401(k) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees
Highlights
What GAO Found
Plan sponsors and participants paid a range of fees for services, though smaller plans typically paid higher fees as a percentage of plan assets. For example, the average amount sponsors of small plans reported paying for recordkeeping and administrative services was 1.33 percent of assets annually, compared with 0.15 percent paid by sponsors of large plans. Larger plans were more likely to pass recordkeeping fees along to participants, but when fees were passed along to participants in small plans, those in large plans paid lower fees than those in small plans. Participants also paid for investment and plan consulting fees—through fees deducted from their plan assets—in more instances than sponsors.
GAO’s survey and review of plan documents showed that some sponsors faced challenges in understanding the fees they and their participants were charged. Some sponsors did not know if their providers used complex fee arrangements, such as revenue sharing, or if their plans paid certain fees under an insurance contract, such as a group annuity contract. In addition, some sponsors reported knowing about arrangements, but did not fully understand how these fees were charged. For example, one relatively large plan underestimated recordkeeping fees by more than $58,000, because the sponsor did not include the fees charged to participants’ accounts under its revenue sharing arrangement.
The Department of Labor (Labor) has taken several actions to help sponsors understand and monitor fees charged by service providers. For example, Labor disseminates a number of publications and resources, including a 401(k) fees checklist that is available to sponsors on its website to help them better understand plan fees. However, according to GAO’s survey results, more than an estimated 90 percent of sponsors either did not know about or have not used Labor’s resources to compare and assess plan fees. Additionally, sponsors have access to the plan information of others, including some fees paid, through the Form 5500, but GAO’s survey also shows that the information is not being used by sponsors. Finally, although Labor has recently taken on regulatory initiatives to enhance fee disclosures to sponsors, their effect remains to be seen. For example, Labor is in the process of revising a proposed change to the definition of the term “fiduciary,” which may allow Labor to oversee a broader range of plan investment advisers. However, Labor’s authority over other types of providers, who have considerable influence over sponsors and may charge sponsors and their plan participants excessive fees, is limited.
The Department of Labor (Labor) has taken several actions to help sponsors understand and monitor fees charged by service providers. For example, Labor disseminates a number of publications and resources, including a 401(k) fees checklist that is available to sponsors on its website to help them better understand plan fees. However, according to GAO’s survey results, more than an estimated 90 percent of sponsors either did not know about or have not used Labor’s resources to compare and assess plan fees. Additionally, sponsors have access to the plan information of others, including some fees paid, through the Form 5500, but GAO’s survey also shows that the information is not being used by sponsors. Finally, although Labor has recently taken on regulatory initiatives to enhance fee disclosures to sponsors, their effect remains to be seen. For example, Labor is in the process of revising a proposed change to the definition of the term “fiduciary,” which may allow Labor to oversee a broader range of plan investment advisers. However, Labor’s authority over other types of providers, who have considerable influence over sponsors and may charge sponsors and their plan participants excessive fees, is limited.
Why GAO Did This Study
Studies have been conducted to better understand the fees 401(k) plan sponsors and their participants pay. However, these studies focus on larger plans. Thus, uncertainty remains about the amounts paid by small and medium-sized plans and the level of knowledge and expertise these sponsors have to assess the fees charged by service providers.
GAO addressed the following related to small, medium-sized, and large plans: (1) amounts plan sponsors and participants pay for services, (2) challenges sponsors face in understanding how fees are charged, and (3) actions Labor has taken to help sponsors better understand and monitor the fees charged by service providers. GAO reviewed relevant federal laws, regulations, and retirement research, and interviewed federal officials and industry experts. GAO also conducted a survey of 1,000 401(k) plans to collect information about fees paid for plan services. The response rate allowed GAO to generalize to the population of 401(k) plans for most of the survey questions. The survey instrument and most results can be viewed at GAO-12-550SP.
Recommendations
GAO recommends that Labor develop and implement more proactive approaches to sponsor educational outreach, improve public access to annual Form 5500 data, and examine the definition of a fiduciary to determine if it captures the current relationship between sponsors and providers. In response, Labor generally agreed with the findings and will explore ways to implement these recommendations.
To view the e-supplement online, click on GAO-12-550SP.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Labor | In order to help plan sponsors better understand how fees are charged to their plans and to help them make well-informed decisions, the Secretary of Labor should develop and implement alternative approaches to Labor's plan sponsor outreach and education initiatives that actively engage sponsors and allow the agency to track sponsor engagement. Such actions could include e-mailing sponsors about new regulations, guidance, and tools available on its website, and then monitoring website traffic and publication downloads to determine whether such initiatives are reaching their targeted audience. |
The Department of Labor (Labor) noted that helping plan sponsors and participants obtain objective services at a fair price by enhancing the transparency of plan fees has been one of its highest priorities. The agency has made significant efforts to reach out to sponsors about fees and implement this recommendation. Labor completed three regulatory initiatives: (1) a regulation regarding the disclosure of service provider fee and revenue sharing arrangements; (2) disclosure of plan and investment-related information to participants and beneficiaries in 401(k)-type plans; and (3) changes to the information large plans must report about service provider compensation on the Form 5500 designed to augment and improve the disclosure of plan fee information at all levels. Two of these regulations had not been implemented during GAO's review. In 2012, Labor's Employee Benefits Security Administration (EBSA) began distributing a new biweekly newsletter by email as a way to share tools and resources, such as educational materials about retirement plans, notices about public events, and updates about policies that protect retirement savings. In FY13, EBSA reported that it conducted and archived compliance seminars across the country and national webcasts to reach more participants. To meet plan sponsors' needs and preferences, EBSA continues to hold in-person events and webcasts where attendees can ask questions. Outreach events survey participants for feedback to improve the content and presentations. They also provide education for those less familiar with the law as well as technical outreach for experienced practitioners, particularly when there is significant new guidance. Over the past several years, EBSA has utilized various forms of communication to raise plan sponsor awareness, including emails to inform plan sponsors of new guidance and upcoming outreach, newsletters and blast emails of partner agencies and organizations, mailings to Form 5500 filers, and social media. They assess feedback to figure out how many were reached and ways to more effectively provide outreach and education. For example, EBSA reported an increase in web visits and registrations for events shortly after the issuance of the subscriber notice. In addition, blast emails are shared by recipients who are members of the media or organizations that share it with their members. The website presents materials in multiple formats, such as FAQs, publications and interactive tools, and EBSA continues to work to increase awareness of the website. Feedback on the website is used to make it more user-friendly. In addition, EBSA works with other government agencies and organizations whose members are plan sponsors, using their newsletters, blast emails, web postings, and social media to help get the word out. For example, they provide a column for two IRS newsletters (one for practitioners and one for small business owners) that highlights new guidance.
|
| Department of Labor | To help sponsors better understand and monitor plan fees, including those paid by participants, Labor should enhance web access to publicly available fee information it collects on the annual Form 5500 to provide sponsors with information to compare and assess fees charged by service providers, such as building in the ability to search for and create customized reports of plans with similar features or providers for the purpose of benchmarking. It should also consider developing and posting key information, such as a data dictionary, about the publicly available Form 5500 datasets on its website, similar to the information distributed about the Form 5500 research files. |
The Department of Labor (Labor) shares our interest in making the data collected by the Form 5500 accessible to the public. EBSA is preparing to post information on the publicly available Form 5500 Series datasets in the form of a data dictionary or graphical illustration of the Form 5500 Series dataset fieldnames. Regarding better web access to facilitate sponsors' ability to compare and benchmark fees, Labor noted that a web tool for these purposes would have a limited effectiveness because of inherent limitations to the Form 5500 data. GAO's report acknowledges limitations, however, we continue to believe that the fee information collected could help sponsors monitor and compare fees. Labor believes that its new fee disclosure regulations will be a better tool for expanding transparency and encouraging informed comparison shopping by plan fiduciaries. The effects of these regulations remain unclear. In FY13, EBSA reported that it would explore how it might develop specifications for a web-based provider search tool and construct a search that would produce meaningful fee comparisons. The scope, timing and delivery of this functionality are subject to availability of funding, and procurement/contractual constraints. In FY14, EBSA reported that it has developed the beta version of a search tool that allows internal users to select groups of filings for which data are desired, and then print/download summary data for the entire group or detailed data for an individual filing. This tool is being reviewed and tested. The agency is modifying the tool for the public based on feedback from internal users (and possibly pilot public reviewers). EBSA is also considering what infrastructure is needed to support the larger public audience. The agency also reported that it posted data dictionaries for each filing year's data for the publicly available Form 5500 data sets. These data dictionaries provide graphical illustrations of the data set field names. EBSA developed and posted a data dictionary illustrating the Form 5500 data set fields on its website. In FY16, EBSA reported that it developed an "advanced" search tool that allows for more robust searching of Form 5500 data within the agency. In a "proof of concept," EBSA modified the tool to make it suitable for the public and deployed it to a test cloud infrastructure needed to support the larger public audience. EBSA is "maturing" the tool from its current proof of concept, through testing, and anticipates public access in 2017.
|
| Department of Labor |
Priority Rec.
To help strengthen Labor's ability to oversee 401(k) plans, we recommend that in addition to Labor's ongoing efforts, Labor should evaluate whether individuals and service providers who exert significant control over the plan should be considered the Employee Retirement Income Security Act of 1974 (ERISA) fiduciaries. |
The Department of Labor (DOL) agreed with this recommendation and proposed a revised regulation on conflicted investment advice for retirement plans in April 2015. This proposed rule would change the definition of investment advice under which a provider would become a fiduciary. The revised definition would more closely align with the statutory definition of a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) and would encompass a broader range of sponsor and provider relationships where the sponsor is relying on advice from the provider. On April 8, 2016, this "conflict of interest" final rule, along with final prohibited transaction exemptions (PTEs), was published in the Federal Register.
|