Private Pensions: Additional Changes Could Improve Employee Benefit Plan Financial Reporting
Published: 2009-11-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Labor (Labor) collects information on fees charged to 401(k) plans primarily through its Form 5500. Labor issued final regulations in November 2007, making changes to, among other things, Schedule C of the Form 5500. Labor put emphasis on reporting the indirect compensation paid to service providers and between service providers, in an effort to capture all of the costs that plan sponsors incur. Congress and others are concerned that Labor's rules could result in duplicative and confusing reporting. Given these concerns, Government Accountability Office (GAO) was asked to examine the new requirements and determine whether Labor's new requirements will provide (1) clear and understandable guidance to plan sponsors and (2) useful information to Labor and others. GAO analyzed Labor's regulations and interviewed Labor and other officials about disclosure and reporting practices.
section_title: What GAO Found
paragraphs: Sponsors and service providers report confusion over Labor's new reporting requirements for the Form 5500 Schedule C and over how plan expenses are defined. Specifically, they have questions regarding the distinction between eligible and ineligible indirect compensation, that is, which types of indirect compensation must be reported on the Form 5500 (compensation that qualifies as "eligible" does not have to be reported). Labor's guidance on its Web site thus far has been limited, and, according to sponsors and service providers GAO spoke with, has raised additional questions that remain unanswered. Specifically, Labor has not provided sufficient guidance for sponsors and providers to accurately determine what elements of compensation qualify as eligible indirect compensation (fees or expense reimbursements charged to investment funds and reflected in the value of the investment). Therefore, interpretations have been left up to sponsors and providers and may result in a range of reporting practices, causing Labor to receive inconsistent and incomplete data. In addition to the new Form 5500 requirements, Labor has proposed another regulation on service provider fee disclosure (its 408(b)(2) regulation), but it has not yet been finalized. Sponsors and service providers GAO talked with stressed the importance of coordinating this initiative with the new Form 5500 requirements. Doing so may reduce the burden and the cost to service providers of making changes to their data gathering and reporting systems and clarify for plan sponsors the information they need to understand and compare the fees charged by various service providers. In GAO's discussions with Labor officials, they agreed that there was a need to coordinate the two regulations, and said that although they are working to finalize the proposed 408(b)(2) regulation, it is uncertain when it will be published. Labor officials told GAO that they do not have specific plans for using the data received as a result of the new Form 5500 requirements and will wait to see what information is reported before deciding what to do with the data. Although Labor's new requirements are meant to ensure that plan sponsors obtain the information they need to assess the compensation paid to service providers for services rendered to the plan, the Form 5500 may not provide useful information to Labor and others. Because plan sponsors are likely to report indirect compensation in varying formats, it is unclear how Labor will be able to compare such data across plans. In addition, GAO previously reported that the information provided to Labor on the Form 5500 has limited use for effectively overseeing fees paid by 401(k) plans because it does not explicitly list all of the fees paid from plan assets, yet these types of fees comprise the majority of fees in 401(k) plans. For example, plan sponsors are not required to explicitly report asset-based fees that are netted from an investment fund's performance, even though they receive this information for each of the mutual funds they offer in the 401(k) plan. Thus, despite the changes to the Form 5500, the new information provided may not be very useful to Labor, plan sponsors, and others.

section_title: Letter
paragraphs: The Department of Labor (Labor) uses its Form 5500 as a tool to monitor  and enforce plan sponsors’ responsibilities under the Employee  Retirement Income Security Act of 1974 (ERISA). By filing the Form 5500,  plan sponsors satisfy the requirement to file annual reports concerning,  among other things, the financial condition and operation of plans. In  2004, Labor’s ERISA Advisory Council Working Group reported that the  Form 5500 Annual Return/Report (Form 5500), as it was then structured,  did not reflect the way that the defined contribution plan fee structure  works. At that time, only those fees that were billed explicitly and were  paid directly from plan assets were deemed reportable. The Advisory  Council concluded that Form 5500s filed by defined contribution plans  were of little use to policy makers, government enforcement personnel,  plan sponsors, and participants in terms of understanding the cost of a  plan, and recommended that Labor modify it so that all fees incurred  either directly or indirectly by these plans would be reported. As a part of  three regulatory initiatives to improve disclosures provided to various  parties, Labor issued final regulations in November 2007, making changes  to facilitate a transition to an electronic filing system and to update the  annual reporting forms, effective for the 2009 plan year. With these  regulations, Labor made changes to the reporting of service provider  compensation on the Schedule C of the Form 5500. Labor also has  proposed regulations on two other initiatives that are awaiting review and  approval by the current Secretary of Labor.
Congress and others are concerned that Labor’s rules for reporting  compensation are more extensive than necessary and could result in  duplicative and confusing reporting. In addition, questions have been  raised by industry experts over whether the new changes impose  significant costs on service providers as they track and disclose the  additional information, and whether these costs will be passed on to plan  participants. Given these concerns, GAO was asked to examine the new  requirements in Labor’s final regulations and form revision and to answer  the following questions:  1.  Do Labor’s new requirements provide clear and understandable  guidance to plan sponsors? 2.  Will the new requirements provide useful information to Labor and  others?
To determine whether Labor’s new requirements provide clear and  understandable guidance to plan sponsors, we interviewed nine plan  sponsors. We randomly selected three plan sponsors from the Form 5500  database, and selected six plan sponsors referred by industry  associations, plan service providers, well-known industry experts,  industry associations, researchers, and Labor. We also reviewed related  documents from Labor, such as its compliance assistance and technical  guidance information, and frequently asked questions (FAQ) from its Web  site that are meant to aid employers in complying with the new regulations  and forms revision. In addition, we reviewed ERISA and relevant  regulations governing 401(k) plans, including Labor’s proposed  regulations, to understand current and proposed annual reporting  requirements. We interviewed and collected documentation from those  affected by the new Schedule C requirements, to get their views on  whether these new requirements will provide useful information to Labor,  plan sponsors, and others. We also interviewed and collected  documentation from a variety of stakeholders, including plan sponsors,  service providers, industry and consumer associations, attorneys, and  Labor. We obtained these stakeholders’ views on the new requirements  and identified any challenges sponsors might face. We also collected and  analyzed information on the Form 5500 from other sources, such as the  reports and testimonies from ERISA Advisory Council Working Groups.  Finally, we reviewed previous work done by GAO to provide an update on  Labor’s efforts regarding the Form 5500 and its regulatory initiatives.
We conducted this performance audit from October 2008 through  November 2009 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: ERISA, among other requirements, establishes the responsibilities of  employee benefit plan decision makers (fiduciaries) and the requirements  for disclosing and reporting plan fees. ERISA is designed to protect the  rights and interests of participants and beneficiaries of employee benefit  plans and to outline the responsibilities of the employers and  administrators who sponsor and manage these plans. Under Titles I and IV  of ERISA and the Internal Revenue Code (IRC), pension and other  employee benefit plan administrators are required to file information  annually on the financial condition and operations of the plan. The  requirements for completing the Form 5500 vary according to the type of  plan. If a company sponsors more than one plan, it must file a Form 5500  for each plan. Additionally, ERISA and the IRC provide for the assessment  or imposition of penalties by Labor and the Internal Revenue Service (IRS)  for plan sponsors not submitting the required information when due.
There are various types of Form 5500 filers. Filers are classified as either  single-employer plans, multiemployer plans, multiple-employer plans, or  direct filing entities (DFE). In general, a separate Form 5500 must be filed  for each plan or DFE. Single-employer plans are maintained by one  employer or employee organization. Multiemployer plans are established  pursuant to collectively bargained pension agreements negotiated between  labor unions representing employees and two or more employers and are  generally jointly administered by trustees from both labor and  management. Multiple-employer plans are maintained by more than one  employer and are typically established without collective bargaining  agreements. DFEs are trusts, accounts, and other investment or insurance  arrangements in which plans participate and that are required to or  allowed to file the Form 5500.
subsections: section_title: Form 5500 Annual Return/Report
paragraphs: The Form 5500 was intended, in part, to measure employers’ compliance  with ERISA’s fiduciary and funding provisions, among other requirements.  It provides information about the financial condition of the plan, annual  amounts contributed by participants, and the plan’s investment income.  The form also provides information on plan characteristics, such as plan  type (defined benefit or defined contribution), method of funding, and  numbers of employees and participants as well as the number of  employees who are excluded from the plan for various reasons.
The Form 5500 is the principal source of information about employer- sponsored pension and welfare benefit plans that is available to Labor,  IRS, and the Pension Benefit Guaranty Corporation (PBGC), and is the  reporting vehicle for about 730,000 such plans. Accordingly, the Form 5500  constitutes an integral part of each agency’s enforcement, research, and  policy formulation programs. It is also a source of information and data for  use by other federal agencies, Congress, and the private sector in  assessing employee benefit, tax, and economic trends and policies. The  form also serves as a primary means by which plan operations can be  monitored by participants, beneficiaries, and the general public.
Labor, IRS, and PBGC jointly developed the Form 5500 so that employee  benefit plans could satisfy (1) the provisions of the IRC that apply to tax- qualified pension plans and (2) the annual reporting requirements under  ERISA. Labor enforces ERISA’s reporting and disclosure provisions and  fiduciary responsibility standards, which, among other things, concern the  type and extent of information provided to the federal government and  plan participants and ensure that employee benefit plans are operated  solely in the interests of plan participants. IRS enforces standards that  relate to such matters as how employees become eligible to participate in  benefit plans; how they become eligible to earn rights to benefits; and how  much, at a minimum, employers must contribute. PBGC insures the  benefits of participants in defined benefit private pension plans.
section_title: Labor’s Regulatory Initiatives
paragraphs: Labor’s regulatory initiatives to expand disclosure requirements cover the  following three distinct areas: (1) disclosures by plan sponsors to assist  participants in making informed investment decisions; (2) disclosures by  service providers to assist plan fiduciaries in assessing the reasonableness  of provider compensation and potential conflicts of interest; and (3) more  efficient, expanded fee and compensation disclosures to the government  and the public through a substantially revised, electronically filed Form  5500 Annual Return/Report.
Labor implemented the third initiative on expanding fee and compensation  disclosures on the Form 5500—issuing regulations revising the Form 5500  in November 2007—in an effort to facilitate the transition to an electronic  filing system; reduce and streamline annual reporting burdens; and update  the annual reporting forms to reflect current issues, agency priorities, and  new requirements under the Pension Protection Act of 2006. According to  officials at Labor, these changes were made to increase transparency  regarding the fees and expenses paid by employee benefit plans. Labor  also wanted to ensure that plan officials obtain the information they need  to assess the compensation paid for services rendered to the plan, taking  into consideration revenue-sharing arrangements among plan service  providers and potential conflicts of interest.
section_title: Fee/Compensation Reporting on the Form 5500
paragraphs: For the 2009 plan year Form 5500, the new Schedule C requires plan  sponsors to classify the fees they pay service providers as either “direct”  or “indirect” compensation. As shown in table 1, fees are separated into  those paid directly by the plan to a service provider and those received by  a service provider indirectly from another service provider.
Plan sponsors must also determine whether any indirect compensation is  reportable (i.e., “ineligible” or “eligible” for exemption from Labor’s  reporting requirements, as shown in table 2). Most indirect compensation  starts out as having to be reported on the Schedule C.
However, indirect compensation can readily become “eligible” indirect  compensation (EIC). For indirect compensation to be EIC, and thus not  reported on the Schedule C, the plan sponsor must receive written  materials from the service provider that describe and disclose the  following information: 1.  the existence of indirect compensation,  2.  services provided for this compensation,  3.  formulas used to calculate the value of this compensation,  4.  who received the compensation, and  5.  who paid the compensation.
When indirect compensation does qualify as “eligible,” sponsors have the  option of using an alternative reporting format that, according to Labor, is  simpler than the format that must be used to report ineligible indirect  compensation. With the alternative reporting format, plan sponsors only  have to disclose the name, address, and employer identification number of  these service providers. Whether a plan sponsor receives the required  written disclosures is the key to whether indirect compensation is  reportable on the Schedule C.
According to Labor, reporting indirect compensation as EIC is an option  that the sponsor may choose instead of reporting under the rules  applicable to other indirect compensation. Indirect compensation does not  qualify as EIC if a service provider does not provide the required  disclosures to the plan sponsor. In this case, the plan sponsor is required  to report the available information from the service provider on the  Schedule C, such as the identity of the service provider and nature of the  services provided. The plan sponsor is also required to list the service  provider for failing to or refusing to provide necessary information.  However, if the plan sponsor does receive information from the service  provider upon request, the plan sponsor has the option of reporting the  indirect compensation as EIC (i.e., reporting only that indirect  compensation was paid and who provided the disclosure).
Many of the fees and expenses associated with mutual fund investments  are not explicitly reported on the Form 5500. According to a 2004 report  by Labor’s ERISA Advisory Council Working Group on Plan Fees and  Reporting on Form 5500, many 401(k) and 403(b) plans have moved  toward using mutual funds as an investment option. With mutual funds,  the plan service provider takes the investment management fees and  expenses of managing the mutual fund directly from the mutual fund  earnings, and these fees are not explicitly reported to plan sponsors.  Without data on mutual funds, the largest component of most 401(k)  retirement plans, Labor is unable to fully assess the impact of service  provider fees on investment returns. In our November 2006 report, we  recommended that Congress consider a statutory change with explicit  disclosure requirements for service providers. Without such a change, we  concluded, Labor will continue to lack comprehensive information on all  fees being charged directly or indirectly to 401(k) plans. Figure 1  illustrates the disclosure of plan fee information from service providers to  plan sponsors, which then report the fees to the federal government. The  figure also shows that some fees are reported to the Securities and  Exchange Commission (SEC), not to Labor.
Additionally, many plan fiduciaries enter into bundled arrangements with  other plan service providers for recordkeeping or other administrative  services that typically do not entail explicit charges to the plan. In a  “bundled arrangement” plan, service providers such as recordkeepers and  trustees are often compensated for their services to the plan (1) through   either subtransfer agent fees, 12b-1 fees, or other administrative fees or  (2) through what are called “revenue-sharing arrangements.” As a result,  fees and expenses are not paid from plan assets, but rather from the  expenses of one of the plan’s investments (e.g., a mutual fund’s operating  expense, which is shared with the plan’s service provider).
section_title: Labor’s New Reporting Requirements Remain Unclear to Sponsors, but Coordination with Other Regulatory Initiative May Help
subsections: section_title: Sponsors Report That Labor’s New Requirements Remain Unclear
paragraphs: Even though Labor has provided guidance on their recent changes to the  Form 5500 Schedule C, plan sponsors and service providers reported that  they were unclear about Labor’s new reporting requirements. Specifically,  plan sponsors and experts told us that they have questions regarding the  distinction between eligible and ineligible indirect compensation, and  several said that they were unclear about what types of compensation  qualified as EIC. A recent survey of service providers also reports  confusion regarding compliance. An industry association representing  service providers surveyed its membership, asking if sponsors and service  providers understand Labor’s new Schedule C requirements enough to  effectively comply. Although only a small number of members   (19) responded to the survey, 74 percent of the respondents (14) reported  that Labor has not provided sufficient guidance for providers to accurately  determine what elements of compensation qualify as EIC.
Plan sponsors and experts were also concerned about how much  compensation should be disclosed. Figure 2 illustrates the potential  difficulty. For example, a plan pays a recordkeeper direct compensation to  administer the plan, which includes sending new participants a welcome  packet about the plan. Part of the compensation that the recordkeeper  receives goes toward paying a fulfillment vendor to make the welcome  packets and send them to participants. The fulfillment vendor, in turn,  pays a printer to print and collate the packets. As a result, there are  multiple layers of payments involved, and sponsors and experts were  unsure of how much of the indirect compensation they should be required  to disclose. They were also concerned that the compensation would be  reported multiple times on the Schedule C. For example, amounts paid by  the recordkeeper to vendors would already be included in the overall  amount paid by the plan sponsor to the recordkeeper.
Concerns have also been raised about how to report noncash  compensation. Sponsors and service providers said that they were  uncertain about the new Schedule C requirement to report noncash  compensation, which is also a type of indirect compensation. Sixty-three  percent (12 of 19) of members who responded to the industry survey  reported insufficient guidance on this issue. For example, one plan  sponsor explained that he was not sure how he would handle, or whether  he would even report, the noncash compensation benefit (food,  entertainment, and making contacts) of attending a marketing event  designed to facilitate future sales of ERISA plans. Respondents (service  providers) in the industry survey were asked to imagine that their  organization sponsored a similar event for customers and potential  customers. Respondents were evenly split on how they would  communicate the value of the benefit to attendees for purposes of  Schedule C reporting. Some respondents believed the event would not be  reportable, while others said they would provide its full value to all  attendees and leave it to them to decide whether the event is reportable.
section_title: Uncertainty Regarding the Reporting of Indirect Compensation May Result in Incomplete Data Being Reported to Labor
paragraphs: Because service providers may have difficulty determining what elements  of compensation qualify as EIC, different interpretations and reporting  practices may ensue and could result in inconsistent and incomplete data  being reported to Labor. For example, some sponsors may interpret  certain compensation as reportable, while others may not, leaving Labor  with incomplete information from some plans. In addition, since amounts  categorized as EIC will not be reported, Labor will have no way of using  these data to determine whether the amounts being paid by plans are  reasonable and will be unable to compare these types of compensation  across plans. According to Labor, not having to report amounts  categorized as EIC is intended to simplify the annual reporting process  and reduce the burden for plans and service providers for the types of  indirect compensation that commenters said would be difficult and  potentially expensive to allocate to individual plans.
Industry experts and plan sponsors with whom we spoke said additional  guidance on reporting indirect compensation may make it easier for plan  sponsors to comply. Labor has posted a set of FAQs on its Web site  regarding the changes that are specific to Schedule C reporting. However,  industry officials with whom we spoke said that although these FAQs  answered many questions, additional questions have stemmed from  reading the FAQs that have not yet been addressed. Labor officials told us  that they were reviewing and prioritizing the additional questions they  have received to develop further guidance.
As filing deadlines for the 2009 plan year draw closer, sponsors and  service providers have told us that they still have questions about the new  Schedule C requirements, and may need more time to comply. Labor has  already noted on its Web site that there is flexibility regarding reporting  for the 2009 plan year, stating that as long as sponsors receive a statement  from their service providers that, despite a good-faith effort, they were  unable to provide the newly required information to them, sponsors will  not be required to report those service providers on the Schedule C.
section_title: Coordination with Other Regulatory Initiative Could Alleviate Compliance Burden
paragraphs: According to industry experts and plan sponsors with whom we spoke, the  coordination of one of Labor’s other initiatives on fee disclosure with the  current Form 5500 requirements could make it easier for plan sponsors to  comply. Specifically, sponsors and service providers stressed the  importance of Labor coordinating the new Form 5500 requirements, which  govern reporting at the end of a plan year, with the finalization of its  proposed rule on “up-front” service provider disclosure to plan sponsors.  Labor has requirements that govern the entering of a service agreement  between a sponsor and service provider, referred to as the 408(b)(2)  requirements, and has proposed changes to them that have not yet been  finalized. Consequently, the new Schedule C requirements, or “after-the- fact” disclosures,” were finalized before the 408(b)(2) regulation, which  governs “up-front” disclosures. Since plan sponsors report on the Schedule  C an after-the-fact summary of the fees and expenses paid by their plans  during the plan year, the information provided on this form is directly  related to information about fees and expenses that service providers will  be required to disclose to plan sponsors by the 408(b)(2) requirements “up  front,” at the beginning of a service relationship. In our discussions with  Labor officials, they noted that the better scenario would have been  publishing the finalized 408(b)(2) regulation before the new Form 5500  requirements and acknowledged the importance of coordinating the  finalization of the proposed regulation with the Form 5500 requirements.  The officials told us that the move to require electronic filing for the 2009  plan year led them to finalize the Schedule C requirements first. However,  it is unclear when the 408(b)(2) regulation will be finalized, which is  important given that the first Form 5500s will be filed under the new  requirements in July 2010.
If the Schedule C requirements are not coordinated with the finalization of  the proposed rule to change up-front disclosure, there could be competing  sets of disclosure requirements for sponsors and service providers. Service  providers had anticipated that the 408(b)(2) regulations would have  already been finalized to coordinate with the changes to the Form 5500 to  ensure they comply with both sets of rules at once. Without the  coordination, service providers are in the position of potentially having to  make expensive investments to update their data systems two separate  times. In addition, coordinating the 408(b)(2) requirements with the Form  5500 requirements could help ensure that plan sponsors are meeting their  fiduciary responsibilities when selecting or renewing a contract with a  service provider.
section_title: Labor Is Unclear about How It Will Use the New Information Reported on the Form 5500, and the Form 5500 May Continue to Not Provide Useful Fee Information to Labor and Others
paragraphs: Labor officials told us that they do not have specific plans for using the  data received as a result of the new requirements, and we found that even  with the changes, the Form 5500 may not be useful to Labor, sponsors, or  others. Labor officials told us that they will wait to see how the newly  required information is reported before determining its use. In addition,  because plan sponsors will be required to list any service provider who  fails to or refuses to provide the necessary information on the Schedule C,  Labor could potentially pursue listed service providers for enforcement  action. However, it is unclear whether Labor has any plans to devote  additional resources to follow up on service providers. In fact, for the 2009  plan year, plan sponsors will not be required to list service providers who  fail to provide information if the service provider provides a statement that  they made a good-faith effort to make any necessary recordkeeping and  information system changes in a timely fashion.
It is also unclear whether Labor has a plan to follow up with plan sponsors  to ensure that they have received the newly required disclosures. Labor  officials told us that the new requirements are meant to reinforce a  fiduciary’s obligation of monitoring service providers and plan fees and  also are intended as an “exercise in discipline” for the sponsor, since the  sponsor will have to create a financial record to submit it to Labor.  According to these officials, this will ensure that sponsors receive the  information they need about indirect compensation paid to service  providers.
Labor’s efforts are also meant to effect a behavioral change in plan  sponsors and service providers. According to Labor officials, the intent is  for plan sponsors to understand and then obtain the information they need  to determine the reasonableness of the fees they are paying. Since service  providers often prepare the Form 5500 on behalf of plan sponsors, the  regulatory changes are also designed to notify service providers that  compensation information should be provided to sponsors. Still, Labor and  others are concerned that some service providers, who may not feel bound  by Labor’s reporting requirements, may neglect to list the indirect  compensation they may have received.
Finally, the Form 5500 continues to have limited use for Labor, sponsors,  and participants.
Labor. Despite Labor’s efforts with the new Form 5500 requirements,  information on asset-based fees is still not explicitly required to be  reported on the form. As we have previously reported, the form does not  explicitly list all of the fees paid from plan assets. For example, plan  sponsors were not required to report mutual fund investment fees to  Labor, even though they received this information for each of the mutual  funds they offered in the 401(k) plan in the form of a prospectus. 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. Furthermore, prospectuses provide fees as  expense ratios, which are used as an intermediate step in calculating net  rates of return, and, as such, the dollar amount of deductions from plan  assets are not explicitly stated.
Labor officials told us that asset-based fees are now required to be  reported on the Schedule C. However, even with the changes made to the  reporting of indirect compensation, plan sponsors may wind up only  reporting the presence of such fees on the Schedule C along with the  identity of the service provider. Because these fees are already reported to  SEC, the service provider must either (1) provide the plan sponsor with a  document that discloses the documents already sent to SEC, with  references to the pages or sections of the documents that contain the  required information, or (2) determine whether the amount of the fund’s  investment management fee that is allocable to the specific 401(k) plan is  enough to be reportable, and then provide the dollar amount or a  description of the formula used to calculate the amount of the  compensation to the plan sponsor. The plan sponsor can then treat the  asset-based fee or compensation as EIC and only report the identity of the  service provider. Without information on all of the fees charged directly or  indirectly to 401(k) plans, Labor is limited in its ability to identify fees that  may be questionable.
Labor officials told us that the changes to the Form 5500 were not meant  to result in a comprehensive database of plan fees, because Labor did not  want to put an undue burden on plan sponsors to comply with the new  Form 5500 requirements. Labor asserts the expansion of the Schedule C is  already significant. In addition, Labor officials told us that because the  Schedule C is only filled out by larger plans with more than 100  participants, the schedule is not a complete picture of the universe of plan  fees.
Sponsors. The Form 5500 may also not be the best vehicle for sponsors to  assess service provider fee reasonableness or to understand business  arrangements between service providers, since the form is filed long after  the plan sponsor has already engaged the provider and selected the  investment options. For the most part, the form is filled out for plan  sponsors by service providers, who know the compensation arrangements  and how to calculate the fees charged. According to industry experts,  determining the dollar amounts to attach to ineligible indirect  compensation is a source of confusion, because although some indirect  compensation is straightforward, the calculation of other compensation is  left to the best judgment of the service provider. Also, service providers  may also choose to disclose only the formulas they use to determine  ineligible indirect compensation, making it difficult for sponsors to assess  fees or understand business arrangements.
Participants. Participant groups told us that plan sponsors who use the  Form 5500 to inform participants are likely to overwhelm participants with  the volume and detail required as a result of Labor’s new regulations. Both  Labor and industry experts told us that the Schedule C is not designed to  be used by participants because it does not provide them with an easy  comparison of available investment options.
section_title: Conclusions
paragraphs: Labor has recently made some effort to improve the Form 5500,  specifically the Schedule C. However, the changes made seem unlikely to  resolve the issues surrounding service provider disclosure to plan  sponsors. Absent detailed guidance aimed at clarifying the indirect  compensation reporting requirements, Labor is at risk of receiving  inconsistent and incomparable information on the Schedule C. In addition,  the new requirements currently give plan sponsors the option of not  disclosing EIC on the Schedule C. If Labor allows certain indirect  compensation to be deemed EIC, and therefore not to be reported, Labor  will continue to have incomplete information on compensation received  by service providers, and will be no better informed.
Similarly, as long as asset-based fees netted from an investment fund’s  performance are not required to be reported on the Form 5500, sponsors,  participants, and Labor will not know the true costs of a plan. Requiring  plan sponsors or administrators to report more complete information to  Labor on fees—that is, those paid out of plan assets or by participants— puts the agency in a better position to effectively oversee defined  contribution plans.
Despite Labor’s intentions in changing the Form 5500 Schedule C, the way  the regulations are currently written may not result in an increase in the  amount of meaningful service provider compensation information  reported to Labor. In addition, it is unclear whether plan sponsors will  actually receive the information on service provider compensation that  Labor believes is important for them to have. Because of the option to  distinguish indirect compensation as either eligible or ineligible, service  providers may choose to qualify their compensation as EIC and not  provide their disclosures to plan sponsors.
Meanwhile, Labor has also proposed regulatory changes that could  eliminate some of the confusion surrounding 408(b)(2) disclosure  requirements. However, it is unclear whether the final regulations will be  coordinated with the existing changes to the Form 5500 reporting  requirements. Coordinating these initiatives may reduce the burden and  the cost to service providers and clarify for plan sponsors the information  they need for the service provider selection and renewal processes.
Finally, as we suggested in our November 2006 report, absent a statutory  change with explicit requirements for service providers, Labor will  continue to lack comprehensive information on all fees being charged  directly or indirectly to 401(k) plans.
section_title: Recommendations for Executive Action
paragraphs: To minimize the possibility that inconsistent and incomparable  information will be reported on the Schedule C and to ensure that the data  collected results in meaningful information for Labor, sponsors, and  participants, we recommend that the Secretary of Labor take the following  action:    Provide additional guidance regarding the reporting of indirect  compensation and require that all indirect compensation be disclosed on  the Schedule C.
Furthermore, consistent with our previous recommendation, to ensure  comparable disclosure among all types of service providers and ensure  that all investment products’ fees are fairly disclosed, we recommend that  the Secretary of Labor take the following action:    Require asset-based fees that are netted from an investment fund’s  performance (and, as such, are not paid with plan assets) be explicitly  reported on the Form 5500.
To reduce the potential for additional costs and burden being placed on  service providers, we recommend that the Secretary of Labor take the  following action:    Coordinate the implementation of the Form 5500 revisions with the  publication of its final 408(b)(2) regulations, since the two initiatives are  closely related.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Department of Labor (Labor). We  received written comments from the Assistant Secretary for Employee  Benefits Security Administration, which we reproduced in appendix I.  Labor generally agreed with our recommendations. Labor also provided  technical comments, which we have incorporated in this report where  appropriate.
Labor stated that it is committed to making the shift to the expanded  Schedule C reporting requirements as smooth as possible, and that it has  already engaged in substantial outreach on the new reporting  requirements. Specifically, regarding our recommendation that Labor  provide additional guidance on the reporting of indirect compensation,  Labor stated that it has plans to continue its outreach efforts, including  publishing additional Schedule C guidance. Regarding our  recommendation that all indirect compensation be disclosed on the  Schedule C and that asset-based fees be explicitly reported on the Form  5500, Labor explained that it had originally proposed that all indirect  compensation charged against a plan’s investments be required to be  reported on the Schedule C, without providing an alternative reporting  option. However, Labor provided an alternative reporting option for  eligible indirect compensation to plan fiduciaries on the basis of  comments received on the proposed rule. Labor stated that the alternative  reporting option would provide the department with enough information  to engage in effective oversight activities. Labor also stated that once  Schedule C reporting begins (for most plans, July 2010 and later), it will be  able to evaluate the data it receives, taking into consideration our  recommendation. Although Labor stated in its comments that its eligible  indirect compensation reporting requirements are intended to help ensure  fiduciaries are collecting information and evaluating service provider  indirect compensation, we believe that it is also important for the indirect  compensation information to be reported to Labor. As we stated in our  report, we continue to believe that Labor will not receive enough  information to engage in effective oversight activities. Finally, Labor stated  that it agreed with our recommendation to coordinate the implementation  of the Form 5500 regulations with the publication of its final 408(b)(2)  regulation, and that it will continue to coordinate the two initiatives.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution until 30 days after the date of this  report. At that time, we will send copies of this report to the appropriate  congressional committees, the Secretary of Labor, and other interested  parties. In addition, the report will be available at no charge on GAO’s Web  site at http://www.gao.gov.
If you or your staff has any questions concerning this report, please  contact me at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made key contributions to this  report are listed in appendix II.
section_title: Appendix I: Comments from the Department of Labor
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: The following team members made key contributions to this report:  Tamara Cross, Assistant Director; Monika Gomez, Analyst-in-Charge;  Christopher Langford; James Bennett; Jessica Orr; Walter Vance; and  Roger Thomas.
section_title: Related GAO Products
paragraphs: Private Pensions: Conflicts of Interest Can Affect Defined Benefit and  Defined Contribution Plans. GAO-09-503T. Washington, D.C.: March 24,  2009.
Private Pensions: Fulfilling Fiduciary Obligations Can Present  Challenges for 401(k) Plan Sponsors. GAO-08-774. Washington, D.C.:   July 16, 2008.
Private Pensions: GAO Survey of 401(k) Plan Sponsor Practices  (GAO-08-870SP, July 2008), an E-supplement to GAO-08-774.  GAO-08-870SP. Washington, D.C.: July 16, 2008.
Private Pensions: Information That Sponsors and Participants Need to  Understand 401(k) Plan Fees. GAO-08-222T. Washington, D.C.:   October 30, 2007.
Private Pensions: 401(k) Plan Participants and Sponsors Need Better  Information on Fees. GAO-08-95T. Washington, D.C.: October 24, 2007.
Defined Benefit Pensions: Conflicts of Interest Involving High Risk or  Terminated Plans Pose Enforcement Challenges. GAO-07-703.  Washington, D.C.: June 28, 2007.
Private Pensions: Increased Reliance on 401(k) Plans Calls for Better  Information on Fees. GAO-07-530T. Washington, D.C.: March 6, 2007.
Private Pensions: Changes Needed to Provide 401(k) Plan Participants  and the Department of Labor Better Information on Fees. GAO-07-21.  Washington, D.C.: November 16, 2006.
Private Pensions: Government Actions Could Improve the Timeliness  and Content of Form 5500 Pension Information. GAO-05-491.  Washington, D.C.: June 3, 2005.