United States Government Accountability Office

GAO Report to the Ranking Minority 

Member, Committee on Education and 

the Workforce, House of 

Representatives 

PRIVATE PENSIONS

Changes Needed to 

Provide 401(k) Plan 

Participants and the 

Department of Labor 

Better Information on 

Fees 

November 2006 

 

GAO-07-21 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2006

PRIVATE PENSIONS

Changes Needed To Provide 401(k) Plan 

Participants and the Department of Labor 

Better Information on Fees 

Highlights of GAO-07-21, a report to 

Ranking Minority Member, Committee on 

Education and the Workforce, House of 

Representatives 

American workers are increasingly

relying on 401(k) plans, which 

allow pre-tax contributions to 

individual accounts, for their 

retirement income. As workers 

accrue earnings on their 

investments, they also pay a

number of fees that may 

significantly decrease their 

retirement savings. 

Because of concerns about the 

effects of fees on participants’ 

retirement savings, GAO examined

(1) the types of fees associated

with 401(k) plans and who pays 

these fees, (2) how information on 

fees is disclosed to plan 

participants, and (3) how the 

Department of Labor (Labor)

oversees plan fees and certain 

business arrangements. GAO 

reviewed industry surveys on fees 

and interviewed Labor officials and 

pension professionals about

disclosure and reporting practices. 

What GAO Recommends

Congress should consider 

amending ERISA to require 

sponsors to disclose fee 

information on each 401(k) 

investment option in the plan to

participants and to require that 

401(k) service providers disclose to

plan sponsors the compensation

providers receive from other 

service providers. In addition, GAO 

recommends that Labor require 

plan sponsors to report a summary

of all fees paid out of plan assets or 

by participants. Labor generally

agreed with the findings and 

conclusions of our report.

Investment fees, which are charged by companies managing mutual funds 

and other investment products for all services related to operating the fund, 

comprise the majority of fees in 401(k) plans and are typically borne by 

participants. Plan record-keeping fees generally account for the next largest 

portion of plan fees. These fees cover the cost of various administrative 

activities carried out to maintain participant accounts. Although plan 

sponsors often pay for record-keeping fees, participants bear them in a 

growing number of plans. 

The information on fees that 401(k) plan sponsors are required by law to 

disclose is limited and does not provide for an easy comparison among 

investment options. The Employee Retirement Income Security Act of 1974

(ERISA) requires that plan sponsors provide participants with certain 

disclosure documents, but these documents are not required to contain 

information on fees borne by individual participants. Additional fee 

disclosures are required for certain—but not all—plans in which participants 

direct their investments. These disclosures are provided to participants in a 

piecemeal fashion and do not provide a simple way for participants to 

compare plan investment options and their fees. 

Labor has authority under ERISA to oversee 401(k) plan fees and certain 

types of business arrangements that could affect fees, but lacks the 

information it needs to provide effective oversight. Labor collects 

information on fees from plan sponsors, investigates participants’ 

complaints or referrals from other agencies on questionable 401(k) plan 

practices, and conducts outreach to educate plan sponsors about their 

responsibilities. However, the information reported to Labor does not 

include all fees charged to 401(k) plans and therefore has limited use for 

effective oversight and for identifying undisclosed business arrangements 

among service providers. Without disclosing these arrangements, service 

providers may steer plan sponsors toward investment products or services 

that may not be in the best interest of participants and may cause them to 

pay higher fees. Labor has several initiatives underway to improve the 

information it has on fees and the various business arrangements among 

service providers. 

Effect of a 1-Percentage Point in Higher Annual Fees on a $20,000 401(k) Balance Invested

over 20 Years 

Source: GAO analysis.

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Account balance

Accumulated account balance with 0.5 percent charge for fees

Accumulated account balance with 1.5 percent charge for fees

www.gao.gov/cgi-bin/getrpt?GAO-07-21.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 
Contents 

Letter 1

Results in Brief 2 

Background 5

Investment Fees Account for Most 401(k) Plan Fees and Are 

Usually Borne by Plan Participants 10 

Required Disclosures Provide Limited Fee Information to Assist 

Participants in Comparing Investment Options 15 

Labor Has Authority over 401(k) Plan Fees and Certain Types of 

Business Arrangements, but Lacks Information for Effective 

Oversight 20

Conclusions 28

Matters for Congressional Consideration 29 

Recommendation for Executive Action 29 

Agency Comments 29 

Appendix I Scope and Methodology 31 

Appendix II Comments from the Department of Labor 34 

Appendix III GAO Contact and Staff Acknowledgments 38 

Tables 

Table 1: Payers of Major 401(k) Plan Fees, 2005 14 

Table 2: Required Disclosure Documents to All Participants 16 

Table 3: Required Timing of Disclosure Documents with Fee 

Information 18

Figures 

Figure 1: 401(k) Plan Average Asset Allocation in 2005 6 

Figure 2: Flow of Bundled Plan Services 8 

Figure 3: Flow of Unbundled Plan Services 8 

Figure 4: Investment Fees as a Percentage of Total Plan Fees, 2005 11 

Figure 5: Plan Record-Keeping Fees as a Percentage of Total Plan 

Fees, 2005 12 

Page i GAO-07-21 401(k) Fees
Abbreviations 

AARP American Association of Retired Persons 

EBSA Employee Benefits Security Administration 

ERISA Employee Retirement Income Security Act 

FDIC Federal Deposit Insurance Corporation 

FRB Federal Reserve Board

NASD National Association of Securities Dealers, Inc. 

OCC Office of the Comptroller of the Currency 

PSCA Profit Sharing/401(k) Council of America 

SEC Securities and Exchange Commission 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

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other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-07-21 401(k) Fees
United States Government Accountability Office

Washington, DC 20548 

November 16, 2006 

The Honorable George Miller 

Ranking Minority Member 

Committee on Education and the 

 Workforce 

House of Representatives 

Dear Mr. Miller: 

American workers are increasingly relying on 401(k) plans for their 

retirement incomes. Named after section 401(k) of the Internal Revenue

Code, 401(k) plans are private pension plans that allow workers to save 

for retirement by diverting a portion of their pre-tax income into an 

investment account that can grow tax-free until withdrawn in retirement. 

Participation in 401(k) plans rose from fewer than 8 million participants in

the mid-1980s to about 47 million participants in 2005, and assets in these 

plans increased by more than twenty fold during the same period, from 

less than $100 billion to more than $2 trillion.1

 As workers accrue earnings

on their investments, they also pay a number of fees, including expenses, 

commissions, or other charges associated with operating a 401(k) plan. 

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. Even a small fee deducted 

from a worker’s assets today could represent a large amount of money 

years later had it remained in the account to be reinvested. Concerns have 

been raised that employers sponsoring the plans and plan participants may 

not be aware of all of the fees being charged to them or whether 

companies providing services to the plan have undisclosed business 

arrangements with other service providers that could negatively affect

participants. In light of the potential effects of fees on plan participants’ 

 1

For 2005 estimates, 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). 

Page 1 GAO-07-21 401(k) Fees
retirement savings, the Ranking Member of the House Committee on 

Education and the Workforce asked GAO to examine 

• the types of fees associated with 401(k) plans and who pays these 

fees, 

• how information on fees is disclosed to plan participants, and 

• how the Department of Labor (Labor) oversees plan fees and

certain types of business arrangements. 

To identify the fees associated with 401(k) plans and how they are charged 

to plan sponsors and plan participants, we interviewed officials from 

Labor, the Federal Deposit Insurance Corporation (FDIC), the Federal 

Reserve Board (FRB), the Securities and Exchange Commission (SEC), 

and the Treasury Department’s Office of the Comptroller of the Currency 

(OCC); met with service providers and other industry professionals; and 

collected information about the range of fees and how they are charged to

plan sponsors and participants. We also reviewed several industry surveys 

of 401(k) sponsors. To examine how well fees are disclosed to

participants, we identified the legal and regulatory disclosure 

requirements; met with 401(k) plan practitioners; and reviewed sample 

disclosure documents. To examine Labor’s role in overseeing plan fees 

and any undisclosed business arrangements among service providers, we 

reviewed Labor’s and other agencies’ legal and regulatory authority and 

Labor’s procedures for assuring that plans are meeting overall legal 

requirements, including the reporting of information on the form plan 

sponsors are required to submit to Labor, Form 5500. We also interviewed 

officials from four of Labor’s field offices and reviewed Labor’s current 

initiatives related to 401(k) plans. We conducted our review from January 

2006 through October 2006 in accordance with generally accepted 

government auditing standards. See appendix I for more detail regarding

our scope and methodology. 

Various fees are associated with 401(k) plans, but investment and recordkeeping fees account for most 401(k) plan fees and are borne by both plan

participants and sponsors. Investment fees—such as those charged by 

mutual fund advisors to select securities for the fund—account for the 

largest portion of total fees in most plans. For example, a 2005 industry 

survey estimated that investment fees made up about 80 to 99 percent of 

plan fees, depending on the number of participants in the plan. Plan 

record-keeping fees—those associated with maintaining participants’ 

Results in Brief 

Page 2 GAO-07-21 401(k) Fees
accounts, such as processing their fund selections and preparing and 

mailing account statements—are the second-largest portion of plan fees. 

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 comprise 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 record-keeping fees are charged as a percentage of a participant’s 

assets, a flat fee, or a combination of both. Although plan sponsors pay 

these fees in a considerable number of plans, they are increasingly being 

paid by participants. 

The information on fees that the Employee Retirement Income Security 

Act (ERISA) of 19742

 requires 401(k) plan sponsors to disclose is limited 

and does not provide an easy comparison of investment options. All 401(k)

plans are required to provide information on plan operations, participant 

accounts, and the plan’s financial status, which may include some 

information related to fees. ERISA also requires 401(k) plan sponsors that 

have elected liability protection from participants’ investment decisions to 

provide additional fee information. Most 401(k) plan sponsors elect this 

protection and therefore must provide information such as transaction 

fees related to each available investment option. Other plans that do not 

elect this protection may also provide access to fee information via such 

documents as 401(k) account statements and fund prospectuses. 

According to industry professionals, because plan sponsors provide this 

information in a piecemeal fashion, participants may not receive a clear 

picture of the total fees that they pay. In order to get a complete picture of

fees, participants must collect various documents over time and may be 

required to seek out some documents. Furthermore, the documents that 

participants receive do not provide a simple way for participants to 

compare fees—along with risk and historical performance—among the 

investment options in their 401(k) plan. 

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 

 2

29 U.S.C. §§ 1001-1461. 

Page 3 GAO-07-21 401(k) Fees
responsible for enforcing the requirements that plan sponsors (1) ensure 

that fees paid with plan assets are reasonable and for necessary services;

(2) be prudent and diversify the plan’s investments or, if plan sponsors 

elect liability protection, provide a broad range of investment choices for 

participants; and (3) report information known on certain business 

arrangements involving service providers. Labor does this in a number of 

ways, including collecting 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. Despite the agency’s efforts, the 

information reported to Labor, such as information reported on Form 

5500, does not include all fees paid by 401(k) plans. For example, plan 

sponsors are not required to report mutual fund investment fees to Labor

on the Form 5500 even though they receive this information from the 

mutual fund companies in the form of a prospectus. Without information 

on all fees, Labor’s oversight is limited because it is unable to identify fees 

that may be questionable. In addition, Labor and plan sponsors may not 

have information on arrangements among service providers that, 

according to officials at Labor, could steer plan sponsors toward offering 

investment options that benefit service providers but may not be in the 

best interest of participants. For example, a service provider that assists a 

plan sponsor in selecting investment options for the plan may also be 

receiving compensation from mutual fund companies for recommending 

their funds. The service provider may not disclose this business 

arrangement to the plan sponsor, and as a result, participants may have 

more limited investment options and pay higher fees for these options 

than they otherwise would. Labor has several initiatives underway to 

improve the information it has on fees and the various business 

arrangements among service providers. 

To ensure that plan participants, sponsors, and the Department of Labor

have more information on the fees associated with 401(k) plans, Congress 

should consider amending ERISA to require all plan sponsors of 

participant-directed plans to disclose fee information on each 401(k) 

investment option to participants in a way that facilitates comparison 

among the options. In addition, Congress should consider amending 

ERISA to explicitly require 401(k) service providers to disclose to plan 

sponsors the compensation they receive from other service providers. 

Finally, to better enable Labor to effectively oversee 401(k) plan fees, we

are recommending that the Secretary of Labor require plan sponsors to 

report a summary of all fees that are paid out of plan assets or by 

participants. In response to our draft report, Labor generally agreed with 

our findings and conclusions. Specifically, Labor stated that it will give 

Page 4 GAO-07-21 401(k) Fees
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. 

Roughly half of all workers participate in an employer-sponsored 

retirement, or pension, plan. Private sector pension plans are classified 

either as defined benefit or as 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) 

plans, employee stock ownership plans, and profit-sharing plans. 

Background 

Over the past two decades, there has been a noticeable shift by employers 

away from defined benefit plans to defined contribution plans. The most 

dominant and fastest growing defined contribution plans are 401(k) plans, 

which allow workers to choose to contribute a portion of their pre-tax 

compensation to the plan under section 401(k) of the Internal Revenue 

Code.3

 The use of 401(k) plans accelerated in the 1980s after the Treasury 

issued a ruling clarifying a new section of the tax code that allowed 

employers and employees to make pre-tax contributions, up to certain 

limits, to employees’ individual accounts. 

According to the most recent data from Labor, most 401(k) plans are 

participant-directed, meaning that a participant makes investment 

decisions about his or her own retirement plan contributions. About 

87 percent of all 401(k) plans—covering 92 percent of all 401(k) plan 

participants and 91 percent of all 401(k) plan assets—generally allow 

participants to choose how much to invest, within federal limits, and to 

select from a menu of diversified investment options selected by the 

 3

26 U.S.C. § 401(k) sets out requirements for plans to qualify for tax-deferred treatment.

Roth contributions to 401(k) plans were created under the Economic Growth and Tax

Relief Reconciliation Act of 2001 effective for plan years beginning on or after January 1,

2006. This new account type was subsequently made permanent under the Pension 

Protection Act of 2006. Designated Roth contributions are a new type of contribution that

can be accepted by new or existing 401(k) plans. If a plan adopts this feature, employees

can designate some or all of their elective contributions as Roth contributions (which are 

included in gross income) rather than pre-tax elective contributions. 

Page 5 GAO-07-21 401(k) Fees
employer sponsoring the plan, such as an assortment of mutual funds that 

include a mix of stocks, bonds, or money market investments. 

Equity funds accounted for nearly half of the 401(k) plan assets at the 

close of 2005. Equity funds are investment options that invest primarily in 

stocks, such as mutual funds, bank collective funds,4

 life insurance 

separate accounts, and certain pooled investment products (see fig. 1). 

Other plan assets were invested in company stock; stable value funds, 5

including guaranteed investment contracts; balanced funds;6

 bond funds; 

and money funds. 

Figure 1: 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

 4

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. 

5

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. 

6

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

Page 6 GAO-07-21 401(k) Fees
As participants accrue earnings on their investments, they also 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, fees may significantly decrease retirement savings. For example, a

1-percentage point difference in fees can significantly reduce the amount 

of money saved for retirement. Assume an employee of 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. 

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. As shown in 

figures 2 and 3, 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). 

Page 7 GAO-07-21 401(k) Fees
Figure 2: Flow of Bundled Plan Services 

Broker/Investment advisor Investment fund

Bundled vendor

Service provider subcontractors

(optional)

401(k) Plan

Source: GAO analysis of information from Profit Sharing/401(k) Council of America.

Figure 3: Flow of Unbundled Plan Services

Source: GAO analysis of information from Profit Sharing/401(k) Council of America.

Pension consultant

401(k) Plan

Investment fund

Record keeper

Custodian

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 

Page 8 GAO-07-21 401(k) Fees
sponsor is a fiduciary.7

 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 plan’s 

participants and beneficiaries. 

The law also provides Labor with oversight authority of pension plans.8

However, the specific investment products commonly contained in 

pension plans—such as company stock, mutual funds, collective 

investment funds, and group annuity contracts—fall under the authority of

the applicable securities, banking, or insurance regulators. 

• The SEC, among other responsibilities, regulates registered 

securities including company stock and mutual funds under 

securities law.9

• The federal agencies charged with oversight of banks—primarily 

FRB, OCC, and FDIC—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.10

 7

Any person who makes investment decisions with respect to a qualified employee benefit 

plan’s assets is generally a fiduciary. The duties the person performs for the plan rather

than their title or office determines whether that person is a plan fiduciary. 29 U.S.C. 

§ 1002(21)(A). 

8

IRS also oversees various aspects of 401(k) contributions under the authority of the 

Internal Revenue Code. 

9

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

with the SEC. 

10The variable annuity contract “wraps” around investment options, often a number of 

mutual funds. Participants select from among the investment options offered, and the

returns to their individual accounts vary with their choice of investments. If registered 

securities make up the underlying investments, they are regulated by the SEC. 

Page 9 GAO-07-21 401(k) Fees
An investment company, bank, or insurance company that is a service 

provider to a 401(k) plan may offer any or all of these types of investment 

products as plan options. 

Investment fees—which are charged by companies that manage mutual 

funds or other investment products for all services related to operating the 

fund—comprise the majority of fees in 401(k) plans and are typically

borne by participants. Plan record-keeping fees generally account for the 

next largest portion of plan fees. These fees cover the cost of various 

administrative activities carried out to maintain participant accounts. 

Participants typically pay for investment fees, which are usually based on 

assets in their accounts. Although plan sponsors often pay for recordkeeping fees, participants bear them in an increasing number of plans. 

Investment fees and plan record-keeping fees comprise the vast majority 

of total plan fees. Investment fees are, for example, fees charged by 

companies that manage a mutual fund for all services related to operating 

the fund. These fees pay for: selecting a mutual fund’s portfolio of 

securities and managing the fund; marketing the fund and compensating 

brokers who sell the fund; and providing other shareholder services, such 

as distributing the fund prospectus.11 These fees are charged regardless of 

whether the mutual fund or other investment product, such as collective 

investment funds or group annuity contracts, is part of a 401(k) plan or 

purchased by individual investors in the retail market.12 As such, the fees 

are usually different for each investment option available to participants in

a 401(k) plan. 

Investment Fees 

Account for Most 

401(k) Plan Fees and 

Are Usually Borne by 

Plan Participants 

Investment Fees and Plan 

Record-Keeping Fees 

Together Account for 

Nearly All of Plan Fees 

Investment fees account for the majority of 401(k) plan fees regardless of 

plan size. For example, as figure 4 illustrates, a 2005 industry survey 

 11Fees related to marketing and compensating brokers to sell the fund are known as 12b-1,

or distribution fees, and are limited by the National Association of Securities Dealers, Inc.

(NASD) to a maximum of 1 percentage point of the total expense ratio per year. 

12Mutual funds that use brokers to sell shares may also impose a sales fee or “load” when a 

fund is bought, transferred, or sold to compensate the broker. SEC does not limit the size

of the sales load a fund may charge, but the NASD does not permit exceeding 8.5 percent of 

the purchase price. A “front-end load,” is incurred when a mutual fund is purchased and 

reduces the amount available to purchase fund shares. A “back-end load” is a fee that is

charged when a mutual fund is sold or transferred. Back-end loads generally decrease over

time in steps until they are eventually eliminated. 

Page 10 GAO-07-21 401(k) Fees
estimated that investment fees accounted for 84.5 percent of total fees in 

plans with 25 members and for 98.6 percent of total fees in plans with 

2,000 participants. 

Figure 4: Investment Fees as a Percentage of Total Plan Fees, 2005 

75

80

85

90

95

100

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

Percentage of total plan fees

Source: HR Investment Consultants.

Number of plan participants

Since investment fees account for the bulk of plan fees, several investment 

consultants we interviewed encourage 401(k) plan sponsors to offer 

options such as institutional funds to lower fees. Institutional mutual 

funds resemble funds available in the retail market, but are typically only 

available to 401(k) plans with assets above a certain threshold, such as 

$1 million. Similarly, indexed funds have lower management fees than 

actively managed funds. These funds closely track a market performance 

indicator, such as the Standard & Poor’s 500, which largely eliminates 

expenditures associated with research, investment selection, and buying 

and selling. 

Plan record-keeping fees, which cover individual account maintenance for 

plan participants, generally constitute the second-largest portion of plan 

fees. Unlike investment fees, plan record-keeping fees apply to the entire 

401(k) plan rather than the individual investment options. Plan recordkeeping fees are usually charged by the service provider to set up and 

maintain the 401(k) plan. These fees cover a variety of activities such as 

enrolling plan participants, processing participant fund selections, 

Page 11 GAO-07-21 401(k) Fees
preparing and mailing account statements, and other related 

administration activities. 

A 2005 industry survey of service providers estimated that plan recordkeeping fees constituted 12 percent of total plan fees for plans with 

25 participants. As shown in figure 5, these fees make up a smaller 

proportion of total plan fees in larger plans, indicating economies of scale. 

Figure 5: Plan Record-Keeping Fees as a Percentage of Total Plan Fees, 2005 

0

5

10

15

20

25

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

Percentage of total plan fees

Source: HR Investment Consultants.

Number of plan participants

Note: While these data include primarily record keeping, they include a negligible amount of other 

administrative fees, according to the survey’s author. 

In addition to investment and record-keeping fees, there are a number of 

other fees charged to administer the plan as a whole, including

• trustee fees that are charged by an individual, bank, or trust 

company to securely maintain plan assets; 

• audit fees that are imposed by a service provider in connection 

with the annual audit that is required of ERISA-covered plans with 

more than 100 participants; 

• legal fees that are charged by an attorney or law firm to provide 

legal support for administrative activities, such as ensuring the 

Page 12 GAO-07-21 401(k) Fees
plan is in compliance with ERISA or representing the plan in a 

divorce settlement; 

• investment consulting fees that are charged by an advisor, often a 

pension consultant, hired to help the plan sponsor select funds for 

the plan and to monitor investments; and 

• communication fees that cover the cost of educating participants 

about the plan. Communication services may include a meeting led 

by a service provider to introduce the plan to participants. 

Communication services may also include providing participants 

with access to toll-free phone services, Internet service, and 

ongoing educational seminars. 

These fees generally comprise a much smaller percentage of total plan 

fees than investment and plan record-keeping fees. 

Participants Bear Most 

Investment Fees and an 

Increasing Number of 

Participants Bear Plan 

Record-Keeping Fees 

Participants pay for the majority of investment fees and a greater number 

bear plan record-keeping fees. As shown in table 1, a 2005 industry survey 

of 401(k) plan sponsors found that plan participants paid investment fees 

in almost 62 percent of plans with 5,000 members or fewer. This 

arrangement was even more common in plans with over 5,000 members 

where participants bear investment fees in about 71 percent of all plans. 

For both size plans, plan sponsors and participants shared investment fees 

in about 10 percent to 12 percent of plans. Another industry survey of plan 

sponsors with 1,000 employees or more also found that plan participants 

paid investment fees in the majority of plans in 2005. 

Page 13 GAO-07-21 401(k) Fees
Table 1: Payers of Major 401(k) Plan Fees, 2005 

Plans with fewer than 5,000 participants Plans with more than 5,000 participants 

Participants 

(percent) 

Sponsor

(percent)

Participants 

and sponsors

(percent)

Participants 

(percent) 

Sponsor

(percent)

Participants 

and sponsors

(percent)

Investment fees 61.8 27.5 10.6 71.5 16.2 12.3

Plan record-keeping 

feesa

32.5 58.3 9.2 50.4 34.6 15.0

Audit fees 16.0 82.5 1.5 33.3 62.2 4.4

Communication to 

employees 

20.0 70.5 9.5 34.3 49.6 16.1

Investment consulting 

fees 

33.0 60.0 7.0 39.0 52.8 8.1

Legal fees 10.3 84.7 5.0 20.7 66.7 12.6

Trustee fees 29.4 66.6 4.0 47.2 43.2 9.6

Source: Profit Sharing/401(k) Council of America (PSCA). 

a

In some cases, plan record-keeping fees are charged as a percentage of assets. 

Participants generally pay investment fees indirectly. The investment 

returns that participants receive reflect their share of the fund’s assets 

after investment fees and other expenses have been subtracted. 

Investment fees are reported as a percentage of the fund’s overall assets, 

also known as the expense ratio. 

The 2005 survey of plan sponsors also found that participants bear a plan’s

record-keeping fees in about 50 percent of plans with 5,000 participants or

more. Plan sponsors paid record-keeping fees in about 35 percent of these 

plans and share fees with participants in about 15 percent. The opposite is 

true for plans with fewer than 5,000 participants, where plan sponsors paid 

record-keeping fees in 58 percent of cases. However, many of the industry 

professionals whom we spoke with said plan participants bear a greater 

portion of these fees than they did in the past. According to these 

professionals, record-keeping fees have shifted to participants because 

companies changed the way they charge record-keeping fees and many 

plan sponsors wanted to reduce their share of plan fees. Originally, recordkeeping fees were explicit fees billed to the plan sponsor. When the use of 

mutual funds in 401(k) plans started to grow, some funds were marketed 

to sponsors as having no record-keeping fees. In these cases, record 

keepers were compensated out of the investment funds’ operating 

expenses for their services, such as maintaining individual account 

records for its retail investors and consolidating participant requests to 

Page 14 GAO-07-21 401(k) Fees
buy or sell shares. Some sponsors may have been unaware that recordkeeping fees were taken out of participant assets. Others were aware that

the fees were passed on to participants. 

Record-keeping fees may be charged as a percentage of assets, or based 

on the number of transactions or the number of participants in the plan.

Some industry professionals told us that fees charged as a percentage of 

assets may not reflect actual costs to the service provider since the fees 

grow regardless of the level of service provided. The professionals said 

service providers may charge record-keeping fees to participants as a flat 

fee and as an asset-based fee in plans with low assets. An asset-based fee 

would not generate enough revenue to cover record-keeping fees in these

plans, so a flat fee is added. As plan assets grow, the revenue generated by

asset-based fees eventually covers plan record-keeping fees, and the flat 

fee may be dropped. Other industry professionals said record-keeping fees

may vary if they are offered by insurance companies or banks that can use

fee structures unique to their industry. 

The fee information that ERISA requires 401(k) plan sponsors to disclose 

is limited and does not provide participants with an easy comparison of 

investment options. All 401(k) plans are required to provide disclosures on 

plan operations, participant accounts, and the plan’s financial status. 

Although they often contain some information on fees, these documents 

are not required to disclose the fees borne by individual participants. 

Additional fee disclosures are required for certain—but not all—plans in 

which participants direct their investments. These disclosures are 

provided to participants in a piecemeal fashion and do not provide a 

simple way for participants to compare plan investment options and their 

fees. 

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 2 provides an overview of each of these 

disclosure documents, and the type of fee information that they may 

contain. 

Required Disclosures 

Provide Limited Fee 

Information to Assist 

Participants in 

Comparing 

Investment Options 

Disclosures Provide 

Limited Information on 

Fees to Participants in a 

Piecemeal Way 

Page 15 GAO-07-21 401(k) Fees
Table 2: 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, 

that 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.

These required documents apply to all 401(k) plans, including plans in 

which participants have no control over investment decisions. Additional 

fee disclosures are required for certain—but not all—plans in which 

participants direct their investments. ERISA requires disclosure of fee 

information to participants where plan sponsors seek liability protection 

from investment losses resulting from participants’ investment decisions.

Such plans—known as 404(c) plans—are required to provide participants

with, 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.13 Upon request, 404(c) plans must also provide participants with, 

among other information, the expense ratio for each investment option. To 

meet certain 404(c) requirements, such plans distribute prospectuses or 

fund profiles. The prospectuses and fund profiles are not meant to be 

comprehensive for the entire 401(k) plan, but rather are relevant for 

individual investment options in the plan. 

According to the most recent Form 5500 data, 54 percent of 401(k) plans—

representing 64 percent of 401(k) participants—classify themselves as 

 13ERISA Section 404(c) generally provides relief for plan fiduciaries of certain individual 

account plans, such as 401(k) plans, from liability for the results of investment decisions 

made by plan participants and beneficiaries, under conditions specified in 29 C.F.R. §

2550.404c-1. 

Page 16 GAO-07-21 401(k) Fees
404(c).14 However, the data also show that 87 percent of 401(k) plans—

representing 92 percent of 401(k) participants—direct their 401(k) 

investments. These data suggest that some participant-directed plans are 

not 404(c) and, thus, not required to disclose to participants certain fee 

information such as the expense ratio of each investment option. 

Plan sponsors may voluntarily provide participants with more information 

on fees than ERISA requires, according to plan practitioners. For example, 

plan sponsors that do not elect to be 404(c) often distribute prospectuses 

or fund profiles when employees become eligible for the plan, just as 

404(c) sponsors do. Also, according to plan practitioners, plan sponsors 

are not required to provide record-keeping or other fee information in 

their account statements, although many do so. In addition, plan sponsors 

are not required to provide the investment fees for the investment options 

in the summary plan document, but they may provide this information as 

well. Still, absent requirements to do so, some plan sponsors may not 

identify all the fees participants pay.

Participants may not be aware of the different fees that they pay, yet are 

responsible for directing their investments within the plan. According to 

industry professionals, participants can be unaware that they pay any fees

for their 401(k) investments and are particularly unaware of investment 

fees that are typically not quantified on account statements. In a 

nationwide survey, more than 80 percent of 401(k) participants report not 

knowing how much they pay in fees.

15 Some industry professionals said 

that making participants who direct their investments more aware of fees 

would help them make more informed investment decisions.

Information on fees is disclosed to participants in a piecemeal way. In 

order to get a more complete picture of fees, participants must collect 

various documents over time. As shown in table 3, disclosure documents

with fee information are generally provided to participants at different 

times. 

 14The actual percentage of plans that qualify under 404(c) is unclear because the 

information is self-reported. 

15AARP Public Policy Institute, “Pension Participant Knowledge About Plan Fees,” Data

Digest (November 2004). 

Page 17 GAO-07-21 401(k) Fees
Table 3: Required Timing of Disclosure Documents with Fee Information 

Disclosure document Timing requirement 

Summary plan 

description 

Within 90 days of being covered by the plan, then every 5 or

10 years depending on changes. 

Account statement Generally, within 30 days of a written requesta

Summary annual report Annually 

Prospectus or fund 

profileb

Immediately following initial investment. 

Source: GAO analysis.

a

The Pension Protection Act of 2006 requires quarterly account statements beginning in 2007. 

b

Required only for 404(c) plans and for securities regulated by the SEC. 

Some documents that contain fee information are provided to participants 

automatically, whereas others, such as prospectuses or fund profiles, may 

require that participants seek them out. According to industry 

professionals, participants may not know to seek such documents out. 

Participants Cannot Easily 

Compare Investment 

Options Based on Fee 

Information Provided 

ERISA does not require that plan sponsors provide participants who are 

responsible for directing their investments with fee information that could 

assist them in comparing the plan’s investment options. To identify the fee 

information for comparing investment options, participants must sift 

through multiple documents that are not always disclosed to them 

automatically. For example, to piece together certain fees associated with

a plan’s investment options, a participant often must collect multiple 

prospectuses or fund profiles. Furthermore, because ERISA does not 

require that these documents be provided automatically to all participants, 

some participants may need to request them but may not know to do so. 

According to industry professionals, some participants may be able to

make comparisons across investment options by piecing together the fees 

that they pay, but doing so requires an awareness of fees that most 

participants do not have. Assessing fees across investment options can be

difficult for participants because the data are typically not presented in a 

single document which facilitates comparison. 

Participants can use fees along with other information, such as risk and 

historical performance, to compare different investment options. In some 

cases, differences in fees across products can be explained by their 

investment focus or other features. For example, mutual funds with shares

in international stock generally charge higher fees than mutual funds with 

shares in domestic stock because international funds generally incur 

Page 18 GAO-07-21 401(k) Fees
additional investment management costs. Higher costs can also arise if an 

investment option has additional features. For example, a provider may 

charge an additional fee to include certain benefit features, such as 

providing the participant with an option to convert a 401(k) account 

balance into a retirement annuity. Industry associations have considered 

different ways to present comparative information about a plan’s 

investment options to participants in a single document, but the industry 

does not have a standard way of doing so. These associations have 

generally suggested annually providing key information—such as the 

investment objective, fees, and other key features—associated with each 

plan’s investment options in a table to help participants compare among 

them. 

Industry professionals suggested that comparing the expense ratio— 

a fund’s operating fees as a percentage of its assets—across investment 

options is the most effective way to compare options’ fees. The expense 

ratio can be used to compare investment options because it includes 

investment fees that account for most of the fees borne by participants 

and is generally the only fee measure that varies by option. Fund options 

with relatively high fees, such as actively managed funds, tend to have 

larger expense ratios than funds which are not actively managed. Also, 

fund options that are only available to institutional investors tend to have 

lower expense ratios than other types of funds. 

Most 401(k) investment options have expense ratios that can be 

compared, but this information is not always provided to participants. 

According to industry data, at least 69 percent of 401(k) assets are 

invested in options, such as mutual funds, that are generally required to 

present the expense ratio in a prospectus.16 Participants who do not belong

to 404(c) plans are not required to receive prospectuses and therefore may 

not receive the expense ratio information. In addition, investment options 

besides mutual funds, such as guaranteed annuity contracts, may not be 

required to produce prospectuses that include expense ratios, but 

according to industry professionals, such options have expense ratio 

equivalents that investment industry professionals can identify. However, 

participants who do not receive this information cannot compare the 

investment options’ expense ratios. 

 16Mutual funds provide prospectuses. Other investment options, such as company stock,

may not provide prospectuses.

Page 19 GAO-07-21 401(k) Fees
Because differences in fees can have large impacts on returns over time, 

industry professionals recommend considering expense ratios when 

making investment decisions. However, they point out that expense ratios 

should not be considered in isolation; rather, they should be considered in 

light of other important investment factors, such as risk and historical 

performance. 

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. Labor collects 

information on fees from plan sponsors, investigates participants’ 

complaints or referrals from other agencies on questionable 401(k) plan 

practices, and conducts outreach to educate plan sponsors about their 

responsibilities. However, 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 other service providers. Certain 

business arrangements that are undisclosed may lead to participants 

paying higher fees for products or services that do not offer any additional 

value or benefit than other lower cost alternatives. Labor has several 

initiatives underway to improve the information it has on fees and the 

various business arrangements among service providers. 

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) diversify the plan’s investments or provide a 

broad range of investment choices for participants, and (3) report 

information known on certain business arrangements involving service 

providers. Labor does this in a number of ways, including collecting 

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. 

Labor collects information on fees charged to 401(k) plans primarily 

through the Form 5500. The form includes information on the plan’s 

sponsor, the features of the plan, and the number of participants. 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

Labor Has Authority 

over 401(k) Plan Fees 

and Certain Types of 

Business 

Arrangements, but 

Lacks Information for 

Effective Oversight 

Labor Collects Information 

on Fees, Investigates 

Complaints and Referrals, 

and Conducts Outreach to 

Educate Plan Sponsors 

Information on Fees 

Page 20 GAO-07-21 401(k) Fees
uses this form as a tool to monitor and enforce plan sponsors’ 

responsibilities under ERISA.17 The reporting form is not routinely 

provided to participants, but ERISA requires that it be made available 

upon request. 

Generally, information on 401(k) fees is reported on two sections of the 

Form 5500, Schedule A and Schedule C.18 Schedule A is used to report fees 

and commissions paid to brokers and sales agents for selling insurance 

products. Schedule C includes information on the fees paid directly or 

indirectly to service providers for all other investment products. Schedule 

C also identifies service providers with fees in excess of $5,000 by name. 

Labor officials told us that complaints from plan participants provide the 

most effective leads on plan sponsors’ violations of ERISA, but that Labor 

receives very few complaints related to excessive 401(k) plan fees. In 

fiscal year 2005, Labor received only 10 inquiries or complaints related to 

401(k) fees. A Labor official told us that most plan participants likely do 

not understand much about plan fees and are thus unlikely to complain 

about them. In addition to responding to complaints, Labor also receives 

referrals from various entities, such as other federal agencies. For 

example, federal banking regulators like the Federal Reserve Board will 

review bank operations as part of their oversight and may uncover 

instances where a bank that provides services to a 401(k) plan is violating

ERISA requirements. Several federal banking regulators have a written 

agreement to refer such cases to Labor, but Labor receives fewer than 

100 referrals per year from these and other entities, such as state 

insurance and securities agencies. A Labor official told us that only one of 

the referrals that the agency has closed over the past 5 years was directly 

related to fees.19

Investigations 

Labor uses the Form 5500 in its investigations, but according to agency 

officials, this effort does not find many fee violations because it is difficult 

to identify unreasonable fees. Officials stated that they conduct few 

investigations based solely on the 401(k) fee information provided on 

Form 5500 but may review the fees charged to the plan as a part of 

 1729 U.S.C. § 1023. 

18In addition to Schedule A and C, Labor also uses Schedules H and I to identify fee issues. 

19Since fiscal year 2004, Labor has closed about 35 additional investigations each year that

were referred from federal and state agencies. These referrals involved some sort of 

fiduciary breach and may have involved 401(k) plans. 

Page 21 GAO-07-21 401(k) Fees
investigations into other problems, such as not depositing participants’ 

contributions into their accounts in a timely manner. In addition, Labor 

may audit the Form 5500 to ensure that appropriate fees are disclosed. 

Labor officials told us that it is difficult to discern whether a fee is 

reasonable or not on its face, and therefore, investigators rarely initiate an

investigation into a fee’s reasonableness. Plan fees can vary widely based 

on the types of services offered, and a “boutique” plan may have high fees 

but offer many services that a plan sponsor has determined are in the 

interest of the plan’s participants. In the rare instance that a fee appears 

egregious, Labor will generally enlist the services of a “fee expert” to make 

that determination, because according to one official, Labor is unable to 

do so itself. A fee expert will conduct a benchmarking study or request 

estimates from other service providers to get a sense of the market rate for 

certain services. 

Labor’s most recent in-depth review of fees identified some plans with 

high fees but determined that they were not unreasonable or in violation 

of ERISA. Labor last undertook a comprehensive review of 401(k) fees in

1997, in response to media, industry, and government concern that 

participants were potentially being charged excessive fees. According to a 

Labor official, 50 401(k) plans were investigated to analyze plans’ 

compliance with certain ERISA requirements related to fees, such as 

ensuring that fees charged to the plan are reasonable.20 The plans were 

selected based on various factors including anecdotal evidence of high

fees and a listing in an industry journal of plans that had recently 

contracted with service providers. Labor found that the plan sponsors had 

complied with these ERISA requirements. In some cases, Labor did 

determine that participants were paying high fees. It referred these 

cases—which included insurance products and international equity 

funds—to a fee expert from academia for further analysis to determine if 

the fees were unreasonably high. The expert determined that the fees were 

high, but not unreasonable. Labor uncovered some violations unrelated to

fees and notified the plans of needed corrective actions. 

In fiscal year 2006, seven of Labor’s regional offices had ongoing 

enforcement projects related to fees, but none were exclusive to 401(k) 

plans. We spoke with four offices about their specific projects, the reasons 

 20Labor also selected 10 403(b) plans, which are similar to 401(k) plans but offered only to

employees of public schools and certain nonprofit organizations. 

Page 22 GAO-07-21 401(k) Fees
for their initiation, and their findings to date. According to agency officials, 

most of the investigations under these projects were initiated due to 

allegations related to defined benefit plans. The projects focused on 

specific areas, such as bank trust department investigations, settlor fees, 

or intermediary investment fees and practices.21

Labor has launched a nationwide campaign to improve workers’ health 

and retirement security by educating employers and service providers 

about their fiduciary responsibilities under ERISA.22 Its fiduciary education 

program includes nationwide educational seminars with fees among the 

topics covered. Labor’s campaign also includes several educational 

publications on topics such as understanding fees and selecting service 

providers. For example, one of the publications, Understanding 

Retirement Plan Fees and Expenses, is designed to help plan sponsors 

better understand and evaluate their plans’ fees and expenses.

23 Another, 

A Look at 401(k) Plan Fees for Employees, highlights the most common 

fees that may be paid by plans and is geared toward plan participants. 

Outreach 

Limited Information on 

Fees Paid by Plans Hinders 

Labor’s Ability to 

Effectively Oversee Fees 

The information reported 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. For example, plan 

sponsors are not required to report mutual fund investment fees to Labor, 

even though they receive this information for each of the mutual funds 

they offer in the 401(k) plan in the form of a prospectus. In addition to 

disclosing this information to sponsors of 401(k) plans, mutual fund 

companies are required to file this information with the SEC, which 

 21The goal of the bank trust department investigations project is to identify and investigate 

plans sponsored by banking institutions with a potential for fiduciary breaches and self 

dealing. Investigations in the settlor fee project examine the extent to which plans pay 

certain expenses that improperly confer a benefit on the plan sponsor. In some instances,

the fees on their face may appear to be reasonable expenses, but should have been paid by

the plan sponsor, rather than the plan. The main objective of the intermediary investment 

fees and practices project is to identify and correct violations stemming from abuses in fee 

arrangements, including hidden fees, excessive fees, and 12b-1 fees. 

22Labor’s fiduciary education program is intended to provide employers and plan officials 

with an understanding of the law and their responsibilities and focuses on steps for 

avoiding the most common problems Labor encounters in its enforcement activities. 

Labor’s educational seminars help plan sponsors understand rules and meet their 

responsibilities to plan participants. Seminars are also targeted to small businesses that are 

considering starting a pension plan. 

23For this and other publications related to 401(k) fees, see www.dol.gov/ebsa. 

Page 23 GAO-07-21 401(k) Fees
regulates mutual funds.24 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.25

Furthermore, prospectuses provide fees as an expense ratio, which is 

deducted from plan assets when investment returns are calculated, and as 

such are not explicitly stated.26 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. 

Industry experts told us that additional information could be reported on 

the Form 5500 to give Labor a more precise idea of the cost of

administering a defined contribution plan and 401(k) plan fees. The ERISA 

Advisory Council Working Group reported that the Form 5500, as 

currently structured, does not reflect the way that the defined contribution 

plan fee structure works, because only those fees that are billed explicitly

and are paid from plan assets are deemed reportable. 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 

reported to plan sponsors or on the Form 5500. The Advisory Council 

concluded that Form 5500s filed by defined contribution plans are of little 

use to policy makers, government enforcement personnel, plan sponsors, 

and participants in terms of understanding the cost of a plan. The Advisory 

Council recommended that Labor modify the Form 5500 and the 

accompanying schedules so that all fees incurred either directly or 

indirectly by these plans can be reported or estimated. This information 

then could be used to compare fees for research or regulatory purposes. 

 24For investors outside of a 401(k) plan, the SEC requires the mutual fund to provide the

prospectus directly to participants. However, in a 401(k) plan, the SEC requires the mutual 

fund to provide the prospectus to the plan sponsor. Sponsors of 404(c) plans are required

to provide participants with a prospectus only upon request.

25Mutual fund prospectuses are filed with the 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. Plan sponsors are not

required to include prospectus fee disclosures with their Form 5500 filings. Further, 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. 

26Further, under generally accepted accounting principles, the fees paid for mutual fund 

services are combined with a fund’s gains and losses and reflected only, and indirectly, in 

the income section in a plan’s Statement of Income and Expenses. 

Page 24 GAO-07-21 401(k) Fees
Labor and Plan Sponsors 

Lack Information on the 

Various Business 

Arrangements among 

Service Providers 

Many opportunities exist for business arrangements to go undisclosed, 

given the various parties involved in today’s 401(k) arena. Problems may 

occur when pension consultants or other companies providing services to

a plan also receive compensation from other service providers. Without 

disclosing these arrangements, service providers may be steering plan 

sponsors toward investment products or services that may not be in the 

best interest of participants. In addition, plan sponsors, being unaware, are 

often unable to report information about these arrangements to Labor on 

Form 5500 Schedule C. 

SEC recently identified certain undisclosed arrangements in the business 

practices of pension consultants that the agency referred to as conflicts of 

interest. 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 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.27 For example, the report revealed that more than 

half of the pension consultants examined had compensation arrangements 

with brokers who sell mutual funds. The report highlighted concerns that

these arrangements may provide incentives for pension consultants to 

recommend certain mutual funds to a 401(k) plan sponsor and create 

conflicts of interest that are not adequately disclosed to plan sponsors. 

Plan sponsors may not be aware of these arrangements and thus could 

select mutual funds recommended by the pension consultant over lowercost 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 

 27Office of Compliance Inspections and Examinations, Staff Report Concerning 

Examinations of Select Pension Consultants (U.S. Securities and Exchange Commission: 

May 16, 2005). 

Page 25 GAO-07-21 401(k) Fees
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.28

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 New Initiatives 

to Improve Information on 

Fees 

Labor officials told us about three initiatives currently underway to 

improve the disclosure of fee information by plan sponsors to participants 

and to avoid conflicts of interest. For one initiative, Labor is considering 

the development of a proposed rule regarding the fee information required 

to be furnished to participants under its section 404(c) regulation. 

According to Labor officials, they are attempting to define the critical 

information on fees that plan sponsors should disclose to participants and 

the best way to do so. They are deliberating on what fee information 

should be provided to participants and in what format to enable 

participants to easily compare the fees across the plan’s various 

investment options. 

The second initiative proposes changes to the Form 5500 Schedule A and 

instructions 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,29 many employers 

have difficulty obtaining timely Schedule A information from insurers. 

Labor proposes to add a checkbox to the form to permit plan sponsors to 

identify situations in which the insurance company has failed to provide 

Schedule A information. The form would also have space to indicate the 

type of information that was not provided. Because plan sponsors must 

submit a separate Schedule A for each insurance contract, Labor would be 

 28These fees are known as subtransfer agent fees. 

29Final Report of the 2004 ERISA Advisory Council Working Group, Health and Welfare 

Form 5500 Requirements (Nov. 10, 2004). 

Page 26 GAO-07-21 401(k) Fees
able to identify which insurance companies are failing to satisfy their 

disclosure obligations under ERISA and its regulations.30

The second initiative also proposes changes requiring plan sponsors to 

report additional information on fees on Schedule C of Form 5500. 

Consistent with recommendations made by the ERISA Advisory Council 

Working Groups and GAO, Labor issued a proposed rule on July 21, 2006, 

to revise the Schedule C and accompanying instructions 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. Also, a new section would be added requiring that the source 

and nature of compensation in excess of $1,000 received from parties 

other than the plan or the plan sponsor, such as record-keepers, be 

disclosed for certain key service providers, including, among others, 

investment managers, consultants, brokers, and trustees as well as all 

other fiduciaries. 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. The proposed change to the 

regulation is intended to make clear what plan sponsors need to know 

and, accordingly, what service providers need to provide to plan sponsors. 

In addition to these three initiatives, Labor has a model fee disclosure 

worksheet available on its Web site. The worksheet was developed to help 

plan sponsors analyze and compare fees during their negotiations with 

service providers. Labor worked with several industry groups to develop

this worksheet as a result of the problems it identified during its 1997 

investigations on 401(k) fees. Labor officials told us that this worksheet or 

a similar tool could be used to facilitate plan sponsors attainment and 

 3029 U.S.C. § 1023(a)(2). 

Page 27 GAO-07-21 401(k) Fees
analysis of fee information and that plan service providers could also use 

the worksheet to disclose their fee arrangements when soliciting potential

clients. 

As American workers take increasing responsibility for the adequacy of 

their retirement savings through 401(k) plans, they need to be more aware 

of the fees that they pay. ERISA does not explicitly require plan sponsors 

to disclose comprehensive information on fees to participants, yet even 

small fees can significantly affect retirement savings over the course of a 

career. Information about investment options’ historical performance is 

useful, but alone does not provide participants with enough information 

for making informed investment decisions. 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 

Amending ERISA and updating regulations to better reflect the impact of 

fees and undisclosed business arrangements among service providers will 

help Labor provide more effective oversight of 401(k) plan fees. Without 

such changes, Labor will continue to lack comprehensive information on 

all fees being charged directly or indirectly to 401(k) plans. In addition, 

some conflicts of interest that affect the fees that participants pay may 

continue to go unnoticed because service providers are not required to 

inform plan sponsors of the compensation they receive from other service 

providers. As a result, Labor may not be able to identify instances in which

service providers might be steering plan sponsors to overpriced 

investment options or services that are not in the best interest of plan 

participants. Further, requiring plan sponsors to report more complete 

information to Labor on fees—those paid out of plan assets or by 

participants—would put the agency in a better position to effectively

oversee 401(k) plans and, in doing so, to protect an increasing number of 

participants. 

Page 28 GAO-07-21 401(k) Fees
To ensure that participants have a tool to make informed comparisons and 

decisions among plan investment options, Congress should 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. This information could 

be provided via expense ratios and be communicated annually in a single

document alongside other key information about the investment options 

such as historical performance and risk. Providing such a disclosure to 

participants who are responsible for directing their 401(k) investments 

would ensure that they have another important tool to make informed 

comparisons and investment decisions among the plan’s options. 

To allow plan sponsors, and ultimately Labor, to provide better oversight 

of fees and certain business arrangements among service providers, 

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. 

To better enable the agency to effectively oversee 401(k) plan fees, 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. This summary 

should list fees by type, particularly investment fees that are being 

indirectly incurred by participants. 

We provided a draft of this report to Labor and SEC. Labor provided 

written comments, which appear in appendix II. Labor’s comments 

generally agree with the findings and conclusions of our report. 

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.

Matters for 

Congressional 

Consideration 

Recommendation for 

Executive Action 

Agency Comments 

Labor described a number of details related to its ongoing regulatory 

initiatives and outreach activities, many of which we also cited in the 

section of our report on Labor’s authority and oversight. In its written 

comments, Labor also suggested an additional technical change on legal 

fees for plan design, which we have made to the final report. 

Page 29 GAO-07-21 401(k) Fees
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 Secretary of Labor, the Chairman of the 

SEC; appropriate congressional committees; and other interested parties. 

In addition, the report will be available at no charge on GAO’s Web site at 

http//:www.gao.gov. 

If you or your staff have any questions about 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 have made major contributions to this report 

are listed in appendix III. 

Sincerely, 

Barbara D. Bovbjerg 

Director, Education, Workforce, and 

 Income Security Issues 

Page 30 GAO-07-21 401(k) Fees
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To identify the major fees associated with 401(k) plans and how they are 

charged to plan sponsors and plan participants, we interviewed officials 

from Labor, the Federal Deposit Insurance Corporation (FDIC), the 

Federal Reserve Board (FRB), the Securities and Exchange Commission 

(SEC), and the Treasury Department’s Office of the Comptroller of the 

Currency (OCC); met with service providers and other industry 

professionals; and collected information about the range of fees and how 

they are charged to plan sponsors and participants. We also reviewed 

several major 2005 industry surveys of 401(k) sponsors including surveys

by HR Investment Consultants, the Profit Sharing and 401(k) Council of

America (PSCA), and Hewitt Associates. Since the survey response rates 

are low, the data may not be generalizable. To assess reliability of the 

survey data, we contacted the authors of each survey and collected 

information on the methodology that was used to complete it.

• 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. Company officials said they survey vendors because 

they are generally more knowledgeable than employers about plan 

fees. The survey was e-mailed to respondents as an attachment in 

2004 and the results were updated in 2005. The authors were not 

able to provide a response rate, but said the survey was completed 

by most respondents. HR Investment Consultants provides a range 

of services to employers offering participant-directed retirement 

plans. 

• PSCA’s survey results are based on responses from 1,106 plan

sponsors that have profit-sharing plans, 401(k) plans, or a 

combination of both and represent 1 to 5,000-plus employees. The 

survey was mailed or faxed to respondents and conducted from 

March 2006 to May 2006. The survey provides a snapshot as of the 

end of 2005. The survey response rate was 21 percent. PSCA 

officials were able to provide us with data that excluded profitsharing plans only. PSCA is a national, nonprofit association of 

1,200 companies and their 6 million plan participants. According to 

PSCA, it represents the interests of its members to federal policy 

makers and offers assistance with profit sharing and 401(k) plan 

design, administration, investment, compliance, and 

communication. 

• Hewitt Associates’ survey results are based on responses from 

458 employers with 1,000 employees or more. Nineteen percent of 

the respondents represented Fortune 500 companies. The survey 

Page 31 GAO-07-21 401(k) Fees
Appendix I: Scope and Methodology 

was conducted from mid-March through April 2005. The survey and

a link to a Web site were e-mailed to respondents whose email 

addresses were available so they could complete the survey on the 

Web or on paper. The other surveys were mailed with a stamped 

and addressed enveloped. The survey had a 9 percent response 

rate. Hewitt Associates is a human resource outsourcing and 

consulting firm. 

To assess how fees are disclosed to plan participants, we reviewed 

relevant laws and regulations, spoke with agency and industry officials, 

and reviewed sample disclosure documents. To understand requirements 

to disclose information about fees to participants, we reviewed ERISA and 

relevant regulation sections such as 404(c) and spoke with agency officials 

described above. 

To identify the content and frequency of fee-related disclosures typically

made to 401(k) plan participants, we spoke with plan practitioners and 

reviewed documents including sample disclosure documents. Specifically,

we interviewed an array of service providers that serve plans of varying 

sizes including members of the American Bankers Association, American 

Benefits Council, American Council of Life Insurers, American Society of 

Pension Professionals & Actuaries, Securities Industry Association, 

Society of Professional Administrators and Record Keepers, as well as 

several plan consultants. We also interviewed officials from three plan 

sponsors. However, because we could not readily obtain a representative 

sample of service providers or plan sponsors, the information obtained 

does not represent the views of all service providers or plan sponsors. In 

addition, we reviewed a limited number of sample disclosure documents 

made to participants. Because the documents do not reflect a 

representative sample, we supplemented the information with Labor 

documents, including those from the 2004 ERISA Advisory Council’s 

Working Group on Fee and Related Disclosures to Participants, to 

determine the type of disclosures typically made to participants. 

To understand participants’ awareness of fees and related disclosures, we 

spoke with the American Association of Retired Persons (AARP) in 

addition to the agency and other industry professionals listed above. We 

also reviewed AARP’s nationwide survey of plan participants regarding 

plan fees and assessed its methodology. The survey reached plan 

participants aged 25 or older during November and December 2003. The 

total sample of over 1,200 respondents was stratified by age and 

geographic region and then weighted by age, region, and gender to create 

a representative sample of the total population. 

Page 32 GAO-07-21 401(k) Fees
Appendix I: Scope and Methodology 

To assess Labor’s role in overseeing plan fees and certain types of 

business arrangements, we reviewed Labor’s and other agencies’ legal and 

regulatory authority and Labor’s procedures for assuring that plans meet 

overall legal requirements. We reviewed the information required to be 

reported on the Form 5500, and several reports produced by federal 

agencies, trade associations, participant groups, and industry experts, 

regarding retirement plan fees and business arrangements among service 

providers. In addition to interviewing Labor officials in the national office 

about the their enforcement and outreach efforts, we also interviewed 

officials from Labor’s regional offices located in Atlanta, Georgia; 

Philadelphia, Pennsylvania; San Francisco, California; and Chicago, Illinois 

about their ongoing enforcement projects related to fees. We spoke with 

officials from the four offices about their specific projects, the reasons for 

their initiation, and the findings to date. Finally, we inquired about Labor’s

past initiative specific to 401(k) fees and reviewed Labor’s current 

initiatives related to 401(k) plans. 

Page 33 GAO-07-21 401(k) Fees
Appendix II: Comments from the Department Appendix II: Comments from the Department of Labor 

of Labor 

Page 34 GAO-07-21 401(k) Fees
Appendix II: Comments from the Department 

of Labor 

Page 35 GAO-07-21 401(k) Fees
Appendix II: Comments from the Department 

of Labor 

Page 36 GAO-07-21 401(k) Fees
Appendix II: Comments from the Department 

of Labor 

Page 37 GAO-07-21 401(k) Fees
Appendix III: GAO

A

 Contact and Staff 

cknowledgments 

Page 38 GAO-07-21

Appendix III: GAO Contact and Staff 

Acknowledgments 

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

In addition to the contact named above, Tamara Cross, Assistant Director, 

Daniel Alspaugh, Monika Gomez, Joel Green, Susan Pachikara, 

Dayna Shah, Roger Thomas, Rachael Valliere, and Walter Vance made 

important contributions to this report. 

 401(k) Fees

GAO Contact 

Staff 

Acknowledgments 

(130544) 
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