401(k) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees
Published: 2012-04-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Studies have been conducted to better understand the fees 401(k) plan sponsors and their participants pay. However, these studies focus on larger plans. Thus, uncertainty remains about the amounts paid by small and medium-sized plans and the level of knowledge and expertise these sponsors have to assess the fees charged by service providers.
GAO addressed the following related to small, medium-sized, and large plans: (1) amounts plan sponsors and participants pay for services, (2) challenges sponsors face in understanding how fees are charged, and (3) actions Labor has taken to help sponsors better understand and monitor the fees charged by service providers. GAO reviewed relevant federal laws, regulations, and retirement research, and interviewed federal officials and industry experts. GAO also conducted a survey of 1,000 401(k) plans to collect information about fees paid for plan services. The response rate allowed GAO to generalize to the population of 401(k) plans for most of the survey questions. The survey instrument and most results can be viewed at GAO-12-550SP .
section_title: What GAO Found
paragraphs: Plan sponsors and participants paid a range of fees for services, though smaller plans typically paid higher fees as a percentage of plan assets. For example, the average amount sponsors of small plans reported paying for recordkeeping and administrative services was 1.33 percent of assets annually, compared with 0.15 percent paid by sponsors of large plans. Larger plans were more likely to pass recordkeeping fees along to participants, but when fees were passed along to participants in small plans, those in large plans paid lower fees than those in small plans. Participants also paid for investment and plan consulting feesthrough fees deducted from their plan assetsin more instances than sponsors.
GAOs survey and review of plan documents showed that some sponsors faced challenges in understanding the fees they and their participants were charged. Some sponsors did not know if their providers used complex fee arrangements, such as revenue sharing, or if their plans paid certain fees under an insurance contract, such as a group annuity contract. In addition, some sponsors reported knowing about arrangements, but did not fully understand how these fees were charged. For example, one relatively large plan underestimated recordkeeping fees by more than $58,000, because the sponsor did not include the fees charged to participants accounts under its revenue sharing arrangement.
The Department of Labor (Labor) has taken several actions to help sponsors understand and monitor fees charged by service providers. For example, Labor disseminates a number of publications and resources, including a 401(k) fees checklist that is available to sponsors on its website to help them better understand plan fees. However, according to GAOs survey results, more than an estimated 90 percent of sponsors either did not know about or have not used Labors resources to compare and assess plan fees. Additionally, sponsors have access to the plan information of others, including some fees paid, through the Form 5500, but GAOs survey also shows that the information is not being used by sponsors. Finally, although Labor has recently taken on regulatory initiatives to enhance fee disclosures to sponsors, their effect remains to be seen. For example, Labor is in the process of revising a proposed change to the definition of the term fiduciary, which may allow Labor to oversee a broader range of plan investment advisers. However, Labors authority over other types of providers, who have considerable influence over sponsors and may charge sponsors and their plan participants excessive fees, is limited.
The Department of Labor (Labor) has taken several actions to help sponsors understand and monitor fees charged by service providers. For example, Labor disseminates a number of publications and resources, including a 401(k) fees checklist that is available to sponsors on its website to help them better understand plan fees. However, according to GAOs survey results, more than an estimated 90 percent of sponsors either did not know about or have not used Labors resources to compare and assess plan fees. Additionally, sponsors have access to the plan information of others, including some fees paid, through the Form 5500, but GAOs survey also shows that the information is not being used by sponsors. Finally, although Labor has recently taken on regulatory initiatives to enhance fee disclosures to sponsors, their effect remains to be seen. For example, Labor is in the process of revising a proposed change to the definition of the term fiduciary, which may allow Labor to oversee a broader range of plan investment advisers. However, Labors authority over other types of providers, who have considerable influence over sponsors and may charge sponsors and their plan participants excessive fees, is limited.
section_title: What GAO Recommends
paragraphs: GAO recommends that Labor develop and implement more proactive approaches to sponsor educational outreach, improve public access to annual Form 5500 data, and examine the definition of a fiduciary to determine if it captures the current relationship between sponsors and providers. In response, Labor generally agreed with the findings and will explore ways to implement these recommendations.

section_title: Letter
paragraphs: As American workers have increasingly come to rely on their 401(k) plans  for retirement income, policymakers have focused their attention on the  fees charged to the plan sponsor—typically the employer offering the  plan—and plan participants. Our past work has shown that the amount of  plan fees paid by participants can significantly reduce retirement savings  and is dependent on several factors, including the decisions made by the  plan sponsor to hire service providers—outside entities to help administer  their plans. Studies have also been conducted by industry organizations  to better understand the decisions plan sponsors make in managing their  401(k) plans. However, these studies are generally based on surveys of  larger plans—those with more than 500 participants—and most have not  specifically focused on the fees charged by plan service providers. As a  result, uncertainty remains about the fees paid by small and medium-size  plans, which account for the majority of all 401(k) plans, and about the  level of knowledge and expertise sponsors of these plans have to  determine the fees charged by service providers. Consequently, you  asked us to survey sponsors of small, medium-size, and large plans with  different characteristics, such as total plan assets, geographic distribution,  and nature of business, to collect information on the following:  1.  How much do plan sponsors and participants pay for services  performed by service providers?  2.  What, if any, challenges do sponsors face in understanding how fees  are charged to their plan?  3.  What actions has the Department of Labor (Labor) taken to help plan  sponsors understand and monitor fees charged by service providers?
To answer these questions, we reviewed relevant federal laws and  regulations pertaining to 401(k) fees and fee disclosure. We also  reviewed research and available guidance provided to plan sponsors by  Labor and the Securities and Exchange Commission (SEC), and industry  research related to understanding and disclosing fee information. We  interviewed Labor, SEC, and Internal Revenue Service (IRS) officials;  industry experts; plan sponsors; and service providers about factors that  affect the amount of 401(k) fees that can be charged to sponsors and  participants as well as current and proposed regulations and the  requirements governing the disclosure of fee information.
To obtain information about the fees sponsors pay for services performed  by providers, the factors they considered in selecting service providers,  and Labor resources they may have used during calendar year 2010, we  conducted a representative survey of 401(k) plan sponsors. We drew a  stratified random sample of 1,000 plan sponsors from a population of  468,194 unique 401(k) plans from 2009 Form 5500 Annual Return/Report  filings (Form 5500). The sample was stratified by the number of  participants reported at the beginning of plan year 2009 into five groups:  fewer than 10 participants, 10-49 participants, 50-99 participants, 100-499  participants, or 500-plus participants. This stratification emphasized  smaller plans because the vast majority of plans in the 401(k) plans  universe have fewer than 500 participants. Although our sample was  grouped into five strata, for the purposes of comparison and to help  increase the statistical power of our estimates, we analyzed survey  results by three groups: fewer than 50 participants, 50 to 499, and more  than 500. Our survey yielded a weighted response rate of about 39  percent. We conducted a nonresponse bias analysis to see if the  characteristics of survey respondents generally reflected population  characteristics, such as plan size (i.e., the total number of participants),  total plan assets, geographic distribution, and nature of business. The  results of our nonresponse bias analysis enable us to generalize our  results to the total population of 401(k) plan sponsors for most survey  questions. We make note of instances in which survey responses are not  generalizable. To encourage survey participation, we obtained permission  from our congressional requesters to remove links in our paperwork  between individuals’ identities and their responses. We informed  sponsors of this agreement in the introductory letter transmitted with the  survey. A detailed description of our sampling methodology can be found  in appendix I. The survey instrument and a more complete tabulation of  the results can be viewed at GAO-12-550SP.
As part of our analysis of fees for recordkeeping and administrative  services; investment management; retirement plan consulting; and other  fees, such as legal or trustee fees, we generated estimates of the  amounts paid by sponsors and participants. Although all of our fee  estimates are not generalizable to the population of 401(k) plan sponsors,  we feel they are illustrative of the amounts paid by sponsors and  participants. We calculated our estimates as a percentage of plan assets  and on a per participant basis using the annual amounts reported by  sponsors for each service, plan assets, and number of plan participants  for calendar year 2010. To supplement our analysis of the fee amounts  sponsors reported paying and their understanding of how fees are  charged to plans, we also analyzed documents, such as investment  reports, that sponsors submitted with their survey responses. We also  reviewed investment fund prospectuses associated with the investment  options included in the documents sponsors submitted to determine  whether plans paid certain fees. Finally, for respondents for whom data  were available, we reviewed fee reports generated by a third party,  BrightScope, to determine the estimated fees associated with transaction  costs for individual investment options. BrightScope estimates fee  amounts of 401(k) plan fees by drawing on publicly available data,  primarily Form 5500 filings, which include independently audited  information. We took actions to determine whether the BrightScope data  were sufficiently reliable for our purpose of describing the range of  transaction costs incurred by 401(k) plan participants by interviewing  company representatives and reviewing the methodology used to develop  estimates.
We conducted this performance audit from October 2010 through April  2012 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: Under Title I of the Employee Retirement Income Security Act of 1974  (ERISA), employers are permitted to sponsor two broad types of  retirement plans, defined benefit—plans that promise to provide a benefit  that is generally based on an employee’s years of service and frequently  salary, regardless of the investment portfolio’s performance—or defined  contribution—plans in which retirement savings are based on  contributions and the performance of the investments in individual  accounts. Over the last three decades, employers have shifted away from  sponsoring defined benefit plans and toward defined contribution plans.  The 401(k) plan is the predominant type of defined contribution plan in the  United States. In 2009, employers sponsored over 460,000 401(k) plans  with participation from over 60 million workers. The assets held in these  plans totaled more than $2.4 trillion.
Typically, 401(k) plans allow participants to specify the size of their  contributions and direct their assets to one or more investments among  the options offered within the plan. Investment choices within the plan  generally include options such as mutual funds, target date funds, stable  value funds, company stock, money market funds, and self-directed  brokerage accounts. Industry research shows that as of the end of 2009,  participants had allocated about 41 percent of 401(k) plan assets to  equity funds, a type of mutual fund that mainly invests in stocks, followed  by a mix of other investments, including company stock and stable value  funds—funds that are designed to preserve the total amount of  participants’ contributions, or their principal, while also providing steady  positive returns. When deciding how to allocate assets among the  various investment options, participants are generally advised to consider  a number of factors, such as historical performance, investment risk, and  fees associated with each option. As we previously reported, even a  seemingly small fee, such as a 1 percent annual charge, can significantly  reduce retirement savings over the course of a career.
subsections: section_title: Fiduciary Obligations under ERISA
paragraphs: Under ERISA, a fiduciary is anyone who has discretionary control or  authority over the management or administration of an ERISA-covered  plan, such as a 401(k) plan, including the plan’s assets. Plan sponsors  are typically the named fiduciaries, but others, such as trustees,  investment advisers, or other service providers, may also be fiduciaries  depending on the functions they perform for the plan.
Plan sponsors and other plan fiduciaries have specific responsibilities  under ERISA. For example, ERISA stipulates that plan fiduciaries carry  out their responsibilities prudently and do so solely in the interest of the  plan’s participants and beneficiaries. related Labor regulations and guidance, responsibilities of plan sponsors  and other fiduciaries may include, but are not limited to,   In accordance with ERISA and  selecting and monitoring any service providers to the plan;  reporting plan information to the federal 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 plans are necessary and  that the cost of those services is reasonable.
29 U.S.C §1104(a)(2). advice for a fee. After obtaining written comments from the public and  holding two public hearings on the proposed regulation, Labor announced  it will repropose its rule on the definition of a fiduciary in early 2012.
Labor’s Employee Benefits Security Administration (EBSA) is the primary  agency responsible for protecting private pension plan participants from  the misuse or theft of their pension assets by enforcing ERISA. To carry  out its responsibilities, EBSA issues regulations and guidance, conducts  investigations of plan fiduciaries and service providers, seeks appropriate  remedies to correct violations of the law, and pursues litigation when it  deems that necessary.
section_title: Key 401(k) Plan Services and Fees
paragraphs: Plan sponsors may hire companies that will provide the services  necessary to operate their 401(k) plans. Service providers are outside  entities, such as investment companies, banks, or insurance companies  that a plan sponsor hires to provide some of the services necessary to  operate the plan. These services include  investment management (e.g., selecting and managing the securities  included in a mutual fund),  consulting and providing financial advice (e.g., selecting vendors for  investment options or other services),  recordkeeping (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.
As shown in figure 1, services can be provided by a single “bundled” plan  service provider or through contracts with a combination of several  different entities—also known as an “unbundled” arrangement. In a  bundled arrangement, the sponsor hires one company that provides the  full range of services directly or through subcontracts with other providers.  Using a bundled provider, the sponsor might also delegate the oversight  for the selection and monitoring of plan services, except with respect to  the bundled provider itself. In contrast, in an unbundled arrangement, the  sponsor, acting in a fiduciary capacity, selects each service provider and  retains an ongoing duty to monitor service providers.
Service providers can be compensated for their services either directly  from the plan sponsor or indirectly—payments from sources other than  the plan or plan sponsor. Typically, service provider compensation comes  in the form of fees charged as a percentage of total plan assets, per  participant, an itemized fixed rate, or a combination of all three. How fees  are assessed largely depends on the type of service provided and the  plan sponsor. For example, fees for investment management services,  which can vary by investment option, are generally charged as a  percentage of assets and indirectly charged against participants’  accounts, because they are deducted directly from investment returns.  Administrative fees, on the other hand, can be assessed as an overall  percentage of total plan assets regardless of participants’ investment  choices, in addition to a flat rate for some fixed services, such as the  printing of plan documents. In the latter, the sponsor has the option of  passing along some or all of the administrative fees to participants. We  previously reported that recordkeeping and administrative fees are often  paid by the plan sponsors, but participants bear them in a growing  number of plans.
Service providers charge an array of fees depending on the type of  product and arrangement the provider may have with other entities that  provide plan services. Some common investment-related fees are the  following:
Management fees: These fees are paid out of fund assets to the  fund’s investment adviser for investment portfolio management, other  management fees payable to the fund’s investment adviser or its  affiliates, and administrative fees payable to the investment adviser  that may not be included in some of the fees identified below.
Marketing and distribution fees, also known as 12b-1 fees: These  fees may be used to pay commissions to brokers and other  salespersons, to pay for advertising and other costs of promoting the  fund to investors, and to pay various service providers of a 401(k)  plan pursuant to a bundled services arrangement. They are usually  between 0.25 percent and 1.00 percent of assets annually.
Sub-transfer agent (sub-TA) fees: These fees are typically used to  reimburse a plan’s record keeper for shareholder services that the  fund would have otherwise provided, such as maintaining participant- level accounts and distributing the fund’s prospectus.
Trading or transaction costs: These fees are associated with an  investment manager’s buying and selling of securities within a  particular investment vehicle, such as a mutual fund, which can  include commissions. These also include costs associated with  portfolio turnover.
Wrap fees: These fees are usually associated with insurance  products, such as group variable annuities. They are aggregate fees  that encompass multiple components, such as investment  management fees, mortality risk and administrative expense charges,  and surrender and transfer charges.
Some of these fees may be paid by third parties in connection with  investment-related services, also known as revenue sharing, which are  ultimately indirectly paid for by the plan or its participants.
Description of Revenue Sharing Arrangements  Revenue sharing, in the 401(k) plan industry, generally refers to indirect  payments made from one service provider, such as the investment   fund provider, to another service provider in connection with services  provided to the plan, rather than payments made directly by the plan  sponsor for plan services. For example, a plan’s record keeper and  investment fund manager may have an arrangement where the  investment fund company collects sub-TA fees from plan assets  invested in a particular fund that may then be used as a credit to offset  the record keeper’s fees.
section_title: Form 5500 Annual Return/Report
paragraphs: The Form 5500 Annual Return/Report is the primary source of information  for the federal agencies administering ERISA and the private sector  regarding the operation, funding, assets, and investments of private  pension plans and other employee benefit plans. Labor, IRS, and the  Pension Benefit Guaranty Corporation jointly developed the Form 5500  so employee benefit plans could satisfy annual financial reporting  requirements under ERISA and the Internal Revenue Code. Specifically,  Labor uses the Form 5500, among other mechanisms, as a tool to  monitor and enforce plan sponsors’ responsibilities under ERISA.
The Form 5500 includes information on the plan’s sponsor, the number of  participants, plan service providers, and more specific financial  information, such as plan assets, liabilities, insurance, and financial  transactions. According to Labor officials, the form is made publicly  available to serve as a deterrent to noncompliance with the statutory  duties imposed on plan fiduciaries. A research file is also available in  electronic format to individuals and groups for research purposes.
In November 2007, Labor implemented new regulations to expand fee  and compensation disclosures on the Form 5500. Specifically, for the 2009 plan year, Labor revised the annual reporting requirements  concerning service providers and to facilitate electronic filing. Labor  required larger plan sponsors—mainly those with more than 100 plan  participants—to classify the fees they pay service providers as either  “direct” or “indirect” compensation in an updated Form 5500 Schedule C– Service Provider Information.
section_title: Labor’s Recent Regulatory Actions Regarding Fee Disclosure
paragraphs: Labor’s more recent regulatory initiatives focus on enhanced disclosure to  plan fiduciaries and plan participants; see table 1 for a description of  these initiatives. These regulations, as well as changes to the Form 5500  and its instructions, enhance the disclosure of plan financial information  related to fees and other arrangements involving plan fiduciaries and  participants.
section_title: Sponsors and Participants Paid a Range of Fees, though Smaller Plans Paid Higher Fees than Larger Plans
paragraphs: Industry Studies on 401(k) Plan Fees  Pension industry studies and surveys of 401(k) plans focusing on fees  have found that plans pay a range in fees. For example, BrightScope  recently estimated that the average fees paid by plans with less than  $10 million in assets for all recordkeeping, advice, and investment  management services was 1.90 percent and 1.08 percent for plans with  over $100 million in assets. However, BrightScope’s estimates do not  include plans with fewer than 100 participants, which account for about  88 percent of all 401(k) plans. Another study conducted in 2011, which  included plans of all sizes, estimated that the average total amount paid  in defined contribution plans for recordkeeping, administrative, and  investment fees was approximately 1.30 percent.
subsections: section_title: Sponsors Paid Recordkeeping and Administrative and Other Fees, but Small Plans Typically Paid Higher Amounts and More of the Fees
subsections: section_title: Recordkeeping and Administrative Fees Paid by Sponsors
paragraphs: Eighty-five percent of sponsors reported that they or their participants  paid recordkeeping and administrative fees, as shown in figure 2. Of the  respondents who reported paying fees, over three-quarters were small  plans, close to 20 percent were medium-sized plans, and the remainder  were large plans. In addition to sponsors who said their plans paid  recordkeeping and administrative fees, sponsors of 9 percent of plans did  not know if they or their participants paid for these services, and 7 percent  reported fees were waived by their service providers.
Of the sponsors who said either they or their participants paid fees and  provided fee amounts, the range in fees reported as paid by plan  sponsors for recordkeeping and administrative services was between  0.01 percent and 37.26 percent of plan assets annually. We calculated  that sponsors paid an average of less than 1.77 percent of assets.  However, as shown in figure 3, the average amount paid for by sponsors  of small plans (fewer than 50 participants) was 1.33 percent of assets.  In contrast, sponsors of larger plans—those with more than 500  participants—paid an average of 0.15 percent of assets. According to  industry experts and research, plans with fewer participants generally  have lower plan assets, and therefore pay higher fees as a percentage of  assets than plans with more assets or older plans that have grown their  assets over the years. For example, the respondent in our survey that  paid the highest amount, 37.26 percent of plan assets, for recordkeeping  and administrative service fees started the plan in 2009 and had less than  $1,350 in plan assets at the end of calendar year 2010. Service providers  and an industry expert we met with noted that administrative fees to start  a 401(k) plan can be significant for small plans. Additionally,  representatives of a retirement industry organization said that it may be  difficult for sponsors of small plans to negotiate for lower fees, because  assets in these plans are modest.
Larger plans are more likely to pass recordkeeping and administrative  fees along to participants than smaller plans. Of the sponsors that  provided fees, sponsors of 80 percent of plans reported paying for all the  fees associated with recordkeeping and administrative services.  However, sponsors of only 47 percent of large plans paid for  recordkeeping and administrative services, while at least 82 percent of  smaller plans paid these fees. Thirty-two percent of the larger plans also  reported passing along all of these fees to participants, and 22 percent  shared these fees with participants. Representatives from one industry  organization we interviewed said that as plans get larger, they tend to  pass more of the fees on to participants. However, the reason small plans  paid these fees varied. For example, one sponsor of a small plan told us  that it feels responsible for its employees and, as a result, chooses to pay  the fees. And since sponsors of small plans could also be the business  owners, consultants from one company pointed out these sponsors may  be more personally interested in the plan.
Twenty-one percent of sponsors reported that either they or their  participants paid for other services such as trustee, legal, or audit  services covering plans of all sizes. In addition, sponsors of about 22  percent of plans reported that their service providers waived these fees or  that they did not pay anything for these types of services, while 29  percent of plan sponsors did not know if their plans paid these fees. The  vast majority of respondents who did not know if fees were paid for these  other services sponsored small plans, those with fewer than 50  participants.
Of sponsors who reported they paid for other fees, a majority, 85 percent,  reported they paid all of the fees for other services. Most of the  respondents reported paying less than 0.24 percent of plan assets  annually for these services. However, a couple of respondents of small  and medium-sized plans paid more than 1 percent.
Even though investment management fees account for the majority of  401(k) plan fees, sponsors of about 50 percent of plans did not know if  they or their participants paid investment management fees or believed  these fees were waived. While sponsors of plans of all sizes did not know  about these fees, this was more prevalent among respondents who  sponsor smaller plans than those sponsoring larger plans. For example,  respondents of 57 percent of small plans (fewer than 50 participants)  either did not know or claimed fees were waived, compared with 31  percent of large plans. Most of the sponsors who said these fees were  not paid or believed these fees were waived offered mutual funds, in  which companies that manage these funds charge investment  management fees regardless of whether a fund is in a 401(k) plan or sold  to individual investors. Sponsors may not know if their plans paid  investment management fees or believed fees are waived, because these  fees are usually borne by participants and are typically charged against  participants’ assets, as opposed to invoiced to the plan sponsor.
Many plans have also not asked their providers about fees for  investment-related services, such as 12b-1, sub-TA, or wrap fees, as  shown in table 2. For example, sponsors of 82 percent of plans had not  asked their service providers about sub-TA fees, which are typically used  to reimburse a plan’s record keeper for shareholder services, such as  maintaining participant-level accounts and 70 percent had not asked  about 12b-1 fees, which may be used to market and distribute the fund.  According to our survey, over half of sponsors have not asked their  service providers about any of the fees listed in table 2.
Further, our survey also shows that the sponsors who had not asked  about these fees were more likely to not know if these fees were paid. For  example, as shown in figure 4, of the sponsors who reported that they  had not asked their providers about 12b-1 fees, 64 percent did not know if  their plans paid these fees. Additionally, of the sponsors who had not  requested information about wrap fees, which are typically associated  with insurance accounts and annuities, about 50 percent of those  sponsors did not know if these fees were paid. Moreover, 17 percent of  plans offered insurance company accounts, such as stable value funds,  and 8 percent offered annuities, which typically charge a wrap fee, but  over a quarter of those sponsors that offered insurance company  accounts and annuities reported not paying wrap fees.
Last, of the sponsors that provided fee amounts, sponsors of about 24  percent of plans reported that they paid all investment management fees  and participants paid nothing. Among respondents who provided  amounts, the range in fees these respondents paid was very minimal to  1.17 percent of plan assets. However, as noted above, these fees are  typically borne by participants and paid out of assets. While the amounts  reported may reflect fees charged by service providers for investment- related services, it is unclear what these sponsors paid for.
section_title: Participants Ultimately Paid for 401(k) Plan Fees
subsections: section_title: Recordkeeping and Administrative Fees Paid by Participants
paragraphs: Participants generally paid part or all of the fees charged for key 401(k)  plan services. For example, even though in many plans the sponsor paid  recordkeeping and administrative fees, our survey shows that participants  also paid these fees. About 10 percent reported recordkeeping and  administrative fees were paid for out of plan assets—from participants’  accounts. For respondents who reported this information and provided  amounts, participants paid between 0.02 percent and 1.59 percent  annually, with an average of about 0.39 percent. Respondents who  sponsored smaller plans were more likely to pay these fees, and their  participants tend to pay higher fees than participants in larger plans.  Participants in small plans (fewer than 50 participants) paid an average of  0.43 percent annually. Meanwhile, participants in larger plans—those  with more than 500 participants—paid 0.22 percent. We also found that  in a few plans participants paid more than 1 percent in plan assets. Two  of these plans used an insurance provider and offered insurance  company accounts. Plans administered by insurance companies may  have higher fees and expenses because wrap fees, which include  components such as mortality and expense risk fees, are imposed on  these products, according to Labor research.
Participants were more likely to pay for their plans’ consulting or advisory  services than plan sponsors. Plans may opt to hire a consultant or adviser  to help the plan sponsor with various plan responsibilities, such as  monitoring investments, selecting vendors, and negotiating fees or  services with other providers. Our survey shows that 85 percent of plans  hired a retirement plan consultant or investment adviser during 2010 to  assist the sponsor with these services. Overall, in 77 percent of plans,  participants paid for the services rendered to the plan by these providers,  while only 17 percent of plan sponsors paid these fees. Among  respondents who reported fee amounts, participants paid between 0.01  percent and 1.40 percent annually for these plan services. In addition,  on the basis of survey results, participants in smaller plans paid higher  fees as a percentage of assets than participants in larger plans. For  example, while the median amount participants in larger plans (500 or  more participants) paid was 0.07 percent of assets, participants in smaller  plans paid approximately 0.29 percent annually.
Finally, as shown in figure 5, in about 73 percent of the plans,  respondents said that participants paid 100 percent of investment fees,  which are the largest share of 401(k) plan fees. Among respondents  who reported fee amounts, participants paid between less than 0.01  percent and 3.24 percent of assets. The sponsor who said participants  paid approximately 3.24 percent in plan assets reported using an  insurance company for investment options and did not know if different  types of investment vehicles, such as mutual funds, were offered to  participants. However, most respondents reported their plans paid less  than 1 percent of plan assets. These tended to be older plans, in  existence for at least 10 years, and those having more than $1 million in  plan assets. Among plans that paid more than 1 percent of assets, about  half of these respondents told us that other factors such as the historical  performance of a fund were more important than low investment fees  when considering which options to offer within the plan.
section_title: Plan Sponsors Were Challenged by Complex Fee Arrangements and Likely Paid More than They Realized
subsections: section_title: Some Sponsors Were Not Aware of Revenue Sharing Arrangements, Resulting in Higher Fees
paragraphs: Our review of select plans indicates that some plan sponsors did not  understand the impact of third-party fee arrangements, also known as  revenue sharing, on total plan fees. Revenue sharing arrangements, in  which fees for plan services are indirectly charged to the plan through an  outside entity, can benefit plans if sponsors clearly understand how much  they are paying for these types of arrangements and the services they can  help provide. For example, according to a 2007 report by the ERISA  Advisory Council’s Working Group on Fiduciary Responsibilities and  Revenue Sharing Practices, many of these arrangements may help reduce  overall plan costs and provide plans with services and benefits that may not  otherwise be affordable to them. In addition, as we have previously  reported, revenue sharing arrangements can be used to offset expenses the  plan has agreed to pay, and can either be cost-neutral to the plan or may  instead result in increased compensation to the service providers. Our  review found examples in which revenue sharing arrangements for  recordkeeping and administrative services did not offset other fees, namely  investment fees. In these cases, an additional asset-based fee for  recordkeeping under a revenue sharing arrangement was charged on top of  each fund’s reported expense ratio, as opposed to a lower rate.
Service providers and consultants we spoke with noted that plan sponsors  typically do not fully understand revenue sharing arrangements. One industry  expert explained that plan sponsors are commonly not aware of fees or fee  arrangements disclosed outside of the expense ratio. Representatives from a  consulting firm told us that some of their clients possess a good  understanding of revenue sharing, but most have no understanding of  revenue sharing and the potential impact on plan fees. As shown in figure 6,  sponsors of an estimated 48 percent of plans did not know if their service  providers had revenue sharing arrangements with other providers.  Furthermore, 51 respondents that reported being aware of revenue sharing  also reported that they did not consider the revenue sharing arrangements  when selecting service providers, or that they did not have enough  information to do so.
Plan sponsors who reported not having or not knowing if their providers  had revenue sharing arrangements may, in fact, have had these  arrangements and were not aware of it. Our review found that at least 45  of the 91 plan sponsors who provided investment reports had revenue  sharing arrangements, despite reporting not having or not knowing of  such arrangements. Some of the documents provided by these plan  sponsors specifically identified revenue collected from or paid to third  parties for plan services, such as recordkeeping and investment adviser  fees. Evidence of revenue sharing was also found through our review of  some of the funds these plans invested in, which showed that 12b-1 fees  were charged. Similarly, plans paid sub-TA fees, but about 50 percent  of sponsors reported not knowing if these fees were paid during calendar  year 2010. For example, one provider discloses that it receives revenue  sharing fees, including sub-TA fees, but 7 of the 24 survey respondents  that contracted with this provider reported that they did not know if their  plans paid these fees. According to examples we found, in which the plan  sponsor may not have been aware of revenue sharing arrangements,  fees paid under such arrangements varied.
Examples in Which Sponsors Unknowingly Paid Certain Fees  under a Revenue Sharing Arrangement
The sponsor of a plan that had about $6 million in assets reported  not knowing if its plan paid 12b-1 fees, even though a review of its  investment documents indicated that the plan paid about $5,000 in  12b-1 and other revenue sharing fees.
The sponsor of a medium-size plan with over $4 million in plan  assets reported that participants did not pay for recordkeeping and  administrative services—when in fact the provider estimated that  about 43 percent of the fees collected by fund providers from  participants’ accounts, roughly $13,000, would be used to pay for  recordkeeping and administrative services.
Moreover, even plan sponsors that were aware of revenue sharing  arrangements may not fully understand the impact of these arrangements  on plan services and plan fees, and therefore likely paid higher fees than  they reported. For example, our review of the fee report of a 401(k) plan  that used revenue sharing and had over 500 participants and  approximately $13.5 million in plan assets found that the plan sponsor  and participant paid 16 times more in recordkeeping and administrative  fees during calendar year 2010 than the sponsor reported on our survey,  when we included revenue sharing fees, as shown in figure 7. Similarly,  the plan sponsor of a small plan that had about 65 participants and about  $5.8 million in plan assets reported that the company did not pay anything  for recordkeeping and administrative fees, though the fee report the  sponsor provided indicated that these fees in total were about $10,700— about $5,900 was invoiced to the company and roughly $4,800 was paid  to the provider from revenue sharing fees collected from participants’  asset accounts.
A failure to understand these arrangements can have adverse effects on  the plan sponsor and participants. For example, because recordkeeping  fees under a revenue sharing arrangement can be based on the amount  of plan assets under management, the amount paid to the provider for  recordkeeping services could increase as the fund grows and may get  quite large if the sponsor is unaware of these asset-based fees. This  could result in the plan—the sponsor and participants—continuing to pay  more for recordkeeping services as assets grow, although the level of  recordkeeping services provided tends to remain the same. A short video  illustrating a hypothetical example of how revenue sharing arrangements  can work and how the fees for services change over time under such an  arrangement is available at  http://www.gao.gov/multimedia/video/#video_id=590296 .
section_title: Insurance Product Fees Can Be Difficult for Plan Sponsors to Identify and Evaluate
paragraphs: Fees associated with certain 401(k) insurance products—where  participants pay for some benefits but which otherwise appear similar to  noninsurance 401(k) products—can be difficult for sponsors to identify  and therefore evaluate. Some service providers we met with said that  plan sponsors do not often know they are invested in insurance products  such as group variable annuities, which are products that place a  “wrapper” of benefits, namely a guaranteed lifetime annuity income or a  minimum death benefit, around a bundle of investments that are similar to  mutual funds—called separate accounts or subaccounts—and are  unaware of the associated fees. They suggested that it is difficult for  sponsors to distinguish between group variable annuity contracts and  mutual funds, because the insurance company’s separate or subaccounts  often use the same name as the mutual funds, as depicted in figure 8.  However, representatives from one insurance provider said its separate  accounts are invested in the mutual fund for which it is named, but  acknowledged that other providers may mimic the fund rather than  investing in the fund.
In addition, our survey shows that about 17 percent of sponsors did not  know if their plans had group variable annuity contracts. Furthermore,  although sponsors of 72 percent of plans reported not having a group  variable annuity contract, our analysis of their submitted investment  statements indicates that some do currently have these contracts and are  unaware of them. According to our review, it appears that at least 15 of  the plans that provided investment documents and reported not being in a  group variable annuity contract may actually be under such a contract.
The various ways that information about these contracts is disclosed can  make it difficult to determine with certainty whether or not sponsors have  these contracts. As shown in figure 9, a 401(k) group annuity contract and  a 401(k) plan without such a contract may look very similar. For example,  the sponsor of a small plan with about 12 plan participants did not know if  the plan had a group variable annuity contract. However, the statement  provided by the sponsor noted that the plan was a group variable  contract, and included a mortality, expense, and administrative charge— charges by an insurance company to cover the cost of insurance features  in an annuity contract. Similarly, another plan sponsor we met with told us  its plan did not use group annuity contracts; its advisers, however, later  clarified that the sponsor’s plan is, in fact, a group variable annuity  contract and charges wrap fees at 0.1 percent of plan assets. The  advisers explained that these contracts are not often identified as group  variable annuity contracts and suggested that a lot of sponsors would not  know if their plans had such contracts. Another sponsor told us that its  third-party administrator told it that its plan was not under a group annuity  contract, even though it was stated on the plan’s investment report,  because the provider, which is an insurance company, was required to  disclose its group annuity contract terms on all plan documents,  regardless of the actual terms.
Fees associated with group annuities can add significant costs to a plan.  The additional fees for group annuity contracts—known as wrap fees— include administrative fees and a mortality and expense risk charge,  which is typically in the range of 1.25 percent of assets per year. We also  found that in addition to each fund’s expense ratio, an insurance  provider’s administrative service fees were up to 2.00 percent of plan  assets for a few plans that responded to our survey. Furthermore, two  service providers we met with said that they will often discourage their  clients from using group annuities, and one noted that it was able to  reduce one plan sponsor’s fees by about $90,000 off a total of $300,000  by switching the plan away from group annuities to mutual funds.  However, another provider told us that it packages a range of services  into its group annuity contracts and spread fees out over a number of  years, making it more affordable for smaller plans to offer their employees  a retirement plan. In addition to ongoing fees, these contracts also  typically charge a surrender fee for terminating the contract, which may  begin in excess of 4 or 5 percent, according to one service provider, but  typically decline over a period of about 5 or 7 years after a purchase  payment. As these fees can be significant, plan sponsors are likely  contracting with providers that charge higher fee rates without knowing  the benefits for which they and their participants are paying. Moreover,  without being aware of whether or not their plan is a group annuity  contract, for example, plan sponsors cannot adequately assess whether  or not the benefits tied to that product are worth the fees associated with  them.
section_title: A Majority of Sponsors Did Not Know about Commonly Charged Transaction Costs
paragraphs: Many plan sponsors may not be aware that their participants are paying  potentially significant transaction costs (also known as trading costs),  which are commonly paid for indirectly by plan participants out of fund  assets and typically include commissions associated with an investment  manager’s buying and selling of securities within a particular investment  vehicle. While transaction costs are common among mutual funds, and  more than 80 percent of 401(k) plans in our survey offer mutual funds,  sponsors of an estimated 48 percent of plans did not know if their plans— through the deduction from participants’ returns of investments—incurred  transaction costs. In fact, as shown in figure 10, only an estimated 12  percent of sponsors said that their plans incurred these costs.
Of the sponsors that did not know if their plan participants were charged  transaction costs, about 95 percent of them also reported that they had  not asked their service providers for information regarding transaction or  trading costs. Even those that did ask about these fees sometimes did not  know whether their plan participants were charged transaction costs. For  example, a plan sponsor of a large plan with 15,000 participants and over  $100 million in plan assets told us that its plan does not pay transaction or  trading costs, and that it has asked its service provider for information on  these fees. However, on the basis of BrightScope’s estimates, the plan  was charged about $310,400 in transaction costs.
SEC has identified four major types of mutual fund transaction costs:  commissions, spread costs, market impact costs, and opportunity  costs. However, no industrywide standard currently exists for  calculating transaction costs. Different researchers and private sector  companies have developed various methods to determine transaction  costs. For example, one researcher focuses on spread costs,  brokerage commissions, and tax costs using individual fund quarterly  reports of stocks traded and SEC filings, while another researcher  estimates trading costs using price impacts and effective bid-ask  spreads. Adding to the difficulty of estimating transaction costs is the  fact that even though mutual funds have transaction costs associated  with them, they are not uniformly measured or disclosed  Transaction costs vary by different types of investment vehicles. Our review  of BrightScope data for 83 plan sponsors that responded to our survey and  had corresponding BrightScope data suggests that transaction costs for an  investment option can be as high as 2.72 percent. However, average  transaction costs for the investment options offered in the plans we  reviewed were approximately 0.45 percent of assets. Even though  transaction costs for individual funds are high, the amount a participant or  plan pays may be lower depending on how much is invested in these high- cost options; for example, for the plan that had an investment option with a  transaction cost of 2.72 percent, only 6.57 percent of plan assets were  invested in that option, resulting in transaction costs of 0.18 percent of total  plan assets. Different types of investment options yield different amounts of  transaction costs. For example, more actively managed funds may have  higher transaction costs than less actively managed funds because they  often have a higher turnover. More actively managed investment options  with higher turnovers could benefit participants by producing a higher  return; however, their higher transaction costs may or may not lead to a  higher net return.
section_title: Labor Has Taken Actions to Help Sponsors, but Additional Efforts Are Needed to Effectively Oversee Fees Charged by Service Providers
subsections: section_title: Labor Has Educational Resources, but Sponsors Reported Not Using Them
paragraphs: Labor has made information, guidance, and tools regarding plan fees  available to plan sponsors on its website, but our survey shows that many  sponsors are not using these resources. For example, Labor undertook  several educational initiatives to help sponsors ensure that the services  provided to their plans are necessary and the fees for those services are  consistent with ERISA requirements. We also recently reported that Labor  developed online tools and a website to specifically help small plan  sponsors navigate retirement plan information and make informed  decisions about plan options. In addition, Labor has created a fiduciary  education program intended to provide all plan sponsors and other plan  officials with an understanding of the law and their responsibilities, with an  emphasis on obligations, such as understanding the terms of their plans  and selecting and monitoring service providers. The program includes  holding nationwide educational seminars and webcasts on topics such as  fees. As part of this initiative, Labor also distributes a number of  publications and tools for sponsors, including a model fee disclosure  form, to help them review and compare the fees charged by service  providers. As described in table 3, Labor distributes other key  publications, which are available to sponsors on its website. www.dol.gov.
However, as shown in figure 11, our generalizable survey results indicate  that the majority of plan sponsors either did not use Labor’s resources to  compare and assess fees or did not know about them. Specifically, on the  basis of our survey of plan sponsors, we estimate that sponsors of less  than 6 percent of 401(k) plans used Labor’s publication A Look At 401(k)  Plan Fees, which includes a 401(k) fees checklist, when comparing and  assessing the fees charged by their various providers. In addition to the  resources we specifically asked about, one sponsor noted using Labor’s  Frequently Asked Questions, available on its website, but also reported  not knowing how much the plan paid in investment management and  consulting fees. Another sponsor, who did not know about Labor’s  resources, commented that Labor’s website is massive, which could  make it difficult to access 401(k) information. Additionally, in March 2012,  we reported that many small employers with retirement plans were  unaware of Labor’s education and outreach initiatives and recommended  that Labor take steps to enhance the visibility and usefulness of federal  guidance on retirement plans for small employers.
Sponsors typically rely on their service providers for plan fee information  and advice, which may be one reason sponsors do not use the resources  on Labor’s website. Our prior work indicated that small employers use  plan service providers to address various aspects of plan administration  and may lack the financial resources and in-house expertise to manage a  plan. Our survey of small and large plan sponsors shows that about 95  percent of plans hired outside entities, such as a plan consultant, an  investment adviser, or a third-party administrator, to help with plan  functions. In survey comments, some sponsors told us that their service  providers either provided or could provide other types of information, such  as a breakdown of fees by services performed or comparative plan size  benchmarking data, to help ensure the services provided to the plan are  necessary and the fees for those services are reasonable. However, our  survey results do not indicate that Labor’s efforts are reaching its target  audience, even though it aims to educate and assist employers,  particularly small employers, in understanding their obligations under the  law and related regulations.
section_title: Labor Has Improved Form 5500 Data, but Sponsors Do Not Use the Information
paragraphs: Labor has also made changes to the Form 5500, expanding plan data  available to sponsors and others, but sponsors are not using the  additional information to help them manage their plans. In particular, an  updated Form 5500 Schedule C requires plan sponsors to collect and  classify the fees they pay service providers as either direct or indirect  compensation. Although these changes were implemented for plan year  2009 filings, understanding indirect fees continues to challenge plan  sponsors, as we noted in the previous section of this report. On the basis  of our survey, of those that reported completing Form 5500 Schedule C,  the additional compensation information helped sponsors of an estimated  17 percent of plans negotiate fees with their current providers.  Furthermore, even less, between 2 and 3 percent, reported that Form  5500 information was used to compare fees paid with those charged by  other providers. As shown in figure 12, sponsors did not know or use  Form 5500 information to compare or assess fees charged by various  service providers. Specifically, sponsors of an estimated 50 percent of  plans did not use Form 5500 data available on Labor’s website to  compare and assess record keeper fees, and about 47 percent did not  know the data could be used for this purpose. Moreover, industry experts  and sponsors told us that plan reporting is an onerous and costly part of  operating and maintaining a 401(k) plan.
In addition, even if sponsors wanted to use Form 5500 data from other  plans to determine fees, they would be hindered because of several  limitations we found, such as the inability to search for reports of plans  with similar features or the same provider to compare fees. Table 4  describes some limitations that pose obstacles to sponsors using Form  5500 data.
As of December 2011, Labor did not have plans to address these  limitations. For example, while Labor is developing an online search  capability for pre-2009 filings, which are currently not searchable, it does  not have plans to expand the search functions and capabilities for  information filed under the new Form 5500 web-based filing system.
Labor has also not taken steps to make additional information about the  publicly available pre-2009 Form 5550 data to help sponsors and others  use it more effectively.
section_title: Service Provider Disclosure Regulations May Help Plan Sponsors Better Understand Fees
paragraphs: We previously reported that service provider disclosures can be very  complicated and difficult to understand, which could reduce their  usefulness to plan sponsors. Our survey results also indicate that even  when certain service provider business arrangements, such as revenue  sharing, are disclosed to sponsors, they may not fully understand how  these arrangements affect plan fees. On February 3, 2012, Labor  finalized the regulations regarding disclosure of service providers’ direct  and indirect compensation, which is intended to provide sponsors with  information to assess the reasonableness of fees received by plan  service providers, their affiliates, and subcontractors. Additionally, the  final rule encourages service providers to provide the information in a  summary format or offer a guide to sponsors to help them locate  information, but does not require such actions. However, our survey  also shows that sponsors contract with more than one provider, some of  which have revenue sharing arrangements with other providers.  Therefore, under the final rule, sponsors could receive disclosure  statements in different formats from different providers, which may further  contribute to sponsors’ confusion about plan fees. We previously  recommended that Labor require that the service provider disclosures be  provided in a consistent and summary format, and in light of our survey  results, making these actions a requirement and not voluntary on the part  of service providers may be useful to plan sponsors.
section_title: Labor Is Reexamining the Definition of a Fiduciary, but Additional Efforts Could Help Sponsors and Others
paragraphs: Labor has also taken steps to broaden its oversight of service providers,  particularly investment advisers, which may help sponsors in their role as  plan fiduciaries, but the impact of its actions remains to be seen. In  October 2010, Labor proposed regulations to amend the definition of an  ERISA fiduciary to account for significant changes in both the financial  industry and the expectations of plan officials and participants who  receive investment advice by reducing the number of conditions that need  to be met to be deemed an ERISA fiduciary. These changes would likely  allow Labor to oversee a broader range of plan providers. However, on  September 19, 2011, Labor withdrew its proposal, citing the need for  more public input and announced that it will repropose its rule in 2012.
While Labor’s initial proposal to amend the definition of an ERISA  fiduciary may help reduce confusion on the part of plan sponsors with  respect to their providers that provide investment advice, it may not  address any unclear roles related to a variety of other providers that have  considerable influence over the plan sponsor. Our survey results show  that, on the basis of respondents’ perceptions, various providers other  than investment advisers also serve as plan fiduciaries, but some may not  be considered fiduciaries under current and proposed regulations. For example, of those that use a third-party administrator, sponsors of an  estimated 14 percent of plans reported that their administrator also  served as a plan fiduciary. Sponsors also reported that some bundled  service providers served as fiduciaries. However, most service providers,  including some investment advisers, are not considered to be plan  fiduciaries by plan sponsors, according to information on our survey.
We also found that some sponsors relied on providers, who may not be  considered plan fiduciaries under current regulations, to perform fiduciary  functions, which can lead to gaps in plan oversight. As shown in figure 13,  service providers who perform certain activities could be considered  ERISA fiduciaries, and thus under the authority of Labor; however there  are circumstances that may result in an unclear fiduciary role. During the  course of our review, we found instances in which plan fiduciary roles  were unclear. For example, we met with a sponsor of a small plan that  told us the plan relied on its bundled provider to the extent that the  sponsor considered the provider a plan manager and never felt the need  to negotiate plan fees, because the sponsor trusted that the provider’s  representatives would let the sponsor know if the plan was being  overcharged. This sponsor also told us that the provider’s representative  was always very clear that the information provided was not investment  advice, and therefore the provider may not be considered an ERISA  fiduciary. In another instance, a sponsor told us that the selection of the  plan’s investment provider was based on the recommendation of the  plan’s third-party administrator, whose fiduciary status was unclear.
Nonetheless, unclear fiduciary roles can lead to gaps in plan oversight.  We previously reported that Labor generally would not be able to take  action against a provider that was not considered a fiduciary under  ERISA, and even in instances in which the courts have allowed Labor to  pursue nonfiduciaries that contribute to a fiduciary breach, Labor officials  noted that remedies were limited. These limitations are further  exacerbated by the fact that, as our survey shows, in the current  retirement market, sponsors heavily rely on providers that may not be  considered plan fiduciaries to help them manage their plans. Therefore, in  addition to Labor’s ongoing effort to amend the definition of an ERISA  fiduciary, Labor may need to conduct a separate evaluation of  relationships between sponsors and providers, whose fiduciary status is  unclear. Such an evaluation may help Labor better oversee providers that  may knowingly or unknowingly charge sponsors and participants higher  fees than are necessary.
section_title: Conclusions
paragraphs: While some of our fee estimates are not representative of all 401(k)  plans, our results indicate that small plans, which account for the majority  of 401(k) plans, pay higher fees for a number of reasons. Our previous  work on issues related to retirement plan sponsorship among small  employers indicated that starting and maintaining a plan can be  challenging. Some small plan sponsors are overwhelmed by the various  administrative and fiduciary responsibilities and use service providers to  help manage their plans, which can be costly. Regardless of plan size,  many of these fees charged in 401(k) plans are passed along to plan  participants, which ultimately results in reduced retirement savings. In this  regard, plan sponsors may need to be aware of and closely monitor the  fees charged by various service providers to help ensure the fees they  and their participants pay are not excessive. However, in several  instances, sponsors of large and small plans did not know or fully  understand the fees charged to their plans, because fee arrangements  have become so complex and may be disclosed differently, adding to  sponsor confusion about plan fees. In addition, because sponsors of  plans of all sizes may not be aware of certain fees that participants are  paying, such as transaction costs and wrap fees, it is difficult to get a  clear understanding of the total fees that participants are actually paying.
Labor has taken actions to help educate plan sponsors and provide them  with complete information about fees, but our survey shows that Labor’s  efforts are not reaching its target audience. While Labor’s service provider  disclosure regulation is likely to provide plan sponsors with information to  help them assess the reasonableness of fees received by plan service  providers, our survey results show that sponsors whose providers are  already disclosing revenue sharing arrangements have trouble  understanding the impact of these arrangements on plan fees.  Furthermore, sponsors in our survey had more than one provider and will  likely receive multiple disclosure statements under the new regulation.  Thus, more disclosures from multiple service providers about their fees  may not be enough to ensure sponsors, and ultimately participants, are  paying the most appropriate fee for plan services if they do not fully  understand how certain arrangements work. By taking a more proactive  approach to its educational outreach efforts, thereby ensuring its efforts  are more effective at reaching plan sponsors, particularly those of small  plans, who may lack the in-house expertise and resources necessary to  manage their plans, Labor can increase the awareness of how fees are  charged under complex arrangements and reduce the likelihood that  sponsors and participants pay higher fees than necessary.
Although the Form 5500 was not intended to be a comprehensive  database of plan fees, it could be a valuable source of information for  sponsors to help them compare the fees they pay with those paid by  other plans of similar size. Without enhancements to Labor’s website,  such as search functions for multiple purposes and different audiences, it  will be difficult for users, namely plan sponsors, to use Form 5500 data, if  they so choose, to compare the fees charged by service providers. Labor  has a unique opportunity to make the information it collects available to  sponsors in a way that will help them compare and negotiate their fees. In  the absence of better access to high-quality plan fee information,  sponsors will continue to rely on service providers for comparative fee  information, which may or may not be unbiased. In addition, sponsors will  continue to believe filing the form is onerous and not beneficial to them,  because they cannot easily access and use it to determine fees.
Finally, our work shows that numerous providers have significant  influence over sponsors and plan decisions but do not consider  themselves to be fiduciaries, are not considered fiduciaries by plan  sponsors, and may not be considered fiduciaries under Labor’s proposed  changes because they do not provide investment advice or have not  already identified themselves as fiduciaries. In addition to Labor’s ongoing  efforts, an evaluation of the entire definition of the term “fiduciary” would  be helpful to plan sponsors and service providers. Without an evaluation  that considers the current structure of the retirement market, sponsors  may continue to be unclear about the role of their providers. In addition,  Labor may not have the ability to pursue service providers who have  substantial influence over the plan and may seek to profit at the expense  of the plan participants.
section_title: Recommendations for Executive Action
paragraphs: In order to help plan sponsors better understand how fees are charged to  their plans and to help them make well-informed decisions, we  recommend that the Secretary of Labor develop and implement  alternative approaches to Labor’s plan sponsor outreach and education  initiatives that actively engage sponsors and allow the agency to track  sponsor engagement. Such actions could include e-mailing sponsors  about new regulations, guidance, and tools available on its website, and  then monitoring website traffic and publication downloads to determine  whether such initiatives are reaching their targeted audience.
To help sponsors better understand and monitor plan fees, including  those paid by participants, Labor should enhance web access to publicly  available fee information it collects on the annual Form 5500 to provide  sponsors with information to compare and assess fees charged by  service providers, such as building in the ability to search for and create  customized reports of plans with similar features or providers for the  purpose of benchmarking. It should also consider developing and posting  key information, such as a data dictionary, about the publicly available  Form 5500 datasets on its website, similar to the information distributed  about the Form 5500 research files.
To help strengthen Labor’s ability to oversee 401(k) plans, we  recommend that in addition to Labor’s ongoing efforts, Labor should  evaluate whether individuals and service providers who exert significant  control over the plan should be considered ERISA fiduciaries.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Labor, the Department of the  Treasury, and SEC for their review and comment. The Department of the  Treasury did not have any comments. Labor and SEC provided technical  comments, which we incorporated as appropriate. Labor also provided  written comments, which are reproduced in appendix III.
In its written response, Labor generally agreed with our findings and  recommendations. Labor appreciated our interest in improving awareness  of plan fees and in ensuring that employers and other plan fiduciaries  make more informed decisions with respect to the management of 401(k)  plans. Labor noted that helping plan sponsors and participants obtain  objective services at a fair price by enhancing the transparency of plan  fees has been one of its highest priorities in recent years. Specifically,  Labor cited the completion of three regulatory initiatives—(1) a regulation  regarding the disclosure of service provider fee and revenue sharing  arrangements, (2) disclosure of plan and investment-related information  to participants and beneficiaries in 401(k)-type plans, and (3) changes to  the information large plans must report about service provider  compensation on the Form 5500—designed to augment and improve the  disclosure of plan fee information at all levels. Labor was surprised that  these initiatives were not highlighted more prominently in the summary  section of the report. In fact, we outline these regulations in the  background section of the report, discuss issues related to Labor’s  service provider disclosure regulation in the third section of the report,  and summarize our overall assessment of Labor’s regulatory actions on  our highlights page. Labor also noted that the draft report did not include  a substantive discussion of how these regulations are expected to  address the issues raised in the report. Of the three regulations Labor  noted, two—Labor’s regulations regarding service provider disclosures to  plan fiduciaries and disclosures to participants and beneficiaries—had not  yet been implemented during our review, and therefore their effectiveness  remains to be seen. With respect to the third regulation noted in Labor’s  written comments regarding changes to Schedule C of the Form 5500  Annual Report, which began with the 2009 plan year, our report and e- supplement describe these changes and how sponsors have used the  additional information collected on the Form 5500. Our survey results  show that the additional information collected on Schedule C provided  some plan sponsors more useful information about their provider’s  compensation, but it did not help many sponsors negotiate plan fees nor  did it result in the ability to compare fees paid with those charged by other  service providers.
We commend Labor for quickly responding to our prior recommendation  to finalize the regulation regarding disclosures of service providers’ direct  and indirect compensation from plan investments and Labor’s efforts to  collect information on a guide or similar requirement to assist plan  sponsors in identifying and understanding the disclosures. As we noted  in the third section of this report, service provider disclosures under the  new regulation may be difficult to understand, and multiple disclosures in  different formats may further contribute to sponsors’ confusion about plan  fees. Labor shared our concerns about how plan fee information could be  presented to sponsors and stated it will propose for public comment a  supplement to the service provider disclosure regulation to fully address  our previous recommendation.
Regarding our third objective, Labor appreciated our interest in EBSA’s  outreach and educational efforts on key fiduciary responsibilities, such as  the fees paid for operating retirement plans. With respect to our  recommendation on Labor’s approach to plan sponsor outreach and  education, Labor cited several ongoing efforts to engage sponsors and  stated that it is exploring new ways to reach plan sponsors. We commend  Labor for its efforts to provide educational information to the public; host  webcasts on complex topics, such as its new fee regulations; and work  with stakeholders, such as the Small Business Administration, to reach  plan sponsors with its limited resources. However, throughout the section  we illustrate through various survey results that Labor’s efforts are not  currently reaching its target audience. Specifically, our survey results  show that sponsors of more than 90 percent of 401(k) plans either did not  use or did not know about Labor’s resources. We recognize that reaching  sponsors may be challenging, but attempts to directly reach sponsors and  help ensure they are considering all the relevant information when making  plan decisions will be even more important as Labor’s regulatory changes  take effect. Consequently, we continue to believe new approaches to  outreach are needed to help educate sponsors about complex fee  arrangements and ensure sponsors and participants do not pay higher  fees than necessary.
With respect to our findings on the availability of Form 5500 data, Labor  shares our interest in making the data collected accessible to the public.  Regarding our recommendation that Labor provide additional  documentation to help users of the unedited Form 5500 data, Labor plans  to explore the implementation of our recommendation. With respect to our  recommendation that Labor enhance web access to facilitate sponsors’  ability to compare and benchmark fees, Labor noted that a web tool for  these purposes would have a limited effectiveness because of some  inherent limitations to the Form 5500 data. Our report also outlines  limitations with the data including the fact that not all plan fees are explicitly  reported on the Form 5500. However, we continue to believe that the fee  information collected could help sponsors monitor and compare fees.  Additionally, while Labor also noted that it believes its new fee disclosure  regulations will be a better tool for expanding transparency and  encouraging informed comparison shopping by plan fiduciaries, as we  previously noted, the effects of these regulations remain unclear.  Furthermore, although Labor notes that the Form 5500 was not designed to  be a government database for evaluating compensation arrangements in  the pension plan market, it remains the primary and most comprehensive  source of information on U.S. private pension plans and could be more  effectively used to help sponsors. Thus, we reaffirm our recommendation to  enhance web access to publicly available Form 5500 data.
Finally, with respect to our findings about the fiduciary status of service  providers, Labor stated that it appreciated our support for its recent effort  to update its rule defining the persons who are investment advice  fiduciaries under ERISA. Regarding our recommendation to evaluate the  types of individuals who should be considered ERISA fiduciaries, Labor  agreed that there are individuals and service providers who exert  significant control over plan decisions and should be held accountable for  the advice they provide as fiduciaries. Labor noted that this regulatory  initiative continues to be a high priority and that the agency plans to craft  a clear and workable regulation that provides the strongest possible  protections to individuals as well as to plan sponsors who offer retirement  plans for their workers. While our review focused on plan sponsors, we  recognize that 401(k) plan participants generally make investment  decisions for their own accounts and ultimately pay the vast majority of  plan fees. Therefore, we also agree with Labor’s position that the  absence of adequate fiduciary protections and safeguards is particularly  problematic for plan participants.
As arranged with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Labor,  the Secretary of the Treasury, and the Chairman of the Securities and  Exchange Commission. In addition, the report will be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for  our Office of Congressional Relations and Office of 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 IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: On the basis of our research objectives, we obtained information on fee  amounts paid by sponsors and participants for services, examined  challenges sponsors faced in understanding how fees are charged, and  identified actions the Department of Labor (Labor) has taken to help  sponsors understand and monitor fees. We conducted this performance  audit from October 2010 to April 2012, 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.
To answer our research objectives, we reviewed relevant federal laws  and regulations pertaining to 401(k) fees and fee disclosure. We also  reviewed available guidance provided by Labor, the Securities and  Exchange Commission (SEC), and industry research related to  understanding and disclosing fee information. We interviewed Labor,  SEC, and Internal Revenue Service officials; industry experts; plan  sponsors; and service providers to learn about current and proposed  regulations and the requirements governing the disclosure of fee  information as well as factors that affect the amount of 401(k) fees that  can be charged to sponsors and participants.
subsections: section_title: Survey of 401(k) Plan Sponsors
subsections: section_title: Overview
paragraphs: We also surveyed plan sponsors to obtain information regarding their  plans from calendar year 2010, such as the fee amounts paid for certain  services, the factors they considered in selecting service providers, the  investments offered to plan participants, and Labor resources they may  have used, among other things. We conducted our survey using mail and  electronic distribution from May 2011 to September 2011. To encourage  survey participation, we obtained permission from our congressional  requesters to remove links in our paperwork between individuals’  identities and their responses. We informed sponsors of this agreement in  the introductory letter transmitted with the survey. A copy of the  questionnaire and survey responses for most questions is available in the  e-supplement to this report, GAO-12-550SP. The practical difficulties of  conducting any survey may introduce errors, commonly referred to as  nonsampling errors. For example, difficulties in interpreting a particular  question or sources of information available to respondents can introduce  unwanted variability into the survey results. We took steps in developing  the questionnaire, collecting the data, and analyzing them to minimize  such nonsampling error (see below).
section_title: Sample Design and Survey Pretesting
paragraphs: In order to capture information from plans of all sizes, we identified the  population of 401(k) plans using Form 5500 filings submitted for plan year  2009, which resulted in approximately 468,000 unique active plans. We  used Form 5500 data because they are the primary data source of  information about the operations, funding, and investments of  approximately 800,000 retirement and welfare benefit plans. We chose to  use the Form 5500 dataset for the 2009 plan year because it was the  most current and accurate available as of January 2011. For details on  our methodology for identifying the population of 401(k) plans and  assessing the reliability of Form 5500 data, see appendix II. We drew a  representative sample of 1,000 401(k) plans from the 2009 population.  We stratified our sample based on the number of participants reported at  the beginning of plan year 2009 into five groups: fewer than 10  participants, 10-49 participants, 50-99 participants, 100-499 participants,  or 500-plus participants. This stratification emphasized smaller plans  because a majority of plans in the 401(k) plans universe have fewer than  500 participants. Although our sample was grouped into five strata, for the  purposes of comparison and to help increase the statistical power of our  estimates, we analyzed survey results by three groups: fewer than 50  participants (small), 50 to 499 participants (medium), and 500 or more  participants (large). We defined “small,” “medium,” and “large” for the  purposes of our report, as there is no industrywide definition.
To inform the design of our survey instrument, we reviewed surveys  conducted by companies and industry organizations and met with them to  gain a better understanding of their methodology and any limitations. In  addition, for each of our five strata, we conducted two to three in-person  and telephone pretests with plan sponsors in four geographically different  areas representing an array of businesses for a total of 13 pretests to  ensure that survey questions were collecting the expected information,  obtain any suggestions for clarification, and determine whether sponsors  would be willing to provide fee information.
section_title: Efforts to Minimize Response Bias
paragraphs: For the 1,000 plans in our sample, we contacted the individuals who  signed the Form 5500 as the plan sponsor or plan administrator, because  these individuals are generally responsible for, or serve on the committee  responsible for, selecting a 401(k) plan’s investment options or service  providers, among other key plan decisions that affect plan fees. To help  ensure the plan was still within the scope of our review and that the  identified individual was the appropriate survey respondent to complete  the survey, we contracted with a survey research firm to call sampled  sponsors to confirm the name and contact information of the target.  Contractor staff used a call script, which we drafted, and included  questions about whether the plan was still active. The script also included  several screening questions to help determine whether our identified  target was the appropriate survey respondent. These questions were as  follows:
Are you or a committee you serve on responsible for selecting the  companies that provide services such as recordkeeping, financial  advice, or managing securities, for your 401(k) plan?
Are you or a committee you serve on responsible for selecting the  menu of investment options for your company’s 401(k) plan?
Are you or a committee you serve on responsible for handling non- investment decisions for your company’s 401(k) plan, such as the  level of the employer match and rules about loans, vesting, and  coverage?
We included these questions to help ensure that a person knowledgeable  about the plan received the survey and reduce the likelihood of response  bias being introduced by nonfiduciaries completing the survey. We  determined that if a target did not respond affirmatively to at least two of  three questions, then contractor staff should attempt to collect the name  and contact information for an alternative target. If contractor staff were  able to connect with the alternative target, the screener questions were  again asked. Once the survey had been fielded, contractor staff  conducted follow-up calls using a script to confirm that the target had  received the survey and encourage participation. As with the first round of  calling, the script included questions geared toward verifying the plan was  still active and that the appropriate target received the survey. Inactive  plans were considered to be out of scope for this survey.
section_title: Analysis of Respondents
paragraphs: As summarized in table 5, we obtained questionnaires from 365  respondents, for an overall weighted response rate of 39 percent. We  conducted a nonresponse bias analysis to see if the characteristics of  survey respondents generally reflected population characteristics, such  as plan size (i.e., the total number of participants), total plan assets,  geographic distribution, and nature of business. We initially used  variables available in the Form 5500 data to look at plans’ propensity to  respond to the survey. We looked at a couple of models, but found that  the stratification variable did as good a job of predicting response as the  other models. The differences between the models were not substantively  significant. The number of participants is the basis of our stratification  variable and a significant factor for the propensity of response. We  assumed that the nonrespondents were missing at random within each  stratum and used the strata as nonresponse adjustment cells. The results  of our analysis enable us to generalize our results to the total population  of 401(k) plan sponsors for most survey questions. All percentage  estimates from the survey have margins of error at the 95 percent  confidence level of plus or minus 8 percentage points or less, unless  otherwise noted.
We also conducted integrity checks of answers across questions and  enforced skip patterns, when appropriate. As a result of this review, we  re-categorized the type of information provided by some sponsors when  their responses were inconsistent. For example, if a sponsor did not  respond to the question asking whether the plan paid recordkeeping and  administrative fees, but in a subsequent question listed amounts paid or  that were taken out of plan assets for recordkeeping and administrative  services, we determined it was reasonable to categorize the plan as  having paid these fees.
section_title: Fee Estimates
paragraphs: To compare fees reported for (1) recordkeeping administrative services,  (2) investment management, (3) retirement plan consulting and  investment advice, and (4) other fees, we generated estimates of the  amounts paid by plan sponsors and participants. We calculated our  estimates as a percentage of plan assets and on a per participant basis  using the annual amounts reported by sponsors for each service, plan  assets, and number of plan participants for calendar year 2010. We  calculated fee estimates by each service type, instead of calculating an  overall fee amount, because only 14 of our 365 survey respondents  provided amounts for all of the services. When generating our estimates  of the amounts paid by sponsors for a particular service, we excluded a  sponsor’s response if  the value for the amount that the sponsor paid was missing;  the sponsor indicated that it did not know the amount paid by  reporting a value of “1” per survey instructions; or  the value for plan assets or number of plan participants was missing,  since these were needed to estimate fees as a percentage of assets  and on a per participant basis, respectively.
Similarly, when generating our estimates of the amounts paid by  participants for a particular service, we excluded a sponsor’s response if  the value for the amount that participants paid was missing;  the sponsor indicated that it did not know the amount paid by  participants by reporting a value of “1” per survey instructions; or  the value for plan assets or number of plan participants was missing,  since these were needed to estimate fees as a percentage of assets  and on a per participant basis, respectively.
In addition, we also exclude respondents who indicated their fees were  waived or the amount the sponsor paid was zero when reporting ranges  and averages to more accurately represent the fees deducted from plans  and plan participants.
section_title: Analysis of Supplemental Documents
paragraphs: As part of our analysis of sponsors’ understanding of how fees are  charged to plans, we analyzed documents that sponsors submitted with  their survey responses. Of the 365 plan sponsors who responded to our  survey, 163 provided copies or successfully uploaded documents for our  request for a summary of all investment options and the fees associated  with each option. We reviewed the documents provided to determine if  their plans paid revenue sharing fees, such as 12b-1 or sub-TA fees, and  wrap fees associated with insurance products. We also reviewed  investment fund prospectuses associated with the investment options  included in the documents sponsors submitted to determine if their plans  paid these fees. Finally, for respondents for whom data were available,  we reviewed fee reports generated by a third party, BrightScope, to  determine the fees associated with transaction costs for individual  investment options. BrightScope calculates estimates of 401(k) plan fees  by drawing on publicly available data, primarily Form 5500 filings.BrightScope fee data are limited to plans with more than 100 participants,  because the data’s main source is Form 5500 Schedule H–Financial  Information, which includes independently audited information, and plans  with fewer than 100 participants are generally not required to file this  schedule. We took actions to determine whether the BrightScope data  were sufficiently reliable for our purpose of describing the range of  transaction costs incurred by 401(k) plan participants by interviewing  company representatives and reviewing the methodology used to develop  estimates.
In conducting a review of fees and analysis of supplemental documents, it  was not the purpose, nor does GAO purport, to identify situations or  circumstances in this report where plan sponsors or fiduciaries may have  breached their fiduciary duties. Determining whether a fiduciary breach  has occurred is based upon the facts and circumstances of each case.  Our follow-up with plan sponsors was not aimed at reaching this  determination. Therefore, our findings should not be read as indicating a  breach of fiduciary or other obligation.
section_title: Appendix II: Identification of 401(k) Universe and Assessment of Form 5500 Data
paragraphs: To identify our study population of 401(k) plans, we obtained the most  current and complete Form 5500 Annual Reports/Filings from Labor,  which as of January 2011 were plan year 2009 data. We used Form 5500  data because they are the primary data source of information about the  operations, funding, and investments of approximately 800,000 retirement  and welfare benefit plans. During our initial meeting with Labor officials on  November, 30, 2010, the most complete dataset available was for plan  year 2007 and plan year 2008 data would be available in the spring of  2011. However, according to Labor officials, 2008 data are the least  accurate and reliable of years 2007, 2008, and 2009—with 2009 being  the most accurate. By January 2011, about 85 percent of the expected  filings for 2009 were received and validated. The main reason that Labor  has not received the remaining 15 percent of expected filings is because  plans can have later beginning and ending plan dates (i.e., December 30,  2009-December 31, 2010) and therefore are not yet required to file. For  example, if a plan’s begin date is December 31, 2009, and end date is  December 31, 2010, the normal statutory deadline to file would be July  31, 2011. Labor officials suggested that we supplement incomplete 2009  filings with 2008 filings. On the basis of testimonial evidence from Labor  officials and representatives from other entities that regularly use Form  5500 data, and our review of key variables, we determined that the 2008  data were not sufficiently reliable for our purpose of identifying the  population of 401(k) plans for a single year.
To assess the reliability of Labor’s data, we (1) performed electronic  checking for errors in accuracy and completeness; (2) reviewed related  documentation, such as the system’s Data Element Requirements; and  (3) held numerous meetings and remained in ongoing correspondence  with Labor to discuss data fields and analysis procedures. When we  found inconsistencies, for example, between the data and information  Labor officials told us about the structure of the file, we clarified them with  Labor. For example, during our interviews with Labor, we learned that the  unedited Form 5500 datasets contained duplicate filings for unique plans  (with a unique combination of an Employer Identification Number   and plan number), because filers may amend their returns and, for data  file pre-2009, steps would need to be taken to identify the most current  filing. After clarifying and resolving our questions pertaining to the data,  we concluded that the 2009 dataset was reliable for the purpose of  identifying the population of 401(k) plans.
In using plan year 2009 data, we had to merge data filed from filers of the  normal Form 5500, and the Form 5500-SF (Short Form) filings for small  plans—generally plans with fewer than 100 participants—that choose to  file the new shorter form. Our analysis also included a review of plan  assets, which are filed in Schedule H–Financial Information for plans with  100 or more participants at the beginning of the plan year and   Schedule I–Financial Information-Small Plan for plans with fewer than  100 participants. Because data filed for schedules are stored separately,  financial information for plans also had to be merged before we could  conduct our analysis of the data.
For the purposes of this report, we defined our study population as unique  single-employer-sponsored 401(k) plans. On the basis of discussions with  Labor officials, a unique plan is defined by a unique combination of a  plan’s Employer Identification Number and plan number, because private  sector companies may have more than one plan. We also took the  following steps to edit the data:  Excluded other plan year filings: We first checked for and  removed records in the dataset that were not for the 2009 filing year.  Labor accepts and processes Form 5500 filings as companies  submit information, which could be for an earlier plan year, but  included in a different year’s Form 5500 dataset.  401(k) plans: Because the scope of the job focuses on 401(k) plans  and not other pension plans, such as defined benefit plans, we  created a subset of the data for only 401(k) plans by reviewing  records in which the filer indicated “2J” as a pension feature. Labor  officials recommended that we review the plan name for variations of  401(k), such as “401(k)” or “401k”, because some filers do not  correctly complete or update their pension feature codes, a  recommendation that we incorporated into our design.
Single-employer plans: We exclude multiemployer plan and  multiple-employer plan filers, because these plans are maintained by  more than one employer for special groups such as labor unions and  are typically managed by going to another source for a pension plan  model. We removed records for plan filers that were not single- employer plans—multiemployer, multiple-employer, and direct filing  entity.
Final return: Last, we dropped plans in which the filer indicated that  the report was the final return/report. We assume a final return  indicates that the plan is no longer active. The establishment  sponsoring the plan could have gone out of business or the plan may  have been rolled over as a result of an acquisition or merger.
Our analysis yielded a population of more than 468,000 active unique  single-employer-sponsored 401(k) plans for plan year 2009; see the table  below for additional details.
section_title: Appendix III: Comments from the Department of Labor
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Tamara Cross, Assistant Director;  Lacy Vong, Analyst-in-Charge; Joy Myers; Nathan Gottfried; Michael  Aksman; and Kun-Fang Lee made important contributions to this report.
Cynthia Grant, Ying Long, Karen O’Conor, Carl Ramirez, and Walter  Vance provided technical support in methodology, survey design, and  data analysis. Frank Todisco provided technical advice. Roger Thomas  and Sheila McCoy provided legal assistance. Ernest Powell and Mimi  Nguyen created visuals for the report and provided graphic design  assistance. Kathy Leslie, Delores Hemsley, Timothy Hunter, and David  Chrisinger also provided support.