United States Government Accountability Office

GAO Testimony before the Committee on 

Education and Labor 

House of Representatives 

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 

For Release on Delivery

Expected at 11:00 a.m. EST 

Tuesday, March 6, 2007 

 

GAO-07-530T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 6, 2007

PRIVATE PENSIONS

Increased Reliance on 401(k) Plans Calls 

Highlights of GAO-07-530T, a testimony for Better Information on Fees 

before the Committe on Education and 

Labor, House of Representatives 

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. 

Comparison of Defined Benefit Plans with Defined Contribution Plans, 1985 and 2005.

0

200

400

600

800

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Plans (thousands)

170

462

163

570

132

599

102 84 69 59 50 47

661 683 687

598 619 624

47

653

41

711

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

Defined benefit plans Defined contribution plans

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. 

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. 
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).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 

 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. 

Page 1 GAO-07-530T 
disclosed to participants, and Labor’s oversight of fees and certain related

business arrangements.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.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 participantdirected, 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)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. 

 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. 

Page 2 GAO-07-530T 
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. 

Background 

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.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.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: 

 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 pretax elective contributions. 

Page 3 GAO-07-530T 
• The Securities and Exchange Commission (SEC), among other 

responsibilities, regulates registered securities including company 

stock and mutual funds under securities law.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.8

The number of defined contribution plans has increased since 1985, while 

the number of defined benefit plans has declined dramatically.

9

 Figure 1 

shows the growth of defined contribution plans relative to that of defined

benefit plans from 1985 to 2005. 

An Increasing 

Number of Employees 

Participate in Defined 

Contribution Plans, 

and This Trend Has 

Been Increasing Since 

the 1980s 

 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). 

Page 4 GAO-07-530T 
Figure 1: Changes in the Number of Defined Benefit Plans and Defined Contribution Plans, 1985-2005 

0

100

200

300

400

500

600

700

800

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Plans (thousands)

Defined benefit plans

Defined contribution plans

170

462

163

570

132

599

102

84 69 59 50 47

687 683

661

624 619 598

47

653

41

711

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.

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. 

Page 5 GAO-07-530T 
Figure 2: Changes in the Number of Active Participants in Defined Benefit Plans and Defined Contribution Plans, 1985-2005

0

10

20

30

40

50

60

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Active participants (millions)

Defined benefit plans

Defined contribution plans

29

33

28

35

27

34

26

36

25

23 23 23 22 21

39

42

48

50

52 52

55

21

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.

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 2005.10

 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. 

Page 6 GAO-07-530T 
Figure 3: Changes in Defined Benefit and Defined Contribution Plan Assets, 1985-2005 

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Assets (2006 constant dollars in billions)

Defined benefit plans

Defined contribution plans

1,548

799

1,557

932

1,606

1,118

1,631

1,235

1,741

1,490

1,855 1,748

2,180 2,284

2,490

2,844

2,078

2,408

2,127

2,528

2,013

3,005

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.

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.

11 Equity funds are investment 

 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 ParticipantDirected Retirement Plan Data Collection Project for Year-End 2005,” Research 

Perspective, vol. 12, no. 1A, (2006). 

Page 7 GAO-07-530T 
options that invest primarily in stocks, such as mutual funds, bank 

collective funds,12 life insurance separate accounts, and certain pooled 

investment products (see fig. 4). Other plan assets were invested in 

company stock; stable value funds,13 including guaranteed investment 

contracts; balanced funds;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. 

 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. 

Page 8 GAO-07-530T 
Figure 4: 401(k) Plan Average Asset Allocation in 2005

10%

4%

11%

13%

13%

48%

Source: Investment Company Institute.

1%

Other

Money funds

Bond funds

Balanced funds

Stable value funds

Company stock

Equity funds

Note: The Investment Company Institute’s estimates for 2005 are based on the Department of Labor,

Form 5500 Annual Reports; and other information

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 participantdirected, 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.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 

 15 “Private Pension Plan Bulletin Abstract of 2003 Form 5500 Annual Reports,” U.S. 

Department of Labor (Washington, D.C.: Oct. 2006). 

Page 9 GAO-07-530T 
percent had balances greater than $100,000.16 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. 

 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. 

Page 10 GAO-07-530T 
Figure 5: Effect of 1 Percentage Point in Higher Annual Fees on a $20,000 401(k) 

Balance Invested over 20 Years 

Source: GAO analysis.

Account balance (in dollars)

Accumulated account balance with 0.5 percent charge for fees

Accumulated account balance with 1.5 percent charge for fees

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1 3 5 7 9 11 13 15 17 19

Years

Various fees are associated with 401(k) plans, but investment and recordkeeping 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 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 

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 

Page 11 GAO-07-530T 
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 

65

70

75

80

85

90

95

100

Percentage of total plan fees

Source: HR Investment Consultants.

Number of plan participants

25 50 100 200 500 1,000 2,000 5,000

99.0

84.5

89.6

93.4

95.3

97.1 98.0 98.6

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. 

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.

Page 12 GAO-07-530T 
Figure 7: Plan Record-Keeping Fees as a Percentage of Total Plan Fees, 2005 

0

5

10

15

20

25

Percentage of total plan fees

Source: HR Investment Consultants.

Number of plan participants

25 50 100 200 500 1,000 2,000 5,000

1.0

12.0

8.5

5.6

4.1

2.6 1.9 1.3

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. 

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 recordkeeping 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 recordkeeping 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. 

Page 13 GAO-07-530T 
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.

Required Disclosures 

Provide Limited Fee 

Information to Assist 

Participants in Comparing 

Investment Options 

Table 1: Required Disclosure Documents to All Participants 

Disclosure 

document Document purpose Information on fees 

Summary plan 

description 

To explain to participants how

the plan operates 

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. 

Account 

statement 

To show the account balance 

due to a participant 

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. 

Summary annual 

report 

To disclose the financial 

condition of the plan to 

participants 

Contains total plan costs incurred 

by plan participants during the

year. 

Source: GAO analysis.

ERISA also requires 401(k) plan sponsors that have elected liability 

protection from participants’ investment decisions to provide additional 

fee information.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 

 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).

Page 14 GAO-07-530T 
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.

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.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 

 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. 

Page 15 GAO-07-530T 
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.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 

 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). 

Page 16 GAO-07-530T 
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.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. 

 21 Final Report of the 2004 ERISA Advisory Council Working Group, Health and Welfare 

Form 5500 Requirements (Washington, D.C.: Nov. 10, 2004). 

Page 17 GAO-07-530T 
• Labor has proposed changes to the Form 5500 Schedule A and 

Schedule C to improve reporting of fees.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,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. 

 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). 

Page 18 GAO-07-530T 
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.

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.

Conclusions 

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 

Page 19 GAO-07-530T 
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. 

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. 

Page 20 GAO-07-530T 

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