Private Pensions: Information That Sponsors and Participants Need to Understand 401(k) Plan Fees
Published: 2007-10-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Employers are increasingly moving away from traditional pension plans to what has become the most dominant and fastest growing type of plan, the 401(k). For 401(k) plan sponsors, understanding the fees being charged helps fulfill their fiduciary responsibility to act in the best interest of plan participants. Participants should consider fees as well as the historical performance and investment risk for each plan option when investing in a 401(k) plan because fees can significantly decrease retirement savings over the course of a career. GAO's prior work found that information on 401(k) fees is limited. GAO previously made recommendations to both Congress and the Department of Labor (Labor) on ways to improve the disclosure of fee information to plan participants and sponsors and reporting of fee information by sponsors to Labor. Both Labor and Congress now have efforts under way to ensure that both participants and sponsors receive the necessary fee information to make informed decisions. These efforts on the subject have generated significant debate. This testimony provides information on 401(k) plan fees that (1) sponsors need to carry out their responsibilities to the plan and (2) plan participants need to make informed investment decisions. To complete this statement, GAO relied on previous work and additional information from Labor and industry professionals regarding information about plan fees.
section_title: What GAO Found
paragraphs: Information on 401(k) plan fee disclosure serves different functions for plan sponsors and participants. Plan sponsors need to understand a broad range of information on expenses associated with their plans to fulfill their fiduciary responsibilities. Sponsors need information on expenses associated with the investment options that they offer to participants and the providers they hire to perform plan services. Such information would help them meet their fiduciary duty to determine if expenses are reasonable for the services provided. In addition, sponsors also need to understand the implication of certain business arrangements between service providers, such as revenue sharing. Despite some disagreements about how much information is needed, industry professionals have made various suggestions to help plan sponsors collect meaningful information on expenses. Labor has also undertaken a number of activities related to the information on plan fees that sponsors should consider. Participants need fee information to make informed decisions about their investments--primarily, whether to contribute to the plan and how to allocate their contributions among the investment options the plan sponsor has selected. However, many participants are not aware that they pay any fees, and those who are may not know how much they are paying. Most industry professionals agree that information about an investment option's relative risk, its historic performance, and the associated fees is fundamental for plan participants. Some industry professionals also believe that other fees that are also charged to participants should be understood, so that participants can clearly see the effect these fees can have on their account balances.

section_title: Letter
paragraphs: I am pleased to discuss the information that sponsors and participants  need to better understand the fees associated with their 401(k) plans.  Named after section 401(k) of the Internal Revenue Code, 401(k) plans are  private sector pension plans that typically allow workers to save for  retirement by diverting a portion of their pretax income into an investment  account that can grow tax-free until withdrawn in retirement. Over the  past two decades there has been a noticeable shift in the types of plans  employers are offering employees. Employers are increasingly moving  away from traditional defined benefit plans to what has become the most  dominant and fastest growing type of defined contribution plan, the  401(k). As workers accrue earnings on their investments, they also pay a  number of fees, including expenses, commissions, or other charges  associated with a 401(k) plan.
For plan sponsors, understanding their expenses helps fulfill their  fiduciary responsibility to act in the best interest of plan participants.  Given this responsibility and the potentially large impact on an individual’s  account balance over time, it is important that both plan sponsors,  typically the employer, and participants, as investors, receive and  understand the fee information necessary to make informed decisions.  Even a small fee deducted from a worker’s assets today could represent a  large amount of money years later had it remained in the account to be  reinvested. The Department of Labor (Labor) is currently finalizing  regulations on the disclosure of fees to participants, and several bills have  been introduced to improve such disclosure.  These efforts have generated  debate about the type of fee information sponsors and participants may  need, and the amount and format of fee information that should be  disclosed. As Congress considers these issues, you asked us to describe  information sponsors and participants need about fees. My remarks today  will focus on the information on fees that (1) sponsors need to carry out  their responsibilities to the plan and (2) plan participants need to make  informed investment decisions.
To describe the fee information needed by 401(k) plan sponsors and  participants, we relied on our previous work that examined the types of  fees associated with 401(k) plans and who pays these fees, how  information is disclosed to sponsors and participants, and Labor’s  oversight of fees. We also used information from Labor and from industry  professionals on the subject of fee disclosure to plan sponsors. We  conducted our review in October 2007 in accordance with generally  accepted government auditing standards.
In summary, plan sponsors need to understand a broad range of  information on expenses associated with their 401(k) plans to fulfill their  fiduciary responsibilities. For example, sponsors need information on  expenses associated with the investment options that they offer to  participants and the providers they hire to perform plan services. Such  information would help them meet their fiduciary duty to determine if  expenses are reasonable for the services provided. In addition, sponsors  need to understand the implication of certain business arrangements  between service providers, such as revenue sharing. While industry  professionals might agree about some of the information that sponsors  need, they disagree about how much information is needed about  individual expense components when a package of plan services, known  as a “bundled” arrangement, is sold to a sponsor for a single price. Despite  this disagreement, industry professionals have made various suggestions  to help plan sponsors collect meaningful information on expenses. Labor  has also undertaken a number of activities related to the information on  plan expenses that sponsors should consider.
Participants need fee information to make informed decisions about their  investments—primarily, whether to contribute to the plan and how to  allocate their contributions among the investment options the plan  sponsor has selected. To make informed decisions, participants need to be  made aware of an investment option’s relative risk, its historic  performance, and the fees they pay. However, many participants are not  aware that they pay any fees, and of those who are, most may not know  how much they are paying. Most industry professionals agree that  information about investment fees, such as the expense ratio—a fund’s  operating fees as a percentage of its assets—is fundamental for plan  participants. Some industry professionals also believe that other fees that  are also charged to participants should be understood so that participants  can clearly see the effect these fees can have on their account balances.
subsections: section_title: Background
paragraphs: Roughly half of all workers participate in an employer-sponsored  retirement, or pension, plan. Private sector pension plans are classified as  either defined benefit or defined contribution plans. Defined benefit plans  promise to provide, generally, a fixed level of monthly retirement income  that is based on salary, years of service, and age at retirement, regardless  of how the plan’s investments perform. In contrast, benefits from defined  contribution plans are based on the contributions to and the performance  of the investments in individual accounts, which may fluctuate in value.
The Employee Retirement Income Security Act of 1974 (ERISA)   establishes the responsibilities of employee benefit plan decision makers  and the requirements for disclosing and reporting plan fees. Typically, the  plan sponsor is a fiduciary. A plan fiduciary includes a person who has  discretionary authority or control over plan management or any authority  or control over the management or disposition of plan assets. ERISA  requires that plan sponsors responsible for managing employee benefit  plans carry out their plan responsibilities prudently and solely in the  interest of the plan’s participants and beneficiaries. Plan sponsors, as  fiduciaries, are required to act on behalf of plan participants and their  beneficiaries. These responsibilities include    selecting and monitoring service providers to the plan,  reporting plan information to the government and to participants,    adhering to the plan’s investment policy statement and other plan  documents (unless inconsistent with ERISA),  identifying parties-in-interest to the plan and taking steps to monitor  transactions with them,    selecting investment options the plan will offer and diversifying plan  investments, and    ensuring that the services provided to their plan are necessary and that  the cost of those services is reasonable.
Plan sponsors may receive some information on an investment option’s  expenses that includes management fees, distribution and/or service fees,  and certain other fees, such as accounting and legal fees. These fees are  usually disclosed in the fund’s prospectus or fund profile. To better enable  the agency to effectively oversee 401(k) plan fees, we recommended in  November 2006 that the Secretary of Labor should require plan sponsors  to report to Labor a summary of all fees that are paid out of plan assets or  by participants. This summary should list fees by type, particularly  investment fees that are being indirectly incurred by participants.
In addition to receiving information about investment fees, sponsors may  receive information about expenses for administration and other aspects  of plan operations. Sponsors can also have providers fill out the Form  5500, which ultimately gets filed with Labor, and includes information  about the financial condition and operation of their plans. Generally,  information on 401(k) expenses is reported on two sections of the Form  5500, Schedule A and Schedule C. However, our November 2006 study  reported that the form is of little use to plan sponsors and others in terms  of understanding the cost of a plan.
While plan sponsors may receive information on investment and other  fees, they may not be receiving information on certain relevant business  arrangements. In November 2006, we reported that several opportunities  exist for such business arrangements to go undisclosed, given the various  parties involved in creating and administering 401(k) plans. Problems may  occur when pension consultants or other companies providing services to  a plan also receive compensation from other service providers. Service  providers may be steering plan sponsors toward investment products or  services in which they have a direct business interest themselves without  disclosing such arrangements.  In addition, plan sponsors, being unaware,  are often unable to report information about these arrangements to Labor  on Form 5500 Schedule C. Our November 2006 report also recommended  that Congress consider amending ERISA to require that service providers  disclose to plan sponsors the compensation that providers receive from  other service providers.
In our prior report on 401(k) fees, we found that the fee information that  ERISA requires 401(k) plan sponsors to disclose is limited and does not  provide participants with an easy way to compare investment options. All  401(k) plans are required to provide disclosures on plan operations,  participant accounts, and the plan’s financial status. Although they often  contain some information on fees, these documents are not required to  disclose the fees borne by individual participants. Overall, we found that  the information currently provided to participants does not provide a  simple way for them to compare plan investment options and their fees,  and are provided to participants in a piecemeal fashion.
Additional fee disclosures are required for certain—but not all—plans in  which participants direct their investments. ERISA requires disclosure of  fee information to participants where plan sponsors seek liability  protection from investment losses resulting from participants’ investment  decisions. Such plans—known as 404(c) plans—are required to provide  participants with a broad range of investment alternatives, descriptions of  the risks and historical performance of such investment alternatives, and  information about any transaction fees and expenses in connection with  buying or selling interests in such alternatives. Upon request, 404(c) plans  must also provide participants with, among other information, the expense  ratio for each investment option. Plan sponsors may voluntarily provide  participants with more information on fees than ERISA requires,  according to industry professionals. For example, plan sponsors that do  not elect to be 404(c) often distribute prospectuses or fund profiles when  employees become eligible for the plan, just as 404(c) sponsors do. Still,  absent requirements to do so, some plan sponsors may not identify all the  fees participants pay.
Some participants may be able to make comparisons across investment  options by piecing together the fees that they pay, but doing so requires an  awareness of fees that most participants do not have. Assessing fees  across investment options can be difficult for participants because the  data are typically not presented in a single document that facilitates  comparison. However, most 401(k) investment options have expense  ratios that are provided in prospectuses or fund profiles and can be  compared; based on industry data, expenses for the majority of 401(k)  assets, which are in investment options such as mutual funds, can be  expressed as an expense ratio.
section_title: Sponsors Must Consider a Broad Range of Information to Fulfill Their Fiduciary Responsibilities
paragraphs: Plan sponsors, as fiduciaries, must consider plan fee information related to  a broad range of functions. According to Labor, ERISA requires that  sponsors evaluate fee information associated with the investment options  offered to participants and the providers they hire to perform plan services  and consider the reasonableness of the expenses charged by the various  providers of services to the plan. In addition, the sponsor must understand  information concerning certain arrangements, such as when a service  provider receives some share of its revenue from a third party. While  industry professionals might agree about some of the information that  sponsors need, they disagree about how much information is needed  about individual expense components when a package of plan services,  known as a bundled arrangement, is sold to a sponsor for a single price.  Some pension plan associations and practitioners have made various  suggestions to help plan sponsors collect meaningful information on  expenses. Labor has also undertaken a number of activities related to the  information on plan expenses that sponsors should consider.
subsections: section_title: Sponsors Need Information to Evaluate Fees and Expenses Associated with Investment Options and Plan Services
paragraphs: In order to carry out their duties, plan sponsors have an obligation under  ERISA to prudently select and monitor plan investment options made  available to the plan’s participants and beneficiaries and the persons  providing services to the plan. Understanding and evaluating the fees and  expenses associated with a plan’s investments and services are an  important part of a fiduciary’s responsibility. Plan sponsors need to  monitor the fees and expenses associated with the plan’s investment  options and the services provided by outside vendors, including any  revenue sharing arrangements, to determine whether the expenses  continue to be reasonable for the services provided.
Industry experts have suggested that plan sponsors be required to obtain  complete information about investment options before adding them to the  plan’s menu and obtain information concerning arrangements where a  service provider receives some share of its revenue from a third party. A  number of associations recently put together a list of service- and fee- related data elements they believe defined contribution plan sponsors and  service providers should discuss when entering into agreements. The data  elements include such information as payments received by plan service  providers from affiliates in connection with services to the plan, float  revenue, and investment-related consulting services. The list is meant as  a reference tool for plan sponsors and providers to use to determine the  extent to which a service provider receives compensation in connection  with its services to the plan from other service providers or plan  investment products (e.g., revenue sharing or finders’ fees). According to  the associations that formulated this tool, the information can aid plan  sponsors to evaluate any potential conflicts of interest that may arise in  how fees are allocated among service providers.
In our prior work, we noted that plan sponsors may not have information  on arrangements among service providers that, according to Labor  officials, could steer plan sponsors toward offering investment options  that benefit service providers but may not be in the best interest of  participants. For example, the Securities and Exchange Commission  (SEC) released a report in May 2005 that raised questions about whether  some pension consultants are fully disclosing potential conflicts of interest  that may affect the objectivity of the advice. In addition, specific fees that  are considered to be “hidden” may mask the existence of a conflict of  interest. Hidden fees are usually related to business arrangements where  one service provider to a 401(k) plan pays a third-party provider for  services, such as record keeping, but does not disclose this compensation  to the plan sponsor. The problem with hidden fees is not how much is  being paid to the service provider, but with knowing what entity is  receiving the compensation and whether or not the compensation fairly  represents the value of the service being rendered.
While there is general agreement that understanding the fees and expenses  associated with a plan’s services is an important part of a fiduciary’s  responsibility, pension professionals disagree about how much  information is needed about the expense components of bundled fee  arrangements. One representative speaking on behalf of five industry  associations stated he did not believe that the requirement to “unbundle”  bundled services and provide individual costs in many detailed categories  was particularly helpful because the information provided would not be  very meaningful and the costs of providing this information would  ultimately be passed on to plan participants through higher administrative  fees. He also raised concerns about how a service provider would disclose  component costs for services that are not offered outside a bundled  contract. In addition, he said that posting such information could force  public disclosure of proprietary information regarding contracts between  service providers and plan sponsors. Finally, he stated that as long as they  are fully informed of the services being provided, many plan sponsors  might prefer reviewing aggregate costs so that they can compare and  evaluate whether the overall fees are reasonable without analyzing each  itemized fee.
On the other hand, a representative of another pension association  contended that it is possible with very little cost to develop an allocation  methodology to provide a reasonable breakdown of fees for plan services.  He believes that not disclosing component pricing provides a competitive  advantage, enabling bundled providers to tell plan sponsors that they can  offer certain retirement plan services for free—when fees are deducted  from investment returns—while unbundled providers are required to  disclose the fees for the same services. He further stated that any  disclosure requirements should apply uniformly to all service providers. In  his view this would allow plan fiduciaries to assess the reasonableness of  fees by comparison and thereby allow fiduciaries to determine whether  certain services are needed, which could lead to lower fees.
section_title: Plan Sponsors Need to Collect and Evaluate Meaningful Information on Expenses
paragraphs: Industry professionals have suggested that, before hiring a service  provider or adding investment options to the plan’s menu, plan sponsors  should obtain complete fee information, including information concerning  arrangements in which a service provider receives some share of its  revenue from a third party. Pension plan associations and practitioners  have made various suggestions to help plan sponsors collect meaningful  information on expenses.
In 2004 the ERISA Advisory Council on Employee Welfare and Pension  Benefit Plans created a Working Group to study retirement plan  investment management fees and expenses as they were currently  reported to Labor. In addition to issues related to annual reporting, the  Working Group was also interested in determining whether plan sponsors  currently receive adequate data from the service providers in order to both  understand and report fees. In its final report, the Working Group made  the following recommendations, among others, in an effort to further  educate plan sponsors and fiduciaries about plan fees:  Plan sponsors should avoid entering transactions with vendors who  refuse to disclose the amount and sources of all fees and compensation  received in connection with plan.
Plan sponsors should require plan providers to provide a detailed  written analysis of all fees and compensation (whether directly or  indirectly) to be received for its services to the plan prior to retention.
Plan sponsors should obtain all information on fees and expenses as  well as revenue sharing arrangements with each investment option.  Plan sponsors should also determine the availability of other mutual  funds or share classes within a mutual fund with lower revenue sharing  arrangements prior to selecting an investment option.
Plan sponsors should require vendors to provide annual written  statements with respect to all compensation, both direct and indirect,  received by the provider in connection with its services to the plan.
Plan sponsors need to be aware that with asset-based fees, fees can  grow just as the size of the asset pool grows, regardless of whether any  additional services are provided by the vendor, and as a result, asset- based fees should be monitored periodically.
Plan sponsors should calculate the total plan costs annually.
More recently in 2007, one witness before the ERISA Advisory Council  recommended further that plan sponsors should evaluate fees associated  with three categories of services:  Net investment expenses would not only include investment expenses,  such as the expense ratio of a mutual fund, but would also subtract any  fees or commissions paid to a broker, consultant, or advisor for  services in the categories below.
Administrative expenses would include specific charges for operational  services, such as record keeping, administration, compliance, and  communication, as well as revenue sharing or other payments from  investments.
Advisory expenses would include amounts paid directly by the plan to  consultants, advisors, or brokers, as well as indirect payments from  sources such as investments or related companies.
In addition, some industry professionals believe that plan sponsors, as  they monitor investment alternatives, should review investment alternative  results against appropriate benchmarks and compare their plans’ options  to competing funds with similar investment goals. A benchmark is used  to compare specific investment results with that of the market or  economy. Industry professionals also noted that although there are  appropriate benchmarks for mutual funds, benchmarks are not as readily  available for other types of investment products. According to one  industry professional that we spoke with, plan sponsors do not have good  benchmarks to assess the reasonableness of investment options’ expense  ratios. Only limited information is available, and a national database of  funds and their expense ratios does not exist. He further stated that  without such a source, selecting which funds constitute a meaningful  comparison set is not an easy task, and may be open to interpretation.  Disclosure encourages price competition, but in his opinion, because of  the lack of available information, the 401(k) market is relatively ineffective  at fostering price competition.
section_title: Labor’s Initiatives Related to 401(k) Plan Sponsors
paragraphs: Labor, in its comments on our November 2006 report, stated that the  agency has proposed a number of changes to the Form 5500, including  changes that would expand the information required to be reported on the  Schedule C. The changes are intended to assist plan sponsors in assessing  the reasonableness of compensation paid for services and potential  conflicts of interest that might affect those services. According to  testimony earlier this month from the Assistant Secretary of Labor, the  agency will be issuing a final regulation requiring additional public  disclosure of fee and expense information on the Form 5500 within the  next few weeks. This change will be helpful to plan sponsors as they look  retrospectively at the preceding plan year. In addition, Labor was  considering an amendment to its regulation under section 408(b)(2) of  ERISA, expected to be issued this year. This amendment would help to  ensure that plan sponsors have sufficient information on the  compensation to be paid to the service provider and the revenue sharing  compensation paid by the plan for the specific services and potential  conflicts of interest that may exist on the part of the service provider.
Labor’s ERISA Advisory Council currently has a working group focusing  on fiduciary responsibility and revenue sharing. One area of focus is what  service providers should be required to provide when they enter into a  revenue sharing or rebate arrangement. Labor also provides a model form  on its Web site specifically designed to assist plan fiduciaries and service  providers in exchanging complete disclosures concerning the costs  involved in service arrangements. Other associations and entities continue  to develop model fee disclosure forms for plan sponsors.
We are currently conducting work in the area of 401(k) plan sponsor  practices, identifying how plan sponsors decide which features to include  in the plans they establish and how plan sponsors oversee plan operations.  Part of our work will consider how plan sponsors monitor the fees  charged to their plans. We expect to issue a report in 2008.
section_title: Basic Fee Information Is Important for Participants to Make Informed Decisions
paragraphs: Before making informed decisions about their 401(k) plan investments,  participants must first be made aware of the types of plan fees that they  pay. For example, according to one nationwide survey, some participants  do not even know that they pay plan fees. In 2006, we reported that  investment fees constitute the majority of fees in 401(k) plans and are  typically borne by participants. Most industry professionals agree that  information about investment fees—such as the expense ratio, a fund’s  operating fees as a percentage of its assets—is fundamental for plan  participants. Participants also need to be aware of other types of fees— such as record-keeping fees and redemption fees or surrender charges  imposed for changing or selling investments—to gain a more complete  understanding of all the fees that can affect their account balances.  Whether participants receive only basic expense ratio information or more  detailed information on various fees, presenting the information in a clear,  easily comparable format can help participants understand the content of  the disclosure.
subsections: section_title: Participants May Not Be Aware of the Fee Information Needed to Make Informed Decisions
paragraphs: Currently, most participants are responsible for directing their  investments among the choices offered by their 401(k) plans, but may not  be aware of the different fees that they pay. According to industry  professionals, participants are often unaware that they pay any fees  associated with their 401(k) plan. In fact, studies have shown that 401(k)  participants often lack the most basic knowledge—that there are fees  associated with their plan. When asked in a recent nationwide survey  whether they pay any fees for the 401(k) plan, as figure 1 shows, 65  percent of 401(k) participants responded that they do not pay fees.  Seventeen percent said they do pay fees, and 18 percent stated that they  do not know. When this same group was asked how much they pay in fees,  as shown in figure 2, 83 percent reported not knowing.
section_title: Participants Need Information on Investment Fees
paragraphs: Although it is clear that participants require fee information to make  informed decisions, it is not so clear what fee information is most relevant.  In 2006, we reported that investment fees constitute the majority of fees in  401(k) plans and are typically borne by participants. Investment fees are,  for example, fees charged by companies that manage a mutual fund for all  services related to operating the fund. These fees pay for selecting a  mutual fund’s portfolio of securities and managing the fund; marketing the  fund and compensating brokers who sell the fund; and providing other  shareholder services, such as distributing the fund prospectus. These fees  are charged regardless of whether the mutual fund or other investment  product, such as collective investment funds or group annuity contracts, is  part of a 401(k) plan or purchased by individual investors in the retail  market. As such, the fees are usually different for each investment option  available to participants in a 401(k) plan.
In our previous report, we recommended that Congress consider  amending ERISA to require all sponsors of participant-directed plans to  disclose fee information on 401(k) investment options to participants in a  way that facilitates comparison among the options, such as via expense  ratios. As mentioned earlier, there have been at least two bills recently  introduced in Congress on the subject. Industry professionals have also  suggested that comparing the expense ratio across investment options is  the most effective way to compare options’ fees. They generally agree that  an expense ratio provides valuable information that participants need and  can be used to compare investment options because it includes investment  fees, which constitute most of the total fees borne by participants.  According to an industry official, the disclosure of expense ratios might  include a general description of how expense ratios vary depending on the  type and style of investment. For example, investment options with  relatively high fees, such as actively managed funds, tend to have larger  expense ratios than funds that are not actively managed. Also, investment  options that are only available to institutional investors tend to have lower  expense ratios than other types of funds.
Most of the investment options offered in 401(k) plans have expense ratios  that can be compared, but this information is not always provided to  participants. In addition, investment options other than mutual funds may  not be required to produce prospectuses that include expense ratios, but  according to industry professionals, most options have expense ratio  equivalents that investment industry professionals can identify.
section_title: Participants Also Need Information on Other Fees That Affect Their Account Balances
paragraphs: Industry professionals also believe that participants need information on  other fees that are not included in the expense ratio but still affect their  account balances. For example, annual fees or fees on a per transaction  basis that can be deducted from account balances should be disclosed,  such as administrative and record-keeping fees, participant loan  origination fees, and annual loan charges.
In addition, industry professionals also recommended that certain  investment-specific fees be disclosed, including  redemption fees or sales charges—fees that may be imposed by the  provider as a result of changing investments in a given period,    surrender charges—fees that may be imposed as a result of selling or  withdrawing money from the investment within a given number of  years after investing, and    wrap fees—fees that are assessed on the total assets in a participant’s  account.
Some industry professionals recommended that plan participants be  provided information on their returns net of all fees so that they can  clearly see what their investments have earned after fees. Others  recommended that information be disclosed that explains how the  investment and administrative costs of the plan affect their investment  returns and their overall retirement savings in the plan. These officials  believed that such information would help participants understand that  fees are an important factor to consider when directing their investments.
Whether participants are provided with basic expense ratio information or  more detailed information on various fees, or both, providing the  information in a clear, easily comparable format can assist participants in  understanding the information disclosed. In our prior reports on helping  the public understand Social Security information and on more effective  disclosures for credit cards, we found that certain practices help people  understand complicated information. These practices include  language—writing information in clear language,  layout—using straightforward layout and graphics,  length—providing a short document,    comparability—making options easy to compare in a single document,    distribution—offering a choice of paper or electronic distribution.
section_title: Labor’s Initiatives Related to 401(k) Plan Participants
paragraphs: In our prior work, we noted that Labor is considering the development of a  new rule regarding the fee information required to be furnished to  participants under its section 404(c) regulation. According to Labor  officials, they are attempting to identify the critical information on fees  that plan sponsors should disclose to participants of 404(c) plans (but not  all participant-directed plans) and the best way to do so. The initiative is  intended to explore what steps might be taken to ensure that participants  have the information they need about their plan and available investment  options, without imposing additional costs, given that such costs are likely  to be charged against the individual accounts of participants and affect  their retirement savings. The officials are currently considering what fee  information should be provided to participants and what format would  enable participants to easily compare the fees across a plan’s various  investment options. Labor is also currently evaluating comments received  from consumer groups, plan sponsors, service providers, and others as it  develops its regulation.
Labor also has ongoing efforts designed to help participants and plan  sponsors understand the importance of plan fees and the effect of those  fees on retirement savings. Labor has developed and makes available on  its Web site a variety of educational materials specifically designed to help  plan participants understand the complexities of the various fee and  compensation arrangements involved in 401(k) plans. Its brochure titled A  Look at 401(k) Plan Fees is targeted to participants and beneficiaries of  401(k) plans who are responsible for directing their own investments.
section_title: Conclusions
paragraphs: Both 401(k) plan sponsors and participants need fee information in order  to make the most informed decisions. For plan sponsors, requiring that  certain information on fees be disclosed can help them understand what  services they are paying for, who is benefiting, and whether their current  arrangements are in the best interest of plan participants. Requiring plan  sponsors to report more complete information to Labor on fees—including  those paid out of plan assets by participants—would put the agency in a  better position to effectively oversee 401(k) plans and, in doing so, to  protect an increasing number of participants. The mere act of requiring  such information may actually promote competition among the entities  that provide services to plans and possibly reduce the fees service  providers charge.
For plan participants, given the voluminous amount of information that  could be disclosed, determining the relevant information that participants  most need is key. At a minimum, providing information such as expense  ratios or other investment-specific fee information could be the place to  start. Also, making sure that the information is accessible in terms of the  language, layout, length, comparability, and distribution can ensure that  participants actively utilize the information disclosed. As participants  become more sophisticated or demand more information, decisions can  then be made about the type and format of additional fee information.
Mr. Chairman, this concludes my prepared statement. I would be happy to  respond to any questions you or other members of the committee may  have at this time.
section_title: Contacts and Acknowledgements
paragraphs: For further information regarding this testimony, please contact Barbara  D. Bovbjerg, Director, Education, Workforce, and Income Security Issues,  at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Individuals making key contributions to this testimony  include Tamara E. Cross, Assistant Director; Daniel F. Alspaugh; Monika  R. Gomez; Matthew J. Saradjian; Susannah L. Compton; Craig H. Winslow;  and Walter K. Vance.
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