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. Examples of defined contribution plans include 401(k) profit-sharing and thrift-savings plans, stock bonus plans, and annuity plans. Labor’s Employee Benefits Security Administration (EBSA) oversees 401(k) plans—including the fees associated with running the plans— because they are considered employee benefit plans under ERISA. Enacted before 401(k) plans came into wide use, 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 control or authority over the management or administration of the plan, including the plan’s assets. ERISA requires that plan sponsors responsible for managing employee benefit plans carry out their responsibilities prudently and do so solely in the interest of the plans’ participants and beneficiaries. The law also provides Labor with oversight authority over pension plans. However, the specific investment products commonly contained in pension plans—such as company stock, mutual funds, collective investment funds, and group annuity contracts—fall under the authority of the applicable securities, banking, or insurance regulators: The Securities and Exchange Commission (SEC), among other responsibilities, regulates registered securities including company stock and mutual funds under securities law. The federal agencies charged with oversight of banks—primarily the Federal Reserve Board, the Treasury Department’s Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation—regulate bank investment products, such as collective investment funds. State agencies generally regulate insurance products, such as variable annuity contracts. Such investment products may also include one or more insurance elements, which are not present in other investment options. Generally, these elements include an annuity feature, interest and expense guarantees, and any death benefit provided during the term of the contract. The number of defined contribution plans has increased since 1985, while the number of defined benefit plans has declined dramatically. Figure 1 shows the growth of defined contribution plans relative to that of defined benefit plans from 1985 to 2005. In 2005, more workers were covered by defined contribution plans than by defined benefit plans. In 1985, defined benefit plans covered approximately 29 million active participants, compared to 33 million active participants in defined contribution plans. By 2005, the difference in the numbers had become more pronounced, with roughly 21 million active participants covered by defined benefit plans and approximately 55 million active participants in defined contribution plans. Figure 2 shows the shift in active participants from defined benefit to defined contribution plans since 1985. With the growth in plans and participants, the majority of private pension plan assets are now held in defined contribution plans. As shown in figure 3, defined benefit plan assets decreased from $2.0 trillion in constant 2006 dollars, or about 66 percent of total private pension assets, in 1985 to $1.5 trillion, or just over 40 percent of the total, in 2005. Similarly, the number of 401(k) plans grew from less than 30,000 in 1985, or less than 7 percent of all defined contribution plans, to an estimated 417,000 plans, or about 95 percent of all defined contribution plans in 2005. During this same time period, the number of active participants in 401(k) plans increased from 10 million to 47 million, and plan assets increased from $270 billion to about $2.5 trillion in constant 2006 dollars. Based on industry estimates, equity funds accounted for nearly half of the 401(k) plan assets at the close of 2005. Equity funds are investment options that invest primarily in stocks, such as mutual funds, bank collective funds, life insurance separate accounts, and certain pooled investment products (see fig. 4). Other plan assets were invested in company stock; stable value funds, including guaranteed investment contracts; balanced funds; bond funds; and money funds. Several of these options can be held in mutual funds, which in total represent about 51 percent of 401(k) plan assets. Common plan features, like the type and number of investment options provided to participants in their 401(k) plans, is a topic being studied under other GAO work on plan sponsor practices requested by this committee. With the growth in 401(k) plans, more workers now bear greater responsibility for funding their retirement income. According to the most recent data from Labor, the majority of 401(k) plans are participant- directed, meaning that a participant makes investment decisions about his or her own retirement plan contributions. In 2003, about 88 percent of all 401(k) plans—covering 93 percent of all active 401(k) plan participants and 92 percent of all 401(k) plan assets—generally allowed participants to choose how much to invest, within federal limits, and to select from a menu of diversified investment options selected by the employer sponsoring the plan. While some participants have account balances of greater than $100,000, most have much smaller balances. Based on industry estimates for 2005, 37 percent of participants had balances of less than $10,000, while 16 percent had balances greater than $100,000. The median account balance was $19,328, while the average account balance was $58,328. Participants’ account balances also include any contributions employers make on their behalf. Fees are charged by the various outside companies that the plan sponsor—often the employer offering the 401(k) plan—hires to provide a number of services necessary to operate the plan. Services can include investment management (i.e., selecting and managing the securities included in a mutual fund); consulting and providing financial advice (i.e., selecting vendors for investment options or other services); record keeping (i.e., tracking individual account contributions); custodial or trustee services for plan assets (i.e., holding the plan assets in a bank); and telephone or Web-based customer services for participants. Generally there are two ways to provide services: “bundled” (the sponsor hires one company that provides the full range of services directly or through subcontracts) and “unbundled” (the sponsor uses a combination of service providers). Fees are one of many factors—such as the historical performance and investment risk for each plan option—participants should consider when investing in a 401(k) plan because fees can significantly decrease retirement savings over the course of a career. As participants accrue earnings on their investments, they pay a number of fees, including expenses, commissions, or other charges associated with operating a 401(k) plan. Over the course of the employee’s career, for example, a 1 percentage point difference in fees can significantly reduce the amount of money saved for retirement. Figure 5 assumes an employee who is 45 years of age with 20 years until retirement changes employers and leaves $20,000 in a 401(k) account until retirement. If the average annual net return is 6.5 percent—a 7 percent investment return minus a 0.5 percent charge for fees—the $20,000 will grow to about $70,500 at retirement. However, if fees are instead 1.5 percent annually, the average net return is reduced to 5.5 percent, and the $20,000 will grow to only about $58,400. The additional 1 percent annual charge for fees would reduce the account balance at retirement by about 17 percent. Various fees are associated with 401(k) plans, but investment and record- keeping fees account for most 401(k) plan fees. However, inadequate disclosure and reporting requirements may leave participants and Labor without important information on these fees. The information on fees that plan sponsors are required to disclose to participants does not allow participants to easily compare the fees for the investment options in their 401(k) plan. In addition, Labor does not have the information it needs to oversee fees and identify questionable 401(k) business practices. Labor has several initiatives under way to improve the information it has on fees and the various business arrangements among service providers. Investment fees account for the largest portion of total fees regardless of plan size, as figure 6 illustrates. 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. Plan record-keeping fees generally constitute the second-largest portion of plan fees. Plan record-keeping fees are usually charged by the service provider to set up and maintain the 401(k) plan. These fees cover activities such as enrolling plan participants, processing participant fund selections, preparing and mailing account statements, and other related administrative activities. Unlike investment fees, plan record-keeping fees apply to the entire 401(k) plan rather than the individual investment options. As shown in figure 7, these fees make up a smaller proportion of total plan fees in larger plans, indicating economies of scale. There are a number of other fees associated with establishing and maintaining a plan, such as fees to communicate basic information about the plan to participants. However, these fees generally constitute a much smaller percentage of total plan fees than investment and plan record- keeping fees. Whether and how participants or plan sponsors pay these fees varies by the type of fee and the size of the 401(k) plan. Investment fees, which are usually charged as a fixed percentage of assets and deducted from investment returns, are typically borne by participants.