Private Pensions: Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors
Published: 2008-07-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: American workers increasingly rely on 401(k) plans for their retirement security, and sponsors of 401(k) plans--typically employers--have critical obligations under the Employee Retirement Income Security Act of 1974 (ERISA). When acting as fiduciaries, they must act prudently and solely in the interest of plan participants and beneficiaries. The Department of Labor (Labor) is responsible for protecting private pension plan participants and beneficiaries by enforcing ERISA. GAO examined: (1) common 401(k) plan features, which typically have important fiduciary implications, and factors affecting these decisions; (2) challenges sponsors face in fulfilling their fiduciary obligations when overseeing plan operations; and (3) actions Labor takes to ensure that sponsors fulfill their fiduciary obligations, and the progress Labor has made on its regulatory initiatives. To address these objectives, GAO administered a survey asking sponsors how they select plan features and oversee operations, reviewed industry research, conducted interviews, and reviewed related documents.
section_title: What GAO Found
paragraphs: Plan sponsors commonly select certain noninvestment and investment features, and their decisions about which investment features to select generally have important fiduciary implications. According to industry research, most 401(k) plans offer a number of common features, such as employer contributions and loans for employees. Some of these decisions seldom involve fiduciary obligations set by ERISA because they are mainly business decisions related to establishing the plan. However, a sponsor's decisions about investment features, like the menu of investment options, entail important fiduciary obligations under ERISA. ERISA and its regulations stipulate certain requirements for these investment decisions, like offering diversified funds and prudently selecting and monitoring investment options. Various other factors also affect a sponsor's menu decisions, including the size of the plan and the role of external advisers and other providers. Plan sponsors face challenges in fulfilling their obligations when fiduciary roles are not clearly defined or when sponsors lack important information about arrangements between service providers. Fiduciary roles that are not clearly defined can lead to gaps in plan oversight. For example, several industry professionals noted situations when sponsors assumed they had delegated fiduciary investment advice for the selection and monitoring of investment funds to a service provider, but the service provider did not acknowledge that fiduciary role. Sponsors also have fiduciary obligations when selecting and monitoring one or more service providers. To fulfill these obligations, Labor's guidance indicates that sponsors should obtain information about service providers' compensation arrangements and potential conflicts of interest that could affect the service provider's performance. Labor and various industry practitioners have proposed new ways to improve fiduciary oversight that may address some of the challenges of unclear fiduciary roles and providers' arrangements. Labor takes various actions to monitor sponsors' fiduciary oversight of 401(k) plans and has made some progress on its regulatory initiatives. Labor's actions include investigating reports of questionable 401(k) plan practices, collecting information from plan sponsors, and conducting outreach to educate plan sponsors about their responsibilities. Labor is also proceeding with several initiatives to improve disclosures to participants, plan sponsors, government agencies and the public. For example, Labor recently published a proposed rule on the information that service providers must disclose to plan sponsors but is trying to resolve several questions before issuing a final rule. In addition, certain matters that GAO has asked Congress to consider would help Labor in its efforts to improve sponsors' fiduciary oversight. We previously suggested that Congress amend ERISA to (1) explicitly require 401(k) service providers to disclose to plan sponsors the compensation they receive from other service providers and (2) give Labor authority to recover plan losses against certain types of service providers even if they are not currently considered fiduciaries under ERISA.

section_title: Letter
paragraphs: Over the past two decades, American workers have become increasingly  reliant on 401(k) plans for their retirement security. These employer- sponsored pension plans typically allow workers to divert a portion of  their pretax income, often with employer contributions, into an investment  account that can grow tax free until withdrawn in retirement. According to  the Department of Labor (Labor), in 2005, there were about 436,000 401(k)  plans that held about $2.4 trillion in assets for the retirement savings of  more than 54 million plan participants—more than any other type of  employer-sponsored pension plan in the United States. To administer  these plans, the sponsor—typically the employer offering the 401(k)  plan—selects plan features and other characteristics, including the types  of investment options offered to participants, and monitors the  performance of one or more service providers, such as investment  advisers and record keepers. The Employee Retirement Income Security  Act of 1974 (ERISA) imposes significant fiduciary obligations on plan  sponsors and other plan fiduciaries, requiring them to act prudently and in  the interests of the plan’s participants and beneficiaries. Labor is  responsible for ensuring that plan sponsors and other plan fiduciaries  fulfill these obligations.
In two recent reports, we asked Congress to consider amending ERISA to  expand Labor’s statutory authority over plan service providers and help  ensure that sponsors are properly overseeing plan services. While  Congress continues to consider new legislation, Labor has also tried to  address some of these underlying issues through regulatory initiatives. As  Congress considers changes to the law that governs how these plans are  designed, managed, and overseen, GAO was asked to identify the  following:    common 401(k) plan features, those that typically have important  fiduciary implications, and what factors affect these decisions;    challenges sponsors face in fulfilling their fiduciary obligations when  overseeing plan operations; and    actions Labor takes to ensure that sponsors fulfill their fiduciary  obligations, and the progress Labor has made on its regulatory initiatives.
To determine common plan features and which decisions typically have  fiduciary implications and related factors, and the challenges sponsors  face in fulfilling their fiduciary obligations, we collected and analyzed the  results of published industry research. We also collected information on  sponsor practices from a range of plan sponsors, service providers,  industry associations, and other industry professionals—including  fiduciary advisers—through interviews and reviews of documents, such as  materials on fiduciary obligations given by service providers to sponsors.  In addition, we administered a survey in coordination with Plansponsor  Magazine (Plansponsor) asking sponsors how they select plan features  and oversee plan operations. The survey and a more complete tabulation  of the results can be viewed at GAO-08-870SP. The survey respondents  were members of Plansponsor’s subscription list, and their responses  cannot be considered representative of the overall population of 401(k)  plan sponsors. We received a total of 448 completed survey responses  after distributing the survey to a population of about 22,000. Because of  the methodological limitations of this survey, information from this survey  is anecdotal and represents only the views of the 448 survey respondents.  To determine the actions that Labor takes to ensure that sponsors fulfill  their fiduciary obligations, we interviewed Labor officials and reviewed  Labor’s legal and regulatory authority and its procedures for assuring that  plans are meeting the overall requirements. See appendix I for more  details regarding our scope and methodology. We conducted our review  from January 2007 through June 2008 in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: Roughly half of all workers participate in an employer-sponsored  retirement, or pension, plan. Private sector pension plans are classified as  either defined benefit or defined contribution plans. Defined benefit plans  promise to provide, generally, a fixed level of monthly retirement income  that is based on salary, years of service, and age at retirement, regardless  of how the plan’s investments perform. In contrast, benefits from defined  contribution plans are based on the contributions to and the performance  of the investments in individual accounts, which may fluctuate in value.  These accounts are tax-advantaged in that contributions are typically  excluded from current income, and earnings on balances grow tax- deferred until they are withdrawn. One type of defined contribution, or  individual account, plan is the 401(k) plan.
subsections: section_title: Fiduciary Obligations under ERISA
paragraphs: In accordance with ERISA and related Labor regulations and guidance,  plan sponsors and other fiduciaries must exercise an appropriate level of  care and diligence given the scope of the plan and act for the exclusive  benefit of plan participants and beneficiaries, rather than for their own or  another party’s gain. Responsibilities of fiduciaries include:    selecting and monitoring any service providers to the plan;  reporting plan information to the government and to participants;    adhering to the plan documents, including any investment policy  identifying parties-in-interest to the plan and taking steps to monitor  transactions with them;    selecting and monitoring investment options the plan will offer and  diversifying plan investments; and    ensuring that the services provided to their plan are necessary and that the  cost of those services is reasonable.
ERISA allows plan sponsors to hire companies that will provide services  necessary to operate their 401(k) plan if certain conditions are met. In  general, ERISA prohibits parties-in-interest—such as service providers,  plan fiduciaries, the employer, the union, owners, officers, and relatives of  parties-in-interest—from doing business with the plan, but provides  various exemptions to these prohibited transactions. Some of the  exemptions provide for dealings with banks, insurance companies, and  other financial institutions essential to the ongoing operations of the plan.  The Internal Revenue Code sets forth parallel prohibited transaction  provisions with respect to “disqualified persons,” such as service  providers, and provides a parallel conditional exemption for the provision  of services.  The exemption requires that: (1) the contract or arrangement  must be reasonable, (2) the services must be necessary to operate the  plan, and (3) the compensation can not exceed what is reasonable for the  services provided. Some other prohibited transactions relate solely to  fiduciaries using plan assets in their own interest or acting on both sides of  a transaction involving a plan. Fiduciaries cannot receive money or any  other consideration for their personal account from any party doing  business with the plan related to that business.
In the course of providing services, a service provider may become a  fiduciary by reason of providing investment advice for a fee, or exercising  sufficient control over, or discretion with respect to, the administration or  assets of the plan. For example, holding plan assets in trust to assure that  they are used solely to benefit the participants and their beneficiaries  would make the trustee a fiduciary. An outside professional that provides  advice for a fee to plan sponsors about the selection of funds to be  included in the menu of options made available to participants would also  be a fiduciary. Providers of many other necessary services—such as  keeping the record of participants’ individual accounts and providing the  investment funds being made available to plan participants—are typically  not fiduciaries.
section_title: The Department of Labor’s Role
paragraphs: Labor’s Employee Benefits Security Administration (EBSA) is the primary  agency responsible for protecting private pension plan participants and  beneficiaries from the misuse or theft of their pension assets by enforcing  ERISA, which defines and sets certain standards for employee benefit  plans sponsored by private sector employers. EBSA oversees 401(k) plans  because they are considered employee benefit plans under ERISA.  Enacted before the 401(k) provision was added to the Internal Revenue  Code, ERISA establishes the responsibilities of employee benefit plan  decision makers.
EBSA conducts civil and criminal investigations to determine whether the  provisions of ERISA or other federal laws related to employee benefit  plans have been violated. EBSA regularly works in coordination with other  federal and state enforcement agencies, including Labor’s Office of the  Inspector General, the Pension Benefit Guaranty Corporation, the Internal  Revenue Service, the Department of Justice (including the Federal Bureau  of Investigation), the Securities and Exchange Commission, the federal  banking agencies, state insurance commissioners, and state attorneys  general.
In addition to its investigations, Benefits Advisors in the field and in  EBSA’s Office of Participant Assistance (OPA), help workers get the  information they need to protect their benefit rights and obtain benefits  that have been improperly denied. In fiscal year 2007, Benefits Advisors  recovered over $96 million on behalf of participants and beneficiaries  through informal resolution of participant complaints. Benefits Advisors  also refer cases for investigation. There were 611 enforcement cases  closed in fiscal year 2007 whose original source was a Benefit Advisor  referral. Of these, 451 were 401(k) plan investigations, including 389 that  were closed with monetary results of over $46 million.
EBSA’s policy is to resolve 401(k) participant complaints involving late or  unremitted employee contributions at the earliest possible opportunity.  Benefits Advisors are provided with guidance on how to handle these  401(k) contribution-related complaints. While Benefits Advisors do not  have investigative authority and cannot make formal demands on  employers or plan sponsors, they are authorized to request that the  employer, plan sponsor, or other appropriate third-party official provide  documents or information related to a participant’s complaint on an  individual or plan-wide basis. EBSA’s Benefits Advisors may also attempt  to resolve the complaints and correct any violations on a plan-wide basis  through informal dispute resolution. If the complaint involves unremitted  or untimely employee contributions, Benefits Advisors can request  information from the plan sponsor and, after review, advise the plan on  the amount of contributions due. In fiscal year 2007, $5.8 million in  pension benefits were restored to plans by Benefits Advisors as a result of  this procedure.
EBSA also has regional initiatives focused on fiduciary oversight. Several  of them have produced results related to 401(k) fiduciary issues. Even  with an initiative focused on settlor fees, one regional office still obtained  results related to fiduciary issues under the project. According to an EBSA  official, 401(k) plans have obtained monetary results related to fiduciary  issues in three cases under the project, totaling more than $8 million.
Labor’s ERISA Advisory Council, created by ERISA to provide advice to  the U.S. Secretary of Labor, is another resource for Labor. For example, in  2007, this council formed the Working Group on Fiduciary Responsibilities  and Revenue Sharing Practices to study numerous issues regarding  fiduciary responsibilities arising from the enactment of the Pension  Protection Act of 2006 and to address issues relative to the practice of  revenue sharing, a now-common practice used to offset plan expenses  with respect to defined contribution 401(k) plans. The working group’s  report concluded that there is a role for Labor to take the lead in formally  defining 401(k) terms, such as “revenue sharing,” and that Labor should  compile appropriate terminology in connection with that definition.  According to the report, the provision of concise definitions would be a  considerable step in reducing the confusion about the flows of revenues,  fees, and costs, and could only benefit the plan sponsors, fiduciaries, and  service providers in fulfilling their role to participants.
section_title: Plan Services
paragraphs: Plan sponsors of 401(k) plans often hire various outside companies to  provide a number of services necessary to operate a 401(k) plan. As shown  in figure 1, these services can  include investment management (e.g., selecting and managing the  securities included in a bank collective trust fund); consulting and  providing financial advice (e.g., selecting vendors for investment options  or other services); record keeping (e.g., tracking individual account  contributions); custodial or trustee services for plan assets (e.g., holding  the plan assets in a bank); and telephone or Web-based customer services  for participants.
The delivery structure for providing plan services can vary. Generally,  there are two structures: “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), as  shown in Figure 2.
In a bundled arrangement, a sponsor might delegate the oversight for the  selection and monitoring of plan services, except for the selection and  monitoring of the bundled provider itself. In contrast, in an unbundled  arrangement, the sponsor might retain oversight of the selection and  monitoring for some or all other service providers.
section_title: Sponsors Determine a Number of Common Plan Features, and Their Decisions about Investment Features Have Important Fiduciary Implications
paragraphs: Although, when determining a number of common, noninvestment  features and other plan characteristics, plan sponsors are frequently acting  as settlors, their decisions about investment features have important  fiduciary implications. Industry research finds that most 401(k) plans offer  a number of common noninvestment features such as employer  contributions and loan programs. For example, industry research shows  that at least 94 percent of sponsors offered some type of employer  contribution. Like whether or not to establish a plan, these  determinations are primarily business decisions that seldom involve  fiduciary duties. However, when a sponsor makes decisions about  investment features—like selecting the menu of investment options—it  acts as a fiduciary and is subject to fiduciary obligations under ERISA.  While sponsors must act prudently and solely in the interest of  participants and beneficiaries when acting as a fiduciary for investment  functions, they have considerable latitude in selecting fund options, such  as the number and types of options. Besides ERISA and its regulations,  various other factors affect a sponsor when it makes investment decisions  regarding the selection of the investment menu, including the size of the  plan and the role of external advisers and providers.
subsections: section_title: Plan Sponsors Determine Some Common Plan Features to Establish the Plan
paragraphs: Some common plan features and other characteristics include an  employer contribution, a loan program, eligibility of employees, and  vesting of benefits. While an employer contribution and a loan program  are optional, a 401(k) plan is required to have eligibility and vesting rules.
An employer contribution can take different forms, such as a matching  contribution and/or nonmatching contribution made regardless of  participant contributions. In industry research we reviewed, at least 94  percent of sponsors indicated that they offer some type of employer  contribution, while 6 percent or fewer do not offer such contributions.  Research by the Bureau of Labor Statistics and industry groups shows the  different methods to determine any employer contribution, such as  formulas based on participant contributions, years of service, company  profits, or other means.
A loan program enables participants to take one or more loans from the  contributions in their account. In industry research we reviewed, at least  84 percent of sponsors include a loan program.
Eligibility of employees refers to the requirements for employees to  become eligible to participate in the plan, such as an age or service  requirement. Sponsors can choose less restrictive requirements for  eligibility than required by law. For example, in industry research GAO  reviewed, about half of respondents to industry research offer immediate  eligibility with no age or service requirements.
Vesting of benefits refers to the length of time before a plan participant  has a nonforfeitable right to an accrued benefit. For 401(k) plans,  participant contributions are required to be vested immediately, but  employer contributions may be vested over time according to plan terms.  As with employee eligibility, the law sets the maximum amounts of time  before an employee is vested, but sponsors can decide on less restrictive  vesting provisions. For example, in industry research GAO reviewed,  about 40 percent of respondents have immediate vesting in employer  matching contributions.
When making decisions about some noninvestment plan features,  sponsors act as settlors rather than fiduciaries. According to our survey,  186 of 441 sponsors said the sponsor’s committee was the primary  decision maker for various noninvestment, settlor decisions, while 205  sponsors said that company management was. Sponsors make many  settlor function decisions, such as those related to establishing, amending,  or terminating a plan. They are considered business decisions and include  the decision to offer a particular type of plan, the levels of benefits to  provide, and the termination of the plan. The fiduciary obligations under  ERISA, including the overarching duties to act prudently and solely in  participants’ interest, are seldom involved in many of these decisions.
section_title: Sponsors’ Decisions about Investment Features Have Important Fiduciary Implications
paragraphs: When making decisions about investment features, ERISA’s fiduciary  duties apply. As a result, when plan sponsors acting as a fiduciary for  investment functions make such decisions, they must offer prudent,  diversified choices for participants to fulfill the duties of acting prudently  and diversifying plan investments. Several pension professionals told us, in  fact, that the main plan feature with important fiduciary implications is the  investment menu. When developing that menu, sponsors must act for the  sole benefit of participants and beneficiaries, rather than that of their own  or another party. According to our survey, 349 of 440 responding sponsors  said that the sponsor committee or management was the primary decision  maker for selecting the menu of investment options. Industry research  shows that the median number of options was in the range of 11 to 15,  with as many as 24 percent of responding plans offering 20 or more  funds.
When acting as fiduciaries for investment functions, sponsors have  considerable latitude in selecting fund options, including the number and  types of funds, from which participants choose. Table 1 shows funds  available for participant contributions, according to research from one  industry group. These funds involve different categories of investments.
ERISA’s fiduciary obligations require that fees paid by the plan are  reasonable and that services provided to the plan are necessary. Thus,  sponsors must consider the fees and other characteristics of the funds,  including potential returns and risk. For example, index funds are  passively managed funds with lower management fees than actively  managed funds, for which the investment provider pursues particular  investments in an attempt to obtain higher than average returns. Similarly,  sponsors must prudently select the service providers to the plan, such as  the providers of record keeping services and service providers that make  investment options available to the plan. In our survey, the primary  decision maker for selecting service providers for investment options was  the sponsor committee for 283 of 445 respondents and sponsor  management for 108 respondents. For selecting providers of record  keeping, the primary decision maker was the sponsor committee for 256 of  445 respondents and sponsor management for 135 respondents. As with  selecting funds, fees are one of many issues—such as providers’  qualifications and quality of services—to consider when selecting  providers.
ERISA’s fiduciary duties also apply to a sponsor including a default option  for participants not making an investment choice. These duties include  prudently selecting and monitoring the option based on an objective,  thorough, and analytical process that involves careful consideration of the  quality of competing providers and investment products, as appropriate. A  recent Labor regulation provides certain fiduciary relief when participants’  contributions are invested in qualified default investment alternatives that  include lifecycle funds, balanced funds, or managed accounts. Labor  decided on these alternatives, which combine stocks and fixed income  securities like bonds, based on considerations that included diversification  and adequacy of savings for retirement. Thus, if participants do not  provide instructions on how to invest their contributions, sponsors may  place contributions into a default investment. For example, participants  may not provide investment instructions when automatically enrolled in a  plan by their sponsor.
Once the investment menu is selected, sponsors must monitor the fund  options as part of their fiduciary obligations. Several pension professionals  noted that monitoring funds may involve quantitative criteria that include  investment returns as compared to benchmarks, risk, and fees, along with  qualitative criteria such as the stability of the provider. In our survey, 362  of 448 sponsors said they benchmark the investment performance of the  401(k) plan. Of those who do benchmarking, 297 respondents said they  benchmark each option to the performance of a peer group as one way of  monitoring performance. As part of this monitoring of fund options,  efforts of sponsors may include reviewing reports about the performance  of the funds, holding meetings, placing poorly performing funds on a  watch list, ultimately removing funds or replacing them with better  options, and documenting their decisions. Some pension professionals  told us that investment monitoring efforts generally were of good quality  overall but that certain fund characteristics, such as risk, or particular plan  sizes, such as some small plans, were not always monitored adequately.
Some pension professionals are concerned that sponsors may rely on the  investment provider or record keeper to monitor the funds. For example,  one fiduciary adviser noted that research by an industry group showed  that the provider may conduct investment monitoring for as many as 38  percent of respondents. According to this fiduciary adviser, if a sponsor  relies on the provider for fund monitoring and lacks an independent  adviser, an objective analysis of the funds may not occur, which could  result in a prohibited transaction under certain circumstances. According  to our survey, the entity primarily responsible for monitoring the  performance of the plan investments as compared to investment goals or  policy was frequently the plan sponsor committee (214 of 443  respondents) or an external investment/financial adviser (107  respondents).
Sponsors may also set investment goals and policies for the 401(k) plan.  Before selecting funds for the menu, sponsors may set investment goals  and policies that affect which particular categories of funds it can include  in the menu. Many pension professionals noted that such planning by the  sponsor should take into account the needs of its workforce, such as its  age profile or level of knowledge about investments. This planning may  be documented in a written investment policy statement (IPS), which 339  of 440 sponsors responding to our survey have. An IPS is a document that  can guide future decisions by documenting the intended goals and  performance of the plan, as well as the guidelines for selecting,  monitoring, and altering investments. According to our survey, 208 of 339  respondents said the sponsor’s committee was the primary decision maker  for establishing a written IPS. Despite the advantages of an IPS, the policy  statement may present difficulties for certain sponsors, such as greater  risks of fiduciary breaches and potential liability if the sponsor does not  follow it. Regardless of a plan’s goals and policies, Labor’s regulation on  investment duties specifies factors for sponsors to consider for prudent  investment decisions, including diversification, liquidity, return, and risk in  relation to the overall portfolio.
The asset size of the plan may affect the investment menu, as sponsors of  larger plans generally have greater internal expertise and/or capacity for  committees to aid in overseeing the plan, as well as more leverage to  negotiate the menu and fees. Of 447 sponsors answering this question in  our survey, 396 had one or more plan committees with typically three to  seven members, while research by an industry group found 72 percent had  committees. For plans with $200 million or more in assets, 60 of 90  sponsors reported that they have exactly one committee, and 29 reported  having more than one committee. However, for some employers,  particularly smaller businesses, the owner of the company acts as the  fiduciary to decide about the plan investments and providers but may have  less time, knowledge, and resources to make those decisions. In addition,  larger plans typically have more leverage as they negotiate with providers  about fund options and the fees to operate the plan. Several professionals  stated that large and sometimes medium-sized sponsors have greater  ability to prescribe the investment menu than small sponsors who are  more likely to face restricted choices with requirements to include the  investment provider’s own funds. For example, one adviser noted that  plans with over $100 million in assets can generally offer the funds they  want in the menu. Plans with more assets are also better positioned to  negotiate lower fees, given the competition among providers to manage  sponsors’ pension assets.
Furthermore, advisers assisting sponsors may affect decisions about the  investment menu. While ERISA allows the hiring of external advisers and  other providers, they must be prudently selected and monitored for the  quality of their services and conflicts of interest, among other things. Of  445 sponsors responding to this survey question, 308 said they use a third- party investment adviser. According to Labor’s guidance, a plan fiduciary  should hire and monitor external experts if the sponsor lacks the expertise  internally. Several types of advisers are available to assist the sponsor,  such as registered investment advisers, consultants, and insurance or  securities brokers. However, advisers differ in a number of ways, including  by the services they provide, the extent to which they are willing to serve  as a fiduciary, how they are compensated, and whether they are affiliated  with a larger company like an insurance company or a broker-dealer. As a  result, some of these advisers may have incentives not to act solely in the  interest of participants, which may shape the investment menu. In our  survey, for 170 of 438 sponsors, a sponsor committee monitors plan  investment decisions for such potential conflicts of interest, while an  external investment/financial adviser does so for 94 of the sponsors.
As with advisers, other service providers—such as the investment provider  or the record keeper—may shape the menu of investments in different  ways. For example, sponsors or providers can limit the menu largely or  entirely to the provider’s own proprietary funds, which tend to have  greater profit margins or may not always perform as well as funds offered  by other investment providers. Also, a number of pension professionals  indicated that sponsors may defer to the provider about the menu, and  thus about fund performance and fees. However, according to our survey,  most sponsors said that the sponsor’s committee was the primary decision  maker for the investment goals, menu, and any investment policy  statement, with relatively few saying the primary decision maker was the  401(k) provider.
section_title: Plan Sponsors Can Face Challenges in Fulfilling Their Fiduciary Obligations When Business Arrangements Are Unclear or Undisclosed
paragraphs: Plan sponsors face challenges in fulfilling their obligations when fiduciary  roles are not clearly defined or when sponsors lack important information  about arrangements between service providers. Fiduciary roles that are  not clearly defined between the sponsor and other plan fiduciaries can  lead to gaps in plan oversight. Sponsors also have fiduciary obligations  when they select and monitor one or multiple service providers. To fulfill  these obligations, Labor’s guidance indicates that sponsors should obtain  information about service providers’ compensation arrangements and  potential conflicts of interest that could affect the service provider’s  performance. To improve fiduciary oversight in these areas, Labor has  proposed a rule to require pension plan service contracts to disclose  additional information, including the extent to which service providers  will become fiduciaries for the functions they will perform. If finalized,  compliance with this rule could eliminate some of the confusion  surrounding the sharing of fiduciary duties between sponsors and their  service providers and help sponsors provide better oversight of plan  services.
subsections: section_title: A Sponsor’s Failure to Clearly Define Fiduciary Relationships Can Lead to Gaps in Oversight
paragraphs: Plans may have one or multiple plan fiduciaries, but who is and who is not  a fiduciary is not always apparent. ERISA requires that at least one  fiduciary be named in the plan documents, although others may be  identified voluntarily. Depending on how the delivery of plan services is  structured, the sponsor may retain, share, or delegate certain fiduciary  roles with the advisers or other providers it hires. For example, sponsors  may use an officer or company manager, one or more internal committees,  or an outside professional—sometimes called a third-party service  provider—as a fiduciary to manage some or all of a plan’s day-to-day  operations. These services can include investment management,  consulting and providing financial advice, record keeping, custodial or  trustee services for plan assets, and telephone or Web-based customer  services for participants. Providers may also assist sponsors to fulfill their  fiduciary obligations by educating sponsors or helping them comply with  ERISA requirements. For example, one provider we met has informational  materials for its clients, including checklists about fiduciary obligations,  sample documents, and newsletters on regulatory updates.
While ERISA allows a plan sponsor to hire outside professionals to  manage some or all of their plan’s day-to-day operations, this does not  relieve the sponsor of all fiduciary obligation. The hiring of any service  provider is itself a fiduciary act, and under ERISA, a sponsor must act  prudently when selecting one or multiple service providers and monitor  their performance. To comply with ERISA, the plan sponsor must have  sufficient information to make informed decisions about the services,  costs and the qualifications of the service providers, and the quality of the  services being provided. The sponsor must ensure that expenses paid out  of plan assets, including fees paid to service providers, are and continue to  be reasonable in light of the level and quality of services provided. The  sponsor must also determine whether there are conflicts of interest related  to service provider compensation. Conflicts of interest can occur, for  example, when a service provider steers a plan sponsor toward offering  investment options that benefit the service provider but may not be in the  best interest of the plan participants.
Rather than prescribing the specific actions that a sponsor needs to take  when selecting and monitoring one or multiple service providers, ERISA  requires that a prudent process be followed to ensure that the sponsor’s  fiduciary obligations are met. According to Labor, prudence requires  expertise in a variety of areas, such as investments. Lacking that expertise,  a fiduciary will want to hire someone with that professional knowledge to  carry out the investment and other functions. Prudence focuses on the  process for making fiduciary decisions. For instance, in hiring a plan  service provider, a fiduciary may decide to survey a number of potential  providers, asking for the same information and providing the same  requirements. By so doing, a fiduciary can make a meaningful comparison  and selection. According to Labor, however, many of the specific actions  that sponsors may take to meet these duties can vary. Labor recommends  that sponsors establish and follow a formal review process at reasonable  intervals.
Sponsors may assume that they have delegated all their fiduciary duties to  an outside professional hired to run the plan, but the sponsor always  retains some fiduciary obligation. While plan sponsors may hire various  advisers and consultants to provide advice on the selection and  monitoring of investment funds, fiduciary duties may be distributed  differently depending on the service arrangement. For example, an  investment adviser who recommends investment funds to a plan sponsor  for a fee, may be a fiduciary under ERISA. In contrast, if the sponsor is  selecting funds from a broker and the broker provides no investment  advice, the fiduciary obligations may lie entirely with the sponsor under  ERISA, as shown in figure 3.
Sharing or delegating fiduciary duties among service providers can  contribute to indistinct fiduciary roles if their respective roles are not well  defined. Some sponsors may be more concerned with hiring a provider to  perform a particular service than about determining whether or not the  provider will be acting as a plan fiduciary. For example, several industry  professionals noted situations when sponsors assumed they had delegated  fiduciary investment advice for the selection and monitoring of investment  funds to a service provider, but the service provider did not acknowledge  that fiduciary role. Several pension practitioners observed that most  sponsors, especially sponsors of small plans, have very little fiduciary  knowledge. For example, one attorney with an employee benefits firm  stated that while sponsors may know they are fiduciaries, without  understanding the concept and extra duties of being responsible for plan  assets, they primarily see their function as hiring service providers who  they may view as the “real” fiduciaries. A number of practitioners have  stated that some service providers understand fiduciary roles better than  plan sponsors do but may wish to avoid the liability associated with  certain fiduciary duties, even though their actions may define them as  fiduciaries under the law. This can lead some sponsors to assume that they  have delegated certain fiduciary duties to a service provider, although the  provider may not acknowledge any fiduciary role. When the service  provider is not a fiduciary, it is not bound by the fiduciary duties to act  prudently and solely in the plan’s best interest. For example, according to  several practitioners, Registered Investment Advisers (RIA) are generally  fiduciaries, while some other advisers describe themselves as consultants  in an attempt to avoid fiduciary responsibility.
Because ERISA generally does not require that additional fiduciaries be  named, determinations may not be made unless a lawsuit is filed claiming  that the plan has been harmed. Misunderstanding can also occur because  many large providers offer a range of services that a sponsor can choose  from, including some that involve fiduciary duties and others that may not.
section_title: Sponsors Cannot Fulfill Their Fiduciary Obligations without Disclosures about Compensation Arrangements and Potential Conflicts of Interest
paragraphs: Labor’s guidance indicates that to fulfill their fiduciary obligations  sponsors should obtain certain information about service providers’  compensation arrangements and potential conflicts of interest. However,  some sponsors do not understand their service providers’ revenue sharing  arrangements or may be unaware of potential conflicts of interest.  Research by one industry group found that about 60 percent of responding  sponsors said that providers fully disclosed revenue sharing. According to  pension practitioners, sponsors of large plans, helped by advisers or  consultants, may have a better understanding of revenue sharing and are  negotiating lower fees than in the past, but sponsors of medium-sized  plans generally do not understand how undisclosed compensation flows  between service providers behind the scenes, even if they understand  mutual fund expense ratios.
Significant differences in ways that advisers and other providers are  compensated may have important implications for the sponsor’s oversight,  including identifying potential conflicts of interest. According to an RIA  that we spoke with, if the adviser is an RIA hired by a plan sponsor on a  fee-for-service basis, his allegiance may be different than an adviser who is  a broker and receives a commission based on the value of the investment  product that is selected. Furthermore, other experts noted that a sponsor  may opt for what appears to be a “free” 401(k) plan (with no record  keeping fees for the employer) without understanding that the providers’  compensation may be passed on to participants by embedding fees in the  plan’s investment options. “Hidden” fees may also 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. 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. Research by one industry group showed that 36 percent of  responding sponsors either did not know the fees being charged to  participants or thought no fees were charged at all. An RIA told us that if a  “free” 401(k) plan has been selected by the sponsor, it is unlikely that the  sponsor used an RIA to examine the underlying fee structure. In a  situation like this, one practitioner said that it is more likely that the  human resources department, rather than the finance department, selected  the free plan option. In addition to failing to understand the fee structure,  some less knowledgeable staff may act out of loyalty to their employer  without fully understanding ERISA’s fiduciary duty to act in the best  interests of the plan. Consequently, they may select an arrangement that  reduces the employer’s fees at the expense of the higher embedded fees  paid by participants, which may involve a fiduciary breach under certain  circumstances.
section_title: Various Ways to Improve Fiduciary Oversight Have Been Proposed
paragraphs: Labor officials and various industry practitioners have proposed new ways to  improve fiduciary oversight. A regulation recently proposed by Labor could  eliminate some of the confusion surrounding fiduciary obligations. In  December 2007, Labor proposed a regulation that would require, among other  things, a service provider of an employee benefit plan, including 401(k) plans,  to state whether it will provide services to the plan as a fiduciary. Labor  believes that plan fiduciaries, including sponsors and service providers, would  benefit from regulatory guidance in this area. According to Labor, the  increased complexity of administering services and benefits for these plans  has made it more difficult for plan sponsors to understand compensation  arrangements between service providers. The proposed regulation would  amend the current regulations under ERISA to clarify the meaning of a  reasonable contract or arrangement between sponsors (or other fiduciaries)  and service providers to include the disclosure of information concerning all  compensation to be received by the service providers and any conflicts of  interest that may have adverse effects on the cost and quality of plan services.  Among the information that would be required under the proposed provision  on conflicts of interest, is a requirement to determine whether the entity will  provide services to the plan as a fiduciary.
If finalized, compliance with this rule could eliminate some of the  confusion surrounding the sharing of fiduciary duties between sponsors  and their service providers and help sponsors provide better oversight of  plan services. Labor is in the process of analyzing the information from the  public comments it received earlier this year and the hearings it held  regarding this regulation. Labor officials anticipate issuing a final  regulation by the end of this year.
In addition, consulting organizations have suggested other measures to  improve accountability for fulfilling fiduciary obligations, such as fiduciary  training for plan sponsors and auditing plans for fiduciary compliance.
section_title: Labor Monitors Sponsors’ Operation of 401(k) Plans and Has Made Progress on Recent Regulatory Initiatives
paragraphs: Labor takes various actions to monitor sponsors’ fiduciary oversight of  401(k) plans and has made some progress on its regulatory initiatives.  Labor investigates reports of questionable 401(k) plan practices, collects  information from plan sponsors, and conducts outreach to educate plan  sponsors about their responsibilities. Labor is also pursuing several  initiatives to improve disclosures provided to participants, plan sponsors  and fiduciaries, government agencies and the public. Recently, Labor  issued proposed regulations to clarify the information that service  providers must disclose to plan sponsors. However, Labor is in the  process of resolving several questions before it can issue a clear set of  final regulations. In previous reports, we asked Congress to consider  certain matters that, if addressed, could provide Labor with greater  statutory authority over plan service providers and help ensure that  sponsors are properly overseeing plan services.
subsections: section_title: Labor Investigates Fiduciary Breaches and Conducts Outreach to Educate Plan Sponsors
paragraphs: Labor uses a variety of methods to ensure that sponsors fulfill their  fiduciary obligations. These include enforcement efforts, such as  investigations of employee benefit plans, and outreach efforts to educate  plan sponsors about their responsibilities.
EBSA’s regional offices seek to detect, correct, and deter violations, such  as excessive fees and expenses, and failure by fiduciaries to monitor  ongoing fee structure arrangements. EBSA opened 3,746 civil  investigations and obtained nearly $1.3 billion monetary results in fiscal  year 2007. Over $245 million of those monetary results were related to  401(k) investigations. These investigations cited violations, such as failure  to act prudently, payment of excessive administrative expenses, and  failure to monitor ongoing arrangements.
We reported in 2007 that EBSA does not conduct routine compliance  examinations, such as evaluations of a company’s books, records, and  internal controls. Instead, EBSA uses participant complaints and other  agency referrals as sources of investigative leads and to detect potential  violations. EBSA also identifies leads through informal targeting efforts by  investigators, primarily using data reported by plan sponsors on their  Form 5500 annual returns. During our 2007 review, EBSA officials raised  concerns that conducting such examinations would divert resources from  EBSA’s current enforcement practices.
When EBSA uncovers a fiduciary breach, it can take several actions  against the fiduciary. These actions can result in a monetary result for the  plan (such as restored plan assets), or an action taken by EBSA that  results in the fiduciary or a service provider being enjoined or removed  (these commonly include compelling the fiduciary to fulfill its obligations,  enjoining the fiduciary from committing a further violation, compelling the  fiduciary to make restitution for the violation, removing the fiduciary,  and/or disallowing the fiduciary from ever serving in another fiduciary  capacity, to name a few).
Labor receives complaints regarding fiduciary breaches in several areas,  such as  fees or expenses charged for plan services. This can include the plan  having paid unreasonable/excessive fees or settlor fees.    situations where the employer has filed for or may file for bankruptcy.
This includes alleged mismanagement and/or misuse of plan assets  combined with the fact that the employer has filed bankruptcy.    how long an employer may take to deposit participant contributions into  the plan (including participant’s loan repayments). This includes inquiries  regarding possible fiduciary violations and missing or delinquent  contributions. Contributions are delinquent when an employer fails to  transmit employee contributions as soon as reasonably possible.  investment of funds. This includes imprudent investments, those  prohibited by the plan document or failure of the plan administrator to  offer a diversified menu of investment options in a 401(k) plan.  loans or sales to parties in interest and/or the use of plan assets for  personal or company use. This includes prohibited transactions related to  self-dealing (a fiduciary acting in its own interest); dual loyalties  (representing adverse parties); or receipt of consideration from a third  party, also known as kickbacks.
EBSA also focuses some of its enforcement efforts on compensation  arrangements between pension plan sponsors and service providers hired  to assist in the investment of plan assets. EBSA’s Consultant/Adviser  Project (CAP), created in October 2006, is focused on identifying conflicts  of interest and the receipt of indirect, undisclosed compensation by  pension consultants and other investment advisers. Its investigations  determine whether the receipt of such compensation violates ERISA  because the adviser or consultant used its status with respect to a benefit  plan to generate additional fees for itself or its affiliates. According to an  EBSA official, the agency has not yet taken enforcement action against  consultants or advisers or 401(k) plan fiduciaries. However, the official  told us that by implementing this initiative, EBSA has demonstrated its  concern about the receipt of indirect, undisclosed compensation by  fiduciary consultants and advisers doing business with 401(k) plans. CAP  also seeks to identify potential criminal violations, such as kickbacks or  fraud.
In addition to its enforcement efforts, EBSA works to educate and assist  employers (particularly small employers), auditors and other service  providers in understanding and complying with their obligations under the  law and related regulations and procedures, including those related to  401(k) plans. EBSA also has a program called the Voluntary Fiduciary  Correction Program (VFCP), which allows plan officials to disclose and  correct certain violations without penalty. In fiscal year 2007, 1,303 401(k)  VFCP applications were received by EBSA’s regional offices, and over  $20.7 million was restored to 401(k) plans as a result of this program.
According to EBSA, virtually all transactions under the VFCP program are  related to fiduciary issues.
section_title: Labor Has Made Some Progress on Relevant Regulatory Initiatives but Legislation Could Also Promote Fiduciary Oversight
paragraphs: Since our November 2006 report, EBSA has made progress on three  regulatory initiatives to improve the transparency of fee and   expense information to participants, plan sponsors and fiduciaries,  government agencies and the public. It began these initiatives, in part,  amid concerns that participants were not receiving information in a format  useful to them when making investment decisions and that plan fiduciaries  were having difficulty getting needed fee and compensation arrangement  information from service providers to fully satisfy their fiduciary  obligations.
EBSA’s regulatory initiatives to expand disclosure requirements cover  three distinct areas, (1) disclosures by plan sponsors to participants to  assist in making informed investment decisions; (2) disclosures by service  providers to plan fiduciaries to assist 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 Report. At the time of our last review, EBSA had a proposed  rule for its initiative on disclosures to the government and the public.  Table 2 shows the progress EBSA has made since our November 2006  report.
Labor’s request for information (RFI) requested comments on fee and  expense disclosure issues affecting participants and beneficiaries of  401(k)-type plans governed by ERISA. Specifically, Labor sought  information on what administrative and investment-related fee and  expense information participants should consider when investing their  retirement savings, the manner in which the information should be  furnished to participants, and who should provide that information. The  RFI cited our November 2006 report on fees as part of the impetus for  issuing the RFI. However, while we did suggest that Congress consider  amending ERISA to require all sponsors to disclose fee information to  participants in a way that facilitates comparison among the options, our  recommendation to the Secretary of Labor was to require plan sponsors to  report a summary of all fees that are paid out of plan assets or by  participants to Labor. Labor has not yet published a proposed regulation  related to the RFI.
subsections: section_title: Status of Initiative on Disclosures by Service Providers to Plan Sponsors
paragraphs: According to Labor officials, they are in the process of resolving several  questions before Labor can issue final regulations, such as the extent to  which providers within a bundled arrangement—a package of plan  services—would be bound by the disclosure requirements of the  regulations. Labor held a hearing on March 31, 2008, to further develop the  public record regarding the regulation and the class exemption and to  assist the department in understanding the issues involved. Labor heard  testimony from a variety of interested parties, including plan service  providers, industry and participant associations, plan sponsors, and law  firms. According to Labor officials, they are still reviewing the comments  and testimony received.
The Assistant Secretary for the Employee Benefits Security Administration  told Congress that EBSA will work to ensure that the benefits of the  proposed regulation—which may include lower fees, increased  efficiencies, and some reduced costs—will outweigh the costs of  compliance. According to the Assistant Secretary, plan fiduciaries could  be provided an exemption if they enter into contracts that are not  “reasonable” because, unbeknownst to them, the service provider failed to  comply with its disclosure obligations. Several members of Congress sent  a letter to Labor expressing their displeasure over the proposed regulation.
Among other things, the letter stated that Labor, rather than excusing  failures with class exemptions for fiduciaries who fail to receive required  disclosures, should update its guidance on fiduciary responsibility and  provide model documents and explanations of key terms to pension plan  officials.
Several members of Congress have introduced bills that would require  various additional disclosures related to individual account plans,  including information from service providers. One bill, as introduced,  would require service providers to disclose to the plan sponsor all fees  that workers will pay, including such things as sales commissions, trading  costs, and termination or surrender charges. The bill would require service  providers to outline any financial or other conflicts of interest to plan  sponsors.
Some sponsors, however, have expressed concern about the introduction  of fee disclosure legislation. For example, in our survey, sponsors  expressed concern about the amount and manner in which information is  disclosed to plan participants. Given the complexity of the information  being provided, sponsors felt that disclosures should be simple and easy to  understand. In our survey, sponsors also stated that fees should be  disclosed in a transparent manner and should be readily identifiable by the  plan sponsor and participants. In addition to concerns about fee  disclosures, several sponsors suggested that disclosures would work best  if standardized and that legislation may help providers be consistent in  their data preparation and allow “apples to apples” comparisons of fee  information.
While the Assistant Secretary of Labor for the Employee Benefits Security  Administration has stated that a statutory amendment is not necessary for  the department to complete its work, we continue to believe that a  statutory change is necessary to ensure that these matters are fully  addressed and that the matters that GAO has recently asked Congress to  consider, if addressed, would help Labor in its efforts to improve sponsors’  fiduciary oversight. For example,    We previously asked that Congress consider amending ERISA to explicitly  require 401(k) service providers to disclose to plan sponsors the  compensation they receive from other service providers. This change  would provide Labor with explicit statutory authority over plan service  providers for this purpose and help sponsors properly oversee plan  services.
In addition, in our 2007 report on conflicts of interest in defined benefit  plans, we found that undisclosed business arrangements or conflicts of  interest may have resulted in financial harm to some plans. Given this  risk, we asked that Congress consider amending ERISA to give Labor  authority to recover plan losses against certain types of service providers  even if they are not currently considered fiduciaries under ERISA. These  findings may have similar implications for defined contribution plans,  especially 401(k) plans.
section_title: Concluding Observations
paragraphs: As the retirement security of American workers increasingly depends on  401(k) plans, it is important that plan sponsors fulfill their fiduciary  responsibilities in connection with such plans. Sponsors make decisions  about the investment features of a 401(k) plan that carry significant  fiduciary implications. Some, particularly those with small plans, may have  limited time, specialization, knowledge, and ability to negotiate about  service providers or investment funds. Absent a greater understanding of  how sharing plan functions with their service providers or delegating  functions to them may lead to confusion about fiduciary roles, some  sponsors are likely to remain vulnerable to advisers or other providers  whose compensation and affiliation may promote interests besides those  of the plan, such as higher plan fees.
Since our 2006 report, Labor has made progress on its disclosure  initiatives but some important fiduciary issues have yet to be fully  addressed. In our previous reports, we asked Congress to consider  amending ERISA to (1) explicitly require 401(k) service providers to  disclose to plan sponsors the compensation they receive from other  service providers and (2) give Labor authority to recover plan losses  against certain types of service providers, even if they are not currently  considered fiduciaries to that plan under ERISA. While Labor has  proposed a regulatory change that could eliminate some of the confusion  surrounding certain fiduciary obligations, it is unclear how closely the  final regulation will follow the proposed rule. We continue to believe that  changes to ERISA would help Labor in its efforts to promote sponsors’  fiduciary oversight and be in the best interest of participants.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Department of Labor (Labor). Labor  provided technical comments, which we have incorporated where  appropriate.
As agreed with your staff, unless you publicly announce its contents earlier,  we plan no further distribution of this report until 30 days after its issue date.  At that time, we will send copies of this report to the Secretary of Labor, as  well as to other interested parties. We will also make copies available to  others upon request. In addition, the report will be available at no charge on  the GAO Web site at http://www.gao.gov. If you or your staff have 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: Scope and Methodology
paragraphs: To determine common 401(k) plan features and which typically have  important fiduciary implications as well as challenges sponsors face in  fulfilling their fiduciary obligations, we collected and analyzed industry  research and information from the Department of Labor (Labor), such as  Bureau of Labor Statistics information, as well as previous GAO work.  Although comprehensive data on 401(k) features is limited, industry  research provides some indication of the prevalence of these features. The  industry research that we reviewed has limitations, such as the lack of  random sampling that prevents results generalizable to the universe of  401(k) plan sponsors. Thus, we used the following three sources of  industry research that reached different audiences to corroborate one  another, where possible. We also checked the reliability of the data by  interviewing the surveyors about their methodology.
Profit Sharing/401(k) Council of America’s (PSCA) survey results are  based on responses from 1,000 plan sponsors that have profit-sharing  plans, 401(k) plans, or a combination of both and represent 1 to 5,000-plus  employees. Thirty-nine of 1000 respondents had profit-sharing plans  without a 401(k) component. The survey was mailed, faxed, or made  available online to respondents and conducted from April to June 2007.  The survey provides a snapshot as of the end of 2006. The survey response  rate was 13 percent. 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 302  employers with mostly 1,000 employees or more. Twenty-nine percent  represented Fortune 500 companies. The survey was conducted from  March through June 2007. The survey was online, and paper copies of the  questionnaire that included the survey Web site were also mailed out.  Most respondents completed the survey online. The survey had a 6  percent response rate. Hewitt Associates is a human resources  outsourcing and consulting firm.
Deloitte Consulting received responses from 830 employers for its survey  that was initially sent to over 3,000 contacts. The survey was sent by e- mail and made available online to a wide array of sponsors based on the  contacts of Deloitte and partnering organizations, along with other  interested sponsors who became aware of the survey. It is possible that  contacts beyond the initial mailing completed the survey, so a response  rate was not calculated. As with other industry surveys, Deloitte’s survey  covers a range of plan sizes but under-represents small plans, as measured  by number of participants. Deloitte is a professional services organization  that provides pension consulting services.
In addition to analysis of industry research, we conducted a Web-based  survey to learn more about how sponsors select plan features and oversee  plan operations. In conducting our design work, we determined that a  representative survey of sponsors would not be feasible for this study,  given the methodological and administrative challenges associated with  (1) establishing a sampling frame using Labor’s Form 5500 data, (2)  identifying appropriate points of contact for sponsors from the universe of  over 400,000 plans, and (3) the perceived sensitivity of the survey’s content  and the willingness of sponsors to provide candid responses about their  fiduciary obligations. To overcome the methodological and administrative  challenges, we administered our survey in coordination with Plansponsor  Magazine (Plansponsor). The sponsors who responded to our survey  were members of Plansponsor’s subscription list – which contains  approximately 41,000 members who receive the organization’s electronic  newsletters and magazine.
Plansponsor used two methods for soliciting survey responses from their  subscription list. These methods included the distribution of notices in  their daily newsletter and a more targeted electronic mailing sent to the  sponsors who responded to Plansponsor’s 2007 Defined Contributions  Survey. While there is some overlap between the sponsors that receive the  daily newsletter and those who responded to Plansponsor’s 2007 Defined  Contributions Survey, Plansponsor estimates that the daily newsletter was  distributed to approximately 41,000 subscribers. The targeted electronic  mailing was sent to approximately 5,500 sponsors. Using Plansponsor’s  distribution estimates, we estimate the number of 401(k) sponsors that  received our survey notification to be approximately 22,000. We received  448 usable responses to our survey, representing 594 plans. Labor’s  Abstract of 2005 Form 5500 Annual Reports shows that there are over  400,000 plans in the United States.
We do not have evidence to determine the extent to which our survey  respondents are representative of the general sponsor population. Our  respondent population excludes sponsors who do not belong to  Plansponsor’s subscriber list. Therefore, the extent to which our survey  results provide useful information about the general population depends  on whether or not there are differences between the excluded sponsors  and those belonging to Plansponsor’s subscriber list. For example, as  members of Plansponsor’s subscriber list, our survey respondents are self- selected recipients of a publication that provides information to managers  of pensions and 401(k) retirement plans. Because of their affiliation with  Plansponsor, our survey respondents are likely to be more informed than  the average sponsor, given that they are actively engaged in learning  through the magazine. Although our survey respondents may be more  informed than the average sponsor, Plansponsor affirms that their  membership represents the overall sponsor demographic.
To minimize the variability of survey results, we took steps in the  development of the questionnaire, the data collection, and data analysis to  minimize nonsampling errors. For example, prior to administering the  survey, the questionnaire was reviewed by an independent survey expert  in our methodology group, as well as an official from Plansponsor. In  addition, we conducted six pretests by telephone to determine the extent  to which (1) the survey questions were clear, (2) the terms used were  precise, (3) respondents were able to provide the information we were  seeking, and (4) the questions were unbiased. We identified sponsors for  the pretest through a series of questions posted in a survey that  Plansponsor administers weekly to its subscribers. Sponsors were  selected for the pretest based upon the total number of participants and  the total amount of assets in the plan. We made changes to the content and  format of the questionnaire based on the feedback we received.
The Web-based questionnaire was accessible through a secure GAO  server. Sponsors completing the survey created usernames and passwords  to access the survey. Plansponsor notified its subscribers of the survey’s  availability in its daily newsletter over a period of several weeks between  March 2008 and May 2008. To solicit additional responses, Plansponsor  sent a targeted electronic mailing to sponsors who responded to  Plansponsor’s 2007 Defined Contribution Survey, within the same period.  No follow-up discussions with survey respondents were conducted for this  study.
To further determine which features typically have important fiduciary  implications and factors when making such decisions, as well as  challenges sponsors face in fulfilling their fiduciary obligations when  overseeing plan operations, we identified the relevant laws and regulations  for 401(k) plans under ERISA. We interviewed and collected  documentation from a variety of stakeholders, including plan sponsors,  service providers, fiduciary advisers, industry and consumer associations,  attorneys, and Labor. We also obtained their views on sponsors’  awareness of fiduciary responsibilities and identified any challenges  sponsors might face. We also collected and analyzed information on plan  sponsor oversight from other sources, such as the reports and testimonies  from ERISA Advisory Council working groups.
To determine the actions that Labor takes to ensure that sponsors are  fulfilling their fiduciary obligations and the progress Labor has made on its  regulatory initiatives, we reviewed ERISA and Labor’s regulations to  clearly define Labor’s authority to oversee the conduct of 401(k) plan  sponsors in fulfilling their key fiduciary obligations. We reviewed Labor’s  enforcement strategies for overseeing plan sponsors (e.g., reviewing the  types of complaints about fiduciary breaches). We reviewed the actions  Labor has taken against plan sponsors and the reasons for such actions.  We also reviewed the recent work of other GAO staff in order to provide  an update on Labor’s compliance assistance and outreach efforts;  participated in certain fiduciary education seminars; and conducted  follow-up interviews with agency officials about their current initiatives.
We conducted our review from January 2007 through June 2008 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments:
paragraphs: The following team members made key contributions to this report:  Tamara Cross, Assistant Director; Daniel Alspaugh, Analyst-in-Charge;  LaKeshia Allen; Monika Gomez; Matthew Saradjian; Susan Baker;  Susannah Compton; Mimi Nguyen; Walter Vance; and Craig Winslow.