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entitled 'Private Pensions: Increased Reliance on 401(k) Plans Calls 
for Better Information on Fees' which was released on March 6, 2007. 

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Testimony before the Committee on Education and Labor: 

House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 11:00 a.m. EST: 

Tuesday, March 6, 2007: 

Private Pensions: 

Increased Reliance on 401(k) Plans Calls for Better Information on 
Fees: 

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

GAO-07-530T: 

GAO Highlights: 

Highlights of GAO- 07-530T, a testimony before the Committee on 
Education and Labor, House of Representatives 

Why GAO Did This Study: 

Over the past two decades there has been a noticeable shift in the 
types of plans employers are offering employees. Employers are 
increasingly moving away from traditional defined benefit plans to what 
has become the most dominant and fastest growing type of defined 
contribution plan, the 401(k). 

As more workers participate in 401(k) plans, they bear more of the 
responsibility for funding their retirement. Given the choices facing 
participants, specific information about the plan and plan options 
becomes more relevant than under defined benefit plans because 
participants are responsible for ensuring that they have adequate 
income at retirement. While information on historical performance and 
investment risk for each plan option are important for participants to 
understand, so too is information on fees because fees can 
significantly decrease participants’ retirement savings over the course 
of a career. As a result of employees bearing more responsibility for 
funding their retirement under 401(k) plans, you asked us to talk about 
the prevalence of 401(k) plans today and to summarize our recent work 
on providing better information to 401(k) participants and the 
Department of Labor (Labor) on fees. My remarks today will focus on (1) 
trends in the use of 401(k) plans, and (2) the types of fees associated 
with these plans. 

What GAO Found: 

There are an increasing number of active participants in 401(k) plans 
than in other types of employer-sponsored pension plans, a trend that 
has accelerated since the 1980s. Now, 401(k) plans represent the 
majority of all private pension plans; they also service the most 
participants and hold the most assets. These plans offer a range of 
investment options, but equity funds—those that invest primarily in 
stocks—accounted for nearly half of 401(k) assets at the close of 2005. 
Most 401(k) plans are participant-directed, meaning that a participant 
is responsible for making the investment decisions about his or her own 
retirement plan contributions. Inadequate disclosure and reporting 
requirements may leave participants without a simple way to compare 
fees among plan investment options, and Labor without the information 
it needs to oversee fees and identify questionable 401(k) business 
practices. The Employee Retirement Income Security Act (ERISA) of 1974 
requires 401(k) plan sponsors to disclose only limited information on 
fees. Participants must collect various documents over time and may be 
required to seek out some documents in order to get a clear picture of 
the total fees that they pay. Furthermore, the documents that 
participants receive do not provide a simple way to compare fees—along 
with risk and historical performance—among the investment options in 
their 401(k) plan. 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 service providers. As a result, 
participants may have more limited investment options and pay higher 
fees for these options than they otherwise would. 

Figure: Comparison of Defined Benefit Plans with Defined Contribution 
Plans, 1985 and 2005: 

[See PDF for Image] 

Source: U.S. Department of Labor (1985-2003 data); Investment Company 
Institute (2005 estimates). 

[End of figure] 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-530T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Barbara D. Bovbjerg at 
(202) 512-7215 or bovbjergb@gao.gov. 

[End of figure] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here to discuss American workers' increased 
participation in 401(k) plans and the potential effects of the fees 
associated with these plans on their retirement income. Over the past 
two decades there has been a noticeable shift in the types of plans 
employers are offering employees. Employers are increasingly moving 
away from traditional defined benefit plans to what has become the most 
dominant and fastest growing type of defined contribution plan, the 
401(k).[Footnote 1] 

As more workers participate in 401(k) plans, they bear more of the 
responsibility for funding their retirement than they do when covered 
by traditional defined benefit plans. Under 401(k) plans, participants 
are responsible for choosing how much of their pretax income to 
contribute, how to invest their contributions in the choices offered by 
the plan sponsor, and how to manage their 401(k) investments upon 
retirement. Given the choices facing participants, specific information 
about the plan and plan options becomes more relevant than under 
defined benefit plans because participants are responsible for ensuring 
that they have adequate income at retirement. Although information on 
historical performance and investment risk for each plan option are 
important for participants to understand, so too is information on fees 
because fees can significantly decrease participants' retirement 
savings over the course of a career. As a result of employees bearing 
more responsibility for funding their retirement under 401(k) plans, 
you asked us to talk about the prevalence of 401(k) plans in the 
private pension system today and to summarize our recent work on 
providing better information to 401(k) participants and the Department 
of Labor (Labor) on fees. My remarks today will focus on (1) trends in 
the use of 401(k) plans, and (2) the types of fees associated with 
these plans and the information available to participants and Labor. 

To describe the current trend toward the increased use of 401(k) plans, 
we relied on our previous work on the nature of the private pension 
system and information from Labor and industry research. Regarding plan 
fees, we also relied on our previous work that looked at the types of 
fees associated with 401(k) plans, who pays these fees, how information 
is disclosed to participants, and Labor's oversight of fees and certain 
related business arrangements.[Footnote 2] We conducted our review from 
February 2007 through March 2007 in accordance with generally accepted 
government auditing standards. 

In summary, there are more active participants now in 401(k) plans than 
other types of employer-sponsored pension plans, a trend that has 
accelerated since the 1980s.[Footnote 3] Now, 401(k) plans represent 
the majority of all private pension plans; they also service the most 
participants and hold the most assets. These plans offer a range of 
investment options, but equity funds--those that invest primarily in 
stocks--accounted for nearly half of 401(k) assets at the close of 
2005. Most 401(k) plans are participant-directed, meaning that a 
participant is responsible for making the investment decisions about 
his or her own retirement plan contributions. 

Inadequate disclosure and reporting requirements may leave participants 
without a simple way to compare fees among plan investment options, and 
Labor without the information it needs to oversee fees and identify 
questionable 401(k) business practices. The Employee Retirement Income 
Security Act of 1974 (ERISA)[Footnote 4] requires 401(k) plan sponsors 
to disclose only limited information on fees. Participants must collect 
various documents over time and may be required to seek out some 
documents in order to get a clear picture of the total fees that they 
pay. Furthermore, the documents that participants receive do not 
provide a simple way to compare fees--along with risk and historical 
performance--among the investment options in their 401(k) plan. 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 service providers. As a result, participants may have 
more limited investment options and pay higher fees for these options 
than they otherwise would. 

Background: 

Roughly half of all workers participate in an employer-sponsored 
retirement, or pension plan. Private sector pension plans are 
classified as either defined benefit or 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) profit-sharing and thrift-savings 
plans, stock bonus plans, and annuity plans. 

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.[Footnote 5] 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 plans' participants and beneficiaries. 

The law also provides Labor with oversight authority over pension 
plans.[Footnote 6] 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: 

* The Securities and Exchange Commission (SEC), among other 
responsibilities, regulates registered securities including company 
stock and mutual funds under securities law.[Footnote 7] 

* The federal agencies charged with oversight of banks--primarily the 
Federal Reserve Board, the Treasury Department's Office of the 
Comptroller of the Currency, and the Federal Deposit Insurance 
Corporation--regulate bank investment products, such as collective 
investment funds. 

* 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.[Footnote 8] 

An Increasing Number of Employees Participate in Defined Contribution 
Plans, and This Trend Has Been Increasing Since the 1980s: 

The number of defined contribution plans has increased since 1985, 
while the number of defined benefit plans has declined 
dramatically.[Footnote 9] Figure 1 shows the growth of defined 
contribution plans relative to that of defined benefit plans from 1985 
to 2005. 

Figure 1: Changes in the Number of Defined Benefit Plans and Defined 
Contribution Plans, 1985-2005: 

[See PDF for image] 

Source: U.S. Department of Labor (1985-2003 data); Investment Company 
Institute (2005 estimates). 

Note: The Investment Company Institute's estimates for 2005 are based 
on the Department of Labor, Form 5500 Annual Reports, and other 
information. 

[End of figure] 

In 2005, more workers were covered by defined contribution plans than 
by defined benefit plans. In 1985, defined benefit plans covered 
approximately 29 million active participants, compared to 33 million 
active participants in defined contribution plans. By 2005, the 
difference in the numbers had become more pronounced, with roughly 21 
million active participants covered by defined benefit plans and 
approximately 55 million active participants in defined contribution 
plans. Figure 2 shows the shift in active participants from defined 
benefit to defined contribution plans since 1985. 

Figure 2: Changes in the Number of Active Participants in Defined 
Benefit Plans and Defined Contribution Plans, 1985-2005: 

[See PDF for image] 

Source: U.S. Department of Labor (1985-2003 data); Investment Company 
Institute (2005 estimates). 

Note: The Investment Company Institute's estimates for 2005 are based 
on the Department of Labor, Form 5500 Annual Reports, and other 
information. 

[End of figure] 

With the growth in plans and participants, the majority of private 
pension plan assets are now held in defined contribution plans. As 
shown in figure 3, defined benefit plan assets decreased from $2.0 
trillion in constant 2006 dollars, or about 66 percent of total private 
pension assets, in 1985 to $1.5 trillion, or just over 40 percent of 
the total, in 2005.[Footnote 10] 

Figure 3: Changes in Defined Benefit and Defined Contribution Plan 
Assets, 1985-2005: 

[See PDF for image] 

Source: U.S. Department of Labor (1985-2003 data); Investment Company 
Institute (2005 estimates). 

Note: The Investment Company Institute's estimates for 2005 are based 
on the Department of Labor, Form 5500 Annual Reports, and other 
information. 

[End of figure] 

Similarly, the number of 401(k) plans grew from less than 30,000 in 
1985, or less than 7 percent of all defined contribution plans, to an 
estimated 417,000 plans, or about 95 percent of all defined 
contribution plans in 2005. During this same time period, the number of 
active participants in 401(k) plans increased from 10 million to 47 
million, and plan assets increased from $270 billion to about $2.5 
trillion in constant 2006 dollars. 

Based on industry estimates, equity funds accounted for nearly half of 
the 401(k) plan assets at the close of 2005.[Footnote 11] Equity funds 
are investment options that invest primarily in stocks, such as mutual 
funds, bank collective funds,[Footnote 12] life insurance separate 
accounts, and certain pooled investment products (see fig. 4). Other 
plan assets were invested in company stock; stable value 
funds,[Footnote 13] including guaranteed investment contracts; balanced 
funds;[Footnote 14] bond funds; and money funds. Several of these 
options can be held in mutual funds, which in total represent about 51 
percent of 401(k) plan assets. Common plan features, like the type and 
number of investment options provided to participants in their 401(k) 
plans, is a topic being studied under other GAO work on plan sponsor 
practices requested by this committee. 

Figure 4: 401(k) Plan Average Asset Allocation in 2005: 

[See PDF for image] 

Source: Investment Company Institute. 

Note: The Investment Company Institute's estimates for 2005 are based 
on the Department of Labor, Form 5500 Annual Reports; and other 
information: 

[End of figure] 

With the growth in 401(k) plans, more workers now bear greater 
responsibility for funding their retirement income. According to the 
most recent data from Labor, the majority of 401(k) plans are 
participant-directed, meaning that a participant makes investment 
decisions about his or her own retirement plan contributions. In 2003, 
about 88 percent of all 401(k) plans--covering 93 percent of all active 
401(k) plan participants and 92 percent of all 401(k) plan assets-- 
generally allowed 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.[Footnote 15] 

While some participants have account balances of greater than $100,000, 
most have much smaller balances. Based on industry estimates for 2005, 
37 percent of participants had balances of less than $10,000, while 16 
percent had balances greater than $100,000.[Footnote 16] The median 
account balance was $19,328, while the average account balance was 
$58,328. Participants' account balances also include any contributions 
employers make on their behalf. 

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. 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). 

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. As participants accrue 
earnings on their investments, they 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, for example, a 1 
percentage point difference in fees can significantly reduce the amount 
of money saved for retirement. Figure 5 assumes an employee who is 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 5: Effect of 1 Percentage Point in Higher Annual Fees on a 
$20,000 401(k) Balance Invested over 20 Years: 

[See PDF for image] 

Source: GAO analysis. 

[End of figure] 

Investment and Record-Keeping Fees Account for Most 401(K) Plan Fees, 
but Information on These Fees May Be Limited or Unavailable to 
Participants and Labor: 

Various fees are associated with 401(k) plans, but investment and 
record-keeping fees account for most 401(k) plan fees. However, 
inadequate disclosure and reporting requirements may leave participants 
and Labor without important information on these fees. The information 
on fees that plan sponsors are required to disclose to participants 
does not allow participants to easily compare the fees for the 
investment options in their 401(k) plan. In addition, Labor does not 
have the information it needs to oversee fees and identify questionable 
401(k) business practices. Labor has several initiatives under way to 
improve the information it has on fees and the various business 
arrangements among service providers. 

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

Investment fees account for the largest portion of total fees 
regardless of plan size, as figure 6 illustrates. 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. 

Figure 6: Investment Fees as a Percentage of Total Plan Fees, 2005: 

[See PDF for image] 

Source: Investment Company Institute. 

Note: 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 but 
may not be representative of the universe of 401(k) plans. 

[End of figure] 

Plan record-keeping fees generally constitute the second-largest 
portion of plan fees. Plan record-keeping fees are usually charged by 
the service provider to set up and maintain the 401(k) plan. These fees 
cover activities such as enrolling plan participants, processing 
participant fund selections, preparing and mailing account statements, 
and other related administrative activities. Unlike investment fees, 
plan record-keeping fees apply to the entire 401(k) plan rather than 
the individual investment options. As shown in figure 7, these fees 
make up a smaller proportion of total plan fees in larger plans, 
indicating economies of scale. 

Figure 7: Plan Record-Keeping Fees as a Percentage of Total Plan Fees, 
2005: 

[See PDF for image] 

Source: HR Investment Consultants. 

Note: 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 but 
may not be representative of the universe of 401(k) plans. While these 
data include primarily record keeping, they include a negligible amount 
of other administrative fees, according to the survey author. 

[End of figure] 

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 constitute 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. 

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

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 1 provides an overview of 
each of these disclosure documents, and the type of fee information 
they may contain. 

Table 1: Required Disclosure Documents to All Participants: 

Disclosure document: Summary plan description; 
Document purpose: To explain to participants how the plan operates; 
Information on fees: May contain information on how various fees such 
as investment, record- keeping, and loan fees are charged to 
participants, but not required by ERISA to do so. 

Disclosure document: Account statement; 
Document purpose: To show the account balance due to a participant; 
Information on fees: Typically identifies fees, such as for loans, 
which are directly attributable to an account during a specific period. 
Also, may show investment and record-keeping fees, but not required by 
ERISA to do so. 

Disclosure document: Summary annual report; 
Document purpose: To disclose the financial condition of the plan to 
participants; 
Information on fees: Contains total plan costs incurred by plan 
participants during the year. 

Source: GAO analysis. 

[End of table] 

ERISA also requires 401(k) plan sponsors that have elected liability 
protection from participants' investment decisions to provide 
additional fee information.[Footnote 17] Most 401(k) plan sponsors 
elect this protection and therefore must provide, 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. Upon request, these plans must also provide participants with 
the expense ratio--a fund's operating fees as a percentage of its 
assets--for each investment option. 

Plan sponsors may voluntarily provide participants with more 
information on fees than ERISA requires. For example, plans may 
distribute prospectuses or fund profiles for individual investment 
options in the plan. Although not required, plan sponsors may provide 
record-keeping or other information on fees in participants' account 
statements. 

Although participants are responsible for directing their investments 
in the plan, they may not be aware of the different fees that they pay. 
In a nationwide survey, more than 80 percent of 401(k) participants 
report not knowing how much they pay in fees.[Footnote 18] Some 
industry professionals said that making participants who direct their 
investments more aware of fees would help them make more informed 
investment decisions. 

Participants may not have a clear picture of the total fees they pay 
because plan sponsors provide this information in a piecemeal fashion. 
Some documents that contain fee information are provided to 
participants automatically, such as annually or within 90 days of 
joining the plan, while others, such as prospectuses, may require that 
participants seek them out. 

Furthermore, the documents that participants receive do not provide a 
simple way for participants to compare fees among the investment 
options in their 401(k) plan. Industry professionals suggested that 
comparing the expense ratio across investment options is the most 
effective way to compare fees within a 401(k) plan.[Footnote 19] The 
expense ratio is useful because it includes investment fees, which 
account for most of the fees participants pay, and is generally the 
only fee measure that varies by option. However, as noted above, not 
all plan sponsors are required to provide expense ratios to 
participants. 

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. 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 some 
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. 

However, the information plan sponsors are required to report to Labor 
is limited, and the lack of information hinders the agency's ability to 
effectively oversee fees. 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 included on the 
annual reporting form plan sponsors submit to Labor, Form 5500. As a 
result, the Form 5500 does not include the largest type of fee, even 
though plan sponsors receive this information from the mutual fund 
companies in the form of a prospectus. In 2004, the ERISA Advisory 
Council concluded that Form 5500s are of little use to policy makers, 
government enforcement personnel, and participants in terms of 
understanding the cost of a plan and recommended that Labor modify the 
form and its accompanying schedules so that all fees incurred directly 
or indirectly can be reported or estimated. Without information on all 
fees, Labor's oversight is limited because it is unable to identify 
fees that may be questionable. 

Labor and plan sponsors also may not have information on arrangements 
among service providers that could steer plan sponsors toward offering 
investment options that benefit service providers but may not be in the 
best interest of participants. For example, 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.[Footnote 20] 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 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.[Footnote 21] 

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 Several Initiatives Under Way to Improve Information It Has 
on Fees and the Various Business Arrangements Among Service Providers: 

Labor officials told us about three initiatives currently under way to 
improve the disclosure of fee information by plan sponsors to 
participants and to avoid conflicts of interest: 

* Labor is considering promulgating a rule regarding the fee 
information required to be furnished to participants in plans where 
sponsors have elected liability protection. According to Labor 
officials, they are attempting to define the critical information on 
fees that plan sponsors should provide to participants and what format 
would enable participants to easily compare the fees across the plan's 
various investment options. 

* Labor has proposed changes to the Form 5500 Schedule A and Schedule C 
to improve reporting of fees.[Footnote 22] 

- Labor proposed to add a check box on Schedule A 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,[Footnote 23] many employers have difficulty 
obtaining timely Schedule A information from insurers. 

- Consistent with recommendations made by the ERISA Advisory Council 
Working Groups and GAO, Labor proposed changes to the Schedule C 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. Plan sponsors also would be 
required to disclose the source and nature of compensation in excess of 
$1,000 that certain key service providers, including, among others, 
investment managers, consultants, brokers, and trustees as well as all 
other fiduciaries, receive from parties other than the plan or the plan 
sponsor, such as record keepers. 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. This 
change to the regulation would be intended to make clear what plan 
sponsors need to know and, accordingly, what service providers need to 
provide to plan sponsors. 

To ensure that participants have a tool to make informed comparisons 
and decisions among plan investment options, we recommended in our 
previous report that Congress 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. To better enable the agency to 
effectively oversee 401(k) plan fees, we recommended that 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. To allow plan 
sponsors, and ultimately Labor, to provide better oversight of fees and 
certain business arrangements among service providers, we also 
recommended that 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. 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. 

Conclusions: 

The pension plan universe has changed: 401(k) plans have emerged to 
cover most plan participants and the majority of plan assets. With this 
shift, participants now bear more responsibility for ensuring they have 
adequate income in retirement, emphasizing the importance of having 
sufficient information to make informed 401(k) investment decisions. 
Information about investment options' historical performance is useful, 
but alone is not enough. Thus, 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. 

Regulators, too, will need to have better information to provide more 
effective oversight, especially of the fees associated with 401(k) 
plans. Amending ERISA and updating regulations to better reflect the 
impact of fees and undisclosed business arrangements among service 
providers will help put Labor in a better position to oversee 401(k) 
plan fees. Furthermore, 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. 

Contacts and Acknowledgements: 

For further information regarding this testimony, please contact 
Barbara D. Bovbjerg, Director, or Tamara Cross, Assistant Director, 
Education, Workforce, and Income Security Issues at (202) 512-7215 or 
bovbjergb@gao.gov. Individuals making key contributions to this 
testimony include Daniel Alspaugh, Monika Gomez, Michael P. Morris, 
Rachael Valliere, Walter Vance, and Craig H. Winslow. 

FOOTNOTES 

[1] Traditional defined benefit plans generally provide a fixed level 
of monthly retirement income that is based on salary, years of service, 
and age at retirement regardless of how the plan's investments perform. 
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. 

[2] 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.: Nov. 2006). 

[3] Active participants include any worker currently in employment 
covered by a plan and workers who are earning or retaining credited 
service under a plan. It does not include retired participants and 
vested participants not yet in pay status. 

[4] 29 U.S.C. §§ 1001-1461. 

[5] A plan fiduciary is anyone who exercises discretionary authority or 
control over plan management (or any authority or control over the 
management or distribution of plan assets), renders or is responsible 
for rendering investment advice for a fee, or has discretionary 
authority or responsibility in plan administration. 29 U.S.C. § 
1002(21)(A). 

[6] The Internal Revenue Service also oversees various aspects of 
401(k) contributions under the authority of the Internal Revenue Code. 
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. 

[7] 15 U.S.C. § 78a. Generally, public offerings and the sale of 
securities must be registered with the SEC. 

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

[9] For 1985 data, see "Private Pension Plan Bulletin Abstract of 1999 
Form 5500 Annual Reports," U.S. Department of Labor (1985 data); for 
2005 estimates, see Sarah Holden, Peter Brady, Michael Hadley, "401(k) 
Plans: A 25-Year Retrospective," Investment Company Institute, Research 
Perspective, vol. 12, no. 2, (2006). 

[10] To calculate 2006 constant dollars, we used consumer price index 
information for the most current year available from the 2007 Economic 
Report of the President, p.302. 

[11] The 2005 data gathered by the Employee Benefit Research Institute 
(EBRI)/Investment Company Institute (ICI) joint project represents 
about 42 percent of estimated 401(k) plan assets, 37 percent of the 
estimated plan participant universe and about 11 percent of the 
estimated total number of 401(k) plans. 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) and 
"Appendix: Additional Figures for the EBRI/ICI Participant-Directed 
Retirement Plan Data Collection Project for Year-End 2005," Research 
Perspective, vol. 12, no. 1A, (2006). 

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

[13] The 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. 

[14] Balanced funds are pooled accounts invested in both stocks and 
bonds. 

[15] "Private Pension Plan Bulletin Abstract of 2003 Form 5500 Annual 
Reports," U.S. Department of Labor (Washington, D.C.: Oct. 2006). 

[16] Sarah Holden and Jack VanDerhei, "Appendix: Additional Figures for 
the EBRI/ICI Participant-Directed Retirement Plan Data Collection 
Project for Year-End 2005," 10. 

[17] Section 404(c) of ERISA generally relieves the fiduciaries of 
participant-directed plans from liability for any loss or breach that 
results from a participant's investment decisions about his or her plan 
assets. 29 U.S.C. § 1104(c) (2000). To be entitled to this relief, the 
plan must meet the standards promulgated by Labor. 29 C.F.R. § 
2550.404c-1 (2006). 

[18] AARP Policy Institute, "Pension Participant Knowledge About Plan 
Fees," Data Digest (November 2004). 

[19] Mutual funds include their expense ratios in their prospectuses. 
Other investment options may not provide prospectuses but have expense 
ratio equivalents that investment industry professionals can identify. 

[20] Office of Compliance Inspections and Examinations, Staff Report 
Concerning Examinations of Select Pension Consultants, U.S. Securities 
and Exchange Commission (Washington, D.C.: May 16, 2005). 

[21] Final Report of the 2004 ERISA Advisory Council Working Group, 
Health and Welfare Form 5500 Requirements (Washington, D.C.: Nov. 10, 
2004). 

[22] 71. Fed. Reg. 41,392 (July 21, 2006). 

[23] Final Report of the 2004 ERISA Advisory Council Working Group, 
Health and Welfare Form 5500 Requirements (Washington, D.C.: Nov. 10, 
2004). 

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