Private Pensions: Changes Needed to Provide 401(k) Plan 	 
Participants and the Department of Labor Better Information on	 
Fees (16-NOV-06, GAO-07-21).					 
                                                                 
American workers are increasingly relying on 401(k) plans, which 
allow pre-tax contributions to individual accounts, for their	 
retirement income. As workers accrue earnings on their		 
investments, they also pay a number of fees that may		 
significantly decrease their retirement savings. Because of	 
concerns about the effects of fees on participants' retirement	 
savings, GAO examined (1) the types of fees associated with	 
401(k) plans and who pays these fees, (2) how information on fees
is disclosed to plan participants, and (3) how the Department of 
Labor (Labor) oversees plan fees and certain business		 
arrangements. GAO reviewed industry surveys on fees and 	 
interviewed Labor officials and pension professionals about	 
disclosure and reporting practices.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-21						        
    ACCNO:   A63445						        
  TITLE:     Private Pensions: Changes Needed to Provide 401(k) Plan  
Participants and the Department of Labor Better Information on	 
Fees								 
     DATE:   11/16/2006 
  SUBJECT:   Employee retirement plans				 
	     Fees						 
	     Financial disclosure				 
	     Funds management					 
	     Investment planning				 
	     Mutual funds					 
	     Pensions						 
	     Policy evaluation					 
	     Professional fees					 
	     Reporting requirements				 
	     Retirement 					 
	     Financial management				 

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GAO-07-21

   

     * [1]Results in Brief
     * [2]Background
     * [3]Investment Fees Account for Most 401(k) Plan Fees and Are Us

          * [4]Investment Fees and Plan Record-Keeping Fees Together Accoun
          * [5]Participants Bear Most Investment Fees and an Increasing Num

     * [6]Required Disclosures Provide Limited Fee Information to Assi

          * [7]Disclosures Provide Limited Information on Fees to Participa
          * [8]Participants Cannot Easily Compare Investment Options Based

     * [9]Labor Has Authority over 401(k) Plan Fees and Certain Types

          * [10]Labor Collects Information on Fees, Investigates Complaints

               * [11]Information on Fees
               * [12]Investigations
               * [13]Outreach

          * [14]Limited Information on Fees Paid by Plans Hinders Labor's Ab
          * [15]Labor and Plan Sponsors Lack Information on the Various Busi
          * [16]Labor Has New Initiatives to Improve Information on Fees

     * [17]Conclusions
     * [18]Matters for Congressional Consideration
     * [19]Recommendation for Executive Action
     * [20]Agency Comments
     * [21]GAO Contact
     * [22]Staff Acknowledgments
     * [23]GAO's Mission
     * [24]Obtaining Copies of GAO Reports and Testimony

          * [25]Order by Mail or Phone

     * [26]To Report Fraud, Waste, and Abuse in Federal Programs
     * [27]Congressional Relations
     * [28]Public Affairs

Report to the Ranking Minority Member, Committee on Education and the
Workforce, House of Representatives

United States Government Accountability Office

GAO

November 2006

PRIVATE PENSIONS

Changes Needed to Provide 401(k) Plan Participants and the Department of
Labor Better Information on Fees

GAO-07-21

Contents

Letter 1

Results in Brief 2
Background 5
Investment Fees Account for Most 401(k) Plan Fees and Are Usually Borne by
Plan Participants 10
Required Disclosures Provide Limited Fee Information to Assist
Participants in Comparing Investment Options 15
Labor Has Authority over 401(k) Plan Fees and Certain Types of Business
Arrangements, but Lacks Information for Effective Oversight 20
Conclusions 28
Matters for Congressional Consideration 29
Recommendation for Executive Action 29
Agency Comments 29
Appendix I Scope and Methodology 31
Appendix II Comments from the Department of Labor 34
Appendix III GAO Contact and Staff Acknowledgments 38

Tables

Table 1: Payers of Major 401(k) Plan Fees, 2005 14
Table 2: Required Disclosure Documents to All Participants 16
Table 3: Required Timing of Disclosure Documents with Fee Information 18

Figures

Figure 1: 401(k) Plan Average Asset Allocation in 2005 6
Figure 2: Flow of Bundled Plan Services 8
Figure 3: Flow of Unbundled Plan Services 8
Figure 4: Investment Fees as a Percentage of Total Plan Fees, 2005 11
Figure 5: Plan Record-Keeping Fees as a Percentage of Total Plan Fees,
2005 12

Abbreviations

AARP American Association of Retired Persons EBSA Employee Benefits
Security Administration ERISA Employee Retirement Income Security Act FDIC
Federal Deposit Insurance Corporation FRB Federal Reserve Board NASD
National Association of Securities Dealers, Inc. OCC Office of the
Comptroller of the Currency PSCA Profit Sharing/401(k) Council of America
SEC Securities and Exchange Commission

This is a work of the U.S. government and is not subject to copyright
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separately.

United States Government Accountability Office

Washington, DC 20548

November 16, 2006

The Honorable George Miller Ranking Minority Member Committee on Education
and the Workforce House of Representatives

Dear Mr. Miller:

American workers are increasingly relying on 401(k) plans for their
retirement incomes. Named after section 401(k) of the Internal Revenue
Code, 401(k) plans are private pension plans that allow workers to save
for retirement by diverting a portion of their pre-tax income into an
investment account that can grow tax-free until withdrawn in retirement.
Participation in 401(k) plans rose from fewer than 8 million participants
in the mid-1980s to about 47 million participants in 2005, and assets in
these plans increased by more than twenty fold during the same period,
from less than $100 billion to more than $2 trillion.1 As workers accrue
earnings on their investments, they also pay a number of fees, including
expenses, commissions, or other charges associated with operating a 401(k)
plan.

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 401(k) plan because fees can significantly decrease
retirement savings over the course of a career. Even a small fee deducted
from a worker's assets today could represent a large amount of money years
later had it remained in the account to be reinvested. Concerns have been
raised that employers sponsoring the plans and plan participants may not
be aware of all of the fees being charged to them or whether companies
providing services to the plan have undisclosed business arrangements with
other service providers that could negatively affect participants. In
light of the potential effects of fees on plan participants' retirement
savings, the Ranking Member of the House Committee on Education and the
Workforce asked GAO to examine

1For 2005 estimates, see Sarah Holden and Jack VanDerhei, "401(k) Plan
Asset Allocation, Account Balances, and Loan Activity in 2005," Research
Perspective, vol. 12, no. 1, (2006).

           o the types of fees associated with 401(k) plans and who pays
           these fees,
           o how information on fees is disclosed to plan participants, and
           o how the Department of Labor (Labor) oversees plan fees and
           certain types of business arrangements.

To identify the fees associated with 401(k) plans and how they are charged
to plan sponsors and plan participants, we interviewed officials from
Labor, the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board (FRB), the Securities and Exchange Commission (SEC), and the
Treasury Department's Office of the Comptroller of the Currency (OCC); met
with service providers and other industry professionals; and collected
information about the range of fees and how they are charged to plan
sponsors and participants. We also reviewed several industry surveys of
401(k) sponsors. To examine how well fees are disclosed to participants,
we identified the legal and regulatory disclosure requirements; met with
401(k) plan practitioners; and reviewed sample disclosure documents. To
examine Labor's role in overseeing plan fees and any undisclosed business
arrangements among service providers, we reviewed Labor's and other
agencies' legal and regulatory authority and Labor's procedures for
assuring that plans are meeting overall legal requirements, including the
reporting of information on the form plan sponsors are required to submit
to Labor, Form 5500. We also interviewed officials from four of Labor's
field offices and reviewed Labor's current initiatives related to 401(k)
plans. We conducted our review from January 2006 through October 2006 in
accordance with generally accepted government auditing standards. See
appendix I for more detail regarding our scope and methodology.

Results in Brief

Various fees are associated with 401(k) plans, but investment and
record-keeping fees account for most 401(k) plan fees and are borne by
both plan participants and sponsors. Investment fees--such as those
charged by mutual fund advisors to select securities for the fund--account
for the largest portion of total fees in most plans. For example, a 2005
industry survey estimated that investment fees made up about 80 to 99
percent of plan fees, depending on the number of participants in the plan.
Plan record-keeping fees--those associated with maintaining participants'
accounts, such as processing their fund selections and preparing and
mailing account statements--are the second-largest portion of plan fees.
There are a number of other fees associated with establishing and
maintaining a plan, such as fees to communicate basic information about
the plan to participants. However, these fees generally comprise a much
smaller percentage of total plan fees than investment and plan
record-keeping fees. Whether and how participants or plan sponsors pay
these fees varies by the type of fee and the size of the 401(k) plan.
Investment fees, which are usually charged as a fixed percentage of assets
and deducted from investment returns, are typically borne by participants.
Plan record-keeping fees are charged as a percentage of a participant's
assets, a flat fee, or a combination of both. Although plan sponsors pay
these fees in a considerable number of plans, they are increasingly being
paid by participants.

The information on fees that the Employee Retirement Income Security Act
(ERISA) of 19742 requires 401(k) plan sponsors to disclose is limited and
does not provide an easy comparison of investment options. All 401(k)
plans are required to provide information on plan operations, participant
accounts, and the plan's financial status, which may include some
information related to fees. ERISA also requires 401(k) plan sponsors that
have elected liability protection from participants' investment decisions
to provide additional fee information. Most 401(k) plan sponsors elect
this protection and therefore must provide information such as transaction
fees related to each available investment option. Other plans that do not
elect this protection may also provide access to fee information via such
documents as 401(k) account statements and fund prospectuses. According to
industry professionals, because plan sponsors provide this information in
a piecemeal fashion, participants may not receive a clear picture of the
total fees that they pay. In order to get a complete picture of fees,
participants must collect various documents over time and may be required
to seek out some documents. Furthermore, the documents that participants
receive do not provide a simple way for participants to compare
fees--along with risk and historical performance--among the investment
options in their 401(k) plan.

Labor has authority under ERISA to oversee 401(k) plan fees and certain
types of business arrangements involving service providers, but lacks the
information it needs to provide effective oversight. Under ERISA, Labor is
responsible for enforcing the requirements that plan sponsors (1) ensure
that fees paid with plan assets are reasonable and for necessary services;
(2) be prudent and diversify the plan's investments or, if plan sponsors
elect liability protection, provide a broad range of investment choices
for participants; and (3) report information known on certain business
arrangements involving service providers. 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 401(k) plan practices, and conducting outreach to educate
plan sponsors about their responsibilities. Despite the agency's efforts,
the information reported to Labor, such as information reported on Form
5500, does not include all fees paid by 401(k) plans. For example, plan
sponsors are not required to report mutual fund investment fees to Labor
on the Form 5500 even though they receive this information from the mutual
fund companies in the form of a prospectus. Without information on all
fees, Labor's oversight is limited because it is unable to identify fees
that may be questionable. In addition, Labor and plan sponsors may not
have information on arrangements among service providers that, according
to officials at Labor, could steer plan sponsors toward offering
investment options that benefit service providers but may not be in the
best interest of participants. For example, a service provider that
assists a plan sponsor in selecting investment options for the plan may
also be receiving compensation from mutual fund companies for recommending
their funds. The service provider may not disclose this business
arrangement to the plan sponsor, and as a result, participants may have
more limited investment options and pay higher fees for these options than
they otherwise would. Labor has several initiatives underway to improve
the information it has on fees and the various business arrangements among
service providers.

229 U.S.C. SS 1001-1461.

To ensure that plan participants, sponsors, and the Department of Labor
have more information on the fees associated with 401(k) plans, Congress
should consider amending ERISA to require all plan sponsors of
participant-directed plans to disclose fee information on each 401(k)
investment option to participants in a way that facilitates comparison
among the options. In addition, Congress should consider amending ERISA to
explicitly require 401(k) service providers to disclose to plan sponsors
the compensation they receive from other service providers. Finally, to
better enable Labor to effectively oversee 401(k) plan fees, we are
recommending that the Secretary of Labor require plan sponsors to report a
summary of all fees that are paid out of plan assets or by participants.
In response to our draft report, Labor generally agreed with our findings
and conclusions. Specifically, Labor stated that it will give careful
consideration to GAO's recommendation that plans be required to provide a
summary of all fees that are paid out of plan assets or by participants.
Labor and SEC also provided technical comments on the draft, which we
incorporated as appropriate.

Background

Roughly half of all workers participate in an employer-sponsored
retirement, or pension, plan. Private sector pension plans are classified
either as defined benefit or as defined contribution plans. Defined
benefit plans promise to provide, generally, a fixed level of monthly
retirement income that is based on salary, years of service, and age at
retirement regardless of how the plan's investments perform. In contrast,
benefits from defined contribution plans are based on the contributions to
and the performance of the investments in individual accounts, which may
fluctuate in value. Examples of defined contribution plans include 401(k)
plans, employee stock ownership plans, and profit-sharing plans.

Over the past two decades, there has been a noticeable shift by employers
away from defined benefit plans to defined contribution plans. The most
dominant and fastest growing defined contribution plans are 401(k) plans,
which allow workers to choose to contribute a portion of their pre-tax
compensation to the plan under section 401(k) of the Internal Revenue
Code.3 The use of 401(k) plans accelerated in the 1980s after the Treasury
issued a ruling clarifying a new section of the tax code that allowed
employers and employees to make pre-tax contributions, up to certain
limits, to employees' individual accounts.

According to the most recent data from Labor, most 401(k) plans are
participant-directed, meaning that a participant makes investment
decisions about his or her own retirement plan contributions. About 87
percent of all 401(k) plans--covering 92 percent of all 401(k) plan
participants and 91 percent of all 401(k) plan assets--generally allow
participants to choose how much to invest, within federal limits, and to
select from a menu of diversified investment options selected by the
employer sponsoring the plan, such as an assortment of mutual funds that
include a mix of stocks, bonds, or money market investments.

326 U.S.C. S 401(k) sets out requirements for plans to qualify for
tax-deferred treatment. Roth contributions to 401(k) plans were created
under the Economic Growth and Tax Relief Reconciliation Act of 2001
effective for plan years beginning on or after January 1, 2006. This new
account type was subsequently made permanent under the Pension Protection
Act of 2006. Designated Roth contributions are a new type of contribution
that can be accepted by new or existing 401(k) plans. If a plan adopts
this feature, employees can designate some or all of their elective
contributions as Roth contributions (which are included in gross income)
rather than pre-tax elective contributions.

Equity funds accounted for nearly half of the 401(k) plan assets at the
close of 2005. Equity funds are investment options that invest primarily
in stocks, such as mutual funds, bank collective funds,4 life insurance
separate accounts, and certain pooled investment products (see fig. 1).
Other plan assets were invested in company stock; stable value funds, 5
including guaranteed investment contracts; balanced funds;6 bond funds;
and money funds.

Figure 1: 401(k) Plan Average Asset Allocation in 2005

4A collective investment fund is a trust managed by a bank or trust
company that pools investments of retirement plans or other large
institutional investors.

5The stable value funds typically offered as 401(k) investment options by
insurance companies and banks generally provide a guaranteed rate of
return over a specific period of time, such as 3 to 5 years.

6Balanced funds are pooled accounts invested in both stocks and bonds.

As participants accrue earnings on their investments, they also pay a
number of fees, including expenses, commissions, or other charges
associated with operating a 401(k) plan. Over the course of the employee's
career, fees may significantly decrease retirement savings. For example, a
1-percentage point difference in fees can significantly reduce the amount
of money saved for retirement. Assume an employee of 45 years of age with
20 years until retirement changes employers and leaves $20,000 in a 401(k)
account until retirement. If the average annual net return is 6.5
percent--a 7 percent investment return minus a 0.5 percent charge for
fees--the $20,000 will grow to about $70,500 at retirement. However, if
fees are instead 1.5 percent annually, the average net return is reduced
to 5.5 percent, and the $20,000 will grow to only about $58,400. The
additional 1 percent annual charge for fees would reduce the account
balance at retirement by about 17 percent.

Fees are charged by the various outside companies that the plan
sponsor--often the employer offering the 401(k) plan--hires to provide a
number of services necessary to operate the plan. Services can include
investment management (i.e., selecting and managing the securities
included in a mutual fund); consulting and providing financial advice
(i.e., selecting vendors for investment options or other services); record
keeping (i.e., tracking individual account contributions); custodial or
trustee services for plan assets (i.e., holding the plan assets in a
bank); and telephone or Web-based customer services for participants. As
shown in figures 2 and 3, generally there are two ways to provide
services: "bundled" (the sponsor hires one company that provides the full
range of services directly or through subcontracts) and "unbundled" (the
sponsor uses a combination of service providers).

Figure 2: Flow of Bundled Plan Services

Figure 3: Flow of Unbundled Plan Services

Labor's Employee Benefits Security Administration (EBSA) oversees 401(k)
plans--including the fees associated with running the plans--because they
are considered employee benefit plans under ERISA. Enacted before 401(k)
plans came into wide use, ERISA establishes the responsibilities of
employee benefit plan decision makers and the requirements for disclosing
and reporting plan fees. Typically, the plan sponsor is a fiduciary.7 A
plan fiduciary includes a person who has discretionary control or
authority over the management or administration of the plan, including the
plan's assets. ERISA requires that plan sponsors responsible for managing
employee benefit plans carry out their responsibilities prudently and do
so solely in the interest of the plan's participants and beneficiaries.

The law also provides Labor with oversight authority of pension plans.8
However, the specific investment products commonly contained in pension
plans--such as company stock, mutual funds, collective investment funds,
and group annuity contracts--fall under the authority of the applicable
securities, banking, or insurance regulators.

           o The SEC, among other responsibilities, regulates registered
           securities including company stock and mutual funds under
           securities law.9

           o The federal agencies charged with oversight of banks--primarily
           FRB, OCC, and FDIC--regulate bank investment products, such as
           collective investment funds.

           o State agencies generally regulate insurance products, such as
           variable annuity contracts. Such investment products may also
           include one or more insurance elements, which are not present in
           other investment options. Generally, these elements include an
           annuity feature, interest and expense guarantees, and any death
           benefit provided during the term of the contract.10

7Any person who makes investment decisions with respect to a qualified
employee benefit plan's assets is generally a fiduciary. The duties the
person performs for the plan rather than their title or office determines
whether that person is a plan fiduciary. 29 U.S.C. S 1002(21)(A).

8IRS also oversees various aspects of 401(k) contributions under the
authority of the Internal Revenue Code.

915 U.S.C. S 78a. Generally, public offerings and the sale of securities
must be registered with the SEC.

10The variable annuity contract "wraps" around investment options, often a
number of mutual funds. Participants select from among the investment
options offered, and the returns to their individual accounts vary with
their choice of investments. If registered securities make up the
underlying investments, they are regulated by the SEC.

An investment company, bank, or insurance company that is a service
provider to a 401(k) plan may offer any or all of these types of
investment products as plan options.

Investment Fees Account for Most 401(k) Plan Fees and Are Usually Borne by Plan
Participants

Investment fees--which are charged by companies that manage mutual funds
or other investment products for all services related to operating the
fund--comprise the majority of fees in 401(k) plans and are typically
borne by participants. Plan record-keeping fees generally account for the
next largest portion of plan fees. These fees cover the cost of various
administrative activities carried out to maintain participant accounts.
Participants typically pay for investment fees, which are usually based on
assets in their accounts. Although plan sponsors often pay for
record-keeping fees, participants bear them in an increasing number of
plans.

Investment Fees and Plan Record-Keeping Fees Together Account for Nearly All of
Plan Fees

Investment fees and plan record-keeping fees comprise the vast majority of
total plan fees. Investment fees are, for example, fees charged by
companies that manage a mutual fund for all services related to operating
the fund. These fees pay for: selecting a mutual fund's portfolio of
securities and managing the fund; marketing the fund and compensating
brokers who sell the fund; and providing other shareholder services, such
as distributing the fund prospectus.11 These fees are charged regardless
of whether the mutual fund or other investment product, such as collective
investment funds or group annuity contracts, is part of a 401(k) plan or
purchased by individual investors in the retail market.12 As such, the
fees are usually different for each investment option available to
participants in a 401(k) plan.

Investment fees account for the majority of 401(k) plan fees regardless of
plan size. For example, as figure 4 illustrates, a 2005 industry survey
estimated that investment fees accounted for 84.5 percent of total fees in
plans with 25 members and for 98.6 percent of total fees in plans with
2,000 participants.

11Fees related to marketing and compensating brokers to sell the fund are
known as 12b-1, or distribution fees, and are limited by the National
Association of Securities Dealers, Inc. (NASD) to a maximum of 1
percentage point of the total expense ratio per year.

12Mutual funds that use brokers to sell shares may also impose a sales fee
or "load" when a fund is bought, transferred, or sold to compensate the
broker. SEC does not limit the size of the sales load a fund may charge,
but the NASD does not permit exceeding 8.5 percent of the purchase price.
A "front-end load," is incurred when a mutual fund is purchased and
reduces the amount available to purchase fund shares. A "back-end load" is
a fee that is charged when a mutual fund is sold or transferred. Back-end
loads generally decrease over time in steps until they are eventually
eliminated.

Figure 4: Investment Fees as a Percentage of Total Plan Fees, 2005

Since investment fees account for the bulk of plan fees, several
investment consultants we interviewed encourage 401(k) plan sponsors to
offer options such as institutional funds to lower fees. Institutional
mutual funds resemble funds available in the retail market, but are
typically only available to 401(k) plans with assets above a certain
threshold, such as $1 million. Similarly, indexed funds have lower
management fees than actively managed funds. These funds closely track a
market performance indicator, such as the Standard & Poor's 500, which
largely eliminates expenditures associated with research, investment
selection, and buying and selling.

Plan record-keeping fees, which cover individual account maintenance for
plan participants, generally constitute the second-largest portion of plan
fees. Unlike investment fees, plan record-keeping fees apply to the entire
401(k) plan rather than the individual investment options. Plan
record-keeping fees are usually charged by the service provider to set up
and maintain the 401(k) plan. These fees cover a variety of activities
such as enrolling plan participants, processing participant fund
selections, preparing and mailing account statements, and other related
administration activities.

A 2005 industry survey of service providers estimated that plan
record-keeping fees constituted 12 percent of total plan fees for plans
with 25 participants. As shown in figure 5, these fees make up a smaller
proportion of total plan fees in larger plans, indicating economies of
scale.

Figure 5: Plan Record-Keeping Fees as a Percentage of Total Plan Fees,
2005

Note: While these data include primarily record keeping, they include a
negligible amount of other administrative fees, according to the survey's
author.

In addition to investment and record-keeping fees, there are a number of
other fees charged to administer the plan as a whole, including

           o trustee fees that are charged by an individual, bank, or trust
           company to securely maintain plan assets;

           o audit fees that are imposed by a service provider in connection
           with the annual audit that is required of ERISA-covered plans with
           more than 100 participants;

           o legal fees that are charged by an attorney or law firm to
           provide legal support for administrative activities, such as
           ensuring the plan is in compliance with ERISA or representing the
           plan in a divorce settlement;

           o investment consulting fees that are charged by an advisor, often
           a pension consultant, hired to help the plan sponsor select funds
           for the plan and to monitor investments; and

           o communication fees that cover the cost of educating participants
           about the plan. Communication services may include a meeting led
           by a service provider to introduce the plan to participants.
           Communication services may also include providing participants
           with access to toll-free phone services, Internet service, and
           ongoing educational seminars.

These fees generally comprise a much smaller percentage of total plan fees
than investment and plan record-keeping fees.

Participants Bear Most Investment Fees and an Increasing Number of Participants
Bear Plan Record-Keeping Fees

Participants pay for the majority of investment fees and a greater number
bear plan record-keeping fees. As shown in table 1, a 2005 industry survey
of 401(k) plan sponsors found that plan participants paid investment fees
in almost 62 percent of plans with 5,000 members or fewer. This
arrangement was even more common in plans with over 5,000 members where
participants bear investment fees in about 71 percent of all plans. For
both size plans, plan sponsors and participants shared investment fees in
about 10 percent to 12 percent of plans. Another industry survey of plan
sponsors with 1,000 employees or more also found that plan participants
paid investment fees in the majority of plans in 2005.

Table 1: Payers of Major 401(k) Plan Fees, 2005

                   Plans with fewer than 5,000          Plans with more than 5,000
                          participants                         participants
               Participants   Sponsor Participants  Participants   Sponsor Participants 
                  (percent) (percent) and sponsors     (percent) (percent) and sponsors 
                                         (percent)                            (percent) 
Investment             61.8      27.5         10.6          71.5      16.2         12.3 
fees                                                                                    
Plan                   32.5      58.3          9.2          50.4      34.6         15.0 
record-keeping                                                                          
feesa                                                                                   
Audit fees             16.0      82.5          1.5          33.3      62.2          4.4 
Communication          20.0      70.5          9.5          34.3      49.6         16.1 
to employees                                                                            
Investment             33.0      60.0          7.0          39.0      52.8          8.1 
consulting                                                                              
fees                                                                                    
Legal fees             10.3      84.7          5.0          20.7      66.7         12.6 
Trustee fees           29.4      66.6          4.0          47.2      43.2          9.6 

Source: Profit Sharing/401(k) Council of America (PSCA).

aIn some cases, plan record-keeping fees are charged as a percentage of
assets.

Participants generally pay investment fees indirectly. The investment
returns that participants receive reflect their share of the fund's assets
after investment fees and other expenses have been subtracted. Investment
fees are reported as a percentage of the fund's overall assets, also known
as the expense ratio.

The 2005 survey of plan sponsors also found that participants bear a
plan's record-keeping fees in about 50 percent of plans with 5,000
participants or more. Plan sponsors paid record-keeping fees in about 35
percent of these plans and share fees with participants in about 15
percent. The opposite is true for plans with fewer than 5,000
participants, where plan sponsors paid record-keeping fees in 58 percent
of cases. However, many of the industry professionals whom we spoke with
said plan participants bear a greater portion of these fees than they did
in the past. According to these professionals, record-keeping fees have
shifted to participants because companies changed the way they charge
record-keeping fees and many plan sponsors wanted to reduce their share of
plan fees. Originally, record-keeping fees were explicit fees billed to
the plan sponsor. When the use of mutual funds in 401(k) plans started to
grow, some funds were marketed to sponsors as having no record-keeping
fees. In these cases, record keepers were compensated out of the
investment funds' operating expenses for their services, such as
maintaining individual account records for its retail investors and
consolidating participant requests to buy or sell shares. Some sponsors
may have been unaware that record-keeping fees were taken out of
participant assets. Others were aware that the fees were passed on to
participants.

Record-keeping fees may be charged as a percentage of assets, or based on
the number of transactions or the number of participants in the plan. Some
industry professionals told us that fees charged as a percentage of assets
may not reflect actual costs to the service provider since the fees grow
regardless of the level of service provided. The professionals said
service providers may charge record-keeping fees to participants as a flat
fee and as an asset-based fee in plans with low assets. An asset-based fee
would not generate enough revenue to cover record-keeping fees in these
plans, so a flat fee is added. As plan assets grow, the revenue generated
by asset-based fees eventually covers plan record-keeping fees, and the
flat fee may be dropped. Other industry professionals said record-keeping
fees may vary if they are offered by insurance companies or banks that can
use fee structures unique to their industry.

Required Disclosures Provide Limited Fee Information to Assist Participants in
Comparing Investment Options

The fee information that ERISA requires 401(k) plan sponsors to disclose
is limited and does not provide participants with an easy comparison of
investment options. All 401(k) plans are required to provide disclosures
on plan operations, participant accounts, and the plan's financial status.
Although they often contain some information on fees, these documents are
not required to disclose the fees borne by individual participants.
Additional fee disclosures are required for certain--but not all--plans in
which participants direct their investments. These disclosures are
provided to participants in a piecemeal fashion and do not provide a
simple way for participants to compare plan investment options and their
fees.

Disclosures Provide Limited Information on Fees to Participants in a Piecemeal
Way

ERISA requires that plan sponsors provide all participants with a summary
plan description, account statements, and the summary annual report, but
these documents are not required to disclose information on fees borne by
individual participants. Table 2 provides an overview of each of these
disclosure documents, and the type of fee information that they may
contain.

Table 2: Required Disclosure Documents to All Participants

Disclosure                                                                 
document          Document purpose     Information on fees                 
Summary plan      To explain to        May contain information on how      
description       participants how the various fees--such as investment,   
                     plan operates.       record-keeping, and loan fees are   
                                          charged to participants--but not    
                                          required by ERISA to do so.         
Account statement To show the account  Typically identifies fees, such as  
                     balance due to a     for loans, that are directly        
                     participant.         attributable to an account during a 
                                          specific period. Also, may show     
                                          investment and record-keeping fees, 
                                          but not required by ERISA to do so. 
Summary annual    To disclose the      Contains total plan costs incurred  
report            financial condition  by plan participants during the     
                     of the plan to       year.                               
                     participants.                                            

Source: GAO analysis.

These required documents apply to all 401(k) plans, including plans in
which participants have no control over investment decisions. Additional
fee disclosures are required for certain--but not all--plans in which
participants direct their investments. ERISA requires disclosure of fee
information to participants where plan sponsors seek liability protection
from investment losses resulting from participants' investment decisions.
Such plans--known as 404(c) plans--are required to provide participants
with, among other information, a description of the investment risk and
historical performance of each investment option available in the plan and
any associated transaction fees for buying or selling shares in these
options.13 Upon request, 404(c) plans must also provide participants with,
among other information, the expense ratio for each investment option. To
meet certain 404(c) requirements, such plans distribute prospectuses or
fund profiles. The prospectuses and fund profiles are not meant to be
comprehensive for the entire 401(k) plan, but rather are relevant for
individual investment options in the plan.

According to the most recent Form 5500 data, 54 percent of 401(k)
plans--representing 64 percent of 401(k) participants--classify themselves
as 404(c).14 However, the data also show that 87 percent of 401(k)
plans--representing 92 percent of 401(k) participants--direct their 401(k)
investments. These data suggest that some participant-directed plans are
not 404(c) and, thus, not required to disclose to participants certain fee
information such as the expense ratio of each investment option.

13ERISA Section 404(c) generally provides relief for plan fiduciaries of
certain individual account plans, such as 401(k) plans, from liability for
the results of investment decisions made by plan participants and
beneficiaries, under conditions specified in 29 C.F.R. S 2550.404c-1.

Plan sponsors may voluntarily provide participants with more information
on fees than ERISA requires, according to plan practitioners. For example,
plan sponsors that do not elect to be 404(c) often distribute prospectuses
or fund profiles when employees become eligible for the plan, just as
404(c) sponsors do. Also, according to plan practitioners, plan sponsors
are not required to provide record-keeping or other fee information in
their account statements, although many do so. In addition, plan sponsors
are not required to provide the investment fees for the investment options
in the summary plan document, but they may provide this information as
well. Still, absent requirements to do so, some plan sponsors may not
identify all the fees participants pay.

Participants may not be aware of the different fees that they pay, yet are
responsible for directing their investments within the plan. According to
industry professionals, participants can be unaware that they pay any fees
for their 401(k) investments and are particularly unaware of investment
fees that are typically not quantified on account statements. In a
nationwide survey, more than 80 percent of 401(k) participants report not
knowing how much they pay in fees.15 Some industry professionals said that
making participants who direct their investments more aware of fees would
help them make more informed investment decisions.

Information on fees is disclosed to participants in a piecemeal way. In
order to get a more complete picture of fees, participants must collect
various documents over time. As shown in table 3, disclosure documents
with fee information are generally provided to participants at different
times.

14The actual percentage of plans that qualify under 404(c) is unclear
because the information is self-reported.

15AARP Public Policy Institute, "Pension Participant Knowledge About Plan
Fees," Data Digest (November 2004).

Table 3: Required Timing of Disclosure Documents with Fee Information

Disclosure document         Timing requirement                             
Summary plan description    Within 90 days of being covered by the plan,   
                               then every 5 or 10 years depending on changes. 
Account statement           Generally, within 30 days of a written         
                               requesta                                       
Summary annual report       Annually                                       
Prospectus or fund profileb Immediately following initial investment.      

Source: GAO analysis.

aThe Pension Protection Act of 2006 requires quarterly account statements
beginning in 2007.

bRequired only for 404(c) plans and for securities regulated by the SEC.

Some documents that contain fee information are provided to participants
automatically, whereas others, such as prospectuses or fund profiles, may
require that participants seek them out. According to industry
professionals, participants may not know to seek such documents out.

Participants Cannot Easily Compare Investment Options Based on Fee Information
Provided

ERISA does not require that plan sponsors provide participants who are
responsible for directing their investments with fee information that
could assist them in comparing the plan's investment options. To identify
the fee information for comparing investment options, participants must
sift through multiple documents that are not always disclosed to them
automatically. For example, to piece together certain fees associated with
a plan's investment options, a participant often must collect multiple
prospectuses or fund profiles. Furthermore, because ERISA does not require
that these documents be provided automatically to all participants, some
participants may need to request them but may not know to do so. According
to industry professionals, some participants may be able to make
comparisons across investment options by piecing together the fees that
they pay, but doing so requires an awareness of fees that most
participants do not have. Assessing fees across investment options can be
difficult for participants because the data are typically not presented in
a single document which facilitates comparison.

Participants can use fees along with other information, such as risk and
historical performance, to compare different investment options. In some
cases, differences in fees across products can be explained by their
investment focus or other features. For example, mutual funds with shares
in international stock generally charge higher fees than mutual funds with
shares in domestic stock because international funds generally incur
additional investment management costs. Higher costs can also arise if an
investment option has additional features. For example, a provider may
charge an additional fee to include certain benefit features, such as
providing the participant with an option to convert a 401(k) account
balance into a retirement annuity. Industry associations have considered
different ways to present comparative information about a plan's
investment options to participants in a single document, but the industry
does not have a standard way of doing so. These associations have
generally suggested annually providing key information--such as the
investment objective, fees, and other key features--associated with each
plan's investment options in a table to help participants compare among
them.

Industry professionals suggested that comparing the expense ratio-- a
fund's operating fees as a percentage of its assets--across investment
options is the most effective way to compare options' fees. The expense
ratio can be used to compare investment options because it includes
investment fees that account for most of the fees borne by participants
and is generally the only fee measure that varies by option. Fund options
with relatively high fees, such as actively managed funds, tend to have
larger expense ratios than funds which are not actively managed. Also,
fund options that are only available to institutional investors tend to
have lower expense ratios than other types of funds.

Most 401(k) investment options have expense ratios that can be compared,
but this information is not always provided to participants. According to
industry data, at least 69 percent of 401(k) assets are invested in
options, such as mutual funds, that are generally required to present the
expense ratio in a prospectus.16 Participants who do not belong to 404(c)
plans are not required to receive prospectuses and therefore may not
receive the expense ratio information. In addition, investment options
besides mutual funds, such as guaranteed annuity contracts, may not be
required to produce prospectuses that include expense ratios, but
according to industry professionals, such options have expense ratio
equivalents that investment industry professionals can identify. However,
participants who do not receive this information cannot compare the
investment options' expense ratios.

16Mutual funds provide prospectuses. Other investment options, such as
company stock, may not provide prospectuses.

Because differences in fees can have large impacts on returns over time,
industry professionals recommend considering expense ratios when making
investment decisions. However, they point out that expense ratios should
not be considered in isolation; rather, they should be considered in light
of other important investment factors, such as risk and historical
performance.

Labor Has Authority over 401(k) Plan Fees and Certain Types of Business
Arrangements, but Lacks Information for Effective Oversight

Labor has authority under ERISA to oversee 401(k) plan fees and certain
types of business arrangements involving service providers, but lacks the
information it needs to provide effective oversight. Labor collects
information on fees from plan sponsors, investigates participants'
complaints or referrals from other agencies on questionable 401(k) plan
practices, and conducts outreach to educate plan sponsors about their
responsibilities. However, the information reported to Labor does not
identify all fees charged to 401(k) plans and therefore has limited use
for effectively overseeing fees and identifying undisclosed business
arrangements among consultants or other service providers. Certain
business arrangements that are undisclosed may lead to participants paying
higher fees for products or services that do not offer any additional
value or benefit than other lower cost alternatives. Labor has several
initiatives underway to improve the information it has on fees and the
various business arrangements among service providers.

Labor Collects Information on Fees, Investigates Complaints and Referrals, and
Conducts Outreach to Educate Plan Sponsors

Under ERISA, Labor is responsible for enforcing the requirements that plan
sponsors (1) ensure that fees paid with plan assets are reasonable and for
necessary services, (2) diversify the plan's investments or provide a
broad range of investment choices for participants, and (3) report
information known on certain business arrangements involving service
providers. 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 401(k) plan
practices, and conducting outreach to educate plan sponsors about their
responsibilities.

  Information on Fees

Labor collects information on fees charged to 401(k) plans primarily
through the Form 5500. The form includes information on the plan's
sponsor, the features of the plan, and the number of participants. The
form also provides more specific information, such as plan assets,
liabilities, insurance, and financial transactions. Filing this form
satisfies the requirement for the plan administrator to file annual
reports concerning, among other things, the financial condition and
operation of plans. Labor uses this form as a tool to monitor and enforce
plan sponsors' responsibilities under ERISA.17 The reporting form is not
routinely provided to participants, but ERISA requires that it be made
available upon request.

Generally, information on 401(k) fees is reported on two sections of the
Form 5500, Schedule A and Schedule C.18 Schedule A is used to report fees
and commissions paid to brokers and sales agents for selling insurance
products. Schedule C includes information on the fees paid directly or
indirectly to service providers for all other investment products.
Schedule C also identifies service providers with fees in excess of $5,000
by name.

  Investigations

Labor officials told us that complaints from plan participants provide the
most effective leads on plan sponsors' violations of ERISA, but that Labor
receives very few complaints related to excessive 401(k) plan fees. In
fiscal year 2005, Labor received only 10 inquiries or complaints related
to 401(k) fees. A Labor official told us that most plan participants
likely do not understand much about plan fees and are thus unlikely to
complain about them. In addition to responding to complaints, Labor also
receives referrals from various entities, such as other federal agencies.
For example, federal banking regulators like the Federal Reserve Board
will review bank operations as part of their oversight and may uncover
instances where a bank that provides services to a 401(k) plan is
violating ERISA requirements. Several federal banking regulators have a
written agreement to refer such cases to Labor, but Labor receives fewer
than 100 referrals per year from these and other entities, such as state
insurance and securities agencies. A Labor official told us that only one
of the referrals that the agency has closed over the past 5 years was
directly related to fees.19

Labor uses the Form 5500 in its investigations, but according to agency
officials, this effort does not find many fee violations because it is
difficult to identify unreasonable fees. Officials stated that they
conduct few investigations based solely on the 401(k) fee information
provided on Form 5500 but may review the fees charged to the plan as a
part of investigations into other problems, such as not depositing
participants' contributions into their accounts in a timely manner. In
addition, Labor may audit the Form 5500 to ensure that appropriate fees
are disclosed.

1729 U.S.C. S 1023.

18In addition to Schedule A and C, Labor also uses Schedules H and I to
identify fee issues.

19Since fiscal year 2004, Labor has closed about 35 additional
investigations each year that were referred from federal and state
agencies. These referrals involved some sort of fiduciary breach and may
have involved 401(k) plans.

Labor officials told us that it is difficult to discern whether a fee is
reasonable or not on its face, and therefore, investigators rarely
initiate an investigation into a fee's reasonableness. Plan fees can vary
widely based on the types of services offered, and a "boutique" plan may
have high fees but offer many services that a plan sponsor has determined
are in the interest of the plan's participants. In the rare instance that
a fee appears egregious, Labor will generally enlist the services of a
"fee expert" to make that determination, because according to one
official, Labor is unable to do so itself. A fee expert will conduct a
benchmarking study or request estimates from other service providers to
get a sense of the market rate for certain services.

Labor's most recent in-depth review of fees identified some plans with
high fees but determined that they were not unreasonable or in violation
of ERISA. Labor last undertook a comprehensive review of 401(k) fees in
1997, in response to media, industry, and government concern that
participants were potentially being charged excessive fees. According to a
Labor official, 50 401(k) plans were investigated to analyze plans'
compliance with certain ERISA requirements related to fees, such as
ensuring that fees charged to the plan are reasonable.20 The plans were
selected based on various factors including anecdotal evidence of high
fees and a listing in an industry journal of plans that had recently
contracted with service providers. Labor found that the plan sponsors had
complied with these ERISA requirements. In some cases, Labor did determine
that participants were paying high fees. It referred these cases--which
included insurance products and international equity funds--to a fee
expert from academia for further analysis to determine if the fees were
unreasonably high. The expert determined that the fees were high, but not
unreasonable. Labor uncovered some violations unrelated to fees and
notified the plans of needed corrective actions.

In fiscal year 2006, seven of Labor's regional offices had ongoing
enforcement projects related to fees, but none were exclusive to 401(k)
plans. We spoke with four offices about their specific projects, the
reasons for their initiation, and their findings to date. According to
agency officials, most of the investigations under these projects were
initiated due to allegations related to defined benefit plans. The
projects focused on specific areas, such as bank trust department
investigations, settlor fees, or intermediary investment fees and
practices.21

20Labor also selected 10 403(b) plans, which are similar to 401(k) plans
but offered only to employees of public schools and certain nonprofit
organizations.

  Outreach

Labor has launched a nationwide campaign to improve workers' health and
retirement security by educating employers and service providers about
their fiduciary responsibilities under ERISA.22 Its fiduciary education
program includes nationwide educational seminars with fees among the
topics covered. Labor's campaign also includes several educational
publications on topics such as understanding fees and selecting service
providers. For example, one of the publications, Understanding Retirement
Plan Fees and Expenses, is designed to help plan sponsors better
understand and evaluate their plans' fees and expenses.23 Another, A Look
at 401(k) Plan Fees for Employees, highlights the most common fees that
may be paid by plans and is geared toward plan participants.

Limited Information on Fees Paid by Plans Hinders Labor's Ability to Effectively
Oversee Fees

The information reported to Labor on the Form 5500 has limited use for
effectively overseeing fees paid by 401(k) plans because it does not
explicitly list all of the fees paid from plan assets. For example, plan
sponsors are not required to report mutual fund investment fees to Labor,
even though they receive this information for each of the mutual funds
they offer in the 401(k) plan in the form of a prospectus. In addition to
disclosing this information to sponsors of 401(k) plans, mutual fund
companies are required to file this information with the SEC, which
regulates mutual funds.24 While prospectuses are provided to SEC on a
fund-by-fund basis, neither SEC nor Labor have readily available
information to be able to link individual fund information to the various
401(k) plans to which the funds may be offered as investment options.25
Furthermore, prospectuses provide fees as an expense ratio, which is
deducted from plan assets when investment returns are calculated, and as
such are not explicitly stated.26 Without information on all of the fees
charged directly or indirectly to 401(k) plans, Labor is limited in its
ability to identify fees that may be questionable.

21The goal of the bank trust department investigations project is to
identify and investigate plans sponsored by banking institutions with a
potential for fiduciary breaches and self dealing. Investigations in the
settlor fee project examine the extent to which plans pay certain expenses
that improperly confer a benefit on the plan sponsor. In some instances,
the fees on their face may appear to be reasonable expenses, but should
have been paid by the plan sponsor, rather than the plan. The main
objective of the intermediary investment fees and practices project is to
identify and correct violations stemming from abuses in fee arrangements,
including hidden fees, excessive fees, and 12b-1 fees.

22Labor's fiduciary education program is intended to provide employers and
plan officials with an understanding of the law and their responsibilities
and focuses on steps for avoiding the most common problems Labor
encounters in its enforcement activities. Labor's educational seminars
help plan sponsors understand rules and meet their responsibilities to
plan participants. Seminars are also targeted to small businesses that are
considering starting a pension plan.

23For this and other publications related to 401(k) fees, see
www.dol.gov/ebsa.

Industry experts told us that additional information could be reported on
the Form 5500 to give Labor a more precise idea of the cost of
administering a defined contribution plan and 401(k) plan fees. The ERISA
Advisory Council Working Group reported that the Form 5500, as currently
structured, does not reflect the way that the defined contribution plan
fee structure works, because only those fees that are billed explicitly
and are paid from plan assets are deemed reportable. Many of the fees are
associated with the individual investment options in the 401(k) plan, such
as a mutual fund; they are deducted from investment returns and not
reported to plan sponsors or on the Form 5500. The Advisory Council
concluded that Form 5500s filed by defined contribution plans are of
little use to policy makers, government enforcement personnel, plan
sponsors, and participants in terms of understanding the cost of a plan.
The Advisory Council recommended that Labor modify the Form 5500 and the
accompanying schedules so that all fees incurred either directly or
indirectly by these plans can be reported or estimated. This information
then could be used to compare fees for research or regulatory purposes.

24For investors outside of a 401(k) plan, the SEC requires the mutual fund
to provide the prospectus directly to participants. However, in a 401(k)
plan, the SEC requires the mutual fund to provide the prospectus to the
plan sponsor. Sponsors of 404(c) plans are required to provide
participants with a prospectus only upon request.

25Mutual fund prospectuses are filed with the SEC and are available to the
public from SEC's Electronic Data Gathering, Analysis, and Retrieval
system. The filings are not exclusive to those mutual funds offered as
part of a 401(k) plan. Plan sponsors are not required to include
prospectus fee disclosures with their Form 5500 filings. Further, it is
not an agency practice for SEC to provide prospectus information to Labor,
nor would such a practice benefit Labor unless the information was then
consolidated with the corresponding Form 5500 filings for plans that
offered the mutual fund.

26Further, under generally accepted accounting principles, the fees paid
for mutual fund services are combined with a fund's gains and losses and
reflected only, and indirectly, in the income section in a plan's
Statement of Income and Expenses.

Labor and Plan Sponsors Lack Information on the Various Business Arrangements
among Service Providers

Many opportunities exist for business arrangements to go undisclosed,
given the various parties involved in today's 401(k) arena. Problems may
occur when pension consultants or other companies providing services to a
plan also receive compensation from other service providers. Without
disclosing these arrangements, service providers may be steering plan
sponsors toward investment products or services that may not be in the
best interest of participants. In addition, plan sponsors, being unaware,
are often unable to report information about these arrangements to Labor
on Form 5500 Schedule C.

SEC recently identified certain undisclosed arrangements in the business
practices of pension consultants that the agency referred to as conflicts
of interest. Plan sponsors pay pension consultants to give them advice on
matters such as selecting investment options for the plan and monitoring
their performance and selecting other service providers, such as
custodians, administrators, and broker-dealers. The SEC released a report
in May 2005 that raised questions about whether some pension consultants
are fully disclosing potential conflicts of interest that may affect the
objectivity of the advice.27 For example, the report revealed that more
than half of the pension consultants examined had compensation
arrangements with brokers who sell mutual funds. The report highlighted
concerns that these arrangements may provide incentives for pension
consultants to recommend certain mutual funds to a 401(k) plan sponsor and
create conflicts of interest that are not adequately disclosed to plan
sponsors. Plan sponsors may not be aware of these arrangements and thus
could select mutual funds recommended by the pension consultant over
lower-cost alternatives. As a result, participants may have more limited
investment options and may pay higher fees for these options than they
otherwise would.

In addition, specific fees that are considered to be "hidden" may mask the
existence of a conflict of interest. Hidden fees are usually related to
business arrangements where one service provider to a 401(k) plan pays a
third-party provider for services, such as record keeping, but does not
disclose this compensation to the plan sponsor. For example, a mutual fund
normally provides record-keeping services for its retail investors, i.e.,
those who invest outside of a 401(k) plan. The same mutual fund, when
associated with a plan, might compensate the plan's record keeper for
performing the services that it would otherwise perform, such as
maintaining individual participants' account records and consolidating
their requests to buy or sell shares.28

27Office of Compliance Inspections and Examinations, Staff Report
Concerning Examinations of Select Pension Consultants (U.S. Securities and
Exchange Commission: May 16, 2005).

The problem with hidden fees is not how much is being paid to the service
provider, but with knowing what entity is receiving the compensation and
whether or not the compensation fairly represents the value of the service
being rendered. Labor's position is that plan sponsors must know about
these fees in order to fulfill their fiduciary responsibilities. However,
if the plan sponsors do not know that a third party is receiving these
fees, they cannot monitor them, evaluate the worthiness of the
compensation in view of services rendered, and take action as needed.

Labor Has New Initiatives to Improve Information on Fees

Labor officials told us about three initiatives currently underway to
improve the disclosure of fee information by plan sponsors to participants
and to avoid conflicts of interest. For one initiative, Labor is
considering the development of a proposed rule regarding the fee
information required to be furnished to participants under its section
404(c) regulation. According to Labor officials, they are attempting to
define the critical information on fees that plan sponsors should disclose
to participants and the best way to do so. They are deliberating on what
fee information should be provided to participants and in what format to
enable participants to easily compare the fees across the plan's various
investment options.

The second initiative proposes changes to the Form 5500 Schedule A and
instructions to improve the disclosure of insurance fees and commissions
and identify insurers who fail to supply information to plan sponsors.
According to a 2004 ERISA Advisory Council Report,29 many employers have
difficulty obtaining timely Schedule A information from insurers. Labor
proposes to add a checkbox to the form to permit plan sponsors to identify
situations in which the insurance company has failed to provide Schedule A
information. The form would also have space to indicate the type of
information that was not provided. Because plan sponsors must submit a
separate Schedule A for each insurance contract, Labor would be able to
identify which insurance companies are failing to satisfy their disclosure
obligations under ERISA and its regulations.30

28These fees are known as subtransfer agent fees.

29Final Report of the 2004 ERISA Advisory Council Working Group, Health
and Welfare Form 5500 Requirements (Nov. 10, 2004).

The second initiative also proposes changes requiring plan sponsors to
report additional information on fees on Schedule C of Form 5500.
Consistent with recommendations made by the ERISA Advisory Council Working
Groups and GAO, Labor issued a proposed rule on July 21, 2006, to revise
the Schedule C and accompanying instructions to clarify that the plan
sponsor must report any direct and indirect compensation (i.e., money or
anything else of value) it pays to a service provider during the plan
year. Also, a new section would be added requiring that the source and
nature of compensation in excess of $1,000 received from parties other
than the plan or the plan sponsor, such as record-keepers, be disclosed
for certain key service providers, including, among others, investment
managers, consultants, brokers, and trustees as well as all other
fiduciaries. Labor officials told us that the revision aims to improve the
information plan sponsors receive from service providers. The officials
acknowledge, however, that this requirement may be difficult for plan
sponsors to fulfill without an explicit requirement in ERISA for service
providers to give plan sponsors information on the fees they pay to other
providers.

The third initiative involves amending Labor's regulations under section
408(b)(2) of ERISA to define the information plan sponsors need in
deciding whether to select or retain a service provider. According to
Labor, plan sponsors need information to assess the reasonableness of the
fees being paid by the plan for services rendered and to assess potential
conflicts of interest that might affect the objectivity with which the
service provider provides its services to the plan. The proposed change to
the regulation is intended to make clear what plan sponsors need to know
and, accordingly, what service providers need to provide to plan sponsors.

In addition to these three initiatives, Labor has a model fee disclosure
worksheet available on its Web site. The worksheet was developed to help
plan sponsors analyze and compare fees during their negotiations with
service providers. Labor worked with several industry groups to develop
this worksheet as a result of the problems it identified during its 1997
investigations on 401(k) fees. Labor officials told us that this worksheet
or a similar tool could be used to facilitate plan sponsors attainment and
analysis of fee information and that plan service providers could also use
the worksheet to disclose their fee arrangements when soliciting potential
clients.

3029 U.S.C. S 1023(a)(2).

Conclusions

As American workers take increasing responsibility for the adequacy of
their retirement savings through 401(k) plans, they need to be more aware
of the fees that they pay. ERISA does not explicitly require plan sponsors
to disclose comprehensive information on fees to participants, yet even
small fees can significantly affect retirement savings over the course of
a career. Information about investment options' historical performance is
useful, but alone does not provide participants with enough information
for making informed investment decisions. Giving participants key
information on fees for each of the plan's investment options in a simple
format--including fees, historical performance, and risk--will help
participants make informed investment decisions within their 401(k) plan.
In choosing between investment options with similar performance and risk
profiles but different fee structures, the additional provision of expense
ratio data may help participants build their retirement savings over time
by avoiding investments with relatively high fees.

Amending ERISA and updating regulations to better reflect the impact of
fees and undisclosed business arrangements among service providers will
help Labor provide more effective oversight of 401(k) plan fees. Without
such changes, Labor will continue to lack comprehensive information on all
fees being charged directly or indirectly to 401(k) plans. In addition,
some conflicts of interest that affect the fees that participants pay may
continue to go unnoticed because service providers are not required to
inform plan sponsors of the compensation they receive from other service
providers. As a result, Labor may not be able to identify instances in
which service providers might be steering plan sponsors to overpriced
investment options or services that are not in the best interest of plan
participants. Further, requiring plan sponsors to report more complete
information to Labor on fees--those paid out of plan assets or by
participants--would put the agency in a better position to effectively
oversee 401(k) plans and, in doing so, to protect an increasing number of
participants.

Matters for Congressional Consideration

To ensure that participants have a tool to make informed comparisons and
decisions among plan investment options, Congress should consider amending
ERISA to require all sponsors of participant-directed plans to disclose
fee information of 401(k) investment options to participants in a way that
facilitates comparison among the options. This information could be
provided via expense ratios and be communicated annually in a single
document alongside other key information about the investment options such
as historical performance and risk. Providing such a disclosure to
participants who are responsible for directing their 401(k) investments
would ensure that they have another important tool to make informed
comparisons and investment decisions among the plan's options.

To allow plan sponsors, and ultimately Labor, to provide better oversight
of fees and certain business arrangements among service providers,
Congress should consider amending ERISA to explicitly require that 401(k)
service providers disclose to plan sponsors the compensation that
providers receive from other service providers.

Recommendation for Executive Action

To better enable the agency to effectively oversee 401(k) plan fees, the
Secretary of Labor should require plan sponsors to report a summary of all
fees that are paid out of plan assets or by participants. This summary
should list fees by type, particularly investment fees that are being
indirectly incurred by participants.

Agency Comments

We provided a draft of this report to Labor and SEC. Labor provided
written comments, which appear in appendix II. Labor's comments generally
agree with the findings and conclusions of our report. Specifically, Labor
stated that it will give careful consideration to GAO's recommendation
that plans be required to provide a summary of all fees that are paid out
of plan assets or by participants. Labor and SEC also provided technical
comments on the draft, which we incorporated as appropriate.

Labor described a number of details related to its ongoing regulatory
initiatives and outreach activities, many of which we also cited in the
section of our report on Labor's authority and oversight. In its written
comments, Labor also suggested an additional technical change on legal
fees for plan design, which we have made to the final report.

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 Labor, the Chairman of
the SEC; appropriate congressional committees; and other interested
parties. In addition, the report will be available at no charge on GAO's
Web site at http//:www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-7215 or [email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who have made major contributions to
this report are listed in appendix III.

Sincerely,

Barbara D. Bovbjerg Director, Education, Workforce, and

Income Security Issues

Appendix I: Scope and Methodology 

To identify the major fees associated with 401(k) plans and how they are
charged to plan sponsors and plan participants, we interviewed officials
from Labor, the Federal Deposit Insurance Corporation (FDIC), the Federal
Reserve Board (FRB), the Securities and Exchange Commission (SEC), and the
Treasury Department's Office of the Comptroller of the Currency (OCC); met
with service providers and other industry professionals; and collected
information about the range of fees and how they are charged to plan
sponsors and participants. We also reviewed several major 2005 industry
surveys of 401(k) sponsors including surveys by HR Investment Consultants,
the Profit Sharing and 401(k) Council of America (PSCA), and Hewitt
Associates. Since the survey response rates are low, the data may not be
generalizable. To assess reliability of the survey data, we contacted the
authors of each survey and collected information on the methodology that
was used to complete it.

           o The results of HR Investment Consultants' survey are based on
           responses from 125 vendors that service 401(k) plans. This
           response represents about 85 percent of the assets invested in
           401(k) plans. Company officials said they survey vendors because
           they are generally more knowledgeable than employers about plan
           fees. The survey was e-mailed to respondents as an attachment in
           2004 and the results were updated in 2005. The authors were not
           able to provide a response rate, but said the survey was completed
           by most respondents. HR Investment Consultants provides a range of
           services to employers offering participant-directed retirement
           plans.

           o PSCA's survey results are based on responses from 1,106 plan
           sponsors that have profit-sharing plans, 401(k) plans, or a
           combination of both and represent 1 to 5,000-plus employees. The
           survey was mailed or faxed to respondents and conducted from March
           2006 to May 2006. The survey provides a snapshot as of the end of
           2005. The survey response rate was 21 percent. PSCA officials were
           able to provide us with data that excluded profit-sharing plans
           only. PSCA is a national, nonprofit association of 1,200 companies
           and their 6 million plan participants. According to PSCA, it
           represents the interests of its members to federal policy makers
           and offers assistance with profit sharing and 401(k) plan design,
           administration, investment, compliance, and communication.

           o Hewitt Associates' survey results are based on responses from
           458 employers with 1,000 employees or more. Nineteen percent of
           the respondents represented Fortune 500 companies. The survey was
           conducted from mid-March through April 2005. The survey and a link
           to a Web site were e-mailed to respondents whose email addresses
           were available so they could complete the survey on the Web or on
           paper. The other surveys were mailed with a stamped and addressed
           enveloped. The survey had a 9 percent response rate. Hewitt
           Associates is a human resource outsourcing and consulting firm.

To assess how fees are disclosed to plan participants, we reviewed
relevant laws and regulations, spoke with agency and industry officials,
and reviewed sample disclosure documents. To understand requirements to
disclose information about fees to participants, we reviewed ERISA and
relevant regulation sections such as 404(c) and spoke with agency
officials described above.

To identify the content and frequency of fee-related disclosures typically
made to 401(k) plan participants, we spoke with plan practitioners and
reviewed documents including sample disclosure documents. Specifically, we
interviewed an array of service providers that serve plans of varying
sizes including members of the American Bankers Association, American
Benefits Council, American Council of Life Insurers, American Society of
Pension Professionals & Actuaries, Securities Industry Association,
Society of Professional Administrators and Record Keepers, as well as
several plan consultants. We also interviewed officials from three plan
sponsors. However, because we could not readily obtain a representative
sample of service providers or plan sponsors, the information obtained
does not represent the views of all service providers or plan sponsors. In
addition, we reviewed a limited number of sample disclosure documents made
to participants. Because the documents do not reflect a representative
sample, we supplemented the information with Labor documents, including
those from the 2004 ERISA Advisory Council's Working Group on Fee and
Related Disclosures to Participants, to determine the type of disclosures
typically made to participants.

To understand participants' awareness of fees and related disclosures, we
spoke with the American Association of Retired Persons (AARP) in addition
to the agency and other industry professionals listed above. We also
reviewed AARP's nationwide survey of plan participants regarding plan fees
and assessed its methodology. The survey reached plan participants aged 25
or older during November and December 2003. The total sample of over 1,200
respondents was stratified by age and geographic region and then weighted
by age, region, and gender to create a representative sample of the total
population.

To assess Labor's role in overseeing plan fees and certain types of
business arrangements, we reviewed Labor's and other agencies' legal and
regulatory authority and Labor's procedures for assuring that plans meet
overall legal requirements. We reviewed the information required to be
reported on the Form 5500, and several reports produced by federal
agencies, trade associations, participant groups, and industry experts,
regarding retirement plan fees and business arrangements among service
providers. In addition to interviewing Labor officials in the national
office about the their enforcement and outreach efforts, we also
interviewed officials from Labor's regional offices located in Atlanta,
Georgia; Philadelphia, Pennsylvania; San Francisco, California; and
Chicago, Illinois about their ongoing enforcement projects related to
fees. We spoke with officials from the four offices about their specific
projects, the reasons for their initiation, and the findings to date.
Finally, we inquired about Labor's past initiative specific to 401(k) fees
and reviewed Labor's current initiatives related to 401(k) plans.

Appendix II: Comments from the Department of Labor

III: GAO Contact and Staff Acknowledgments

GAO Contact

Barbara D. Bovbjerg (202) 512-7215 or [email protected]

Staff Acknowledgments

In addition to the contact named above, Tamara Cross, Assistant Director,
Daniel Alspaugh, Monika Gomez, Joel Green, Susan Pachikara, Dayna Shah,
Roger Thomas, Rachael Valliere, and Walter Vance made important
contributions to this report.

(130544)

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www.gao.gov/cgi-bin/getrpt?GAO-07-21 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Barbara Bovbjerg at (202) 512-7215 or
[email protected].

Highlights of [38]GAO-07-21 , a report to Ranking Minority Member,
Committee on Education and the Workforce, House of Representatives

November 2006

PRIVATE PENSIONS

Changes Needed To Provide 401(k) Plan Participants and the Department of
Labor Better Information on Fees

American workers are increasingly relying on 401(k) plans, which allow
pre-tax contributions to individual accounts, for their retirement income.
As workers accrue earnings on their investments, they also pay a number of
fees that may significantly decrease their retirement savings.

Because of concerns about the effects of fees on participants' retirement
savings, GAO examined (1) the types of fees associated with 401(k) plans
and who pays these fees, (2) how information on fees is disclosed to plan
participants, and (3) how the Department of Labor (Labor) oversees plan
fees and certain business arrangements. GAO reviewed industry surveys on
fees and interviewed Labor officials and pension professionals about
disclosure and reporting practices.

[39]What GAO Recommends

Congress should consider amending ERISA to require sponsors to disclose
fee information on each 401(k) investment option in the plan to
participants and to require that 401(k) service providers disclose to plan
sponsors the compensation providers receive from other service providers.
In addition, GAO recommends that Labor require plan sponsors to report a
summary of all fees paid out of plan assets or by participants. Labor
generally agreed with the findings and conclusions of our report.

Investment fees, which are charged by companies managing mutual funds and
other investment products for all services related to operating the fund,
comprise the majority of fees in 401(k) plans and are typically borne by
participants. Plan record-keeping fees generally account for the next
largest portion of plan fees. These fees cover the cost of various
administrative activities carried out to maintain participant accounts.
Although plan sponsors often pay for record-keeping fees, participants
bear them in a growing number of plans.

The information on fees that 401(k) plan sponsors are required by law to
disclose is limited and does not provide for an easy comparison among
investment options. The Employee Retirement Income Security Act of 1974
(ERISA) requires that plan sponsors provide participants with certain
disclosure documents, but these documents are not required to contain
information on fees borne by individual participants. Additional fee
disclosures are required for certain--but not all--plans in which
participants direct their investments. These disclosures are provided to
participants in a piecemeal fashion and do not provide a simple way for
participants to compare plan investment options and their fees.

Labor has authority under ERISA to oversee 401(k) plan fees and certain
types of business arrangements that could affect fees, but lacks the
information it needs to provide effective oversight. Labor collects
information on fees from plan sponsors, investigates participants'
complaints or referrals from other agencies on questionable 401(k) plan
practices, and conducts outreach to educate plan sponsors about their
responsibilities. However, the information reported to Labor does not
include all fees charged to 401(k) plans and therefore has limited use for
effective oversight and for identifying undisclosed business arrangements
among service providers. Without disclosing these arrangements, service
providers may steer plan sponsors toward investment products or services
that may not be in the best interest of participants and may cause them to
pay higher fees. Labor has several initiatives underway to improve the
information it has on fees and the various business arrangements among
service providers.

Effect of a 1-Percentage Point in Higher Annual Fees on a $20,000 401(k)
Balance Invested over 20 Years

References

Visible links
    38. http://www.gao.gov/cgi-bin/getrpt?GAO-07-21
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