new
administration.
[30] [hyperlink, http://www.gao.gov/products/GAO-07-21], p. 29.
[31] Sponsor involvement must be limited to certain activities that
facilitate the operation of the plan. Other safe harbor conditions are:
plan participation must be "completely voluntary" for employees; rights
under the plan are enforceable solely by employees (or a beneficiary of
an employee); and the sponsor must not receive compensation or
consideration for offering the plan, other than reasonable compensation
to cover certain expenses.
[32] On this form--Form 5500 Annual Return/Report of Employee Benefit
Plan--most sponsors report information like the number of participants,
as well as details on the plan's financial condition and investments.
[33] I.R.C. § 6103 prohibits IRS from disclosing returns and return
information unless a specific exception applies. However, there may be
instances in which information, not considered a "return or return
information" under §6103, could be disclosed without violating that
statute.
[34] We have reported that agencies can strengthen their commitment to
work collaboratively by articulating their agreements in formal
documents, such as a memorandum of understanding, interagency guidance,
or an interagency planning document, signed by senior officials in the
respective agencies. See GAO, Results-Oriented Government: Practices
That Can Help Enhance and Sustain Collaboration among Federal Agencies,
[hyperlink, http://www.gao.gov/products/GAO-06-15] (Washington, D.C.:
Oct. 21, 2005), p. 11.
[35] In addition to these age 50 catch-up provisions, "special" catch-
up provisions apply to both 457(b) tax-exempt and 457(b) governmental
plans. For both governmental and tax-exempt 457(b) plans, for
participants who are 3 years or less away from the year of normal
retirement age, the plan ceiling is limited to the lesser of $33,000 or
$16,500 plus the sum of any amounts in which the participant did not
contribute up to the annual limit in prior years.
[36] We have reported that IRS can efficiently resolve errors of this
sort on taxpayer submissions using math error authority (MEA). Where
possible, IRS uses MEA to correct certain errors before interest is
owed by the taxpayer. IRS is granted MEA in 26 U.S.C. § 6213(b). It can
only be used for certain purposes specified by Congress in 26 U.S.C. §
6213(g)(2). For more information, see GAO, Tax Administration: IRS's
2008 Filing Season Generally Successful Despite Challenges, although
IRS Could Expand Enforcement during Returns Processing, [hyperlink,
http://www.gao.gov/products/GAO-09-146] (Washington, D.C.: Dec. 12,
2008).
[End of section]
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