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Report to the Chairman, Committee on Education and Labor, House of 
Representatives: 

United States Government Accountability Office: 
GAO: 

November 2009: 

Private Pensions: 

Additional Changes Could Improve Employee Benefit Plan Financial 
Reporting: 

GAO-10-54: 

GAO Highlights: 

Highlights of GAO-10-54, a report to the Chairman, Committee on 
Education and Labor, House of Representatives. 

Why GAO Did This Study: 

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, 
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. 

What GAO Found: 

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. 

What GAO Recommends: 

GAO recommends that Labor (1) provide additional guidance and require 
all indirect compensation be disclosed on the Schedule C, (2) 
coordinate the implementation of its new Form 5500 requirements with 
the publication of its 408(b)(2) regulation, and (3) require that asset-
based fees be explicitly reported. Labor generally agreed with GAO’s 
recommendations, although the agency proposes evaluating the data after 
reporting begins to determine how best to address indirect 
compensation. 

View [hyperlink, http://www.gao.gov/products/GAO-10-54] or key 
components. For more information, contact Barbara D. Bovbjerg at (202) 
512-7215 or bovbjergb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Labor's New Reporting Requirements Remain Unclear to Sponsors, but 
Coordination with Other Regulatory Initiative May Help: 

Labor Is Unclear about How It Will Use the New Information Reported on 
the Form 5500, and the Form 5500 May Continue to Not Provide Useful Fee 
Information to Labor and Others: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Comments from the Department of Labor: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Distinction between Direct and Indirect Compensation: 

Table 2: Types of Reportable Indirect Compensation and Criteria for 
Qualifying Indirect Compensation as "Eligible" for Exemption: 

Figures: 

Figure 1: Disclosure of Plan Fee Information from Service Providers to 
Plan Sponsors, Which Then Report the Fees to the Federal Government: 

Figure 2: Examples of the Layers of Compensation Paid to Entities for 
Services to a Defined Contribution Plan: 

Abbreviations: 

DFE: direct filing entities: 

EIC: eligible indirect compensation: 

ERISA: Employee Retirement Income Security Act of 1974: 

FAQ: frequently asked questions: 

IRC: Internal Revenue Code: 

IRS: Internal Revenue Service: 

PBGC: Pension Benefit Guaranty Corporation: 

SEC: Securities and Exchange Commission: 

SPARK: Society of Professional Asset-Managers and Record Keepers: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

November 5, 2009: 

The Honorable George Miller: 
Chairman: 
Committee on Education and Labor: 
House of Representatives: 

Dear Mr. Chairman: 

The Department of Labor (Labor) uses its Form 5500 as a tool to monitor 
and enforce plan sponsors' responsibilities under the Employee 
Retirement Income Security Act of 1974 (ERISA).[Footnote 1] By filing 
the Form 5500, plan sponsors satisfy the requirement to file annual 
reports concerning, among other things, the financial condition and 
operation of plans. In 2004, Labor's ERISA Advisory Council Working 
Group reported that the Form 5500 Annual Return/Report (Form 5500), as 
it was then structured, did not reflect the way that the defined 
contribution plan fee structure works. At that time, only those fees 
that were billed explicitly and were paid directly from plan assets 
were deemed reportable.[Footnote 2] The Advisory Council concluded that 
Form 5500s filed by defined contribution plans were of little use to 
policy makers, government enforcement personnel, plan sponsors, and 
participants in terms of understanding the cost of a plan, and 
recommended that Labor modify it so that all fees incurred either 
directly or indirectly by these plans would be reported. As a part of 
three regulatory initiatives to improve disclosures provided to various 
parties, Labor issued final regulations in November 2007, making 
changes to facilitate a transition to an electronic filing system and 
to update the annual reporting forms, effective for the 2009 plan year. 
[Footnote 3] With these regulations, Labor made changes to the 
reporting of service provider compensation on the Schedule C of the 
Form 5500.[Footnote 4] Labor also has proposed regulations on two other 
initiatives that are awaiting review and approval by the current 
Secretary of Labor.[Footnote 5] 

Congress and others are concerned that Labor's rules for reporting 
compensation are more extensive than necessary and could result in 
duplicative and confusing reporting. In addition, questions have been 
raised by industry experts over whether the new changes impose 
significant costs on service providers as they track and disclose the 
additional information, and whether these costs will be passed on to 
plan participants. Given these concerns, GAO was asked to examine the 
new requirements in Labor's final regulations and form revision and to 
answer the following questions: 

1. Do Labor's new requirements provide clear and understandable 
guidance to plan sponsors? 

2. Will the new requirements provide useful information to Labor and 
others? 

To determine whether Labor's new requirements provide clear and 
understandable guidance to plan sponsors, we interviewed nine plan 
sponsors. We randomly selected three plan sponsors from the Form 5500 
database, and selected six plan sponsors referred by industry 
associations,[Footnote 6] plan service providers, well-known industry 
experts, industry associations, researchers, and Labor. We also 
reviewed related documents from Labor, such as its compliance 
assistance and technical guidance information, and frequently asked 
questions (FAQ) from its Web site that are meant to aid employers in 
complying with the new regulations and forms revision. In addition, we 
reviewed ERISA and relevant regulations governing 401(k) plans, 
including Labor's proposed regulations, to understand current and 
proposed annual reporting requirements. We interviewed and collected 
documentation from those affected by the new Schedule C requirements, 
to get their views on whether these new requirements will provide 
useful information to Labor, plan sponsors, and others. We also 
interviewed and collected documentation from a variety of stakeholders, 
including plan sponsors, service providers, industry and consumer 
associations, attorneys, and Labor. We obtained these stakeholders' 
views on the new requirements and identified any challenges sponsors 
might face. We also collected and analyzed information on the Form 5500 
from other sources, such as the reports and testimonies from ERISA 
Advisory Council Working Groups. Finally, we reviewed previous work 
done by GAO to provide an update on Labor's efforts regarding the Form 
5500 and its regulatory initiatives.[Footnote 7] 

We conducted this performance audit from October 2008 through November 
2009 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

ERISA: 

ERISA, among other requirements, establishes the responsibilities of 
employee benefit plan decision makers (fiduciaries) and the 
requirements for disclosing and reporting plan fees. ERISA is designed 
to protect the rights and interests of participants and beneficiaries 
of employee benefit plans and to outline the responsibilities of the 
employers and administrators who sponsor and manage these plans. Under 
Titles I and IV of ERISA and the Internal Revenue Code (IRC), pension 
and other employee benefit plan administrators are required to file 
information annually on the financial condition and operations of the 
plan. The requirements for completing the Form 5500 vary according to 
the type of plan. If a company sponsors more than one plan, it must 
file a Form 5500 for each plan. Additionally, ERISA and the IRC provide 
for the assessment or imposition of penalties by Labor and the Internal 
Revenue Service (IRS) for plan sponsors not submitting the required 
information when due. 

There are various types of Form 5500 filers. Filers are classified as 
either single-employer plans, multi-employer plans, multiple-employer 
plans, or direct filing entities (DFE). In general, a separate Form 
5500 must be filed for each plan or DFE. Single-employer plans are 
maintained by one employer or employee organization. Multi-employer 
plans are established pursuant to collectively bargained pension 
agreements negotiated between labor unions representing employees and 
two or more employers and are generally jointly administered by 
trustees from both labor and management. Multiple-employer plans are 
maintained by more than one employer and are typically established 
without collective bargaining agreements. DFEs are trusts, accounts, 
and other investment or insurance arrangements in which plans 
participate and that are required to or allowed to file the Form 5500. 

Form 5500 Annual Return/Report: 

The Form 5500 was intended, in part, to measure employers' compliance 
with ERISA's fiduciary and funding provisions, among other 
requirements.[Footnote 8] It provides information about the financial 
condition of the plan, annual amounts contributed by participants, and 
the plan's investment income. The form also provides information on 
plan characteristics, such as plan type (defined benefit or defined 
contribution),[Footnote 9] method of funding, and numbers of employees 
and participants as well as the number of employees who are excluded 
from the plan for various reasons. 

The Form 5500 is the principal source of information about employer- 
sponsored pension and welfare benefit plans that is available to Labor, 
IRS, and the Pension Benefit Guaranty Corporation (PBGC), and is the 
reporting vehicle for about 730,000 such plans. Accordingly, the Form 
5500 constitutes an integral part of each agency's enforcement, 
research, and policy formulation programs. It is also a source of 
information and data for use by other federal agencies, Congress, and 
the private sector in assessing employee benefit, tax, and economic 
trends and policies. The form also serves as a primary means by which 
plan operations can be monitored by participants, beneficiaries, and 
the general public. 

Labor, IRS, and PBGC jointly developed the Form 5500 so that employee 
benefit plans could satisfy (1) the provisions of the IRC that apply to 
tax-qualified pension plans and (2) the annual reporting requirements 
under ERISA. Labor enforces ERISA's reporting and disclosure provisions 
and fiduciary responsibility standards, which, among other things, 
concern the type and extent of information provided to the federal 
government and plan participants and ensure that employee benefit plans 
are operated solely in the interests of plan participants. IRS enforces 
standards that relate to such matters as how employees become eligible 
to participate in benefit plans; how they become eligible to earn 
rights to benefits; and how much, at a minimum, employers must 
contribute. PBGC insures the benefits of participants in defined 
benefit private pension plans. 

Labor's Regulatory Initiatives: 

Labor's regulatory initiatives to expand disclosure requirements cover 
the following three distinct areas: (1) disclosures by plan sponsors to 
assist participants in making informed investment decisions;[Footnote 
10] (2) disclosures by service providers to assist plan fiduciaries in 
assessing the reasonableness of provider compensation and potential 
conflicts of interest;[Footnote 11] and (3) more efficient, expanded 
fee and compensation disclosures to the government and the public 
through a substantially revised, electronically filed Form 5500 Annual 
Return/Report.[Footnote 12] 

Labor implemented the third initiative on expanding fee and 
compensation disclosures on the Form 5500--issuing regulations revising 
the Form 5500 in November 2007--in an effort to facilitate the 
transition to an electronic filing system; reduce and streamline annual 
reporting burdens; and update the annual reporting forms to reflect 
current issues, agency priorities, and new requirements under the 
Pension Protection Act of 2006.[Footnote 13] According to officials at 
Labor, these changes were made to increase transparency regarding the 
fees and expenses paid by employee benefit plans. Labor also wanted to 
ensure that plan officials obtain the information they need to assess 
the compensation paid for services rendered to the plan, taking into 
consideration revenue-sharing arrangements among plan service providers 
and potential conflicts of interest. 

Fee/Compensation Reporting on the Form 5500: 

For the 2009 plan year Form 5500, the new Schedule C requires plan 
sponsors to classify the fees they pay service providers as either 
"direct" or "indirect" compensation. As shown in table 1, fees are 
separated into those paid directly by the plan to a service provider 
and those received by a service provider indirectly from another 
service provider. 

Table 1: Distinction between Direct and Indirect Compensation: 

Direct compensation: 
* Compensation received by a plan service provider directly from plan 
assets; 
* Does not include anything the employer pays from corporate assets, 
since employer-paid fees do not reduce plan assets. 

Indirect compensation: 
* Any payment received by a plan service provider from sources other 
than directly from the plan or plan sponsor, if received in connection 
with services provided to the plan (either monetary or nonmonetary) or 
in connection with the service provider's position with the plan, such 
as meals, entertainment, or free travel. 

Source: Department of Labor, Annual Reporting and Disclosure Revision 
of Annual Information Return/Reports; Final Rule and Notice, 72 Fed. 
Reg. 64709 (2007) codified at 29 C.F.R. § 2520.103-1. 

[End of table] 

Plan sponsors must also determine whether any indirect compensation is 
reportable (i.e., "ineligible" or "eligible" for exemption from Labor's 
reporting requirements, as shown in table 2). Most indirect 
compensation starts out as having to be reported on the Schedule C. 

Table 2: Types of Reportable Indirect Compensation and Criteria for 
Qualifying Indirect Compensation as "Eligible" for Exemption: 

Eligible indirect compensation (EIC); 
Definition: EIC includes fees or expense reimbursements charged to 
investment funds and reflected in the value of the investment or in the 
return on investment (e.g., finders' fees, "soft dollar" revenue, float 
revenue, and/or brokerage commissions); 
Reported on Schedule C: If a fee falls into this category, no amount 
needs to be reported because these fees are eligible for exemption. An 
alternative reporting method can be used, which allows sponsors to 
report only that there was EIC paid and the entity that provided the 
required written disclosures.[A]. 

Ineligible indirect compensation; 
Definition: 
* Reportable gifts, meals, and entertainment; 
* Fees paid to a recordkeeper by an investment provider on a per 
participant or per plan account basis; 
Reported on Schedule C: Yes, along with the specific amount, because it 
is ineligible for exemption. The service provider receiving the 
compensation does not have to provide an actual amount. It may simply 
provide a formula through which the compensation is determined. 

Source: Department of Labor, Department of the Treasury, Pension 
Benefit Guaranty Corporation, Revision of Annual Information Return/ 
Reports, 72 Fed. Reg. 64731 (2007). 

Note: Amounts charged against the fund for ordinary operating expenses, 
such as attorneys' fees, accountants' fees, and printers' fees, are not 
reportable indirect compensation for Schedule C purposes. 

[A] Written disclosures for a bundled arrangement must separately 
disclose and describe each component of indirect compensation that 
would be required to be separately reported if the provider were not 
relying on this alternative reporting option. 

[End of table] 

However, indirect compensation can readily become "eligible" indirect 
compensation (EIC). For indirect compensation to be EIC, and thus not 
reported on the Schedule C, the plan sponsor must receive written 
materials from the service provider that describe and disclose the 
following information: 

1. the existence of indirect compensation, 

2. services provided for this compensation, 

3. formulas used to calculate the value of this compensation, 

4. who received the compensation, and: 

5. who paid the compensation. 

When indirect compensation does qualify as "eligible," sponsors have 
the option of using an alternative reporting format that, according to 
Labor, is simpler than the format that must be used to report 
ineligible indirect compensation. With the alternative reporting 
format, plan sponsors only have to disclose the name, address, and 
employer identification number of these service providers.[Footnote 14] 
Whether a plan sponsor receives the required written disclosures is the 
key to whether indirect compensation is reportable on the Schedule C. 

According to Labor, reporting indirect compensation as EIC is an option 
that the sponsor may choose instead of reporting under the rules 
applicable to other indirect compensation. Indirect compensation does 
not qualify as EIC if a service provider does not provide the required 
disclosures to the plan sponsor. In this case, the plan sponsor is 
required to report the available information from the service provider 
on the Schedule C, such as the identity of the service provider and 
nature of the services provided. The plan sponsor is also required to 
list the service provider for failing to or refusing to provide 
necessary information. However, if the plan sponsor does receive 
information from the service provider upon request, the plan sponsor 
has the option of reporting the indirect compensation as EIC (i.e., 
reporting only that indirect compensation was paid and who provided the 
disclosure). 

Many of the fees and expenses associated with mutual fund investments 
are not explicitly reported on the Form 5500. According to a 2004 
report by Labor's ERISA Advisory Council Working Group on Plan Fees and 
Reporting on Form 5500, many 401(k)[Footnote 15] and 403(b)[Footnote 
16] plans have moved toward using mutual funds as an investment option. 
With mutual funds, the plan service provider takes the investment 
management fees[Footnote 17] and expenses of managing the mutual fund 
directly from the mutual fund earnings, and these fees are not 
explicitly reported to plan sponsors. Without data on mutual funds, the 
largest component of most 401(k) retirement plans, Labor is unable to 
fully assess the impact of service provider fees on investment returns. 
In our November 2006 report, we recommended that Congress consider a 
statutory change with explicit disclosure requirements for service 
providers.[Footnote 18] Without such a change, we concluded, Labor will 
continue to lack comprehensive information on all fees being charged 
directly or indirectly to 401(k) plans. Figure 1 illustrates the 
disclosure of plan fee information from service providers to plan 
sponsors, which then report the fees to the federal government. The 
figure also shows that some fees are reported to the Securities and 
Exchange Commission (SEC), not to Labor. 

Figure 1: Disclosure of Plan Fee Information from Service Providers to 
Plan Sponsors, Which Then Report the Fees to the Federal Government: 

[Refer to PDF for image: illustration] 

Retirement plan sponsors are required to report the fees charged by 
service providers to Labor, except those already reported to SEC, which 
collects data on fees charged by mutual funds. 

Record-keeping: to Retirement Plan Sponsor; 
Customer Service: to Retirement Plan Sponsor; 
Retirement Plan Sponsor: to Department of Labor. 

Investment Management: to Securities and Exchange Commission. 

Source: GAO analysis of Department of Labor regulations. 

[End of figure] 

Additionally, many plan fiduciaries enter into bundled arrangements 
[Footnote 19] with other plan service providers for recordkeeping or 
other administrative services that typically do not entail explicit 
charges to the plan. In a "bundled arrangement" plan, service providers 
such as recordkeepers and trustees are often compensated for their 
services to the plan (1) through either subtransfer agent fees, 
[Footnote 20] 12b-1 fees,[Footnote 21] or other administrative fees 
[Footnote 22] or (2) through what are called "revenue-sharing 
arrangements."[Footnote 23] As a result, fees and expenses are not paid 
from plan assets, but rather from the expenses of one of the plan's 
investments (e.g., a mutual fund's operating expense, which is shared 
with the plan's service provider). 

Labor's New Reporting Requirements Remain Unclear to Sponsors, but 
Coordination with Other Regulatory Initiative May Help: 

Sponsors Report That Labor's New Requirements Remain Unclear: 

Even though Labor has provided guidance on their recent changes to the 
Form 5500 Schedule C, plan sponsors and service providers reported that 
they were unclear about Labor's new reporting requirements. 
Specifically, plan sponsors and experts told us that they have 
questions regarding the distinction between eligible and ineligible 
indirect compensation, and several said that they were unclear about 
what types of compensation qualified as EIC. A recent survey of service 
providers also reports confusion regarding compliance. An industry 
association representing service providers surveyed its membership, 
asking if sponsors and service providers understand Labor's new 
Schedule C requirements enough to effectively comply[Footnote 24]. 
Although only a small number of members (19) responded to the survey, 
74 percent of the respondents (14) reported that Labor has not provided 
sufficient guidance for providers to accurately determine what elements 
of compensation qualify as EIC. 

Plan sponsors and experts were also concerned about how much 
compensation should be disclosed. Figure 2 illustrates the potential 
difficulty. For example, a plan pays a recordkeeper direct compensation 
to administer the plan, which includes sending new participants a 
welcome packet about the plan. Part of the compensation that the 
recordkeeper receives goes toward paying a fulfillment vendor to make 
the welcome packets and send them to participants.[Footnote 25] The 
fulfillment vendor, in turn, pays a printer to print and collate the 
packets. As a result, there are multiple layers of payments involved, 
and sponsors and experts were unsure of how much of the indirect 
compensation they should be required to disclose. They were also 
concerned that the compensation would be reported multiple times on the 
Schedule C. For example, amounts paid by the recordkeeper to vendors 
would already be included in the overall amount paid by the plan 
sponsor to the recordkeeper. 

Figure 2: Examples of the Layers of Compensation Paid to Entities for 
Services to a Defined Contribution Plan: 

[Refer to PDF for image: illustration] 

First example: 

401(k) Defined Contribution Plan: 

Administers plan by contracting with a: 

Mutual Fund Company: Can offer everything from a single investment 
product for inclusion in an employer-sponsored retirement plan to “turn-
key” options that include management of the various investments 
included in a comprehensive plan. 

Who buy services from a: 

Financial Advisor: Independent company gives investment advice to 
participants; and/or: 

Transfer Agent: Processes transactions, such as exchanges between 
funds, investments, and withdrawals. 

Second example: 

401(k) Defined Contribution Plan: 

Administers plan by contracting with a: 

Recordkeeper: Service provider who administers the plan; 

Who buy services from a: 

Fulfillment Vendor: Provides a variety of services for a plan, 
including data entry; call centers; and order processing, such as 
mailing participant statements and welcome kits; 

Who buy services from a: 

Locator Service: Third-party vendor specializes in finding “lost” 
participants; and/or: 

Commercial Printer: Vendor prints welcome packets and envelopes. 

Source: GAO analysis of examples provided by the Groom Law Group. 

[End of figure] 

Concerns have also been raised about how to report noncash 
compensation.[Footnote 26] Sponsors and service providers said that 
they were uncertain about the new Schedule C requirement to report 
noncash compensation, which is also a type of indirect compensation. 
Sixty-three percent (12 of 19) of members who responded to the industry 
survey reported insufficient guidance on this issue. For example, one 
plan sponsor explained that he was not sure how he would handle, or 
whether he would even report, the noncash compensation benefit (food, 
entertainment, and making contacts) of attending a marketing event 
designed to facilitate future sales of ERISA plans. Respondents 
(service providers) in the industry survey were asked to imagine that 
their organization sponsored a similar event for customers and 
potential customers. Respondents were evenly split on how they would 
communicate the value of the benefit to attendees for purposes of 
Schedule C reporting. Some respondents believed the event would not be 
reportable, while others said they would provide its full value to all 
attendees and leave it to them to decide whether the event is 
reportable. 

Uncertainty Regarding the Reporting of Indirect Compensation May Result 
in Incomplete Data Being Reported to Labor: 

Because service providers may have difficulty determining what elements 
of compensation qualify as EIC, different interpretations and reporting 
practices may ensue and could result in inconsistent and incomplete 
data being reported to Labor. For example, some sponsors may interpret 
certain compensation as reportable, while others may not, leaving Labor 
with incomplete information from some plans. In addition, since amounts 
categorized as EIC will not be reported, Labor will have no way of 
using these data to determine whether the amounts being paid by plans 
are reasonable and will be unable to compare these types of 
compensation across plans. According to Labor, not having to report 
amounts categorized as EIC is intended to simplify the annual reporting 
process and reduce the burden for plans and service providers for the 
types of indirect compensation that commenters said would be difficult 
and potentially expensive to allocate to individual plans. 

Industry experts and plan sponsors with whom we spoke said additional 
guidance on reporting indirect compensation may make it easier for plan 
sponsors to comply. Labor has posted a set of FAQs on its Web site 
regarding the changes that are specific to Schedule C reporting. 
However, industry officials with whom we spoke said that although these 
FAQs answered many questions, additional questions have stemmed from 
reading the FAQs that have not yet been addressed. Labor officials told 
us that they were reviewing and prioritizing the additional questions 
they have received to develop further guidance. 

As filing deadlines for the 2009 plan year draw closer, sponsors and 
service providers have told us that they still have questions about the 
new Schedule C requirements, and may need more time to comply. Labor 
has already noted on its Web site that there is flexibility regarding 
reporting for the 2009 plan year, stating that as long as sponsors 
receive a statement from their service providers that, despite a good-
faith effort, they were unable to provide the newly required 
information to them, sponsors will not be required to report those 
service providers on the Schedule C. 

Coordination with Other Regulatory Initiative Could Alleviate 
Compliance Burden: 

According to industry experts and plan sponsors with whom we spoke, the 
coordination of one of Labor's other initiatives on fee disclosure with 
the current Form 5500 requirements could make it easier for plan 
sponsors to comply. Specifically, sponsors and service providers 
stressed the importance of Labor coordinating the new Form 5500 
requirements, which govern reporting at the end of a plan year, with 
the finalization of its proposed rule on "up-front" service provider 
disclosure to plan sponsors. Labor has requirements that govern the 
entering of a service agreement between a sponsor and service provider, 
referred to as the 408(b)(2) requirements, and has proposed changes to 
them that have not yet been finalized.[Footnote 27] Consequently, the 
new Schedule C requirements, or "after-the-fact" disclosures," were 
finalized before the 408(b)(2) regulation, which governs "up-front" 
disclosures. Since plan sponsors report on the Schedule C an after-the-
fact summary of the fees and expenses paid by their plans during the 
plan year, the information provided on this form is directly related to 
information about fees and expenses that service providers will be 
required to disclose to plan sponsors by the 408(b)(2) requirements "up 
front," at the beginning of a service relationship. In our discussions 
with Labor officials, they noted that the better scenario would have 
been publishing the finalized 408(b)(2) regulation before the new Form 
5500 requirements and acknowledged the importance of coordinating the 
finalization of the proposed regulation with the Form 5500 
requirements. The officials told us that the move to require electronic 
filing for the 2009 plan year led them to finalize the Schedule C 
requirements first. However, it is unclear when the 408(b)(2) 
regulation will be finalized, which is important given that the first 
Form 5500s will be filed under the new requirements in July 2010. 

If the Schedule C requirements are not coordinated with the 
finalization of the proposed rule to change up-front disclosure, there 
could be competing sets of disclosure requirements for sponsors and 
service providers. Service providers had anticipated that the 408(b)(2) 
regulations would have already been finalized to coordinate with the 
changes to the Form 5500 to ensure they comply with both sets of rules 
at once. Without the coordination, service providers are in the 
position of potentially having to make expensive investments to update 
their data systems two separate times. In addition, coordinating the 
408(b)(2) requirements with the Form 5500 requirements could help 
ensure that plan sponsors are meeting their fiduciary responsibilities 
when selecting or renewing a contract with a service provider. 

Labor Is Unclear about How It Will Use the New Information Reported on 
the Form 5500, and the Form 5500 May Continue to Not Provide Useful Fee 
Information to Labor and Others: 

Labor officials told us that they do not have specific plans for using 
the data received as a result of the new requirements, and we found 
that even with the changes, the Form 5500 may not be useful to Labor, 
sponsors, or others. Labor officials told us that they will wait to see 
how the newly required information is reported before determining its 
use. In addition, because plan sponsors will be required to list any 
service provider who fails to or refuses to provide the necessary 
information on the Schedule C, Labor could potentially pursue listed 
service providers for enforcement action. However, it is unclear 
whether Labor has any plans to devote additional resources to follow up 
on service providers. In fact, for the 2009 plan year, plan sponsors 
will not be required to list service providers who fail to provide 
information if the service provider provides a statement that they made 
a good-faith effort to make any necessary recordkeeping and information 
system changes in a timely fashion. 

It is also unclear whether Labor has a plan to follow up with plan 
sponsors to ensure that they have received the newly required 
disclosures. Labor officials told us that the new requirements are 
meant to reinforce a fiduciary's obligation of monitoring service 
providers and plan fees and also are intended as an "exercise in 
discipline" for the sponsor, since the sponsor will have to create a 
financial record to submit it to Labor. According to these officials, 
this will ensure that sponsors receive the information they need about 
indirect compensation paid to service providers. 

Labor's efforts are also meant to effect a behavioral change in plan 
sponsors and service providers. According to Labor officials, the 
intent is for plan sponsors to understand and then obtain the 
information they need to determine the reasonableness of the fees they 
are paying. Since service providers often prepare the Form 5500 on 
behalf of plan sponsors, the regulatory changes are also designed to 
notify service providers that compensation information should be 
provided to sponsors. Still, Labor and others are concerned that some 
service providers, who may not feel bound by Labor's reporting 
requirements, may neglect to list the indirect compensation they may 
have received. 

Finally, the Form 5500 continues to have limited use for Labor, 
sponsors, and participants. 

Labor. Despite Labor's efforts with the new Form 5500 requirements, 
information on asset-based fees is still not explicitly required to be 
reported on the form. As we have previously reported, the form does not 
explicitly list all of the fees paid from plan assets.[Footnote 28] For 
example, plan sponsors were not required to report mutual fund 
investment fees to Labor, even though they received this information 
for each of the mutual funds they offered in the 401(k) plan in the 
form of a prospectus.[Footnote 29] While prospectuses are provided to 
SEC, on a fund-by-fund basis, neither SEC nor Labor have readily 
available information to be able to link individual fund information to 
the various 401(k) plans to which the funds may be offered as 
investment options.[Footnote 30] Furthermore, prospectuses provide fees 
as expense ratios, which are used as an intermediate step in 
calculating net rates of return, and, as such, the dollar amount of 
deductions from plan assets are not explicitly stated. 

Labor officials told us that asset-based fees are now required to be 
reported on the Schedule C. However, even with the changes made to the 
reporting of indirect compensation, plan sponsors may wind up only 
reporting the presence of such fees on the Schedule C along with the 
identity of the service provider. Because these fees are already 
reported to SEC, the service provider must either (1) provide the plan 
sponsor with a document that discloses the documents already sent to 
SEC, with references to the pages or sections of the documents that 
contain the required information, or (2) determine whether the amount 
of the fund's investment management fee that is allocable to the 
specific 401(k) plan is enough to be reportable, and then provide the 
dollar amount or a description of the formula used to calculate the 
amount of the compensation to the plan sponsor. The plan sponsor can 
then treat the asset-based fee or compensation as EIC and only report 
the identity of the service provider. Without information on all of the 
fees charged directly or indirectly to 401(k) plans, Labor is limited 
in its ability to identify fees that may be questionable. 

Labor officials told us that the changes to the Form 5500 were not 
meant to result in a comprehensive database of plan fees, because Labor 
did not want to put an undue burden on plan sponsors to comply with the 
new Form 5500 requirements. Labor asserts the expansion of the Schedule 
C is already significant. In addition, Labor officials told us that 
because the Schedule C is only filled out by larger plans with more 
than 100 participants, the schedule is not a complete picture of the 
universe of plan fees. 

Sponsors. The Form 5500 may also not be the best vehicle for sponsors 
to assess service provider fee reasonableness or to understand business 
arrangements between service providers, since the form is filed long 
after the plan sponsor has already engaged the provider and selected 
the investment options. For the most part, the form is filled out for 
plan sponsors by service providers, who know the compensation 
arrangements and how to calculate the fees charged. According to 
industry experts, determining the dollar amounts to attach to 
ineligible indirect compensation is a source of confusion, because 
although some indirect compensation is straightforward, the calculation 
of other compensation is left to the best judgment of the service 
provider. Also, service providers may also choose to disclose only the 
formulas they use to determine ineligible indirect compensation, making 
it difficult for sponsors to assess fees or understand business 
arrangements. 

Participants. Participant groups told us that plan sponsors who use the 
Form 5500 to inform participants are likely to overwhelm participants 
with the volume and detail required as a result of Labor's new 
regulations. Both Labor and industry experts told us that the Schedule 
C is not designed to be used by participants because it does not 
provide them with an easy comparison of available investment options. 

Conclusions: 

Labor has recently made some effort to improve the Form 5500, 
specifically the Schedule C. However, the changes made seem unlikely to 
resolve the issues surrounding service provider disclosure to plan 
sponsors. Absent detailed guidance aimed at clarifying the indirect 
compensation reporting requirements, Labor is at risk of receiving 
inconsistent and incomparable information on the Schedule C. In 
addition, the new requirements currently give plan sponsors the option 
of not disclosing EIC on the Schedule C. If Labor allows certain 
indirect compensation to be deemed EIC, and therefore not to be 
reported, Labor will continue to have incomplete information on 
compensation received by service providers, and will be no better 
informed. 

Similarly, as long as asset-based fees netted from an investment fund's 
performance are not required to be reported on the Form 5500, sponsors, 
participants, and Labor will not know the true costs of a plan. 
Requiring plan sponsors or administrators to report more complete 
information to Labor on fees--that is, those paid out of plan assets or 
by participants--puts the agency in a better position to effectively 
oversee defined contribution plans. 

Despite Labor's intentions in changing the Form 5500 Schedule C, the 
way the regulations are currently written may not result in an increase 
in the amount of meaningful service provider compensation information 
reported to Labor. In addition, it is unclear whether plan sponsors 
will actually receive the information on service provider compensation 
that Labor believes is important for them to have. Because of the 
option to distinguish indirect compensation as either eligible or 
ineligible, service providers may choose to qualify their compensation 
as EIC and not provide their disclosures to plan sponsors. 

Meanwhile, Labor has also proposed regulatory changes that could 
eliminate some of the confusion surrounding 408(b)(2) disclosure 
requirements. However, it is unclear whether the final regulations will 
be coordinated with the existing changes to the Form 5500 reporting 
requirements. Coordinating these initiatives may reduce the burden and 
the cost to service providers and clarify for plan sponsors the 
information they need for the service provider selection and renewal 
processes. 

Finally, as we suggested in our November 2006 report, absent a 
statutory change with explicit requirements for service providers, 
Labor will continue to lack comprehensive information on all fees being 
charged directly or indirectly to 401(k) plans. 

Recommendations for Executive Action: 

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, we recommend that the Secretary of Labor take the 
following action: 

* Provide additional guidance regarding the reporting of indirect 
compensation and require that all indirect compensation be disclosed on 
the Schedule C. 

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, we recommend 
that the Secretary of Labor take the following action: 

* 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. 

To reduce the potential for additional costs and burden being placed on 
service providers, we recommend that the Secretary of Labor take the 
following action: 

* 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 Comments and Our Evaluation: 

We provided a draft of this report to the Department of Labor (Labor). 
We received written comments from the Assistant Secretary for Employee 
Benefits Security Administration, which we reproduced in appendix I. 
Labor generally agreed with our recommendations. Labor also provided 
technical comments, which we have incorporated in this report where 
appropriate. 

Labor stated that it is committed to making the shift to the expanded 
Schedule C reporting requirements as smooth as possible, and that it 
has already engaged in substantial outreach on the new reporting 
requirements. Specifically, regarding our recommendation that Labor 
provide additional guidance on the reporting of indirect compensation, 
Labor stated that it has plans to continue its outreach efforts, 
including publishing additional Schedule C guidance. Regarding our 
recommendation that all indirect compensation be disclosed on the 
Schedule C and that asset-based fees be explicitly reported on the Form 
5500, Labor explained that it had originally proposed that all indirect 
compensation charged against a plan's investments be required to be 
reported on the Schedule C, without providing an alternative reporting 
option. However, Labor provided an alternative reporting option for 
eligible indirect compensation to plan fiduciaries on the basis of 
comments received on the proposed rule. Labor stated that the 
alternative reporting option would provide the department with enough 
information to engage in effective oversight activities. Labor also 
stated that once Schedule C reporting begins (for most plans, July 2010 
and later), it will be able to evaluate the data it receives, taking 
into consideration our recommendation. Although Labor stated in its 
comments that its eligible indirect compensation reporting requirements 
are intended to help ensure fiduciaries are collecting information and 
evaluating service provider indirect compensation, we believe that it 
is also important for the indirect compensation information to be 
reported to Labor. As we stated in our report, we continue to believe 
that Labor will not receive enough information to engage in effective 
oversight activities. Finally, Labor stated that it agreed with our 
recommendation to coordinate the implementation of the Form 5500 
regulations with the publication of its final 408(b)(2) regulation, and 
that it will continue to coordinate the two initiatives. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution until 30 days after the date 
of this report. At that time, we will send copies of this report to the 
appropriate congressional committees, the Secretary of Labor, and other 
interested parties. In addition, the report will be available at no 
charge on GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff has any questions concerning this report, please 
contact me at (202) 512-7215 or bovbjergb@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in appendix II. 

Sincerely yours, 

Signed by: 

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

[End of section] 

Appendix I: Comments from the Department of Labor: 

U.S. Department of Labor: 
Assistant Secretary for	Employee Benefits Security Administration: 
Washington, D.C. 20210: 

October 19, 2009: 

Ms. Barbara D. Bovbjerg: 
Director, Education, Workforce, and Income Security Issues: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Bovbjerg: 

Thank you for the opportunity to review the Government Accountability 
Office's (GAO) draft report entitled "Private Pensions: Additional 
Changes Could Improve Employee Benefit Plan Financial Reporting" (GAO-
10-54). Your recommendations focus on new requirements for reporting 
information on service provider fees and other compensation on the 
Schedule C (Service Provider Information) of the Form 5500 Annual 
Return/Report of Employee Benefit Plan, generally effective for plan 
years beginning on or after January 1, 2009. 

The Department of Labor (Department) is responsible for administering 
and enforcing the fiduciary, reporting, and disclosure provisions of 
Title I of the Employee Retirement Income Security Act of 1974 (ERISA). 
ERISA requires plan fiduciaries, when selecting or monitoring service 
providers, to act prudently and solely in the interest of the plan's 
participants and beneficiaries. Having information sufficient to enable 
the plan fiduciary to make informed decisions about the services and 
the reasonableness of the costs for those services is critical because 
excessive fees can undermine the retirement security of plan 
participants. Similarly, understanding how expenses affect participant 
accounts is of critical importance to plan participants and 
beneficiaries in choosing among investment alternatives. 

The increasing use of charges against investment funds, revenue sharing 
among service providers, and other "indirect compensation" arrangements 
has presented challenges for many plan officials trying to understand 
and monitor service providers' compensation. In recognition of those 
challenges, the Department undertook separate, but related regulatory 
initiatives intended to help plan sponsors and participants. As noted 
in the GAO draft report, in addition to expanding indirect compensation 
reporting on Schedule C, the Department is engaged in rulemaking to 
amend the ERISA section 408(b)(2) regulation to require service 
providers to make up front fee and compensation disclosures to plan 
fiduciaries. The Department also published a proposed rule to improve 
the disclosure of fee information to pension plan participants by, 
among other things, requiring information on investment fees charged to 
individual accounts to be furnished to participants and beneficiaries 
in individual account plans. 

Your draft report recommends that (1) the Department provide additional 
guidance regarding the reporting of indirect compensation and require 
that all indirect compensation be disclosed on the Schedule C; (2) 
coordinate the implementation of its new Form 5500 requirements with 
the publication of its 408(b)(2) regulation; and (3) require that asset-
based fees that are netted from an investment fund's performance be 
explicitly reported on the Form 5500. 

With respect to your first recommendation, the draft report noted that 
members of the regulated community have noted the possible confusion 
that might exist in technical applications of reporting on the new 
Schedule C revenue sharing and other indirect compensation received by 
service providers from sources other than directly from the plan or 
plan sponsor. The Department is committed to making the shift to these 
expanded Schedule C reporting requirements as smooth as possible. The 
Department has already engaged in substantial outreach on both the new 
EFAST2 system and the new reporting requirements. In addition to 
publishing Frequently Asked Questions on the 2009 Schedule C, the 
Department has participated in many public programs and seminars and is 
also offering a series of free webcasts on the new reporting 
requirements. The Department intends to continue its outreach efforts, 
including publishing additional Schedule C guidance on its website and 
updating existing educational materials. 

As to your second recommendation that the Department coordinate the 
implementation of the Form 5500 revisions with the publication of its 
408(b)(2) regulation, as GAO recognized, the Schedule C revisions are 
an integral part of the Department's multi-faceted initiative to 
improve the quality and comprehensibility of service provider fee and 
compensation information. We agree with GAO's recommendation and will 
continue to coordinate the initiatives. 

Finally, the draft report recommended that, in order to ensure 
comparable disclosure among all types of service providers and ensure 
that all investment products' fees are fairly disclosed, the Department 
should modify the alternative reporting option for "eligible indirect 
compensation" and require asset-based fees that are netted from an 
investment fund's performance (and not paid directly by the plan) be 
explicitly reported on the Form 5500. GAO expressed concern that the 
alternative reporting option would preclude the Department from 
obtaining comprehensive data on indirect compensation received by 
service providers in connection with services provided to employee 
benefit plans. 

As originally proposed, all indirect compensation charged against the 
plan's investments was required to be reported on the Schedule C, 
without providing an alternative reporting option.
Comments from the regulated community objected to the requirement. They 
expressed concerns that the nature and complexity of the business and 
investment environment in which plans operate, including omnibus 
account structures, would make it extremely burdensome, costly, and 
potentially misleading to attempt to allocate indirect compensation at 
the per plan or per participant level. Commenters also observed some of 
the fee information relevant to the plan administrator in connection 
with evaluating investments, such as asset-based charges in mutual 
funds, is already required to be disclosed to the Securities and 
Exchange Commission. 

Although the Form 5500 generally serves as a source of data for use by 
the government and private sector in assessing employee benefit, tax, 
economic trends, and policies, the revisions to the Schedule C were not 
designed with an eye toward creating a government data-base for
evaluating and comparing indirect compensation arrangements in the 
pension plan market place. The Schedule C "eligible indirect 
compensation" reporting requirements were intended to help ensure 
fiduciaries were collecting information and evaluating service provider 
indirect compensation. Specifically, in attempting to strike a balance 
between the costs and benefits of improved disclosure of investment-
related fees and expenses, the Department concluded that some of the 
concerns regarding the burden and complexity of allocating fees charged 
in an omnibus account structure could be addressed by establishing a 
separate reporting rule that relied on disclosures regarding those fees 
resulting from other regulations or business practices if those 
disclosures met the objectives underlying the Department's Schedule C 
proposal. The final Schedule C revisions thus included an alternative 
reporting option for "eligible indirect compensation." In the case of 
asset-based charges against plan investments, the alternative reporting 
option requires that the plan identify on the Schedule C the person 
from which the administrator receives certain required disclosures 
regarding that compensation. 

The Department has previously expressed its opinion that in hiring and 
retaining service providers plan fiduciaries must engage in an 
objective process designed to elicit information necessary to assess 
the qualifications of the provider, the quality of services offered, 
and the reasonableness of the fees charged in light of the services 
provided. In addition, the process should be designed to avoid self-
dealing, conflicts of interest, or other improper influence. The 
"alternative reporting option" for eligible indirect compensation was 
intended to emphasize and reinforce the obligation of a plan fiduciary 
to review plan expenses as part of the on-going obligation to monitor 
service provider arrangements. The Department also concluded that it 
would provide the Department with enough information to engage in 
effective oversight activities while addressing concerns about annual 
reporting burdens and costs, which are increasingly being passed on to 
plan participants and beneficiaries. Plans choosing the alternative 
reporting option would also bear the burden of maintaining records 
sufficient to demonstrate compliance with the conditions of the 
alternative reporting option. 

In reaching those conclusions, the Department was mindful of the fact, 
noted in the GAO draft report, that the Schedule C is filed by only 
large funded plans and that only service providers that receive $5000 
or more in compensation are covered. Thus, the fee information on 
Schedule C is by definition an incomplete data field. We also were 
sensitive to the Schedule C changes being part of a broader Form 5500 
update, i.e., the changes to implement a mandatory electronic filing 
requirement for a new form processing system (EFAST2), new pension plan 
reporting requirements mandated by the Pension Protection Act (PPA), 
and a new Short Form 5500 to satisfy a separate PPA mandate to develop 
a new even more simplified report for small plans. 

Nonetheless, we appreciate GAO's interest in enhancing service provider 
fee reporting to optimize the data available to Department and other 
enforcement agencies and research entities. We continually review the 
Form 5500 to see whether changes are needed. Once Schedule C reporting 
begins (for most plans July 2010 and later), we will be able to 
evaluate the data we receive, taking into account GAO's recommendation. 
Also, although we want to avoid using the Schedule C to accomplish fee 
disclosure objectives better dealt with in our 408(b)(2) fiduciary 
disclosure regulation or our participant level fee disclosure 
regulation, we will continue to explore ways to enhance reporting fee 
information in conjunction with those related projects. 

Sincerely, 

Signed by: 

Phyllis C. Borzi: 
Assistant Secretary: 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Barbara Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov: 

Staff Acknowledgments: 

The following team members made key contributions to this report: 
Tamara Cross, Assistant Director; Monika Gomez, Analyst-in-Charge; 
Christopher Langford; James Bennett; Jessica Orr; Walter Vance; and 
Roger Thomas. 

[End of section] 

Related GAO Products: 

Private Pensions: Conflicts of Interest Can Affect Defined Benefit and 
Defined Contribution Plans. GAO-09-503T. Washington, D.C.: March 24, 
2009. 

Private Pensions: Fulfilling Fiduciary Obligations Can Present 
Challenges for 401(k) Plan Sponsors. GAO-08-774. Washington, D.C.: July 
16, 2008. 

Private Pensions: GAO Survey of 401(k) Plan Sponsor Practices (GAO-08-
870SP, July 2008), an E-supplement to GAO-08-774. GAO-08-870SP. 
Washington, D.C.: July 16, 2008. 

Private Pensions: Information That Sponsors and Participants Need to 
Understand 401(k) Plan Fees. GAO-08-222T. Washington, D.C.: October 30, 
2007. 

Private Pensions: 401(k) Plan Participants and Sponsors Need Better 
Information on Fees. GAO-08-95T. Washington, D.C.: October 24, 2007. 

Defined Benefit Pensions: Conflicts of Interest Involving High Risk or 
Terminated Plans Pose Enforcement Challenges. GAO-07-703. Washington, 
D.C.: June 28, 2007. 

Private Pensions: Increased Reliance on 401(k) Plans Calls for Better 
Information on Fees. GAO-07-530T. Washington, D.C.: March 6, 2007. 

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. 

Private Pensions: Government Actions Could Improve the Timeliness and 
Content of Form 5500 Pension Information. GAO-05-491. Washington, D.C.: 
June 3, 2005. 

[End of section] 

Footnotes: 

[1] Under Title I of ERISA, the "administrator" or "plan administrator" 
is the plan official responsible for meeting certain reporting and 
disclosure obligations. However, for the purposes of this report, we 
use the term "plan sponsor" to encompass the responsibilities of the 
plan administrator and plan sponsor (i.e., the employer who sets up the 
plan). 

[2] The Form 5500 includes information on a plan's sponsor and the 
number of participants, among other things. The form also provides more 
specific information, such as plan assets, liabilities, insurance, and 
financial transactions. 

[3] A "plan year" is a 12-month period designated by a retirement plan 
for calculating vesting and distribution, among other things. The plan 
year can be the calendar year or an alternative period (e.g., July 1 to 
June 30). Filers have a normal deadline of 210 days after the end of 
the plan year to submit their Form 5500; therefore, a calendar year 
filer would have to file by July 31 of the next year. 

[4] Service providers are hired by plan sponsors to provide 
administrative services to the plan. Some plans hire a service 
provider, such as a mutual fund company, a bank, or an insurance 
company, that is able to provide an entire range of administrative 
services to a plan. Other plans receive asset management and 
recordkeeping services from a service provider, while providing other 
services with in-house staff. 

[5] On January 20, 2009, the Obama Administration issued a White House 
memorandum that ordered all proposed and final regulations that had not 
been published in the Federal Register to be withdrawn for review and 
approval. 

[6] The information and opinions we gathered from talking with plan 
sponsors is not representative of or generalizeable to the universe of 
plan sponsors. 

[7] GAO, Private Pensions: Government Actions Could Improve the 
Timeliness and Content of Form 5500 Pension Information, [hyperlink, 
http://www.gao.gov/products/GAO-05-491] (Washington, D.C.: June 3, 
2005). 

[8] The Form 5500 includes information on the plan's sponsor and the 
number of participants, among other things. 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 the 
Form 5500 as a tool to monitor and enforce plan sponsors' 
responsibilities under ERISA. 

[9] 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 plans' 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. 

[10] See 73 Fed. Reg. 43013, proposed rules of July 23, 2008, on 
"Fiduciary Requirements for Disclosure in Participant-Directed 
Individual Account Plans." 

[11] See 72 Fed. Reg. 70987, proposed rules of December 13, 2007, on 
"Reasonable Contract or Arrangement Under Section 408(b)(2) - Fee 
Disclosure." 

[12] See 72 Fed. Reg. 64709, final rules of November 16, 2007, on 
"Annual Reporting and Disclosure." 

[13] The regulations also postponed the effective date of the 
electronic filing requirement under 29 C.F.R. § 2520.104a-2 to apply to 
plan years beginning on or after January 1, 2009. The form revisions 
are to be fully implemented as part of the switch under the ERISA 
Filing Acceptance System (also known as EFAST) to a wholly electronic 
filing system for the 2009 reporting year. 

[14] The alternative reporting option does not apply to all indirect 
compensation; it only applies to the indirect compensation that is 
eligible for that treatment. It has to be a particular type of 
compensation, with the most common example being compensation that 
reduces the value of the investment--for example, 12b-1 fees (fees 
related to marketing) that are paid to broker/dealers to sell the fund. 
The alternative reporting method is generally only available for 
service providers receiving indirect compensation exclusively. If a 
service provider receives both direct and indirect compensation, the 
alternative reporting option is not available and more in-depth 
information must be disclosed on the Schedule C. 

[15] "401(k) plans" are private pension plans that allow workers to 
save for retirement by diverting a portion of their pretax income into 
an investment account that can grow tax-free until withdrawn in 
retirement. 

[16] "403(b) plans" are similar to 401(k) plans but are offered only to 
employees of hospitals, educational institutions, and certain nonprofit 
organizations. 

[17] Companies that manage mutual funds or other investment products 
charge investment fees for all services related to operating the fund. 
Such practices are not limited to the mutual fund industry, but rather 
apply to any pooled investment vehicle where fees are intrinsic to the 
underlying investment and not explicitly billed or paid by the plan. 

[18] GAO, Private Pensions: Changes Needed to Provide 401(k) Plan 
Participants and the Department of Labor Better Information on Fees, 
[hyperlink, http://www.gao.gov/products/GAO-07-21] (Washington, D.C.: 
Nov. 16, 2006). 

[19] A "bundled arrangement" is when a plan sponsor hires one service 
provider to provide a full range of services directly or through 
subcontracts to provide services to its employees' retirement plan. 

[20] Subtransfer agent fees are paid by mutual funds to 401(k) 
providers who perform the recordkeeping function for 401(k) plans. They 
are charged against the mutual funds and thereby reduce the 
participants' investment returns and, ultimately, their benefits. The 
payments are intended to support transfer agent and shareholder 
servicing activities by the recordkeeper. These activities include, for 
example, keeping track of share ownership at the plan and participant 
account level, and conveying information about the mutual fund to the 
plan and participants. 

[21] Fees related to marketing and compensating brokers to sell the 
fund are known as 12b-1 fees. 

[22] Administrative fees are charged to administer the plan as a whole, 
and these fees can include trustee, audit, legal, investment 
consulting, and communication fees. 

[23] "Revenue sharing" is a mutual fund distribution practice. These 
payments are paid from a plan's investments to other providers without 
going through the plan. A feature of these payments is that, while they 
are not paid from a plan's assets, the payments are "shared" by the 
plan's service providers, often without the knowledge of the plan 
sponsors, fiduciaries, and participants. 

[24] The Society of Professional Asset-Managers and Record Keepers 
(SPARK) is a professional association servicing mutual fund companies, 
banks, insurance companies, investment advisors, third-party 
administration, recordkeepers, and benefit consulting firms in the 
retirement plan industry, including most major service providers. SPARK 
conducted a survey of its members in early 2009 regarding their 
opinions on the new reporting requirements for the Form 5500 Schedule 
C. The survey was completed by 19 of SPARK's 57 institutional members, 
all but 1 of which provide Form 5500 preparation services. The 
responding firms, however, collectively serve approximately 174,000 
plans with nearly 34 million participants. 

[25] A fulfillment vendor can provide a number of services for a plan, 
including customer service; call center; data entry; and order 
processing, such as mailing participant statements and welcome kits. 

[26] Noncash compensation can be gifts, meals, or entertainment for the 
purpose of facilitating the sales or promotion of an ERISA-related 
plan. 

[27] On December 13, 2007, Labor published a proposed rule (72 Fed. 
Reg. 70987) to amend its current regulation under section 408(b)(2) of 
ERISA to clarify the information fiduciaries must receive and service 
providers must disclose for purposes of determining whether a contract 
or arrangement is "reasonable," as required by ERISA's statutory 
exemption for service arrangements. The regulation would require 
service providers to disclose, in writing, to plan fiduciaries of 
401(k) plans, all services to be furnished; all direct and indirect 
compensation to be received; and any potential conflict of interest, 
such as certain third-party relationships, that could affect their 
objectivity under a service contract or arrangement. 

[28] [hyperlink, http://www.gao.gov/products/GAO-07-21]. 

[29] One 401(k) ratings and analytics firm believes that it is critical 
to separate out all the components of the expense ratio into the 
appropriate categories: for example, management fee, 12b-1, subtransfer 
agent, and shareholder servicing. The firm has devised a methodology to 
calculate a plan's total costs that company officials believe will 
enable a plan sponsor to estimate these costs and determine the impact 
on participant retirement outcomes. According to company officials, the 
end result will be a fully broken out list of all the fees in a 401(k) 
plan that allows comparison across plans and across different fee 
structures (bundled and unbundled). 

[30] Mutual fund prospectuses are filed with SEC and are available to 
the public from SEC's Electronic Data Gathering, Analysis, and 
Retrieval System. The filings are not exclusive to those mutual funds 
offered as part of a 401(k) plan, but are an aggregate filing of fees 
associated with the funds, making it difficult for plan sponsors to 
determine their allocable share. Plan sponsors are not required to 
include prospectus fee disclosures with their Form 5500 filings. 
Furthermore, it is not an agency practice for SEC to provide prospectus 
information to Labor, nor would such a practice benefit Labor, unless 
the information was then consolidated with the corresponding Form 5500 
filings for plans that offered the mutual fund. 

[End of section] 

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