Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 Information
Published: 2014-06-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Form 5500 is the primary means of collecting information for use by the federal government and the private sector on retirement plan assets, which exceeded $6 trillion in fiscal year 2011. Stakeholders, including those who prepare and use the form, have raised concerns about the quality and usefulness of form data. GAO was asked to review Form 5500 plan investment and fee information.
In this report, GAO examined: (1) stakeholder problems with Form 5500 plan investment information; (2) stakeholder problems with Form 5500 service provider fee information, and (3) challenges DOL, IRS, and PBGC face in collecting and revising Form 5500 information. GAO surveyed a panel of plan sponsors, service providers, representatives of plan participants, and researchers; interviewed agency officials; and reviewed studies on Form 5500 data.
section_title: What GAO Found
paragraphs: In a two-phase online GAO survey, stakeholders identified problems with the usefulness, reliability, and comparability of data from the Form 5500 (see table). Despite longstanding concerns with the Form 5500—the annual report that employee benefit plans file with the federal government—agency officials have made only minimal changes over the last 3 years.
Key Challenges Identified with Form 5500
Stakeholders said the form's information on service provider fees was misaligned with other required fee disclosures, and also cited various exceptions and gaps in current reporting requirements as major challenges. Specifically, Form 5500 service provider fee information does not align with other information that service providers must disclose to plan sponsors, forcing providers to produce two different sets of information. Also, differences in service provider compensation types and the lack of definitions for codes designating the types of services provided can result in inconsistent and incomplete data being reported. Other exceptions and gaps in service provider information result in an incomplete picture of plan fees. For example, large plans—those with 100 or more participants—are not required to report fee information for certain types of compensation and small plans file only limited fee information.
The Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) face significant administrative, statutory, and contractual challenges to collecting and revising the annual reporting information required for regulating private pensions. While the rulemaking process and other informal efforts to solicit stakeholder input have provided opportunities for public reaction to proposed changes to the form, these opportunities have been limited and have not included the advance testing OMB guidance suggests. Stakeholder input could lower costs by reducing subsequent changes, improve filer comprehension, and increase the comparability and reliability of the form's data. Additionally, a statutory prohibition against requiring electronic filing caused IRS to remove certain data elements from the Form 5500 after DOL mandated electronic filing of the form. If IRS were able to require electronic filing, it could add the data elements back to the form, which would improve its compliance, restore robust information to its enforcement activities, and decrease its data collection costs.
section_title: What GAO Recommends
paragraphs: GAO recommends DOL, Treasury, and PBGC consider modifying Form 5500 plan investment and service provider fee information to address challenges identified by our panel. DOL, Treasury, and PBGC should look for options to conduct advance testing when making major revisions to the form. Congress should consider granting Treasury authority to require Form 5500 data be filed electronically. PBGC agreed with the recommendations. DOL and Treasury did not state whether they agreed or disagreed with the recommendations; however, they identified actions underway to address the first recommendation. GAO continues to believe the recommendations are valid.

section_title: Letter
paragraphs: Private sector pension plans in the United States represent trillions of  dollars in assets and are a fundamental source of financial security for  millions of Americans. To protect this key source of retirement security,  the federal government needs information to ensure that plans are  operated in accordance with certain prescribed standards and that  sufficient information is provided to protect participant interests. The Form  5500 Annual Return/Report of Employee Benefit Plan (Form 5500) is the  primary source of information for both the federal government and the  private sector regarding the funding, assets, investments, and fees of  pension and other employee benefit plans. The Department of Labor  (DOL), the Department of the Treasury’s Internal Revenue Service (IRS),  and the Pension Benefit Guaranty Corporation (PBGC), jointly developed  the form so plan sponsors could satisfy annual reporting requirements  under the Employee Retirement Income Security Act of 1974 (ERISA)  and the Internal Revenue Code (IRC)5500 to collect information for their various roles in regulating and  monitoring private pension plans. Close to 700,000 plans filed a Form  5500 in 2011, representing over $6 trillion in assets and more than 130  . The three agencies use the Form  million participants and beneficiaries. Additional federal agencies and  many private sector stakeholders use the plan investment and service  provider fee information collected via the Form 5500 to assess plan  benefits, fees, economic trends, public policy implications, and other  issues. Although a large number of retirees rely on employer-sponsored  plans, participants rarely review Form 5500 data themselves. Instead,  participant advocates such as ERISA plaintiff’s attorneys and retirement  counselors use the data to help protect participants’ interests.
Despite widespread use of and reliance on Form 5500 data, concerns  have long been raised by stakeholders—especially those who prepare  and use the form data—about the quality and usefulness of data it  collects on plan investments and service provider fees. Data on those  fees are crucial in assessing the financial risk, health, and cost of the  plans, including service provider fee disclosures. Along with some  researchers, we have expressed concerns that the form does not collect  all of the information stakeholders need, including sufficient detail to fully  understand plan investments, performance, and fees. We and the filing  community have also found aspects of the form to be burdensome to  complete and difficult to interpret. For example, in 2009, we found that  plans were confused over DOL’s Schedule C reporting requirements and  distinctions between compensation types (eligible indirect compensation  vs. reportable indirect compensation).usefulness of plan investment and service provider fee information  collected via Form 5500. Given these competing concerns, we examined  (1) what aspects of the Form 5500 information on plan investments  stakeholders find problematic; (2) what aspects of the Form 5500  information on service provider fees stakeholders find problematic; and  (3) what, if any, challenges DOL, IRS, and PBGC face in collecting and   GAO was asked to review the  revising key annual reporting information on plan investments and service  provider fees needed from plan sponsors.
To address these objectives, we interviewed knowledgeable agency  officials and non-government Form 5500 stakeholders (representatives of  plan sponsors, service providers, retirement consultants, attorneys, and  researchers); reviewed industry publications along with relevant federal  laws, regulations, and agency guidance, and inspected a  nonrepresentative sample of 20 Form 5500 filings—10 defined  contribution large plan filings and 10 defined benefit large plan filings—for  the 2012 plan year. To address the first and second research objectives,  we gathered the opinions of pension professionals outside government  who either work with Form 5500 or rely on it for their work by conducting  a two-phase online panel survey of 43 non-government stakeholders. To  ensure a range of views on our panel, we identified a non-representative  sample of nongovernmental stakeholders from several backgrounds,  including representatives of plan sponsors, participants, and services  providers, as well as researchers and academics. We identified panelists  from a variety of sources, including contacts developed in past related  reports, participants in our 2011 and 2012 Comptroller General’s  Retirement Security Advisory Panel sessions, Form 5500 users identified  by DOL, and large pension and investment plan administrators and  consultants.
We conducted our work from November 2012 to June 2014 in  accordance with generally accepted government auditing standards.  These 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
subsections: section_title: ERISA and Internal Revenue Code Requirements for Form 5500
paragraphs: Private pension plans are governed by ERISA and the IRC, whose annual  reporting requirements may generally be satisfied through filing a Form  5500 Annual Return/Report of Employee Benefit Plan (Form 5500) and its  accompanying schedules. Any sponsor of an employee benefit plan  subject to ERISA must file detailed information about each benefit plan  every year. To satisfy the annual reporting requirements, DOL, IRS, and  PBGC jointly developed and maintain the Form 5500. The form is the  primary source of information collected by the federal government  regarding the operation, funding, expenses, and investments of employee  benefit plans. In 2011, plan sponsors filed close to 700,000 Form 5500  reports, covering more than 130 million active participants and more than  $6 trillion in investments. The Form 5500 Return includes nine schedules  and attachments that collect information on particular plan aspects and  fulfill specific filing requirements including: plan investment and service provider fee information, plan financial condition, annual participant contributions, plan type (i.e., defined benefit or defined contribution), number of participants.
For example, Schedule C requires plans to provide information on fees  charged by select service providers. Schedules H and I require large and  small plans respectively to provide information on plan investments. Plans  are also required to include attachments, such as a Report of  Independent Qualified Public Accountant. Form 5500 data are made  publicly available. Given the form’s valuable information and its  widespread use, we have conducted a number of reviews of it over the  past few years, including examinations of the timeliness and content of  the form, fee reporting, oversight of multiemployer plans, and the clarity of  required disclosures.
section_title: Federal Role and Other Form 5500 Stakeholders
paragraphs: Form 5500 constitutes an integral part of the enforcement, research, and  policy formulation programs of DOL, IRS, and PBGC—the primary federal  agencies that use it to support their role in regulating and monitoring  private plans. DOL’s Employee Benefits Security Administration (EBSA)  uses the Form 5500 as a tool to monitor and enforce plan administrators  and other fiduciaries and service providers’ responsibilities under Title I of  ERISA. IRS uses the form to enforce standards that relate to such  matters as how employees become eligible to participate in benefit plans,  how they become eligible to earn rights to benefits, and the minimum  amount employers must contribute. PBGC uses the form as a tool to  inform its efforts to insure the benefits of participants in most private  sector defined benefit pension plans and help carry out its mission under  Title IV of ERISA to encourage the continuation and maintenance of  private pension plans. In March 2014, the DOL Office of Inspector  General issued an audit report examining whether EBSA was effectively  overseeing the Form 5500 reporting process.agencies and Congress use information collected through the form to  assess economic trends and develop policy initiatives. The Form 5500 is  also a source of information and data for various nongovernmental  stakeholders, who use it to assess employee benefit, tax, and economic  trends and policies. Private plan sponsors are required to file annual  reports concerning, among other things, the financial condition and  operation of their plans. Form 5500 disclosure and reporting was intended  to protect the interests of participants and their beneficiaries by, among  other things, requiring disclosure and reporting to participants and  beneficiaries of financial and other information.
section_title: Agency Initiatives
paragraphs: In 1999, DOL, IRS, and PBGC implemented a new computerized system  called the ERISA Filing Acceptance System (EFAST) to improve  processing of Form 5500 returns. Because there was no electronic filing  requirement when EFAST was implemented, most forms were submitted  on paper. In January 2010, DOL completed its effort to begin collecting  Form 5500 information electronically, an initiative known as ERISA Filing  Acceptance System (EFAST2). DOL contracted with an information  technology firm to design, develop, test, implement, operate, and  maintain the EFAST2 system. While the form and its attachments are  collected electronically, attachments are not all required to be in a single  structured, data-searchable format. The move to EFAST2 and the  implementation of an electronic filing requirement have addressed some  long-standing issues with the timeliness of Form 5500 data, but additional  timeliness concerns have not been addressed. Specifically, in a 2005  report we raised concerns about the timeliness of Form 5500 information  due to statutory reporting requirements that allow filers a substantial  amount of time to file the Form 5500, which did not change with the  implementation of EFAST2.
DOL issued regulations revising the form in November 2007 in an effort to  facilitate the transition to an electronic filing system; reduce and  streamline annual reporting burdens; and update the annual reporting  forms to reflect current issues, agency priorities, and requirements of the  Pension Protection Act of 2006.expanded the fee and compensation disclosures of the Form 5500.  According to DOL officials, these changes were made to increase  transparency regarding the fees and expenses employee benefit plans  pay. DOL officials explained that they also wanted to ensure that plan  officials would obtain the information needed to assess the compensation  paid for services rendered to the plan while taking into consideration  revenue-sharing arrangements among plan service providers and  potential conflicts of interest. Since the 2009 plan year, Schedule C  requires plan sponsors to classify the fees they pay service providers as  either “direct” or “indirect” compensation. These fees are separated into  those the plan pays directly to a service provider and those that service  providers receive from third parties (such as another service provider) or  plan investments.
Among other things, these changes  DOL, IRS, and PBGC have established committees to work collectively  on a number of initiatives related to the form. The tri-agency Form 5500  working group, which consists of representatives from all three agencies,  meets monthly to propose updates and discuss how to implement  updates provided by each agency that should be made to the Form 5500.  Proposed updates include minor technical changes, changes to the  instructions, and changes that must be made as a result of statutory or  regulatory changes. This working group facilitates discussion between the  agencies, but according to DOL officials it is not a decision-making body.  Each of the three agencies decides independently whether to proceed  with changes to the form. Recently the three agencies established the  21st Century Initiative to examine, among other things, the possibility of  modernizing the form by making major, substantive revisions to all its  parts. In addition, the initiative plans to examine the feasibility of  streamlining the lengthy rulemaking process which generally requires  DOL to take several steps, including obtaining review and clearance to  publish by the Office of Management and Budget (OMB) and publishing a  notice of proposed rulemaking in the Federal Register, providing  interested persons the opportunity to comment on the proposed  regulation, and publishing a final regulation. EBSA’s Office of Technology  and Information Services is focused on, among other things, improving  the flexibility of the next EFAST system contract when the current  contract expires in 2020.
In 2012, OMB issued a memorandum to provide guidance to agencies on  testing and simplifying federal forms that collect information from the  public. The memo further directed agencies to engage in advance  testing of information collections— including lengthy and complex forms— where feasible and appropriate, in order to: (1) ensure that they are not  unnecessarily complex, burdensome, or confusing; (2) discover the likely  burden on members of the public (including small businesses); and (3)  identify ways to make the form as simple and easy to use as possible.  The memorandum further advised that advance testing should occur  either before proposing information collections to the public or during the  public comment period required by the Paperwork Reduction Act of 1995  (PRA), which sets forth the requirements that agencies must meet when  collecting information.
section_title: Stakeholders Cited Challenges with Plan Asset Reporting Format, Missing Information, and Inconsistent Data
paragraphs: Form 5500 stakeholders identified challenges to the usefulness, reliability,  and comparability of plan asset information. Through a two-phase online  panel survey process, respondents first generated a wide range of  challenges and potential changes related to Form 5500 plan investment  information. Then, in the second phase of the survey, respondents rated  those challenges and potential changes identified in first phase. The  highest rated challenges fell into three categories: (1) challenges with the  reporting format of plan asset categories, (2) challenges arising from  missing key information, and (3) challenges with inconsistent information.  Table 1 lists the top challenges respondents to the second phase of the  survey rated as having a very or extremely significant impact to their work  with the Form 5500.
subsections: section_title: Challenges with Plan Asset Categories
paragraphs: Some Form 5500 stakeholders stated that the plan asset categories on  Schedule H are not representative of current plan investments, which has  several consequences. Ten of 31 respondents noted that it’s a very or  extremely significant challenge to break out plan assets on Schedule H  differently than the investment industry typically reports this information.  That makes it difficult to determine how to properly categorize  investments based on the asset categories provided, according to a plan  fiduciary. For example, large plans typically use an investment manager  for each asset category (such as fixed income, equities, hedge funds, or  private equity), but Schedule H’s plan asset categories are broken out by  the type of investment vehicle (such as partnerships, collective trusts,  pooled separate accounts, or mutual funds). Thus, it can be difficult to  understand the categories, apply them, and disaggregate the data by  investment vehicle rather than asset class. As one pension consultant  said, the asset categories provide little insight into the investments  themselves, the level of associated risk, or the structures of these  investments. Furthermore, as one preparer pointed out, the trust reports  and the audited financial statement do not match Form 5500 asset  categories—forcing plan sponsors and their service providers to produce  multiple sets of information. In addition, they often found inconsistencies,  incomplete information, or miscategorized investments in the information  service providers submitted.
A second consequence of misaligned plan asset categories, according to  Form 5500 stakeholders, is that the “other” plan asset category is too  broad. The “other” plan asset category may contain a variety of different  types of disparate investments, such as options, index futures, state and  municipal securities, hedge funds, and private equity. Seventeen of the  31 respondents indicated that the “other plan asset” category is too broad  and poses a very or extremely significant challenge to their work with  Form 5500 data. One respondent said that while hedge fund and private  equity have very different risk, return, and disclosure considerations from  state and municipal securities, all these investments could be included in  the “other plan asset” category. This is a growing issue as plan  investment in some of these vehicles has grown considerably in recent  years. As we found in 2012, according to a Pensions & Investments  survey, the percentage of large plans (as measured by total plan assets)  investing in hedge funds grew from 47 percent in 2007 to 60 percent in  2010 and the percentage of large plans that invested in private equity  grew from 80 percent to 92 percent. Similarly, several respondents said  they have seen forms where large portions of plan assets were recorded  in the “other” category.
A third consequence of misaligned plan asset categories is that the  current reporting format of plan investments makes it difficult to see the  underlying holdings of indirect investments. According to a recent  study, large single-employer defined benefit plans invested about 64  percent of their total assets, on average, in four types of indirect  investments in 2010 (see table 2). Thus, a majority of the assets of large  single-employer defined benefit plans are reported only as  “undifferentiated indirect investments” on Schedule H. Similarly, large  single-employer defined contribution plans in 2010 held about 34 percent  of their total assets, on average, in indirect investments (see table 2).  Almost half of our survey respondents indicated that Schedule H’s lack of  transparency into the breakdown of investments held within each trust  was a very or extremely significant challenge. Eight out of 11 researchers  and 5 of 6 participant representatives from our survey panel indicated this  was a very or extremely significant challenge. One ERISA attorney we  spoke to noted that he needed to hire a consulting actuary to provide  clarity of one plan’s financial investments. Without clear information on  these indirect investment vehicles, it is more difficult for Form 5500  stakeholders to assess and analyze the risk of underlying investments of  plans using Form 5500 data. For example, PBGC officials acknowledged  that plan asset information as currently reported is not very useful to their  work and that they have to ask plans for additional information, such as  actuarial reports and audited financial statements, to help identify the  underlying assets in indirect investments to assess the financial health of  the plan.
The ability to see into the underlying holdings of indirect investments is  further complicated by the difficulty in matching a plan’s investments and  returns with those reported in the indirect investment’s filing. Seven of  11 researchers and 3 of 6 participant representatives from our panel cited  difficulty in matching up an individual plan’s investment and returns from  indirect investments as a very or extremely significant challenge. When  plan assets are invested in indirect investments, plan sponsors file a  Schedule D, which lists the plan’s interests in each indirect investment;  the indirect investment’s filing then provides a breakdown of assets in its  own Schedule H (see figs.1 and 2). Although indirect investments are  required to file their own Form 5500, they report on their general asset  holdings, not the holdings of individual plans invested with them.  According to one respondent, there is no way to calculate the fees  charged to individual plans. Furthermore, the information reported on  Schedule D may not be reliable or complete and may not match the  information in the indirect investment’s filing. According to a recent study  of 2008 plan year Form 5500 data, more than 35 percent of plans that  invested in indirect investments reported data on their Schedules H and D  that were inconsistent. In addition to internal inconsistencies, the study  showed that matching a plan’s indirect investments with the indirect  investment’s own filing can be challenging since 18 percent of reported  plan investments could not be matched to a corresponding indirect  investment filing. Furthermore, there may be multiple layers of indirect  investment entities that complicate efforts to identify the underlying  investments individual plans held because it required linking multiple  indirect investment filings to a single plan filing (see fig. 1).
The top rated change to plan investment information suggested by  respondents was to revise Schedule H asset categories to better match  current investment vehicles (see appendix II). Consistent with the results  of our survey panel, DOL, IRS, and PBGC officials all concurred that plan  asset categories do not reflect investments in the current marketplace  and should be revised.
section_title: Challenges with Finding Key Information
paragraphs: In addition to challenges with the reporting format, Form 5500  stakeholders identified various instances where information is not  collected or easily extracted from Form 5500 data. For example, 11 of 31  respondents indicated that having no standard reporting format for the  Schedule of Assets Attachments (Schedule H line 4i) was a very or  extremely significant challenge. Attachments to the form can be large— some may be as long as 400 pages—presenting a challenge for users to  find necessary information. Also, it can be difficult to conduct aggregate  analyses of the information without a unique identifier, such as a  Committee on Uniform Securities Identification Procedures (CUSIP)  number, as one respondent suggested. Our survey results showed that  while most researchers indicated that a lack of a standard reporting  format or unique identifier for plan assets attachment is a major  challenge, representatives of plan sponsors and service providers and  participant representatives did not.indicated that standardizing the format would be a somewhat positive or  very positive change and only 3 respondents indicated this change would  have a negative impact. Both DOL and PBGC officials said there is no  uniform format or uniform identifier to the Schedule of Assets  Attachments; however, they acknowledged that attachments would be  more useful if they were submitted in a structured, data-searchable  format.
However, 22 of 31 respondents  Respondents also identified additional plan investment information that  would be beneficial to add to the Form 5500. First, some respondents— mainly researchers and participant representatives—indicated that a lack  of detailed plan asset information on Schedule I (Financial Information- Small Plan) creates a very or extremely significant challenge for their  work with the Form 5500. In addition, the Schedule H (Financial  Information) is required only with larger plans (plans with 100 or more  participants)—which account for approximately 12.5 percent of all plans  that filed a form in 2011—leaving the vast majority of plan filings without  this critical information. According to one respondent, without the  Schedule H, it is not possible to build a complete picture of a plan’s  health. Schedule H and the accompanying attachments can help  determine if a plan provides a variety of investment options, can help  calculate the total cost of the plan for participants, and provide a more  complete understanding of plan investments. However, another  respondent cautioned against treating small employers like large  employers and burdening them with additional filing requirements to  satisfy researchers or commercial data mining firms. Second, although  the form requires plan sponsors to indicate if a plan includes an auto  enrollment feature through the plan characteristic codes, it does not  capture which default investment is used.respondents indicated that not knowing the default investment is a very or  extremely significant challenge, it was a top-rated suggested change, with  only one respondent citing it would have a negative impact. For a list of all  the top changes rated by our survey respondents, see appendix II.
section_title: Challenges with Identifying Plans and Funds Consistently and Other Issues
paragraphs: Form 5500 stakeholders also cited challenges with understanding  instructions and interpreting inconsistently reported data. Eleven of 31  respondents indicated that inconsistent naming conventions and  Employer Identification Numbers (EIN) throughout the form presented a  very or extremely significant challenge. One plan preparer said that  compiling and recording EINs and Plan Numbers (PN) for each entity  recorded on Schedule D can be difficult and time-consuming because  plan sponsors, trustees, or service providers do not always provide this  information. In addition, one researcher stated that plans often report the  wrong number for indirect investments, which hinders the ability to link the  indirect investment’s filing with the plan’s filing and prevents accurate  attribution of indirect investments. Thirteen of 31 respondents indicated  that providing a central repository of EINs and PNs would be a very  positive change. PBGC officials also acknowledged that inconsistent EINs  and PNs can hinder their ability to analyze records across years. While  IRS officials said they have a repository of EINs and assign EINs to filers,  they do not share the EINs with the other agencies or make this  information publicly available to filers. DOL has taken some steps to  improve the reliability of PNs, EINs, and names that filers reported. For  example, EFAST2 enables filers to identify previously used names and  EINs and form instructions state filers should use the same name and PN  as in previous years. In addition, DOL examines plans that stop filing  Form 5500s as part of its enforcement activities, and often finds that  plans have continued filing, but with inconsistent identification. According  to DOL, in an effort to improve filer consistency in entering key identifying  information, such as the EIN, PN and Plan Name, DOL’s EFAST program  office is developing specifications for cross-year edit checks. These  checks aim to verify identifying information submitted on the Form 5500 in  order to notify the filer and government agencies of instances where  inconsistencies may exist. IRS works with filers to file amended returns to  update and correct EINs when they become aware of an issue, according  to IRS officials.
Some respondents still find the timeliness of Form 5500 to be problematic  (see table 1). According to one independent fiduciary, current plan assets  are usually quite different from the assets listed in the Form 5500. PBGC  officials expressed frustration with Form 5500 reporting deadlines as well.
The EFAST2 system has reduced the time it takes to publish Form 5500  data to the public once it is submitted. Under ERISA, however, plan  sponsors have a normal deadline of 210 days after the end of the plan  year to file and may then apply to IRS for an annual automatic one-time 2  ½ month extension. Thus, plan sponsors can take up to 285 days from  the end of the plan year to file their Form 5500 reports.
In addition to the challenges and suggested changes mentioned above,  respondents identified a number of other changes to Form 5500  investment information that could have a positive impact, such as  clarifying: when to use fair value versus contract value on the Schedules H and  if a “contract administrator” referred to in Schedule H includes record  keepers.
For a complete list of suggested changes identified by respondents  through our two-phase online panel survey, see appendix II.
section_title: Stakeholders Cited Misalignment with Other Fee Disclosures and Inconsistent Reporting of Service Provider Fee Information as Problematic
paragraphs: Stakeholders identified a wide range of challenges related to Form 5500  service provider fee information. Representatives of plan sponsors and  their service providers cited the burden of being required to produce  different sets of fee information—one for ERISA fee disclosures and one  for the Form 5500. Participant representatives found the format confusing  to understand and ineffective for estimating total plan costs. Researchers  found the current Schedule C reporting format unhelpful because it  provides an incomplete picture of plan fees and aggregate data are not  very reliable or comparable. Table 3 lists the top challenges respondents  of our two-phase online panel survey identified as having a very  significant or extremely significant impact to their work with the Form  5500.
subsections: section_title: Form 5500 Service Provider Information Is Not Aligned with Other Plan Fee Disclosures
paragraphs: More than half of respondents indicated that Schedule C reporting  misalignment with similar service provider fee disclosures required by  ERISA—such as ERISA 408(b)(2) disclosures—as an extremely or very  significant challenge (see table 3). As we reported in 2009, this  misalignment creates competing sets of fee information for sponsors and  service providers, contributes to confusion over what Schedule C  requires, is time-consuming for plan sponsors to collect, and is costly for  service providers to prepare. One respondent noted that the confusion  partly stems from the inconsistent definitions of indirect compensation— fees plans pay “indirectly” to service providers—for ERISA fee disclosures  and Schedule C. Another respondent cited confusion among fund  managers and plan recordkeepers over the ability for ERISA fee  disclosures to satisfy the disclosure requirements for eligible indirect  compensation, as defined in Schedule C.
GAO-10-54, 21.
DOL issued final 408(b)(2) regulations in 2012, but these regulations did not fully  address our recommendation because no changes were made to harmonize the final  408(b)(2) service provider disclosures with Form 5500 schedule C service provider  reporting requirements. See Reasonable Contract or Arrangement Under Section  408(b)(2) – Fee Disclosure, 77 Fed. Reg. 5632 (February 3, 2012)(codified at 29 C.F.R.  pt. 2550) and Amendment Relating to Reasonable Contract or Arrangement Under  Section 408(b)(2) – Fee Disclosure/Web Page, 77 Fed. Reg. 41,678 (July 16,  2012)(codified at 29 C.F.R. pt. 2550). to plan sponsors and said they are considering addressing this issue as  part of a joint DOL, IRS, and PBGC initiative to revise the form.
section_title: Challenges with Inconsistent Reporting of Compensation Types
paragraphs: Stakeholders identified various challenges to consistently reporting  information on service provider compensation. Without consistent  information, comparability across plans is limited and, therefore,  identifying questionable fees may be difficult. Fourteen of 31 respondents  indicated that unclear definitions of eligible indirect compensation,  reportable indirect compensation, and direct compensation created a very  or extremely significant challenge. According to a 2013 letter from the  American Society of Pension Professionals & Actuaries (ASPPA)  submitted to DOL, ASPPA members noted that there have been  conflicting interpretations of the instructions for Schedule C. For example,  one disclosure might reflect certain compensation and expenses of a  mutual fund as reportable on one line of Schedule C, while another  disclosure for the same type of payments might be reportable on a  different line of Schedule C. This uncertainty results in the same types of  information being reported inconsistently, as most preparers are not  inclined to challenge where the disclosure should appear and, therefore,  preparers typically report the information as it is provided to them. While  this satisfies the plan’s disclosure obligations, it produces incomparable  and less reliable data. Adding to inconsistencies in fee reporting is   Ten  continuing confusion with the rules on soft dollar disclosure.respondents indicated confusion about the rules on soft dollar disclosure  was a very or extremely significant challenge. DOL officials said that it  published frequently asked questions (FAQ) in 2009 and 2010  respectively, which included clarification on the reporting of soft dollar  compensation, but some respondents indicated confusion and  inconsistencies still exist.
Stakeholders also identified challenges with collecting compensation  information from service providers. Eleven of 15 representatives of plan  sponsors and their service providers responding to our survey indicated  that receiving service provider fee information in differing formats is  extremely or very challenging. According to one preparer, the onus is on  the plan sponsor and their preparers to collect the necessary information  on Schedule C, since there is no requirement for service providers to  report compensation information in a format similar to Schedule C.  However, service providers may or may not interpret certain  compensation as reportable, leaving DOL with incomplete and  incomparable information. For example, service providers may not list  certain breakdowns of compensation information in a format that is similar  to the Form 5500. In addition, some forms of compensation are not  included in information sent to plan preparers. One preparer said they  may look at trust reports or public disclosures to try to determine  compensation amounts, but compensation may not be reported in the  format required for Schedule C and may not include all forms of indirect  compensation. Furthermore, for indirect compensation to be considered  “eligible” and thus reported on the Schedule C in a more limited fashion,  the plan sponsor or plan administrator must receive written materials from  the service provider. There is no requirement to send these materials to  the plan preparer, so they often cannot independently verify disclosure   Ten of 31 survey respondents indicated  requirements have been met.that this was a very or extremely significant challenge. Further, in 2010,  the Investment Company Institute stated in a letter to DOL that there is a  lack of consensus within the mutual fund industry regarding disclosure  requirements for documents provided to plan sponsors that would also  fulfill eligible indirect compensation disclosure for Schedule C.
section_title: Challenges with Completeness of Service Provider Fee Information
paragraphs: Stakeholders also identified issues with the completeness of service  provider and fee information. For example, plan sponsors must report the  name, address, and the EIN of the service provider for eligible indirect  compensation, but not the compensation amounts or services provided  on Schedule C. Compensation categorized as eligible can encompass  many services and a significant portion of compensation that plans and   In addition, service providers may also choose to  participants pay.disclose only the formulas they use to determine reportable indirect  compensation, making it difficult for sponsors to calculate fees or  understand business arrangements. For example, information on revenue  sharing arrangements can be provided in descriptive format and reporting  may vary significantly from provider to provider. Fourteen respondents  indicated that this was a very or extremely significant challenge. Plans  with fewer than 100 participants are not required to complete a Schedule  C (Service Provider Information). Furthermore, one respondent pointed  out several other exceptions in the Schedule C reporting requirements  that apply to large plans that have more than 100 participants. These  include:  stable value contracts insurance company costs and expenses),   (filers are not required to report certain  service providers paid less than $5,000 do not have to be listed,  compensation reported on Schedule A, and   and some associated fees may not be  recorded.
A stable value contract is an insurance company general account investment that  promises a guaranteed rate of return and takes into account various factors, including  insurance company costs and expenses, in establishing the guaranteed crediting rate.  DOL has said that such insurance company costs and expenses do not involve the insurer  receiving reportable compensation for providing services, such as investment  management services, for an investment fund portfolio in which the plan invests.
Given these various exceptions to fee reporting requirements, Schedule  C may not provide participants, the government, or the public with  information about a significant portion of plan expenses and limits the  ability to identify fees that may be questionable.
Most stakeholders indicated that DOL should clarify Schedule C  instructions so that plan fees are reported more consistently. Popular  suggestions on how to achieve this included:  improving instructions for direct, eligible indirect, and reportable  indirect compensation (19 of 31 respondents said this would have a  very positive impact),  improving consistency between DOL’s definition of direct  compensation and generally accepted accounting principles (14 of 31  respondents said this would have a very positive impact), and eliminating any distinction between eligible and reportable indirect  compensation (13 of 30 respondents said this would have a very  positive impact).
See appendix II for a complete list of these and other top suggested  changes related to fees based on responses from our two-phase online  panel survey.
DOL officials said that the definition of indirect compensation was  intentionally broad to ensure comprehensive reporting of hidden service  provider fees. However, they agreed that further clarification of fee  reporting is being considered as part of a joint DOL, IRS, and PBGC  initiative to revise the form. In 2009, we recommended that asset-based  fees should be explicitly reported. We also recommended that DOL  provide additional guidance regarding the reporting of indirect  compensation and require that all indirect compensation be disclosed.  DOL generally agreed with our recommendations; however, these  recommendations remain open.
section_title: Challenges with Service Codes
paragraphs: Stakeholders also identified inconsistent reporting of service codes used  to describe the types of services provided and compensation received by  service providers as a challenge. Thirteen of 31 survey respondents  indicated inconsistent reporting of service codes on Schedule C was a  very or extremely significant challenge. Without definitions for each  service code, the filing community may interpret these codes differently,  creating incomparable information across filings. Preparers must select  from 55 service codes, and one respondent said that several service  codes appear to overlap making it difficult to understand the differences  between service codes without more guidance. Plan sponsors and their  preparers primarily rely on the service codes that service providers  submit, and sometimes service providers report only one code regardless  of the number of services they provide. Other service providers break out  compensation by service codes, creating a record in Schedule C for each  service code instead of including several service codes in one entry which  can result in double-counting. One preparer said they may look at the  service provider contracts to determine what services were provided and  what corresponding service codes to include, but the contracts do not  always reflect all the services provided or provide compensation amounts  attached to those services. Thirteen of 29 respondents indicated that  reducing and simplifying the number of service codes and adding  definitions would be a very positive change. Recently, ASPPA offered an  example of simplified service codes that could be a model to agency  officials.
section_title: DOL, IRS, and PBGC Face Administrative, Statutory, and Contractual Challenges to Collecting More Useful Form 5500 Information
subsections: section_title: Agencies’ Administrative Processes for Revising the Form and Limited Efforts to Solicit Stakeholder Input Pose Challenges
paragraphs: DOL, IRS, and PBGC stated that the process for making form changes is  lengthy and involved, and also noted that it varies by agency. DOL  officials noted their view that any material changes to the Form 5500  require the use of the informal rulemaking process under the  Administrative Procedure Act (APA), which they said can be a time and  resource intensive process. IRS and PBGC on the other hand view the  form as a data collection instrument and handle changes to the form in  compliance with the Paperwork Reduction Act (PRA). Regardless of  whether any changes are made to the form, under PRA, each agency is  required to solicit public comments on proposed collections of  information, such as Form 5500, every 3 years.each agency noted that the comments they receive through the PRA  process are generally limited because the notice is focused on reducing  respondent burden. As a result, DOL officials told us these comments are  not typically useful in gaining insight into the retirement industry’s  perception of the challenges they experience with the Form 5500.
Through a separate effort, IRS also solicits input from stakeholders  through the Information Reporting Program Advisory Committee (IRPAC),  which consists of members of the IRS tax form professional community,  such as accounting firms and financial services firms, and meets  approximately five times a year to discuss issues with all IRS forms.  Published IRPAC reports for the last 3 years have included only one  recommendation related to making material changes to the Form 5500.  In addition, according to PBGC, the Intersector Group, which is  composed of representatives from the American Academy of Actuaries,  Society of Actuaries, Conference of Consulting Actuaries, and ASSPA,  meet twice a year with PBGC and IRS to discuss regulatory and other  issues affecting pension practice, including issues involving the Form  5500.
Request for Public Comment: Proposed  rules are published in the Federal  Register and include a request for public  comment. The standard comment period  is 60 days.  developing the final rule, the agency  considers comments submitted by the  public in response to the proposed  regulation. The final regulation sets forth  the regulatory changes and may vary  from the proposed rule. Final rules  determined to be “significant” are subject  to review by OMB prior to their publication  in the Federal Register.
The agencies also use informal methods to solicit stakeholder feedback,  but do not systematically collect feedback on an ongoing basis. Officials  noted that they attend industry conferences and other venues throughout  the year to maintain an informal, ongoing communication with the filing  community and often receive comments or suggestions for changes to  the form. Additionally, DOL and IRS have call centers that handle  questions related to the form, although we found the information collected  from these calls was limited. Specifically, DOL officials told us they only  collect substantive data on more complex questions call center staff are  unable to answer. These calls—representing about 10 percent of calls— are forwarded to DOL’s Office of the Chief Accountant. Similarly, IRS  officials noted that the call centers do not track substantive data on the  types of questions received and call center staff do not answer specific  questions on the Schedules, but may forward them to knowledgeable IRS  officials. These officials track information on the questions they receive,  which can be used to gain some insight into issues such as lack of form  clarity. While PBGC does not have its own Form 5500 call center, the  DOL call center forwards specific questions or issues to PBGC. However,  officials from all three agencies noted that calls are not generally about  suggesting changes to the form. In addition to using call centers,  stakeholders may choose to provide the agencies comments on various  aspects of the form at any time. DOL provided us with a few examples of  letters they received from stakeholders regarding suggested  improvements. These letters included suggestions also mentioned by our  panelists, including aligning service provider fee disclosure requirements  and standardizing plan asset reporting.
Despite agencies’ efforts to solicit stakeholder input through rulemaking  and other means, stakeholders expressed concerns about their ability to  fully participate in the Form 5500 change process. Specifically, several  made the following observations about the agencies’ efforts to solicit  input: agency officials are not clearly conveying to stakeholders at  conferences and other venues that they wish to solicit feedback and  comments;  the agencies’ overall efforts to solicit informal input is not apparent;
DOL and IRS did not appear interested in the thoughts of the filing  community regarding changes to the form; and
DOL and IRS generally do little to solicit input from non-government  stakeholders even when taking into consideration the notice and  comment process, although the agencies solicit direct input from  stakeholders on an ad hoc basis.
Additionally, while the agencies have solicited comments through  rulemaking processes and other means, several found that these  methods do not necessarily allow the public to contribute to changes that  would be most beneficial for non-federal stakeholders. One stakeholder  stated that it would be beneficial if the agencies consulted both preparers  and the employee benefits plan industry early in the development of  changes using focus groups and other means of advance testing.  However, none of the agencies have used advance testing methods,  such as focus groups, in-person observations, or users’ perception of  forms and questions, to obtain non-governmental stakeholder input into  changes to the form, despite recent OMB guidance advising such a  process be used for complex forms. While DOL officials did not view  these techniques as helpful—stating that it would add costs and time and  that they were not sure it would help gather constructive, actionable  feedback from the filing community—the agency has used focus groups  in the rulemaking process to improve the readability of disclosure  notices. IRS officials have also noted the potential value in using  advance testing methods, stating that some agency sections use these  methods in the development and revisions of tax forms and that IRS was  willing to consider it for the Form 5500. Further, officials noted that the  IRS considered advance testing when developing an annual report  pension plans file to identify separated participants with deferred vested  benefits, although they ultimately decided to use a notice and public  comment process.the form was adopted due to confusion that one official noted may have  been avoided had the form been advance tested.
section_title: Statutory Prohibition on Mandatory Electronic Filing Limits IRS Information Collection on the Form 5500
paragraphs: The IRS has significantly limited its Form 5500 data collection due to a  statutory prohibition on mandatory electronic filing. Currently, the IRS is  prohibited by statute from requiring persons who file fewer than 250  returns annually to submit information electronically, with limited  exceptions. Consequently, IRS removed all information collected  exclusively for its benefit from Form 5500 once DOL moved the form to  an exclusively electronic filing platform in 2010. As a result, some IRS- only information is no longer collected in any manner, while other  information that IRS is statutorily required to collect was moved to newly  created paper-based forms. For example, information on minimum  coverage—used to determine whether employees that qualify for  retirement benefits are properly included—is no longer collected.  Conversely, the IRS issued Form 8955-SSA starting in plan year 2009 to  satisfy its statutory obligation to provide these data for the Social Security  Administration (SSA).
Since IRS has stopped collecting certain data elements using the Form  5500, it has expressed concerns about its ability to effectively conduct  enforcement activities and to remain current with any statutory and other  changes to plans. Further, IRS enforcement officials told us they are no  longer able to include data that had been collected via the Form 5500 in  the risk models used to identify plans for audits. The Department of the  Treasury Inspector General for Tax Administration (TIGTA) examined this  issue in 2011 and found that information formerly collected was used to:  identify funding or minimum coverage requirements issues, and  conduct special projects to target potentially noncompliant retirement  plans.
Both TIGTA in its report and IRS officials were concerned that the lack of  these data would impact IRS’ ability to effectively focus on specific  indicators of noncompliance when selecting plans for examination.  Specifically, officials noted such information would allow them to better  identify noncompliant plans which would, in turn, reduce plan burden and  unnecessary examinations. IRS officials also told us that it has resorted to  obtaining much of these data while conducting audits rather than to  inform the selection of plans to audit, preventing them from taking an  efficient risk-based approach to enforcement. Additionally, IRS officials  were concerned that their inability to require electronic data collection  further hindered their ability to enforce tax provisions that also serve to  protect pension benefits, as they are unable to revise the form to collect  new plan data critical to compliance and enforcement.
Although officials stated that anything short of a statutory change would  fall short of achieving the full efficiency of mandatory electronic filing, IRS  has made other efforts to foster electronic filing and to allow for more  flexibility in making changes to the form. Specifically IRS has: negotiated with DOL to use the form to collect some data that would  be of interest to IRS (pursuant to DOL’s authority in light of the  limitation on IRS’s authority),  included in the past 4 years of the President’s Budget Request, a  legislative proposal to provide Treasury with the authority to require  additional information be included in electronically filed Form 5500  annual reports, and   initiated regulatory action governing electronic filing by proposing in  August 2013 regulations that would require electronic filing for plan  sponsors and others who file more than 250 returns annually.
Revised Electronic Disclosure Rules Could Clarify Use and Better Protect Participant  Choice, GAO-13-594 (Washington, D.C.: September 2013).
GAO-05-491. systems—with paper potentially costing over 20 times more than  electronic.
section_title: Agencies’ Concerns with Contractual Costs Limits Action on Desirable Form Changes
paragraphs: DOL, IRS, and PBGC have identified form changes that would improve  data collection, but have made limited changes under the current  EFAST2 contract. The tri-agency Form 5500 working group meets  regularly to identify and discuss annual changes to the form; however, as  DOL officials noted, the working group is not a decision-making body, and  the ultimate decision to make changes—with any associated  administrative and fiscal burdens—comes from each agency’s various  authorities. According to IRS and DOL officials, in 2010 the agencies  agreed to impose a “no change year” where they disallowed material  changes that would need to be pursued through the rulemaking process  based on the desire for the EFAST2 contractor to focus on any problems  associated with the new system roll out. After 2010, according to DOL,  each agency could independently request form changes at their discretion  based on their respective authority, budget, and policy considerations and  constraints. However, IRS cannot currently make changes to the  electronic form under the EFAST2 contract because the agency is  statutorily prohibited from requiring electronic filing. Generally, the  agencies have made minimal changes to the plan investment and service  provider fee information in the form. According to a recent DOL IG report,  from fiscal years 2010-2012, the tri-agency Form 5500 working group  proposed 13 form changes of which 7 were adopted. Adopted changes  were minor or pursuant to new laws.revisions for 2014, and has begun its discussions for 2015.
The working group is finalizing its  While officials from DOL and PBGC stated that they could elect to make  changes to the form under the current EFAST2 contract, specific  contractual limitations apply. The contract provides that the contractor  shall update and adapt EFAST2 to accommodate changes in the form  from plan year to plan year. The contract further provides that the  contractor is responsible for changes that are “typical” in number and  substance. Specifically, the contract provides that typical changes are  generally minor and related to system functionality. Under the current  contract, the contractor is responsible for implementing a typical level of  no-cost annual changes into the system at no additional cost to the  government. For example, the agencies did not incur additional costs for  the seven minor or legislative changes made by the tri-agency working  group between fiscal years 2010 and 2012. However, the contract  stipulates that in the event of non-typical changes, the contractor and  government shall work collaboratively to determine an approach for  working through the contractual and/or cost implications.
Given the potential additional associated costs with non-typical changes,  among other reasons, DOL and PBGC officials generally expressed  reluctance to make desirable changes, including those identified during  the annual tri-agency review. While DOL, IRS, and PBGC officials  expressed concern that non-typical changes would be costly, none of the  agencies have obtained cost estimates for potential changes. Despite  this lack of information on potential additional costs, agency officials have  determined that any cost above the current contract costs would be  considered too costly to implement. For example, in addition to the added  cost of making non-typical changes, DOL officials noted that  accommodating such changes to the Form 5500 into EFAST2 would  require contract modifications. Agency officials also noted that they view  the contract provision related to non-typical changes as inflexible, despite  the ability to negotiate these changes and associated costs. To address  these concerns, DOL officials told us that as part of their 21st Century  initiative, they have begun to prepare for the next contract, scheduled for  2020, and are considering various contractual and system developmental  methodologies that could provide more flexibility in adjusting the  processing system to accommodate significant forms changes. However,  officials noted that such additional flexibility would likely increase the cost  of the contract.
section_title: Conclusions
paragraphs: The Form 5500 is the primary source of information covering $6.35 trillion  in pension assets in plan year 2011 and the over 130 million participants  and beneficiaries relying on these funds for a secure retirement. For  years, we and others have raised concerns regarding the data collected  via the Form 5500. The challenges identified by our broad-based panel,  while not generalizeable to the broader filing community, provide insight  into the difficulties that preparers, researchers, and participant advocates  still face with respect to reporting and analyzing critical information on  plan investments and fees. The challenges preparers expressed are  particularly troubling as DOL and IRS depend on this information to  conduct crucial compliance and enforcement activities. As OMB guidance  has suggested, poorly designed and unduly complicated forms can prove  difficult and confusing to complete. Moreover, if enforcement agencies  are working from incomplete, inconsistent, and incomparable data to  understand, assess, and oversee plans, vital enforcement activities may  be at risk. Despite these long-standing concerns, agency officials have  made only routine changes to the plan investment and service provider  fee information in the form over the last 3 years.
While the rulemaking process and other informal efforts to solicit  stakeholder input have provided opportunities for public reaction to  proposed changes to the form, these opportunities have been limited and  they have not, as OMB guidance suggests, allowed for sufficient input to  help shape changes to the form. This input could reduce the agencies’  costs of making subsequent changes, improve filer comprehension, and  increase the comparability and reliability of data provided. In addition, it is  important that all agencies have the authority to require useful information  be collected in a more efficient electronic reporting format. Electronic filing  would present an opportunity to reduce costs and potential errors,  increase the quantity and quality of information available, and allow for  more timely use of the data in protecting the retirement security of 130  million participants. IRS currently lacks the authority to fully address this  challenge and, without legislative intervention, will not have all the  information it needs to protect the nation’s retirement assets. The 21st  Century Plan initiative provides a unique opportunity to address long- standing challenges, identify ways to meet the needs of both federal and  non-federal stakeholders, and significantly improve the efficiency,  usefulness, and integrity of the information collected. However, the  inherent risks of incomplete, inconsistent, and incomparable data warrant  immediate action and, as the only nationally-representative data on over  $6 trillion in employee benefits, it is critical that these data be of the  highest quality.
section_title: Recommendations for Executive Actions
paragraphs: To improve the usefulness, reliability, and comparability of Form 5500  data for all stakeholders while limiting the burden on the filing community,  we recommend the Secretaries of DOL and Treasury, and the Director of  PBGC consider implementing the findings from our panel when modifying  plan investment and service provider fee information, including:  revise Schedule H plan asset categories to better match current  investment vehicles and provide more transparency into plan  investments; revise the Schedule of Assets attachments to create a standard  searchable format; develop a central repository for EIN and PN numbers for filers and  service providers to improve the comparability of form data across  filings;  clarify Schedule C instructions for direct, eligible indirect, and  reportable indirect compensation so plan fees are reported more  consistently and, as we recommended in the past, better align with  the 408(b)(2) fee disclosures; and  simplify and clarify Schedule C service provider codes to increase  reporting consistency.
To ease the burden on preparers and ensure the collection of consistent  and reliable data, we recommend that the Secretaries of DOL and  Treasury, and the Director of PBGC conduct advance testing—such as  focus groups, in-person observations and users’ perception of forms and  questions—as appropriate and before proposing major changes to the  form for public comment, in addition to its other outreach efforts.
section_title: Matter for Congressional Consideration
paragraphs: To improve IRS’s enforcement and compliance efforts, decrease the  administrative and financial burden of maintaining both electronic and  paper-based form processing systems, and reduce plan reporting costs,  Congress should consider providing the Department of the Treasury with  the authority to require that the Form 5500 series be filed electronically.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOL, Treasury, and PBGC for  review. PBGC generally agreed with our recommendations. DOL and  Treasury did not state whether they agree or disagree with our  recommendations; but, they stated that actions are underway that would  address our first recommendation. GAO continues to believe the  recommendations are still valid. DOL, Treasury, and PBGC comments  are reproduced in appendices IV, V, VI respectively.
PBGC agreed with our first recommendation and stated that the form’s  current plan asset categories do not provide users with the means to  identify the nature of plan investments and the level of investment risks,  adding that improvements in this area are critical to PBGC’s efforts to  protect and sustain their insurance programs and monitor plan financial  status. PBGC also stated it will work with Treasury and DOL as part of the  21st Century Initiative to address challenges identified in our report. DOL  and Treasury did not state whether they agreed or disagreed with the  recommendations. DOL stated that in 2013 DOL, Treasury, and PBGC  initiated an overall re-examination of the Form 5500, as part of the 21st  Century Initiative, whose scope includes all of our recommendations for  improvement of Form 5500 plan investment and service provider fee  information. While we agree that the 21st Century Initiative was formed  during our review in 2013, DOL only provided internal deliberative  materials that reflected preliminary thoughts on possible areas for change  in the form. Furthermore, our recommendation calls for more than just  identification of potential improvements, it calls for action to be taken by  the agencies to implement these modifications to the form. Treasury  noted that the concerns identified in our study appear valid and the 21st  Century Initiative would address some of the suggested changes in our  recommendation. However, Treasury noted that it would defer to DOL on  suggested changes to service provider fee information since Schedule C  is solely within DOL’s jurisdiction. Regarding developing a central  repository of Employer Identification Numbers and Plan Numbers,  Treasury said that it could improve the comparability of form data across  filings and it would need to evaluate the impact of this recommendation in  light of major, ongoing initiatives across the IRS to reduce the risk of  identity theft and protect taxpayer privacy.
PBGC agreed with our second recommendation, and stated that it would  work with DOL and Treasury to explore options to conduct advance  testing when making revisions to the form.  Treasury and DOL did not  state whether they agreed or disagreed with the recommendation.  Treasury said it would consult with DOL and PBGC on the potential  benefits and costs of conducting advance testing before proposing  changes to the form. DOL noted that advance testing can be helpful in  some cases, but expressed concerns that conducting advanced testing of  Form 5500 changes would require additional expense and delay in their  lengthy process of making changes to the form. DOL said that changes to  the form already include a very transparent and public process of notice  and comment rulemaking. However, as noted in the report, stakeholders  we spoke to expressed concerns about their ability to fully participate in  the Form 5500 change process, noting that agency efforts to solicit  feedback were not apparent. DOL also stated that success of the Form  5500 depends on the careful management of software, technology,  procurement, and regulatory structures and input from the Form 5500  reporting community, which includes a myriad of stakeholders. It is for  these reasons that we believe DOL, Treasury, and PBGC should undergo  advance testing prior to proposing major changes to the form. Such input  could help ensure that any changes are understood by the service  provider and filing community to improve the reliability of the information  reported, potentially reduce the burden of annual reporting, and provide  greater transparency to all users of form data. We recognize the  complexity involved in making changes to the Form 5500 and the variety  of stakeholders affected by any changes. Because of this complexity, we  feel that it is important to increase input from non-government  stakeholders to minimize misunderstanding and confusion and reduce the  need to make additional revisions to changes after they are implemented  in various systems. This outreach would also have the added bonus of  increasing user awareness and understanding of what the form requires.
In responding to our draft report, DOL also expressed concern regarding  our characterization of recent changes to the Form 5500. Specifically,  DOL stated that the report criticizes the agencies for making “minimal  changes to the form over the last 3 years” and asserts that the process of  making form changes has largely been impeded by “reluctance” on the  part of the agencies to engage in negotiations with the contractor that  operates the EFAST2 about the possible costs of such changes. DOL  stated that the Form 5500 recently was subjected to a major public notice  and comment revision in connection with the agencies’ move to a wholly  electronic form processing system (EFAST2), and identified other  important changes that have occurred over the 3 year time period  referenced in our report. However, the changes mentioned in DOL’s  comments do not relate to Form 5500 plan investment and service  provider fee information. Nonetheless, we amended our report to include  these actions taken by the agencies to make changes to other areas of  the form. In our report we acknowledge that the agencies face significant  administrative, statutory, and contractual challenges to collecting and  revising the Form 5500. For example, we noted DOL’s lengthy informal  notice and comment rulemaking process under the Administrative  Procedure Act (APA) as well as Treasury’s statutory prohibition on  mandatory electronic filing. As we noted in the report, while DOL, IRS,  and PBGC officials expressed concern that non-typical changes would be  costly, none of the agencies have obtained cost estimates for potential  changes.
Each agency also provided technical comments, which we incorporated  as appropriate.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from the  date of this letter. At that time, we will send copies to the Secretary of  Labor, Secretary of the Treasury, and Director of the Pension Benefit  Guaranty Corporation. In addition, the report will be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our study sought to examine the following research objectives:  1.  Aspects of the Form 5500 Annual Return/Report of Employee   Benefit Plan (Form 5500) information on plan investments  stakeholders find problematic,  2.  Aspects of the Form 5500 information on service provider fees  3.  Challenges the Department of Labor (DOL), the Department of the  Treasury’s Internal Revenue Service (IRS), and the Pension Benefit  Guaranty Corporation (PBGC) face in collecting and revising key  annual reporting information on plan investments and service provider  fees needed from plan sponsors.
To address these research objectives, we used various databases and  search tools to identify agency, industry, and academic publications and  notices on Form 5500 reporting requirements. We also reviewed  regulations and agency guidance on changes to these requirements. We  focused our review on our key objectives: disclosure requirements  regarding plan investments and service provider fees. This research  helped us develop key themes for our two-phase survey of non- government stakeholders. Additionally, we reviewed relevant federal  laws, regulations, and agency documentation and guidance related to the  administration and maintenance of the Form 5500 series, including  proposed rules, documentation of current initiatives aimed towards Form  improvement, and the ERISA Filing Acceptance System (EFAST2)  vendor contract.
To address the research questions in terms of recent changes to Form  5500’s disclosure requirements and possible issues related to the form,  we conducted interviews with knowledgeable individuals and  organizations and reviewed relevant agency documents. Specifically, we  conducted interviews with relevant officials at DOL, IRS, and PBGC. We  also conducted interviews with non-government parties who interact with  the Form 5500 in different ways—representatives of plan sponsors,  service providers, retirement consultants, attorneys, and researchers—to  learn how they use the form and what recent challenges, if any, they have  encountered. In addition, we reviewed a nonrepresentative sample of 20  Form 5500 Annual Return/Report filings—10 defined contribution plan  filings and 10 defined benefit plan filings—from the DOL’s 2012 Freedom  of Information Act EFAST2 Form 5500 data set to find potential examples  of some of the challenges identified by non-government Form 5500  stakeholders. Specifically, we limited our universe of plan fillings based  on the following criteria:  filings with plan year ending in calendar year 2012,  filings for a defined benefit or defined contribution plan,  filings that included a Schedule C, H, and a Schedule of Assets  Attachments, and  filings that have a non-zero value in the “Other” plan asset category in  Schedule H.
Based on these criteria, our universe included 4,782 defined contribution  plans and 1,361 defined benefit plans. Then, we randomly selected 10  records from defined benefit plans and defined contribution plans from the  universe for review. We chose to pull our sample from the Form 5500  dataset for the 2012 plan year because it was the most current and  accurate dataset available as of December 2013. To assess the reliability  of DOL’s data, we conducted data reliability discussions with EBSA  officials to understand the limitations to the data and ensure we were  using the correct variables to develop our universe of plans to sample.  We found the dataset to be sufficiently reliable for the purposes of our  study.
subsections: section_title: Two-phase Online Panel Survey
paragraphs: To further address the first and second research questions, we gathered  the opinions of a non-representative sample of professionals outside  government who interact with the Form 5500 or rely on it in their work by  conducting a two-phase questionnaire survey of a panel of 43 non- government stakeholders. We identified initial candidates for this panel  from the following sources:
Contacts developed from past reports related to employee benefit  plan investment and service provider fee information,
Participants in our 2011 and 2012 Comptroller General’s Retirement  Security Advisory Panel sessions,
Form 5500 users identified by the DOL
Large pension and investment plan administrators and plan
Contacts obtained during interviews and research for our present  study.
To ensure we had a range of views in our panel, we identified  stakeholders from several backgrounds: representatives of plan  sponsors, participants, and service providers; researchers and  academics; and other subject matter experts from relevant national  organizations. We contacted an initial list of 102 stakeholders to explain  our research, invite them to participate in our panel, and ask for the  names of other potential panelists who may have had expertise in this  area. This allowed us to both expand our initial list of potential panelists  and to validate the relevance of the potential panelists we had already  identified. To be eligible for the panel, we required stakeholders to have  at least 5 years of experience with Form 5500. We categorized eligible  panelists into one of three groups: representatives of participants,  representatives of plan sponsors and their service providers, and  researchers. Of the 102 stakeholders we contacted, 43 stakeholders were  eligible and agreed to participate in our two-phase panel survey. Panelists  had an average of 16 years experience with the Form 5500. In the first  phase, we asked this sample of panelists to identify challenges with the  Form 5500 plan investment and service provider fee data collection, and  to suggest changes that could improve the efficiency, clarity, and  usefulness of those data. We compiled their answers and aggregated  them into lists of distinct challenges and suggested changes. In the  second phase, we asked panelists to rate the importance and potential  impact of those challenges and suggested changes respectively. The  numbers of panelists surveyed and the sample outcomes of this non- probability sample over both phases are shown in table 4. Additional  details of the design and administration of the two phases are provided  below.
In the first phase of the survey, which was conducted from May 28th to  July 9th, 2013, we asked panelists questions about their roles and  experiences related to Form 5500 and asked them to describe, in two  open-ended questions, any specific challenges that (1) plan investment  information, and (2) service provider and fee information collected on the  Form 5500 presented for their work. We then asked them, in two  corresponding open-ended questions, to suggest potential changes to  improve the form. The wording of the four key open-ended questions is  presented in table 5 below.
Thirty-five of the 43 panelists completed the first phase of the survey, and  two of the original panelists had been determined ineligible during the  survey due to insufficient experience with the form, resulting in an 85  percent response rate. Panelists who did not complete the first phase  were dropped from the panel and did not participate in the second phase.
We performed a content analysis on responses from the first phase to the  four open-ended questions to aggregate responses into lists of distinct  challenges and suggested changes. Two GAO analysts developed an  initial coding scheme and coded each of the participant’s responses  together and, when necessary, the coding scheme was updated to reflect  participants’ responses. We re-contacted respondents when a response  to be coded was unclear. Any disagreements in coding decisions were  discussed until consensus was reached. A third GAO analyst reviewed a  sample of the coded responses to check the validity of the coding  decisions. We used the lists of coded answers to each of the four survey  questions to develop closed-ended rating questions for the second phase  of the survey.
In the second phase of the survey, which was conducted from October  23rd to December 11th, 2013, we asked each panelist to rate the  significance of the challenges and the impact of the suggested changes  the panel had collectively identified in the first phase. Specifically, in the  second phase panelists were asked whether each potential challenge  was “Not at all,” “Slightly,” Moderately,” “Very,” or “Extremely” significant  or if they had “No basis to judge,” and were asked whether each  suggested change would have “Very negative,” “Somewhat negative,”  “Neutral,” “Somewhat positive,” or “Very positive” impact or if they had  “No basis to judge.” Usable responses were provided by 32 of the 35  participants in the second phase, resulting in an overall response rate of  78 percent across both phases. Because the surveys were not  administered to a probability sample of all Form 5500 stakeholders, the  results cannot be statistically generalized to all Form 5500 stakeholders;  the results describe only the experiences and opinions of the  stakeholders we included in our panel. Tabulations of the results of the  Phase 2 ratings and corresponding question wording are presented in  appendix II.
We administered both phases of the survey over the Internet. For both  phases, we sent each stakeholder an email invitation to complete the  survey on a GAO web server using a unique username and password.  Because our sample of panelists constituted the entire, unique population  of stakeholders we had identified, the survey results are not subject to  sampling error. However, the practical difficulties of conducting any  survey may introduce other errors. We took steps to minimize errors in  measurement, from nonresponse, and in data processing.
To minimize the risk of measurement error, we designed draft  questionnaires for both phases in close collaboration with GAO survey  specialists. Two independent GAO staff members familiar with Form 5500  provided technical comments on the draft questionnaires. We pretested  the questionnaires in paper form with 5 individuals representing the range  of our stakeholders (representatives of plan sponsors and their service  providers, representatives of plan participants, and researchers). We  made revisions of the questionnaires based on these efforts before we  finalized the surveys. We applied eligibility criteria in the selection of our  panelists to ensure that they had sufficient qualifications for their role. We  performed quality checks on response data to identify and edit specific  response errors.
To reduce the impact of nonresponse error, panelists received several  emails and phone calls encouraging them to complete the surveys. To  increase participation and the validity of answers, panelists were informed  that their personally-identifiable information would not be linked to their  responses during the survey nor in the final report. We examined the  distribution of those not responding across the three stakeholder  categories in the survey population, and determined that response rates  did not differ markedly across them. A second analyst checked the  accuracy of all computer analyses to minimize the likelihood of errors in  data processing.
We conducted our work from November 2012 to June 2014 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.
section_title: Appendix II: Selected Results for Suggested Changes to Plan Investment and Service Provider Fee Information from the Phase 2 Survey of our Two-phase Form 5500 Stakeholder Panel
paragraphs: In the second phase of the survey of our two-phase Form 5500  stakeholder panel, we asked each panelist to rate the significance of the  challenges and impact of the changes the panel had collectively identified  in the first phase. In the second phase, panelists were asked whether  each potential challenge was “Not at all”, “Slightly”, “Moderately”, “Very”,  or “Extremely” significant or if they had “No basis to judge”, and were  asked whether each suggested change would have “Very negative”,  “Somewhat negative”, “Neutral”, “Somewhat positive”, or “Very positive”  impact or if they had “No basis to judge.”
For plan investment changes, we specifically asked: How much of a  positive or negative impact (please consider costs, resources, burden,  and benefit) for your (and your clients’) work would each of the following  potential changes to Form 5500 have on the overall clarity, efficiency, or  usefulness of plan investment information? Table 6 lists the top plan  investment potential changes indicated by survey respondents.
For service provider fee changes, we specifically asked: How much of a  positive or negative impact (please consider costs, resources, burden,  and benefit) for your (and your clients’) work would each of the following  potential changes to Form 5500 have on the overall clarity, efficiency, or  usefulness of service provider and fee information? Table 7 lists the top  service provider fee potential changes indicated by survey respondents.
section_title: Appendix III: 2013 Form 5500 and Select Schedules
section_title: Appendix IV: Comments from Department of Labor
section_title: Appendix V: Comments from Department of Treasury/Internal Revenue Service
section_title: Appendix VI: Comments from the Pension Benefit Guaranty Corporation
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Charles A. Jeszeck, Director, (202) 512-7215 or jeszeckc@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, David Lehrer (Assistant Director),  Suzanna Clark, Carl Ramirez, Ryan Siegel, Michael Silver, Salvatore  Sorbello, and Amber Yancey-Carroll made key contributions to this report.  Also contributing to this report were Amy Bowser, Holly Dye, Kathy Leslie,  Kristine Hassinger, Sheila McCoy, Jonathan McMurray, Libby Mixon,  Mimi Nguyen, Jason Palmer, Roger Thomas, Robyn Trotter, Craig  Winslow, and Jill Yost.
section_title: Related GAO products
paragraphs: Private Pensions: Clarity of Required Reports and Disclosures Could Be  Improved. GAO-14-92. Washington, D.C.: November 21, 2013.
Private Pensions: Revised Electronic Disclosure Rules Could Clarify Use  and Better Protect Participant Choice. GAO-13-594. Washington, D.C.:  September 13, 2013.
Private Sector Pensions: Federal Agencies Should Collect Data and  Coordinate Oversight of Multiple Employer Plans. GAO-12-665.  Washington, D.C.: September 13, 2012.  401(k) Plans: Increased Educational Outreach and Broader Oversight  May Help Reduce Plan Fees. GAO-12-325. Washington, D.C.: April 24,  2012.
E-Filing Tax Returns: Penalty Authority and Digitizing More Paper Return  Data Could Increase Benefits. GAO-12-33. Washington, D.C.: October 5,  2011.  401(k) Plans: Improved Regulation Could Better Protect Participants from  Conflicts of Interest. GAO-11-119. Washington, D.C.: January 28, 2011.
Private Pensions: Additional Changes Could Improve Employee Benefit  Plan Financial Reporting. GAO-10-54. Washington, D.C.: November 5,  2009.
Private Pensions: Government Actions Could Improve the Timeliness and  Content of Form 5500 Pension Information. GAO-05-491. Washington,  D.C.: June 3, 2005.