Private Pensions:

Additional Changes Could Improve Employee Benefit Plan Financial Reporting

GAO-10-54: Published: Nov 5, 2009. Publicly Released: Dec 7, 2009.

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The Department of Labor (Labor) collects information on fees charged to 401(k) plans primarily through its Form 5500. Labor issued final regulations in November 2007, making changes to, among other things, Schedule C of the Form 5500. Labor put emphasis on reporting the indirect compensation paid to service providers and between service providers, in an effort to capture all of the costs that plan sponsors incur. Congress and others are concerned that Labor's rules could result in duplicative and confusing reporting. Given these concerns, Government Accountability Office (GAO) was asked to examine the new requirements and determine whether Labor's new requirements will provide (1) clear and understandable guidance to plan sponsors and (2) useful information to Labor and others. GAO analyzed Labor's regulations and interviewed Labor and other officials about disclosure and reporting practices.

Sponsors and service providers report confusion over Labor's new reporting requirements for the Form 5500 Schedule C and over how plan expenses are defined. Specifically, they have questions regarding the distinction between eligible and ineligible indirect compensation, that is, which types of indirect compensation must be reported on the Form 5500 (compensation that qualifies as "eligible" does not have to be reported). Labor's guidance on its Web site thus far has been limited, and, according to sponsors and service providers GAO spoke with, has raised additional questions that remain unanswered. Specifically, Labor has not provided sufficient guidance for sponsors and providers to accurately determine what elements of compensation qualify as eligible indirect compensation (fees or expense reimbursements charged to investment funds and reflected in the value of the investment). Therefore, interpretations have been left up to sponsors and providers and may result in a range of reporting practices, causing Labor to receive inconsistent and incomplete data. In addition to the new Form 5500 requirements, Labor has proposed another regulation on service provider fee disclosure (its 408(b)(2) regulation), but it has not yet been finalized. Sponsors and service providers GAO talked with stressed the importance of coordinating this initiative with the new Form 5500 requirements. Doing so may reduce the burden and the cost to service providers of making changes to their data gathering and reporting systems and clarify for plan sponsors the information they need to understand and compare the fees charged by various service providers. In GAO's discussions with Labor officials, they agreed that there was a need to coordinate the two regulations, and said that although they are working to finalize the proposed 408(b)(2) regulation, it is uncertain when it will be published. Labor officials told GAO that they do not have specific plans for using the data received as a result of the new Form 5500 requirements and will wait to see what information is reported before deciding what to do with the data. Although Labor's new requirements are meant to ensure that plan sponsors obtain the information they need to assess the compensation paid to service providers for services rendered to the plan, the Form 5500 may not provide useful information to Labor and others. Because plan sponsors are likely to report indirect compensation in varying formats, it is unclear how Labor will be able to compare such data across plans. In addition, GAO previously reported that the information provided 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, yet these types of fees comprise the majority of fees in 401(k) plans. For example, plan sponsors are not required to explicitly report asset-based fees that are netted from an investment fund's performance, even though they receive this information for each of the mutual funds they offer in the 401(k) plan. Thus, despite the changes to the Form 5500, the new information provided may not be very useful to Labor, plan sponsors, and others.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To minimize the possibility that inconsistent and incomparable information will be reported on the Schedule C and to ensure that the data collected results in meaningful information for Labor, sponsors, and participants, the Secretary of Labor should provide additional guidance regarding the reporting of indirect compensation and require that all indirect compensation be disclosed on the Schedule C.

    Agency Affected: Department of Labor

    Status: Closed - Implemented

    Comments: In June 2014, Labor reported that possible improvements to reporting of service provider information on the Schedule C is being considered as part of the joint DOL, IRS, PBGC "21st Century Form 5500 project" that is exploring changes to the Form 5500 as part of the planning for EFAST3. In Dec. 2013, EBSA reported that given the great variety of compensation and fee arrangements used by service providers to pension plans and group health and other welfare plans, it would be difficult to establish a single annual reporting scheme for both large and small plans that collect all forms and types of indirect compensation. Moreover, expanding the Schedule C indirect compensation reporting requirements to small plans and small employers may require legislative change given the Pension Protection Act (PPA) mandate in 2006 to develop and implement a new, even more simplified report for small plans. The Department responded to that PPA mandate at the same time it established expanded Schedule C fee reporting for large plans by establishing a new simplified Form 5500-SF for small plans. The Department also completed separate, but related, fee transparency regulations intended to help plan sponsors and participants identify and understand indirect compensation received by plan service providers. Although these rulemakings have largely implemented this recommendation, the Department will, as part of its ongoing review of the Form 5500 and annual reporting requirements, continue to consider improvements to the reporting of plan service provider information.

    Recommendation: Furthermore, consistent with our previous recommendation, to ensure comparable disclosure among all types of service providers and ensure that all investment products' fees are fairly disclosed, the Secretary of Labor should require asset-based fees that are netted from an investment fund's performance (and, as such, are not paid with plan assets) be explicitly reported on the Form 5500.

    Agency Affected: Department of Labor

    Status: Closed - Not Implemented

    Comments: In June 2014, Labor reported that possible improvements to reporting of service provider information on the Schedule C is being considered as part of the joint DOL, IRS, PBGC "21st Century Form 5500" project that is exploring changes to the Form 5500 as part of the planning for EFAST3. In Dec. 2013, Labor reported that when issuing its final rule expanding Schedule C reporting of indirect compensation received by plan service providers, the Department attempted to strike a balance between the costs and benefits of improved annual reporting and disclosure of investment-related fees and expenses, particularly with regard to plans in which much, if not all, of annual reporting administrative expenses may be borne by the plan's participants and beneficiaries. Public comments on the proposal expressed concerns that the diverse nature and complexity of the business and investment environment in which plans operate would make a requirement to report asset-based fees on the Form 5500 costly and burdensome to employers, plans, and service providers. Commenters also observed that some asset-based fee information, such as asset-based charges in mutual funds, is already required to be disclosed to the Securities and Exchange Commission. Now that EBSA's related fee transparency regulations are complete that require improved disclosure of service provider fees to plan fiduciaries, we will review the Schedule C reporting requirements to determine if there are areas where we could improve the reporting of service provider indirect compensation on the Schedule C. Notice and comment rulemaking would be required to make such changes to the Schedule C. EBSA has other higher priority regulatory projects ongoing at this time and is not prepared to commit to a time when such a Schedule C regulation project could be added to its regulatory agenda.

    Recommendation: To reduce the potential for additional costs and burden being placed on service providers, the Secretary of Labor should coordinate the implementation of the Form 5500 revisions with the publication of its final 408(b)(2) regulations, since the two initiatives are closely related.

    Agency Affected: Department of Labor

    Status: Closed - Not Implemented

    Comments: In June 2014, Labor reported that possible improvements to reporting of service provider information on the Schedule C is being considered as part of the joint DOL, IRS, PBGC "21st Century Form 5500" project that is exploring changes to the Form 5500 as part of the planning for EFAST3. In Dec. 2013, Labor reported that now that the 408(b)(2) rule is published in final form, the Department will be able to review the Schedule C reporting requirements to determine if there are areas, taking into account the differences in underlying purposes and scope, where we could improve the harmonization of the final 408(b)(2) service provider disclosures to plan fiduciaries and the plan fiduciary Schedule C annual Form 5500 reporting requirements. Substantive changes in the Schedule C requirements would require appropriate notice and comment rulemaking. EBSA has other higher priority regulatory projects ongoing at this time and is not prepared to commit to a time when such a Schedule C regulation project could be added to its regulatory agenda.

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