Private Pensions: 401(k) Plan Participants and Sponsors Need	 
Better Information on Fees (24-OCT-07, GAO-08-95T).		 
                                                                 
According to Labor's most recent data, there are an estimated 44 
million active participants in 401(k) plans. As participants	 
accrue earnings on their investments, they also pay a number of  
fees, associated with 401(k) plans. Over the course of the	 
employee's career, fees may significantly decrease retirement	 
account balances. For plan sponsors, understanding the fees they 
are being charged helps fulfill their fiduciary responsibility to
act in the best interest of plan participants. GAO's prior work  
on 401(k) fees found that fee disclosures are limited and do not 
allow an easy comparison of investment options. GAO previously	 
made recommendations to both Congress and Labor on ways to	 
improve the disclosure of fee information to both plan		 
participants and sponsors. Both Labor and Congress now have	 
efforts under way to ensure that both participants and sponsors  
receive the necessary fee information to make informed decisions.
These efforts on the subject have generated significant debate.  
This testimony provides information about the way fee information
could be disclosed to benefit 401(k) participants and sponsors,  
focusing on 1) the information on fees that could be most useful 
for plan participants and plan sponsors and 2) how such 	 
information could be effectively presented. To complete this	 
statement, GAO relied on previous work and also utilized	 
information from Labor and from industry experts on the subject  
of fee disclosure to participants.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-95T 					        
    ACCNO:   A77551						        
  TITLE:     Private Pensions: 401(k) Plan Participants and Sponsors  
Need Better Information on Fees 				 
     DATE:   10/24/2007 
  SUBJECT:   Employee retirement plans				 
	     Fees						 
	     Funds management					 
	     Government information dissemination		 
	     Information disclosure				 
	     Investment planning				 
	     Investments					 
	     Pension plan cost control				 
	     Pensions						 
	     Reporting requirements				 
	     Retirement 					 
	     Retirement income					 
	     Program costs					 
	     Program implementation				 

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GAO-08-95T

   

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Testimony: 

Before the Special Committee on Aging, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:30 a.m. EDT: 

Wednesday, October 24, 2007: 

Private Pensions: 

401(k) Plan Participants and Sponsors Need Better Information on Fees: 

Statement of Barbara D. Bovbjerg, Director Education, Workforce, and 
Income Security Issues: 

GAO-08-95T: 

GAO Highlights: 

Highlights of GAO-08-95T, a testimony before the Senate Special 
Committee on Aging. 

Why GAO Did This Study: 

According to Laborï¿½s most recent data, there are an estimated 44 
million active participants in 401(k) plans. As participants accrue 
earnings on their investments, they also pay a number of fees, 
associated with 401(k) plans. Over the course of the employeeï¿½s career, 
fees may significantly decrease retirement account balances. For plan 
sponsors, understanding the fees they are being charged helps fulfill 
their fiduciary responsibility to act in the best interest of plan 
participants. 

GAOï¿½s prior work on 401(k) fees found that fee disclosures are limited 
and do not allow an easy comparison of investment options. GAO 
previously made recommendations to both Congress and Labor on ways to 
improve the disclosure of fee information to both plan participants and 
sponsors. Both Labor and Congress now have efforts under way to ensure 
that both participants and sponsors receive the necessary fee 
information to make informed decisions. These efforts on the subject 
have generated significant debate. This testimony provides information 
about the way fee information could be disclosed to benefit 401(k) 
participants and sponsors, focusing on 1) the information on fees that 
could be most useful for plan participants and plan sponsors and 2) how 
such information could be effectively presented. To complete this 
statement, GAO relied on previous work and also utilized information 
from Labor and from industry experts on the subject of fee disclosure 
to participants. 

What GAO Found: 

Fee disclosure serves different functions for plan participants and 
sponsors. Studies have shown that 401(k) participants often lack basic 
knowledge about the fees associated with their plan. Participants need 
information about the direct expenses that could be charged to their 
accounts. As we previously recommended and most experts agree, the 
expense ratioï¿½a fundï¿½s operating fees as a percentage of its assetsï¿½is 
a fundamental piece of information for participants. Plan sponsors, in 
contrast, need a range of fee information to fulfill their fiduciary 
responsibilities. Sponsors need additional information on service 
providers, investment options, and revenue sharing arrangements to 
assist them in monitoring plan fees and determining whether they 
continue to be reasonable in light of the services provided. Labor has 
ongoing efforts designed to help participants and plan sponsors 
understand the importance of plan fees and the effect of those fees on 
retirement savings. 

Whether participants receive only basic expense ratio information or 
more detailed information on fees, presenting the information in a 
clear, easily comparable format can help participants understand the 
content of the disclosure. GAOï¿½s prior reports found that certain 
practices help people understand complicated information. For example, 
using clear language and a straightforward layout in a brief document 
can enhance the accessibility of financial information. Also, providing 
graphics and less text can both attract recipient attention and make 
detailed information more quickly and easily understandable. 

Figure: Participantsï¿½ Response to Survey Question on Awareness of Fees: 

This is a pie graph showing how much people knew about fees and 
expenses they are paying for their 401(k) plan. 17% were aware, and 83% 
were not aware. 

[See PDF for image] 

Source: AARPï¿½S Survey of 401(k) Participants' Awareness and 
Understanding of Fees, July 2007. 

[End of figure] 

To view the full product, including the scope and methodology, click on 
GAO-08-95T.
For more information, contact Barbara D. Bovbjerg at (202) 512-7215 or 
[email protected]. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here to discuss how best to disclose fee information 
to 401(k) participants and plan sponsors. Fees can significantly 
decrease participants' retirement savings over the course of a career. 
For 401(k) participants, 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. For plan sponsors, 
understanding the fees being charged helps fulfill their fiduciary 
responsibility to act in the best interest of plan participants. 

Given that fees can have a large impact on an individual's account 
balance over time, it is important that both participants, as 
investors, and plan sponsors, typically the employer, receive the fee 
information necessary to make informed decisions. The Department of 
Labor (Labor) is currently drafting regulations on the disclosure of 
fees to participants, and Congress is now considering legislation to 
improve such disclosure. These efforts have generated debate about the 
type of fee information participants and sponsors may need, and the 
amount and format of fee information that should be disclosed. As 
Congress considers these issues, you asked us to provide information 
about the way fees could be disclosed to benefit 401(k) participants 
and sponsors. My remarks today will focus on 1) the information on fees 
that could be most useful for plan participants and sponsors and 2) how 
such information can be presented to participants so that it is easily 
understandable. 

To describe the fee information that should be provided to 401(k) plan 
participants and sponsors, we relied on our previous work that examined 
the types of fees associated with 401(k) plans and who pays these fees, 
how information is disclosed to participants, and Labor's oversight of 
fees. We also used information from Labor and from industry experts on 
the subject of fee disclosure to participants. To consider how such fee 
information should be provided to participants, we reviewed our 
previous work on the understandability of Social Security and other 
disclosures, and utilized available industry information on the 
subject. We conducted our review from September 2007 through October 
2007 in accordance with generally accepted government auditing 
standards. 

In summary, fee disclosure serves different functions for plan 
participants and sponsors. Participants need information about the 
direct expenses that could be charged to their accounts. As we 
previously recommended and most experts agree, the expense ratio--a 
fund's operating fees as a percentage of its assets--is a fundamental 
piece of information for plan participants. Some experts also recommend 
that other types of fees be disclosed, such as certain types of annual 
fees, and fees that are not necessarily investment-specific. Plan 
sponsors, in contrast, need a range of fee information to fulfill their 
fiduciary responsibilities. Thus, sponsors need additional information 
on service providers, investment options, and revenue sharing 
arrangements to fulfill their duties as fiduciaries. Such information 
assists them in monitoring plan fees and determining whether the fees 
charged continue to be reasonable in light of the services provided. 
Labor is currently considering what fee information should be provided 
to participants and what format to enable participants to easily 
compare fees across a plan's various investment options. The agency 
also has ongoing efforts designed to help participants and sponsors 
understand the importance of plan fees and the effect of those fees on 
retirement savings. 

Whether participants receive only basic expense ratio information or 
more detailed information on various fees, presenting the information 
in a clear, easily comparable format can help participants understand 
the content of the disclosure. The language, layout, length, 
comparability, and distribution are among the important considerations 
that can inform the design of fee disclosure. In our prior reports on 
helping the public understand Social Security publications and on more 
effective disclosures for credit cards, we found that certain practices 
help people understand complicated information. For example, using 
clear language and a straightforward layout in a brief document can 
enhance the accessibility of financial information. Further, providing 
graphics and less text can both attract recipient attention and make 
detailed information more quickly and easily understandable. 

Background: 

According to Labor's most recent data, an estimated 41 million 
participants in 401(k) plans are permitted to direct the investment of 
all or a portion of their plans' accounts from among the choices 
offered by their plans. As participants accrue earnings on their 
investments, they also pay a number of fees, covering expenses, 
commissions, or other charges associated with 401(k) plans. Over the 
course of the employee's career, fees may significantly decrease 
retirement account balances. For example, even a 1-percentage point 
difference in fees can significantly reduce the amount of money 
available for retirement. Figure 1 assumes 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. 

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

This figure is GAO analysis in a combination line chart showing the 
effect of 1 percentage point in higher annual fees on a $20,000 401(k) 
balance invested over a period of 20 years. The lines represent 
accumulated balance with 0.5 percent charge for fees, and accumulated 
account balance with 1.5 percent charge for fees. 

[See PDF for image] 

Source: GAO analysis. 

[End of figure] 

Currently, most participants are responsible for directing their 
investments among the choices offered by their 401(k) plans, but may 
not be aware of the different fees that they pay. According to industry 
professionals, participants are often unaware that they pay any fees 
associated with their 401(k) plan. In fact, studies have shown that 
401(k) participants often lack basic knowledge about the fees 
associated with their plan. As shown in figure 2, in a recent 
nationwide survey, 83 percent of 401(k) participants reported not 
knowing how much they pay in fees. When asked whether they pay any fees 
for the 401(k) plan, less than one-fifth (17%) said they do pay fees. 
As figure 3 shows, almost two-thirds responded that they do not pay 
fees (65%) and 18% stated that they do not know.[Footnote 1] 

Figure 2: Participants' Response to Survey Question on Awareness of 
Fees: 

This is a pie graph showing how much people knew about fees and 
expenses they are paying for their 401(k) plan. 17% were aware, and 83% 
were not aware. 

[See PDF for image] 

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

[End of figure] 

Figure 3: Participants' Response to Survey Question on Awareness of 
Fees: 

This is a pie graph showing how many people knew whether they pay any 
fees for their 401 (k) plan. 65% paid no fee, 18% did not know, and 17% 
paid fees. 

[See PDF for image] 

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

[End of figure] 

Industry professionals agree that making participants who direct their 
investments more aware of fees would help them make more informed 
investment decisions. 

Enacted before these types of plans came into wide use, the Employee 
Retirement Income Security Act (ERISA) of 1974[Footnote 2] establishes 
the responsibilities of employee benefit plan decision makers and the 
requirements for disclosing and reporting plan fees. Typically, the 
plan sponsor is a fiduciary.[Footnote 3] A plan fiduciary includes a 
person who has discretionary authority or control over plan management 
or any authority or control over the management or disposition of plan 
assets.[Footnote 4] ERISA requires that plan sponsors responsible for 
managing employee benefit plans carry out their plan responsibilities 
prudently and solely in the interest of the plan's participants and 
beneficiaries. Plan sponsors, as fiduciaries, are required to act on 
behalf of plan participants and their beneficiaries. These 
responsibilities include: 

* selecting and monitoring service providers to the plan; 

* reporting plan information to the government and to participants; 

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

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

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

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

In our November 2006 report on 401(k) fees, we found that the fee 
information that ERISA requires 401(k) plan sponsors to disclose is 
limited and does not provide participants with an easy way to compare 
investment options.[Footnote 5] All 401(k) plans are required to 
provide disclosures on plan operations, participant accounts, and the 
plan's financial status. Although they often contain some information 
on fees, these documents are not required to disclose the fees borne by 
individual participants. Overall, we found that the information 
currently provided to participants does not provide a simple way for 
them to compare plan investment options and their fees, and are 
provided to participants in a piecemeal fashion. 

Additional fee disclosures are required for certain--but not all--plans 
in which participants direct their investments. ERISA requires 
disclosure of fee information to participants where plan sponsors seek 
liability protection from investment losses resulting from 
participants' investment decisions. Such plans--known as 404(c) plans-
-are required to provide participants with a broad range of investment 
alternatives, descriptions of the risks and historical performance of 
such investment alternatives, and information about any transaction 
fees and expenses in connection with buying or selling interests in 
such alternatives.[Footnote 6] Upon request, 404(c) plans must also 
provide participants with, among other information, the expense ratio 
for each investment option. Plan sponsors may voluntarily provide 
participants with more information on fees than ERISA requires, 
according to 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. 
Still, absent requirements to do so, some plan sponsors may not 
identify all the fees participants pay. 

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

Plan sponsors, on the other hand, may currently receive some 
information on an investment option's expenses that includes management 
fees, distribution and/or service fees, and certain other fees, such as 
accounting and legal fees. These fees are usually disclosed in the 
fund's prospectus or fund profile. In addition to investment fees, 
sponsors may receive information about fees for administration and 
other aspects of plan operations. Sponsors can also have providers fill 
out the Form 5500, which ultimately gets filed with Labor.[Footnote 7] 
Generally, information on 401(k) fees is reported on two sections of 
the Form 5500, Schedule A and Schedule C.[Footnote 8] However, our 
November 2006 reported that the form is of little use to plan sponsors 
and others in terms of understanding the cost of a plan.[Footnote 9] 

While plan sponsors may receive information on investment and other 
fees, they may not be receiving information on certain undisclosed 
business arrangements. We previously reported that several 
opportunities exist for business arrangements to go undisclosed, given 
the various parties involved in creating and administering 401(k) 
plans. Problems may occur when pension consultants or other companies 
providing services to a plan also receive compensation from other 
service providers. 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. 
Our November 2006 report recommended that Congress consider amending 
ERISA to require that service providers disclose to plan sponsors the 
compensation that providers receive from other service providers. 

H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act of 
2007, was introduced in Congress on July 26, 2007, and H.R. 3765, the 
Defined Contribution Plan Fee Transparency Act of 2007, was introduced 
on October 4, 2007. The first bill if enacted would, among other 
things, amend ERISA to require detailed fee disclosures from service 
providers to plan sponsors, as well as from plans to participants, and 
establish additional specific requirements related to the selection of 
investment options by 404(c) plan sponsors. It would also require Labor 
to take various steps related to the enforcement of these requirements 
and would create statutory penalties for failure to comply. The second 
bill would amend the Internal Revenue Code to impose taxes on any 
defined contribution plan administrator failing to provide plan 
participants with prescribed information about plan fees and expenses, 
and on any plan service provider failing to provide defined 
contribution plan administrators prescribed information about plan fees 
and expenses. Both bills suggest that a satisfactory disclosure to 
participants would include a statement explaining that investments 
should not be selected based solely on the level of fees charged but 
also on careful consideration of a range of factors including the 
alternatives' risk level, historic returns, and investment objectives. 

Basic Fee Information is Important for Participants to make Informed 
Decisions but Plan Sponsors Require Broader Information: 

Fee disclosure serves different functions for plan sponsors and 
participants. Participants need fee information to make informed 
decisions about their investments--primarily, whether to contribute to 
the plan (and at what level) and how to allocate their contributions 
among the investment options the plan sponsor has selected. As we 
previously recommended and most experts agree, the expense ratio is a 
fundamental piece of information for plan participants. Plan sponsors, 
as fiduciaries, must consider a range of information, in addition to 
information on fees, such as hiring and supervising plan service 
providers, selecting investment options, and reviewing the 
reasonableness of plan fees. 

Participants Need Fee Information to Make Informed Comparisons and 
Decisions about How to Direct their Investments: 

Although it is clear that participants require fee information to make 
informed decisions, it is not so clear what fee information is most 
relevant. Better disclosure of fee information is important because 
participants in 401(k) plans generally receive less information and 
guidance from investment professionals regarding their investment 
decisions than direct investors. According to industry experts, 
participants need to be given information about the direct expenses 
that could be charged to their accounts. 

In our 2006 report on fees, we found that fees are charged by the 
various outside companies that the plan sponsor hires to provide a 
number of services necessary to operate a plan. Services can include: 

* investment management (i.e., selecting and managing the securities 
included in a mutual fund; marketing the fund and compensating brokers 
who sell the fund;[Footnote 10] and providing other shareholder 
services, such as distributing the fund prospectus);[Footnote 11] 

* recordkeeping (i.e., tracking individual account contributions); 

* consulting and providing financial advice (i.e., selecting vendors 
for investment options or other services); 

* 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. 

In our report, we recommended that Congress consider amending ERISA to 
require all sponsors of participant-directed plans to disclose fee 
information on 401(k) investment options to participants in a way that 
facilitates comparison among the options, such as via expense 
ratios.[Footnote 12] As mentioned earlier, there have been two bills 
recently introduced in Congress on the subject. Industry professionals 
have also suggested that comparing the expense ratio across investment 
options is the most effective way to compare options' fees. They 
generally agree that an expense ratio provides valuable information 
that participants need and can be used to compare investment options 
because it includes investment fees, which constitute most of the total 
fees borne by participants. According to an industry official, the 
disclosure of expense ratios might include a general description of how 
expense ratios vary depending on the type and style of investment. For 
example, investment options with relatively high fees, such as actively 
managed funds, tend to have larger expense ratios than funds that are 
not actively managed. Also, investment options that are only available 
to institutional investors tend to have lower expense ratios than other 
types of funds. 

Most of the investment options offered in 401(k) plans have expense 
ratios that can be compared, but this information is not always 
provided to participants. In addition, investment options other than 
mutual funds may not be required to produce prospectuses that include 
expense ratios, but according to industry professionals, such options 
have expense ratio equivalents that investment industry professionals 
can identify. Despite the general consensus that the expense ratio is 
the most fundamental piece of information that participants receive on 
fees, industry officials also believe that other fees should be 
disclosed to participants. For example, annual fees or fees on a per- 
transaction basis could be disclosed, such as administrative and 
recordkeeping fees, participant loan origination fees, and annual loan 
charges.[Footnote 13] 

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

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

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

* wrap fees--fees that are assessed on the total assets in a 
participant's account.[Footnote 14] 

Industry experts said that it was important that participants receive 
information about their investment returns. For example, some officials 
recommended that plan participants be provided information on their 
returns net of all fees so that they can clearly see what their 
investments have earned after fees. Others recommended that information 
be disclosed that explains how the investment and administrative costs 
of the plan affect their investment returns and their overall 
retirement savings in the plan. These officials believed that such 
information would help participants understand that fees are an 
important factor, but not the only one, to consider when directing 
their investments. In fact, most experts agree that risk and historical 
performance are important factors for participants to also consider 
when making investment decisions. 

Although some industry experts believe that participants should be 
provided comparative benchmarks for their investment options, not all 
experts agreed.[Footnote 15] Most industry experts we consulted 
believed that benchmarks would be more useful for plan sponsors. Since 
plan participants do not have any control over the investment options 
offered in a plan, experts said that benchmarking is less useful to 
plan participants than plan sponsors, since plan sponsors use 
benchmarks in evaluating alternatives to their plans' investment 
options. Experts also noted that although there are appropriate 
benchmarks for mutual funds, benchmarks are not as readily available 
for other types of investment products. 

Industry experts agreed that overall there is certain minimum 
information that participants should receive for each investment option 
offered under all self-directed plans, such as 1) the types of 
securities held and investment objectives of the product; 2) the 
principal risks associated with investing in the product; 3) annual 
fees and expenses expressed in a ratio or fee table; 4) information on 
historical performance; and 5) the identity of the investment manager 
of the plan's investments. Disclosure of this information is 
appropriate for all types of investment options available under the 
plan regardless of type and can fill in the gaps in the information 
currently required to be provided to participants. For example, with 
the exception of mutual funds, for most other types of investment 
products, important information--such as operating expenses and 
historical performance--is available only on request. Industry experts 
support requiring the provision of a summary document for all self- 
directed plans that provides, for each investment product, the type of 
information that investors value and use. 

Labor's initiatives related to 401(k) plan participants: 

In our prior work, we noted that Labor is considering the development 
of a new rule regarding the fee information required to be furnished to 
participants under its section 404(c) regulation. According to Labor 
officials, they are attempting to identify the critical information on 
fees that plan sponsors should disclose to participants and the best 
way to do so. The initiative is intended to explore what steps might be 
taken to ensure that participants have the information they need about 
their plan and available investment options, without imposing 
additional costs, given that such costs are likely to be charged 
against the individual accounts of participants and affect their 
retirement savings. The officials are currently considering what fee 
information should be provided to participants and what format would 
enable participants to easily compare the fees across a plan's various 
investment options. Labor is also currently evaluating comments 
received from consumer groups, plan sponsors, service providers, and 
others as it develops its proposed regulation. 

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

Broader Information Can Help Plan Sponsors Fulfill Their Fiduciary 
Responsibilities: 

Although participants' fee requirements are more specific to the 
investment options offered to them by the plan sponsor, a broader 
spectrum of information relating to fees is needed by plan sponsors. In 
order to carry out their duties, plan sponsors have an obligation under 
ERISA to prudently select and monitor plan investments, investment 
options made available to the plan's participants and beneficiaries, 
and the persons providing services to the plan. Understanding and 
evaluating the fees and expenses associated with a plan's investments 
and services are an important part of a fiduciary's responsibility. 
Plan sponsors continually need, in addition to information on fees, 
information on service providers, investment options, and revenue 
sharing arrangements in order to monitor a plan's fees and expenses to 
determine whether they continue to be reasonable for the services 
provided. 

Industry experts have suggested that plan sponsors be required to 
obtain complete information about investment options before adding them 
to the plan's menu and obtain information concerning arrangements where 
a service provider receives some share of its revenue from a third 
party. A number of associations recently put together a list of service-
and fee-related data elements they believe defined contribution plan 
sponsors and service providers should discuss when entering into 
agreements. The data elements include such information as payments 
received by plan service providers from affiliates in connection with 
services to the plan, float revenue,[Footnote 16] and investment- 
related consulting services. The list is meant as a reference tool for 
plan sponsors and providers to use to determine the extent to which a 
service provider receives compensation in connection with its services 
to the plan from other service providers or plan investment products 
(e.g., "revenue sharing" or "finders' fees"). According to the 
associations that formulated this tool, the information can aid plan 
sponsors to evaluate any potential conflicts of interest that may arise 
in how fees are allocated among service providers. 

Labor, in its comments to our November 2006 report, stated that the 
agency has proposed a number of changes to the Form 5500, including 
changes that would expand the information required to be reported on 
the Schedule C. The changes are intended to assist plan sponsors in 
assessing the reasonableness of compensation paid for services and 
potential conflicts of interest that might affect those services. 
According to testimony earlier this month from the Assistant Secretary 
of Labor, the agency will be issuing a final regulation requiring 
additional public disclosure of fee and expense information on the Form 
5500 within the next few weeks.[Footnote 17] This change will be 
helpful to plan sponsors as they look retrospectively at the preceding 
plan year. In addition, Labor was considering an amendment to its 
regulation under section 408(b)(2) of ERISA, expected to be issued this 
year. This amendment would help to ensure that plan sponsors have 
sufficient information on the compensation to be paid to the service 
provider and the revenue sharing compensation paid by the plan for the 
specific services and potential conflicts of interest that may exist on 
the part of the service provider. 

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

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

Making Fee Information Easy to Understand and Compare Can Help 401(k) 
Participants with Disclosed Information: 

Whether participants are provided with basic expense ratio information 
or more detailed information on various fees, or both, providing the 
information in a clear, easily comparable format can assist 
participants in understanding the information disclosed. In our prior 
reports on helping the public understand Social Security information 
and on more effective disclosures for credit cards, we found that 
certain practices help people understand complicated information. 
[Footnote 18] These practices include: 

* language--writing information in clear language; 

* lay-out--using straightforward layout and graphics; 

* length--providing a short document; 

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

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

Language: We previously noted that certain disclosure materials for the 
public should be written at or below an eighth-grade reading level 
given the diverse population receiving it. Unclear or highly technical 
language can affect the understandability of disclosures to 
participants. Plain English can reduce confusion and promote 
comprehension. Currently, according to one industry expert, 
prospectuses do not provide an understandable summary of investments or 
their expenses to participants since prospectuses are largely written 
to protect the fund. As disclosures address fees beyond the expense 
ratio, clear language remains important so that participants understand 
what key fees mean and when they apply. 

Layout: Some consumer and industry groups emphasized the need for a 
straightforward layout. In response to Labor's Request For Information 
on fee disclosure to participants,[Footnote 19] one industry group 
stated that disclosure with a simple format may lead some participants 
to consider fees as one of many factors in their investment decisions. 
The group added that complex language or layout hinders meaningful 
disclosure. Similarly, in our previous work on Social Security 
disclosures, we noted that the design of certain disclosures did not 
clearly identify the most important information or easily lead the 
reader through the document. For example, letters and statements to 
beneficiaries were harder to follow when the order of information did 
not flow logically or the most important information did not appear 
first in the document. Another aspect of layout--the use of 
inappropriate font sizes and styles--can make a disclosure more 
difficult for consumers to read, as we found in our prior work on 
credit card fee disclosures. For example, materials that excessively 
use capital letters or a small font may be more difficult to read. 

Our prior work also revealed that using graphics helps people 
understand complicated information or information that needs to be 
compared. Table 1 shows an example of how industry associations suggest 
that the expense ratio and other fee information could be disclosed to 
plan participants. Using a table can be a particularly effective way to 
convey information. In a previous report, we noted that using graphics 
to replace text and make some information more quickly and easily 
understandable was a common theme that emerged in the suggestions made 
by focus groups and a benefits consulting firm. 

Table 1: Sample Participant Fee Disclosure Form: 

Investment expenses: Investment option: AAA investment; 
Investment expenses: Participant's assets: $5,000; 
Investment expenses: Expense ratio (as a percentage): 0.30%; 
Investment expenses: Additional fees: 0.00%. 

Investment expenses: Investment option: BBB investment; 
Investment expenses: Participant's assets: $6,000; 
Investment expenses: Expense ratio (as a percentage): 0.22%; 
Investment expenses: Additional fees: 0.00%. 

Investment expenses: Investment option: CCC investment; 
Investment expenses: Participant's assets: $12,000; 
Investment expenses: Expense ratio (as a percentage): 0.36%; 
Investment expenses: Additional fees: 2.00%. 

Investment expenses: Investment option: DDD investment; 
Investment expenses: Participant's assets: $0; 
Investment expenses: Expense ratio (as a percentage): 0.43%; 
Investment expenses: Additional fees: 1.50%. 

Investment expenses: Investment option: EEE investment; 
Investment expenses: Participant's assets: $0; 
Investment expenses: Expense ratio (as a percentage): 0.27%; 
Investment expenses: Additional fees: 0.00%. 

Investment expenses: Investment option: FFF investment; 
Investment expenses: Participant's assets: $42,000; 
Investment expenses: Expense ratio (as a percentage): 0.18%; 
Investment expenses: Additional fees: 0.00%. 

Investment expenses: Investment option: GGG investment; 
Investment expenses: Participant's assets: $3,000; 
Investment expenses: Expense ratio (as a percentage): 0.60%; 
Investment expenses: Additional fees: 1.00%. 

Administrative and transactional expenses: Service: Annual 
administrative and recordkeeping charge; 
Administrative and transactional expenses: Amount of fee: $50 per year. 

Administrative and transactional expenses: Service: Brokerage account; 
Administrative and transactional expenses: Amount of fee: $60 per year. 

Administrative and transactional expenses: Service: Participant loan 
origination fee; 
Administrative and transactional expenses: Amount of fee: $50 per loan. 

Administrative and transactional expenses: Service: Annual loan charge; 
Administrative and transactional expenses: Amount of fee: $25 per year. 

Source: Industry associations, including the American Society of 
Pension Professionals & Actuaries and the Council of Independent 401(k) 
Recordkeepers. 

[End of table] 

Length: In addition to clear language and layout, the length of the 
document can influence how useful it is for participants. Some groups 
have concerns that too much information can overwhelm participants. For 
participant-directed plans, a few studies have shown that more 
investment options are correlated with reduced participation or other 
outcomes, possibly because of too many choices or information overload. 
Shorter disclosures are emerging for a number of vehicles for 
retirement savings. For example, the Securities and Exchange Commission 
(SEC) is currently considering rules to develop a streamlined 
prospectus. This affects the presentation of information about mutual 
funds, which constitute over half of 401(k) assets according to 
industry data. Omitting unnecessary details from disclosure documents 
makes recipients more likely to read and understand information they 
contain. 

Clear, short annual disclosures do not preclude making additional 
information available, especially when using an electronic format. With 
401(k) plans, the availability of additional material permits 
participants to review greater detail about fees and other fund 
characteristics through documents like a prospectus or fund profile. 
These additional sources can be paper or electronic, and industry 
groups noted that an electronic format can allow layered disclosure 
with initial summary information and links to further material or 
source documents. In addition, providing ways for participants to 
obtain more detailed information is helpful. For example, experts we 
consulted during our work on the Social Security Statements[Footnote 
20] advised that statements should contain directions on how to obtain 
additional information. 

Comparability: Our November 2006 report on 401(k) fees emphasized the 
importance of a single document that facilitates the comparison of fund 
options. In their responses to Labor's Request for Information, 
industry groups recently reiterated the importance of disclosures that 
promote comparisons, which would assist participants and treat 
providers of different types of investments evenly. As we recommended 
to Congress, disclosure in a single document that includes expense 
ratios should occur in a way that promotes easy comparison. Similarly, 
additional fees like redemption fees or surrender charges that may 
relate to certain investment options can also be compared in one 
document enabling participants to know what fees they may incur for 
activities like buying and selling in certain funds. Disclosures in 
multiple documents may be more difficult for the reader to use because 
they may require more work to find information, especially when 
delivered over time. 

Distribution: Possible ways to deliver 401(k) fee disclosure include 
both paper and electronic distribution. Paper reports, such as summary 
plan descriptions, prospectuses for mutual funds, and other documents, 
traditionally have been used to provide pension and fee information. 
Not all participants have computer or internet access, and many may 
prefer paper disclosure, as indicated by a recent nationwide survey 
about 401(k) fee disclosure. Although paper disclosure rather than 
electronic delivery may suit certain participants, many industry groups 
place emphasis on computer-based formats, partly to lower costs like 
printing and mailing and to allow layered disclosure by clicking to 
more detailed information or source documents. One industry association 
commented that Internet-based information is easier to maintain and 
update so that it tends to be more timely and accurate. 

Recent pension legislation has discussed electronic disclosure in some 
circumstances. The Pension Protection Act of 2006 allows paper, 
electronic, or other formats for benefit statements to the extent that 
the format is reasonably accessible to the participant or 
beneficiary.[Footnote 21] In guidance about benefit statements issued 
in 2006, Labor stated that continuous access to one or more secured Web 
sites is one way of providing information as long as, among other 
things, notification about the sites includes the right to request and 
obtain free paper versions. In addition, Labor has issued a regulation 
for the general use of electronic disclosure to participants and 
beneficiaries.[Footnote 22] Also, SEC has recently adopted and proposed 
rules with increased electronic disclosure, partly to reduce costs, 
which allow for paper disclosure as well as electronic 
delivery.[Footnote 23] 

Conclusions: 

It is apparent that both 401(k) plan participants and sponsors need fee 
information in order to make the most informed decisions. However, 
given the voluminous amount of information that could be disclosed to 
participants, determining the relevant information that participants 
most need is key. At a minimum, providing information such as expense 
ratios or other investment-specific fee information could be the place 
to start. Also, making sure that the information is accessible in terms 
of the language, layout, length, comparability, and distribution can 
ensure that participants actively utilize the information disclosed. As 
participants become more sophisticated or demand more information, 
decisions can then be made about the type and format of additional fee 
information. 

For plan sponsors, requiring that certain information on fees be 
disclosed can help them understand what services they are paying for, 
who is benefiting, and whether their current arrangements are in the 
best interest of plan participants. The mere act of requiring such 
information may actually promote competition among the entities that 
provide services to plans and possibly reduce the amount of fees 
service providers charge. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 
respond to any questions you or other Members of the Committee may have 
at this time. 

Contacts and Acknowledgements: 

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

[End of section] 

Footnotes: 

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

[2] 29 U.S.C. ï¿½ï¿½ 1001-1461. 

[3] Any person who makes investment decisions with respect to a 
qualified employee benefit plan's assets is generally a fiduciary. The 
duties the person performs for the plan rather than their title or 
office determines whether that person is a plan fiduciary. 29 U.S.C. ï¿½ 
1002(21)(A). 

[4] 29 U.S.C. ï¿½ 1002(21). 

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

[6] ERISA Section 404(c) generally provides relief for plan fiduciaries 
of certain individual account plans, such as 401(k) plans, from 
liability for losses resulting from investment decisions made by plan 
participants and beneficiaries. 29 U.S.C. ï¿½ 1104(c). Implementing 
regulations provide specifics for complying with section 404(c). 29 
C.F.R. ï¿½ 2550.404c-1 (2007). 

[7] The Form 5500 includes information on the plan's sponsor, the 
features of the plan, and the number of participants. The form also 
provides more specific information, such as 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. 

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

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

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

[11] Investment fees are usually different for each investment option 
available to participants in a 401(k) plan, account for the bulk of 
plan fees, and are paid by participants. 

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

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

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

[15] A benchmark is used to compare specific investment results with 
that of the market or economy. Some industry experts believe that plan 
sponsors, as they monitor investment alternatives, should review 
investment-alternative results against appropriate benchmarks and 
compare their plans' investment options to competing funds with similar 
styles. 

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

[17] Statement of Bradford P. Campbell, Assistant Secretary of Labor, 
Before the Committee on Education and Labor, U.S. House of 
Representatives, Oct. 4, 2007. 

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

[19] 72 Fed. Reg. 20,457 (Apr. 25, 2007). 

[20] GAO-05-192. 

[21] Pub. L. No. 109-280, ï¿½ 508(a), 120 Stat. 780, 949-51 (codified at 
29 U.S.C. ï¿½ 1025). 

[22] 29 C.F.R. ï¿½ 2520.104b-1(c) (2007). 

[23] 72 Fed. Reg. 42,222 (Aug. 1, 2007).

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