Roughly half of all workers participate in an employer-sponsored retirement, or pension, plan. Private sector pension plans are classified either as defined benefit or as 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) plans, employee stock ownership plans, and profit-sharing plans. Over the past two decades, there has been a noticeable shift by employers away from defined benefit plans to defined contribution plans. The most dominant and fastest growing defined contribution plans are 401(k) plans, which allow workers to choose to contribute a portion of their pre-tax compensation to the plan under section 401(k) of the Internal Revenue Code. The use of 401(k) plans accelerated in the 1980s after the Treasury issued a ruling clarifying a new section of the tax code that allowed employers and employees to make pre-tax contributions, up to certain limits, to employees’ individual accounts. According to the most recent data from Labor, most 401(k) plans are participant-directed, meaning that a participant makes investment decisions about his or her own retirement plan contributions. About 87 percent of all 401(k) plans—covering 92 percent of all 401(k) plan participants and 91 percent of all 401(k) plan assets—generally allow 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, such as an assortment of mutual funds that include a mix of stocks, bonds, or money market investments. 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. 1). Other plan assets were invested in company stock; stable value funds, including guaranteed investment contracts; balanced funds; bond funds; and money funds. As participants accrue earnings on their investments, they also 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, fees may significantly decrease retirement savings. For example, a 1-percentage point difference in fees can significantly reduce the amount of money saved for retirement. Assume an employee of 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. 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. As shown in figures 2 and 3, 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). 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 plan’s participants and beneficiaries. The law also provides Labor with oversight authority of 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 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 FRB, OCC, and FDIC—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. An investment company, bank, or insurance company that is a service provider to a 401(k) plan may offer any or all of these types of investment products as plan options. Investment fees—which are charged by companies that manage mutual funds or other investment products for all services related to operating the fund—comprise the majority of fees in 401(k) plans and are typically borne by participants. Plan record-keeping fees generally account for the next largest portion of plan fees. These fees cover the cost of various administrative activities carried out to maintain participant accounts. Participants typically pay for investment fees, which are usually based on assets in their accounts. Although plan sponsors often pay for record- keeping fees, participants bear them in an increasing number of plans. Investment fees and plan record-keeping fees comprise the vast majority of total plan fees. 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. Investment fees account for the majority of 401(k) plan fees regardless of plan size. For example, as figure 4 illustrates, a 2005 industry survey estimated that investment fees accounted for 84.5 percent of total fees in plans with 25 members and for 98.6 percent of total fees in plans with 2,000 participants. Since investment fees account for the bulk of plan fees, several investment consultants we interviewed encourage 401(k) plan sponsors to offer options such as institutional funds to lower fees. Institutional mutual funds resemble funds available in the retail market, but are typically only available to 401(k) plans with assets above a certain threshold, such as $1 million. Similarly, indexed funds have lower management fees than actively managed funds. These funds closely track a market performance indicator, such as the Standard & Poor’s 500, which largely eliminates expenditures associated with research, investment selection, and buying and selling. Plan record-keeping fees, which cover individual account maintenance for plan participants, generally constitute the second-largest portion of plan fees. Unlike investment fees, plan record-keeping fees apply to the entire 401(k) plan rather than the individual investment options. Plan record- keeping fees are usually charged by the service provider to set up and maintain the 401(k) plan. These fees cover a variety of activities such as enrolling plan participants, processing participant fund selections, preparing and mailing account statements, and other related administration activities. A 2005 industry survey of service providers estimated that plan record- keeping fees constituted 12 percent of total plan fees for plans with 25 participants. As shown in figure 5, these fees make up a smaller proportion of total plan fees in larger plans, indicating economies of scale. In addition to investment and record-keeping fees, there are a number of other fees charged to administer the plan as a whole, including trustee fees that are charged by an individual, bank, or trust company to securely maintain plan assets; audit fees that are imposed by a service provider in connection with the annual audit that is required of ERISA-covered plans with more than 100 participants; legal fees that are charged by an attorney or law firm to provide legal support for administrative activities, such as ensuring the plan is in compliance with ERISA or representing the plan in a divorce settlement; investment consulting fees that are charged by an advisor, often a pension consultant, hired to help the plan sponsor select funds for the plan and to monitor investments; and communication fees that cover the cost of educating participants about the plan. Communication services may include a meeting led by a service provider to introduce the plan to participants. Communication services may also include providing participants with access to toll-free phone services, Internet service, and ongoing educational seminars.