Employee Benefits Security Administration
Improvements Have Been Made to Pension Enforcement Program but Significant Challenges Remain Gao ID: GAO-05-784T June 9, 2005Congress passed the Employee Retirement Income Security Act of 1974 (ERISA) to address public concerns over the mismanagement and abuse of private sector employee benefit plans by some plan sponsors and administrators. The Department of Labor's Employee Benefits Security Administration (EBSA) shares responsibility with the Internal Revenue Service and the Pension Benefit Guaranty Corporation for enforcing ERISA. EBSA works to safeguard the economic interest of more than 150 million people who participate in an estimated 6 million employee benefit plans with assets in excess of $4.4 trillion. EBSA plays a primary role in ensuring that employee benefit plans operate in the interests of plan participants, and the effective management of its enforcement program is pivotal to ensuring the economic security of workers and retirees. Recent scandals involving abuses by pension plan fiduciaries and service providers, as well as trading scandals in mutual funds that affected plan participants and other investors, highlight the importance of ensuring that EBSA has an effective and efficient enforcement program. Accordingly, this testimony focuses on describing EBSA's enforcement strategy, EBSA's efforts to address weaknesses in its enforcement program along with the challenges that remain.
EBSA's enforcement strategy is a multifaceted approach of targeted plan investigations. To leverage its enforcement resources, EBSA provides education to plan participants and plan sponsors. EBSA allows its regional offices the flexibility to tailor their investigations to address the unique issues in the regions, within a framework established by EBSA's Office of Enforcement. The regional offices then have a significant degree of autonomy in developing and carrying out investigations using a mixture of approaches and techniques they deem most appropriate. Participant leads are still the major source of investigations. EBSA officials told us that they open about 4,000 investigations into actual and potential violations of ERISA annually. To supplement their investigations, the regions conduct outreach activities to educate both plan participants and sponsors. The purpose of these efforts is to gain participants' help in identifying potential violations and to educate sponsors in properly managing their plans and avoiding violations. Finally, EBSA maintains a Voluntary Fiduciary Correction Program through which plan officials can voluntarily report and correct some violations without penalty. EBSA has taken steps to address many of the recommendations we have made over the years to improve its enforcement program, including assessing the level and types of noncompliance with ERISA, improving sharing of best investigative practices, and developing a human capital strategy to better respond changes in its workforce. EBSA reported a significant increase in enforcement results for fiscal year 2004, including $3.1 billion in total monetary results and closing about 4,400 investigations, with nearly 70 percent of those cases resulting in corrections of ERISA violations. Despite this progress, EBSA continues to face a number of significant challenges to its enforcement program, including (1) the lack of timely and reliable plan information, which is highlighted by the fact that EBSA is currently using plan year 2002 and 2003 plan information for its computer targeting, (2) restrictive statutory requirements that limit its ability to assess certain penalties, and (3) the need to better coordinate enforcement strategies with the Securities and Exchange Commission, which is highlighted by recent scandals involving the trading practices and market timing in mutual funds and conflicts of interest by pension consultants.
GAO-05-784T, Employee Benefits Security Administration: Improvements Have Been Made to Pension Enforcement Program but Significant Challenges Remain
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Testimony before the Committee on Health, Education, Labor, and
Pensions, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, June 9, 2005:
Employee Benefits Security Administration:
Improvements Have Been Made to Pension Enforcement Program but
Significant Challenges Remain:
Statement of Barbara D. Bovbjerg, Director, Education, Workforce, and
Income Security Issues:
GAO-05-784T:
GAO Highlights:
Highlights of GAO-05-784T, a testimony before the Committee on Health,
Education, Labor, and Pensions, U.S. Senate:
Why GAO Did This Study:
Congress passed the Employee Retirement Income Security Act of 1974
(ERISA) to address public concerns over the mismanagement and abuse of
private sector employee benefit plans by some plan sponsors and
administrators. The Department of Labor‘s Employee Benefits Security
Administration (EBSA) shares responsibility with the Internal Revenue
Service and the Pension Benefit Guaranty Corporation for enforcing
ERISA. EBSA works to safeguard the economic interest of more than 150
million people who participate in an estimated 6 million employee
benefit plans with assets in excess of $4.4 trillion. EBSA plays a
primary role in ensuring that employee benefit plans operate in the
interests of plan participants, and the effective management of its
enforcement program is pivotal to ensuring the economic security of
workers and retirees.
Recent scandals involving abuses by pension plan fiduciaries and
service providers, as well as trading scandals in mutual funds that
affected plan participants and other investors, highlight the
importance of ensuring that EBSA has an effective and efficient
enforcement program. Accordingly, this testimony focuses on describing
EBSA‘s enforcement strategy, EBSA‘s efforts to address weaknesses in
its enforcement program along with the challenges that remain.
What GAO Found:
EBSA‘s enforcement strategy is a multifaceted approach of targeted plan
investigations. To leverage its enforcement resources, EBSA provides
education to plan participants and plan sponsors. EBSA allows its
regional offices the flexibility to tailor their investigations to
address the unique issues in the regions, within a framework
established by EBSA‘s Office of Enforcement. The regional offices then
have a significant degree of autonomy in developing and carrying out
investigations using a mixture of approaches and techniques they deem
most appropriate. Participant leads are still the major source of
investigations. EBSA officials told us that they open about 4,000
investigations into actual and potential violations of ERISA annually.
To supplement their investigations, the regions conduct outreach
activities to educate both plan participants and sponsors. The purpose
of these efforts is to gain participants‘ help in identifying potential
violations and to educate sponsors in properly managing their plans and
avoiding violations. Finally, EBSA maintains a Voluntary Fiduciary
Correction Program through which plan officials can voluntarily report
and correct some violations without penalty.
EBSA has taken steps to address many of the recommendations we have
made over the years to improve its enforcement program, including
assessing the level and types of noncompliance with ERISA, improving
sharing of best investigative practices, and developing a human capital
strategy to better respond changes in its workforce. EBSA reported a
significant increase in enforcement results for fiscal year 2004,
including $3.1 billion in total monetary results and closing about
4,400 investigations, with nearly 70 percent of those cases resulting
in corrections of ERISA violations. Despite this progress, EBSA
continues to face a number of significant challenges to its enforcement
program, including (1) the lack of timely and reliable plan
information, which is highlighted by the fact that EBSA is currently
using plan year 2002 and 2003 plan information for its computer
targeting, (2) restrictive statutory requirements that limit its
ability to assess certain penalties, and (3) the need to better
coordinate enforcement strategies with the Securities and Exchange
Commission, which is highlighted by recent scandals involving the
trading practices and market timing in mutual funds and conflicts of
interest by pension consultants.
Total Monetary Results from EBSA Enforcement Activities for Fiscal
Years 2000-2004:
[See PDF for image]
[End of figure]
www.gao.gov/cgi-bin/getrpt?GAO-05-784T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barbara Bovbjerg at (202)
512-7215 or bovbjergb@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to provide an overview of our past work
reviewing the Department of Labor's Employee Benefits Security
Administration (EBSA) enforcement program. EBSA works to safeguard the
economic interest of more than 150 million people who participate in an
estimated 6 million employee benefit plans with assets in excess of
$4.4 trillion. EBSA plays a primary role in ensuring that employee
benefit plans operate in the interests of plan participants, and the
effective management of its enforcement program is pivotal to ensuring
the economic security of workers and retirees.
Congress passed the Employee Retirement Income Security Act of 1974
(ERISA) to address public concerns over the mismanagement and abuse of
private sector employee benefit plans by some plan sponsors and
administrators. ERISA is designed to protect the rights and interests
of participants and beneficiaries of employee benefit plans and
outlines the responsibilities of the employers and administrators who
sponsor and manage these plans. The recent bankruptcies of some large
corporations and the effects on employees' retirement savings and the
federal pension insurance program expose certain vulnerabilities in our
private pension system. Such problems point out the need for
comprehensive pension reform. Also, recent scandals involving abuses by
pension plan fiduciaries and service providers, as well as trading
scandals in mutual funds that affected plan participants and other
investors highlight the importance of ensuring that EBSA has an
effective and efficient enforcement program.
Today, I would like to discuss the evolution of EBSA's enforcement
program and the challenges that remain. GAO has conducted several
studies of ERISA enforcement issues, and my statement is largely based
on that work.
In summary, EBSA's enforcement strategy is a multifaceted approach of
targeted plan investigations supplemented by outreach and education. To
leverage its enforcement resources to prevent and detect violations and
promote overall compliance with ERISA, EBSA provides education to plan
participants and sponsors and allows the voluntary self-correction of
certain transactions without penalty. EBSA's education program for plan
participants aims to increase their knowledge of their rights and
benefits under ERISA. EBSA has taken steps to address many of the
recommendations we have made over a number of years to improve its
enforcement program, including assessing the level and types of
noncompliance with ERISA, improving sharing of best investigative
practices, analyzing the sources of cases, and developing a human
capital strategy to better respond changes in its workforce. EBSA
reported a significant increase in enforcement results for fiscal year
2004, including $3.1 billion in total monetary results and closing
nearly 4,400 investigations, with nearly 70 percent of those cases
resulting in corrections of ERISA violations. Despite this progress,
EBSA continues to face a number of significant challenges to its
enforcement program. Such challenges include lack of timely and
reliable plan information, restrictive statutory requirements that
limit its ability to assess certain penalties, and the need to better
coordinate enforcement strategies with the Securities and Exchange
Commission. As we have previously reported, legislative changes will be
required to address some of these issues. Furthermore, the Congress
should consider providing EBSA with additional enforcement tools, such
as enhanced penalty authority, to meet these challenges. Finally, EBSA
needs to continue to look for ways to better target investigations to
leverage its limited resources.
Background:
Three agencies share responsibility for enforcing ERISA: the Department
of Labor (EBSA), the Department of the Treasury's Internal Revenue
Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC).
EBSA enforces fiduciary standards for plan fiduciaries of privately
sponsored employee benefit plans to ensure that plans are operated in
the best interests of plan participants. EBSA also enforces reporting
and disclosure requirements covering the type and extent of information
provided to the federal government and plan participants, and seeks to
ensure that specific transactions prohibited by ERISA are not conducted
by plans.[Footnote 1] Under Title I of ERISA, EBSA conducts
investigations of plans and seeks appropriate remedies to correct
violations of the law, including litigation when necessary.[Footnote 2]
IRS enforces the Internal Revenue Code (IRC) and provisions that must
be met which give pension plans tax-qualified status, including
participation, vesting, and funding requirements. The IRS also audits
plans to ensure compliance and can levy tax penalties or revoke the tax-
qualified status of a plan as appropriate. PBGC, under Title IV of
ERISA, provides insurance for participants and beneficiaries of certain
types of tax-qualified pension plans, called defined benefit plans,
that terminate with insufficient assets to pay promised benefits.
Recent terminations of large, underfunded plans have threatened the
long-term solvency of PBGC. As a result, we placed PBGC's single-
employer insurance program on our high-risk list of programs needing
further attention and congressional action.[Footnote 3]
ERISA and the IRC require plan administrators to file annual reports
concerning, among other things, the financial condition and operation
of plans. EBSA, IRS, and PBGC jointly developed the Form 5500 so that
plan administrators can satisfy this annual reporting requirement.
Additionally, ERISA and the IRC provide for the assessment or
imposition of penalties for plan sponsors not submitting the required
information when due.
About one-fifth of Americans' retirement wealth is invested in mutual
funds, which are regulated by the Securities and Exchange Commission
(SEC), primarily under the Investment Company Act of 1940. The primary
mission of the SEC is to protect investors, including pension plan
participants investing in securities markets, and maintain the
integrity of the securities markets through extensive disclosure,
enforcement, and education. In addition, some pension plans use
investment managers to oversee plan assets, and these managers may be
subject to other securities laws.
EBSA Uses a Multifaceted Enforcement Strategy:
EBSA's enforcement strategy is a multifaceted approach of targeted plan
investigations supplemented by providing education to plan participants
and plan sponsors. EBSA allows its regions the flexibility to tailor
their investigations to address the unique issues in their regions,
within a framework established by EBSA's Office of Enforcement. The
regional offices then have a significant degree of autonomy in
developing and carrying out investigations using a mixture of
approaches and techniques they deem most appropriate. Participant leads
are still the major source of investigations. To supplement their
investigations, the regions conduct outreach activities to educate both
plan participants and sponsors. The purpose of these efforts is to gain
participants' help in identifying potential violations and to educate
sponsors in properly managing their plans and avoiding violations. The
regions also process applications for the Voluntary Fiduciary
Correction Program (VFCP) through which plan officials can voluntarily
report and correct some violations without penalty.
EBSA Enforces ERISA Primarily Through Targeted Investigations:
EBSA attempts to maximize the effectiveness of its enforcement efforts
to detect and correct ERISA violations by targeting specific cases for
review. In doing so, the Office of Enforcement provides assistance to
the regional offices in the form of broad program policy guidance,
program oversight, and technical support. The regional offices then
focus their investigative workloads to address the needs specific to
their region. Investigative staff also have some responsibility for
selecting cases.
The Office of Enforcement identifies national priorities--areas
critical to the well-being of employee benefit plan participants and
beneficiaries nationwide--in which all regions must target a portion of
their investigative efforts. Currently, EBSA's national priorities
involve, among other things, investigating defined contribution pension
plan and health plan fraud. Officials in the Office of Enforcement said
that national priorities are periodically re-evaluated and are changed
to reflect trends in the area of pensions and other benefits.
On the basis of its national investigative priorities, the Office of
Enforcement has established a number of national projects. Currently,
there are five national projects pertaining to a variety of issues
including employee contributions to defined contribution plans,
employee stock ownership plans (ESOP), and health plan fraud. EBSA's
increasing emphasis on defined contribution pension plans reflects the
rapid growth of this segment of the pension plan universe. In fiscal
year 2004, EBSA had monetary results of over $31 million and obtained
10 criminal indictments under its employee contributions project.
EBSA's most recent national enforcement project involves investigating
violations pertaining to ESOPs, such as the incorrect valuation of
employer securities and the failure to provide participants with the
specific benefits required or allowed under ESOPs, such as voting
rights, the ability to diversify their account balances at certain
times, and the right to sell their shares of stock.[Footnote 4]
Likewise, more attention is being given to health plan fraud, such as
fraudulent multiple employer welfare arrangements (MEWAs).[Footnote 5]
In this instance, EBSA's emphasis is on abusive and fraudulent MEWAs
created by promoters that attempt to evade state insurance regulations
and sell the promise of inexpensive health benefit insurance but
typically default on their benefit obligations.[Footnote 6]
EBSA regional offices determine the focus of their investigative
workloads based on their evaluation of the employee benefit plans in
their jurisdiction and guidance from the Office of Enforcement. For
example, each region is expected to conduct investigations that cover
their entire geographic jurisdiction and attain a balance among the
different types and sizes of plans investigated. In addition, each
regional office is expected to dedicate some percentage of its staff
resources to national and to regional projects--those developed within
their own region that focus on local concerns. In developing regional
projects, each regional office uses its knowledge of the unique
activities and types of plans in its jurisdiction. For example, a
region that has a heavy banking industry concentration may develop a
project aimed at a particular type of transaction commonly performed by
banks. We previously reported that the regional offices spend an
average of about 40 percent of their investigative time conducting
investigations in support of national projects and almost 25 percentage
of their investigative time on regional projects.
EBSA officials said that their most effective source of leads on
violations of ERISA is from complaints from plan participants. Case
openings also originate from news articles or other publications on a
particular industry or company as well as tips from colleagues in other
enforcement agencies. Computer searches and targeting of Form 5500
information on specific types of plans account for only 25 percent of
case openings. In 1994, we reported that EBSA had done little to test
the effectiveness of the computerized targeting runs it was using to
select cases. Since then, EBSA has scaled down both the number of
computerized runs available to staff and its reliance on these runs as
a means of selecting cases.[Footnote 7] Investigative staff are also
responsible for identifying a portion of their cases on their own to
complete their workloads and address other potentially vulnerable
areas.
As shown in figure 1, EBSA's investigative process generally follows a
pattern of selecting, developing, resolving, and reviewing cases. EBSA
officials told us that they open about 4,000 investigations into actual
and potential violations of ERISA annually. According to EBSA, its
primary goal in resolving a case is to ensure that a plan's assets, and
therefore its participants and beneficiaries, are protected. EBSA's
decision to litigate a case is made jointly with the Department of
Labor's Regional Solicitors' Offices. Although EBSA settles most cases
without going to court, both the agency and the Solicitor's Office
recognize the need to litigate some cases for their deterrent effect on
other providers.
Figure 1: Overview of EBSA's Investigative Process:
[See PDF for image]
Source: GAO analysis.
[End of figure]
As part of its enforcement program, EBSA also detects and investigates
criminal violations of ERISA. From fiscal years 2000 through 2004,
criminal investigations resulted in an average of 54 cases closed with
convictions or guilty pleas annually. Part of EBSA's enforcement
strategy includes routinely publicizing the results of its litigation
efforts in both the civil and criminal areas as a deterrent factor.
EBSA Uses Education, Outreach, and a Voluntary Fiduciary Correction
Program to Supplement Its Investigations:
To further leverage its enforcement resources, EBSA provides education
to plan participants, sponsors, and service providers and allows the
voluntary self-correction of certain transactions without penalty.
EBSA's education program for plan participants aims to increase their
knowledge of their rights and benefits under ERISA. For example, EBSA
anticipates that educating participants will establish an environment
in which individuals can help protect their own benefits by recognizing
potential problems and notifying EBSA when issues arise. The agency
also conducts outreach to plan sponsors and service providers about
their ongoing fiduciary responsibilities and obligations under ERISA.
At the national level, EBSA's Office of Participant Assistance
develops, implements, and evaluates agency-wide participant assistance
and outreach programs. It also provides policies and guidance to other
EBSA national and regional offices involved in outreach activities.
EBSA's nationwide education campaigns include a fiduciary education
campaign, launched in May 2004, to educate plan sponsors and service
providers about their fiduciary responsibilities under ERISA. This
campaign also includes educational material on understanding fees and
selecting an auditor.
EBSA's regional offices also assist in implementing national education
initiatives and conduct their own outreach to address local concerns.
The regional offices' benefit advisers provide written and telephone
responses to participants. Benefit advisers and investigative staff
also speak at conferences and seminars sponsored by trade and
professional groups and participate in outreach and educational efforts
in conjunction with other federal or state agencies. At the national
level, several EBSA offices direct specialized outreach activities. As
with EBSA's participant-directed outreach activities, its efforts to
educate plan sponsors and service providers also rely upon Office of
Enforcement staff and the regional offices for implementation. For
example, these staff make presentations to employer groups and service
provider organizations about their ERISA obligations and any new
requirements under the law, such as reporting and disclosure
provisions.
To supplement its investigative programs, EBSA is promoting the self-
disclosure and self-correction of possible ERISA violations by plan
officials through its Voluntary Fiduciary Correction Program.[Footnote
8] The purpose of the VFCP is to protect the financial security of
workers by encouraging plan officials to identify and correct ERISA
violations on their own. Specifically, the VFCP allows plan officials
to identify and correct 18 transactions, such as delinquent participant
contributions and participant loan repayments to pension plans. Under
the VFCP, plan officials follow a process whereby they (1) correct the
violation using EBSA's written guidance; (2) restore any losses or
profits to the plan; (3) notify participants and beneficiaries of the
correction; and (4) file a VFCP application, which includes evidence of
the corrected transaction, with the EBSA regional office in whose
jurisdiction it resides. If the regional office determines that the
plan has met the program's terms, it will issue a "no action" letter to
the applicant and will not initiate a civil investigation of the
violation, which could have resulted in a penalty being assessed
against the plan.
EBSA Has Taken Steps to Address Weaknesses in Its Enforcement Program,
but Significant Challenges Remain:
EBSA has taken steps to address many of the recommendations we have
made over a number of years to improve its enforcement program,
including assessing the level and types of noncompliance with ERISA,
improving sharing of best investigative practices, and developing a
human capital strategy to better respond changes in its workforce. EBSA
reported a significant increase in enforcement results for fiscal year
2004, including $3.1 billion in total monetary results and closing
nearly 4,400 investigations, with nearly 70 percent of those cases
resulting in corrections of ERISA violations. Despite this progress,
EBSA continues to face a number of significant challenges to its
enforcement program, including the lack of timely and reliable plan
information, restrictive statutory requirements that limit its ability
to assess certain penalties, and the need to better coordinate
enforcement strategies with the SEC.
EBSA Has Made Progress in Improving Its Enforcement Program:
EBSA has taken a number of steps, including addressing recommendations
from our prior reports that have improved its enforcement efforts
across a number of areas. For example, EBSA has continued to refine its
enforcement strategy to meet changing priorities and provided
additional flexibility to its regional office to target areas of
investigations. More recently, EBSA implemented a series of
recommendations from our 2002 enforcement report that helped it
strategically manage its enforcement program, including conducting
studies to determine the level of and type of noncompliance with ERISA
and developing a Human Capital Strategic Management Plan (see table
1).[Footnote 9]
Table 1: Examples of EBSA's Actions in Response to GAO Recommendations
to Improve its Enforcement Program:
GAO Observation: EBSA had not adequately estimated the nature of
employee benefit plans' noncompliance with ERISA provisions;
GAO Recommendation to EBSA: Develop a cost-effective strategy for
assessing the level and type of ERISA noncompliance among employee
benefit plans;
Examples of EBSA Actions: In fiscal year 2001 conducted national
compliance study of group health plans' compliance with new health care
laws in ERISA; In 2003 conducted compliance study focusing on large
multiemployer health plans; Currently conducting baseline study to
determine the level of compliance with ERISA requirements on timely
transmission of employee contributions to pension plans.
GAO Observation: EBSA had not routinely analyzed the full range of
cases investigated to determine which sources were the most effective
in terms of detecting and correcting violations;
GAO Recommendation to EBSA: Conduct regular reviews of the sources of
cases that lead to investigations;
Examples of EBSA Actions: Conducted analysis on cases closed in fiscal
years 2001, 2002, and 2003; Agreed to perform reviews of the sources of
cases that lead to investigations on an annual basis as long as
resources permit.
GAO Observation: EBSA did not coordinate the sharing of best practices
information among its regions regarding case selection and
investigative techniques;
GAO Recommendation to EBSA: Coordinate the sharing of best practices
information among regions relating to the optimum and most productive
techniques for selecting and conducting investigations;
Examples of EBSA Actions: Established a Best Practices Sharing Team
composed of enforcement staff and regional representatives; Developed
an intranet site to allow EBSA investigators to share best practices,
such as investigative plans, subpoenas, letters, and investigative
guides.
GAO Observation: EBSA lacked a centrally coordinated quality review
process to ensure that its investigations are conducted in accordance
with its investigative procedures;
GAO Recommendation to EBSA: Develop a closed case quality review
process that ensures the independence of reviewers and sufficiently
focuses on substantive technical case issues;
Examples of EBSA Actions: In fiscal year 2003, an EBSA team composed of
Office of Enforcement and field managers developed a closed case
quality review program that focuses on substantive technical issues and
is reported centrally. The program also includes procedures to ensure
the independence of the case reviewer.
GAO Observation: Certain requirements, such as notifying plan
participants of potential violations and levying excise taxes on
prohibited transactions, may hinder participation in the VFCP;
GAO Recommendation to EBSA: Analyze barriers to participation in the
VFCP and explore ways to reduce them;
Examples of EBSA Actions: EBSA modified key features of the program,
eliminating notice requirements to participants, and provided a limited
excise tax exemption for those who participate in the program.
GAO Observation: EBSA gave limited attention to human capital
management despite anticipated workforce and enforcement workload
changes. For example, the agency had not considered succession planning
and workforce retention, which could undermine the continuity and
effectiveness of its enforcement program;
GAO Recommendation to EBSA: Conduct a comprehensive review of its
future human capital needs, including the size of its workforce; the
skills and abilities needed; succession planning challenges; and staff
deployment issues;
Examples of EBSA Actions: EBSA conducted an employee workforce analysis
and an employee training needs assessment. In 2003, EBSA issued its
Human Capital Strategic Management Plan. The plan identified strategies
that address current and project skills shortages, anticipated future
staffing needs, competency requirements to ensure that employees
possess or acquire the critical skills needed to accomplish program
mission and functions, and the recognition and reward of quality
performance.
Source: GAO summary and analysis of EBSA documents.
[End of table]
EBSA has reported a substantial increase in results from its
enforcement efforts since our last review. For fiscal year 2004, EBSA
closed 4,399 civil investigations and reported $3.1 billion in total
results, including $2.53 billion in prohibited transactions corrected
and plan assets protected, up from $566 million in fiscal year 2002.
Likewise, the percentage of civil investigations closed with results
rose from 58 percent to 69 percent. Also, applications received for the
VFCP increased from 55 in fiscal year 2002 to 474 in 2004. EBSA has
been able to achieve such results with relatively small recent
increases in staff. Full-time equivalent (FTE) authorized staff levels
increased from 850 in fiscal year 2001 to 887 FTEs in fiscal year 2005.
The President's budget for fiscal year 2006 requests no additional
FTEs.
Untimely and Incomplete Plan Information Continues to Hinder
Enforcement Efforts:
Previously, we and others have reported that ERISA enforcement was
hindered by incomplete, inaccurate, and untimely plan data.[Footnote
10] We recently reported that the lack of timely and complete of Form
5500 data affects EBSA's use of the information for enforcement
purposes, such as computer targeting and identifying troubled
plans.[Footnote 11] EBSA uses Form 5500 information as a compliance
tool to identify actual and potential violations of ERISA. Although
EBSA has access to Form 5500 information sooner than the general
public, the agency is affected by the statutory filing deadlines, which
can be up to 285 days after plan year end, and long processing times
for paper filings submitted to the ERISA Filing Acceptance System. EBSA
receives processed Form 5500 information on individual filings on a
regular basis once a form is completely processed. However, agency
officials told us that as they still have to wait for a sufficiently
complete universe of plan filings from any given plan year to be
processed in order to begin their compliance targeting programs. As a
result, EBSA officials told us that they are currently using plan year
2002 and 2003 Form 5500 information for computer targeting. They also
said that in some cases untimely Form 5500 information affects their
ability to identify financially troubled plans whose sponsors may be on
the verge of going out of business and abandoning their pension plans,
because these plans may no longer exist by the time that Labor receives
the processed filing or is able to determine that no Form 5500 was
filed by those sponsors.
The Form 5500 also lacks key information that could better assist EBSA,
IRS, and PBGC in monitoring plans and ensuring that they are in
compliance with ERISA. EBSA, IRS and PBGC officials said that they have
experienced difficulties when relying on Form 5500 information to
identify and track all plans across years. Although EBSA has a process
in place to identify and track plans filing a Form 5500 from year to
year, problems still arise when plans change employer identification
numbers (EIN) and/or plan numbers. Identifying plans is further
complicated when plan sponsors are acquired, sold, or merged. In these
cases, agency officials said that there is an increased possibility of
mismatching of EINs, plans, and their identifying information. As
result, EBSA officials said they are unable to (1) verify if all
required employers are meeting the statutory requirement to file a Form
5500 annually, (2) identity all late filers, and (3) assess and collect
penalties from all plans that fail to file or are late. Likewise, PBGC
officials said that must spend additional time each year trying to
identify and track certain defined benefit plans so that they can
conduct compliance and research activities. EBSA officials said they
are considering measures to better track and identify plans but have
not reached any conclusions. Our recent report makes a number of
recommendations aimed at improving the timeliness and content of Form
5500 that will likely assist EBSA's enforcement efforts.[Footnote 12]
In addition to problems with Form 5500 information, concerns remain
about the quality of annual audits of plans' financial statements by
independent public accountants. For many years, we, as well as the
Department of Labor's Office of Inspector General (OIG), have reported
that a significant number of these audits have not met ERISA
requirements. For example, in 1992 we found that over a third of the 25
plan audits we reviewed had audit weaknesses so serious that their
reliability and usefulness were questionable. We recommended that the
Congress amend ERISA to require full-scope audits of employee benefit
plans and to require plan administrators and independent public
accountants to report on how effective an employee benefit plan's
internal controls are in protecting plan assets.[Footnote 13] Although
such changes were subsequently proposed, they were not enacted. In
2004, Labor's OIG reported that although EBSA had reviewed a
significant number of employee benefit plan audits and made efforts to
correct substandard audits, a significant number of substandard audits
remain uncorrected. Furthermore, plan auditors performing substandard
work generally continue to audit employee benefit plans without being
required to improve the quality of the audits.[Footnote 14] As a
result, these audits have not provided participants and beneficiaries
the protections envisioned by Congress. Labor's OIG recommended, among
other things, that EBSA propose changes to ERISA so that EBSA has
greater enforcement authority over employee benefit plan auditors.
Restrictive Statutory Requirements Limit Assessment of Fiduciary
Penalties:
As we have previously reported, restrictive legal requirements have
limited EBSA's ability to assess penalties against fiduciaries or other
persons who knowingly participate in a fiduciary breach.[Footnote 15]
Unlike the SEC, which has the authority to impose a penalty without
first assessing and then securing monetary damages, EBSA does not have
such statutory authority and must assess penalties based on damages or,
more specifically, the restoration of plan assets.[Footnote 16] Under
Section 502(l), ERISA provides for a mandatory penalty against (1) a
fiduciary who breaches a fiduciary duty under, or commits a violation
of, Part 4 of Title I of ERISA or (2) against any other person who
knowingly participates in such a breach or violation. This penalty is
equal to 20 percent of the "applicable recovery amount," or any
settlement agreed upon by the Secretary or ordered by a court to be
paid in a judicial proceeding instituted by the Secretary. However, the
applicable recovery amount cannot be determined if damages have not
been valued. This penalty can be assessed only against fiduciaries or
knowing participants in a breach who, by court order or settlement
agreement, restore plan assets. Therefore, if (1) there is no
settlement agreement or court order or (2) someone other than a
fiduciary or knowing participant returns plan assets, the penalty may
not be assessed. For example, last year we reported that ERISA
presented legal challenges when developing cases related to proxy
voting by plan fiduciaries, particularly with regards to valuing
monetary damages.[Footnote 17] As a result, because EBSA has never
found a violation that resulted in monetary damages, it has never
assessed a penalty or removed a fiduciary because of a proxy voting
investigation. Given the restrictive legal requirements that have
limited the use of penalties for violations of ERISA's fiduciary
requirements, we recommended that Congress consider amending ERISA to
give the Secretary of Labor additional authority with respect to
assessing monetary penalties against fiduciaries. We also recommended
other changes to ERISA to better protect plan participants and increase
the transparency of proxy voting practices by plan fiduciaries.
Recent Scandals Highlight the Need for Better Coordination with SEC:
Recent events such as the abusive trading practices of late trading and
market timing in mutual funds and new revelations of conflicts of
interest by pension consultants highlight the need for EBSA to better
coordinate enforcement strategies with SEC. Last year we reported that
SEC and EBSA had separately taken steps to address abusive trading
practices in mutual funds.[Footnote 18] At the time we issued our
report, SEC had taken a number of actions to address the abuses
including:
* charging some fund companies with defrauding investors by not
enforcing their stated policies on market timing,
* fining some institutions hundreds of millions of dollars (some of
this money was to be returned to long-term shareholders who lost money
due to abusive practices),
* permanently barring some individuals from future work with investment
companies, and:
* proposing new regulations addressing late trading and market timing.
Separate from SEC activities, EBSA began investigating possible
fiduciary violations at some large investment companies, including
those that sponsor mutual funds, and violations by plan fiduciaries.
EBSA also issued guidance suggesting that plan fiduciaries review their
relationships with mutual funds and other investment companies to
ensure they are meeting their responsibilities of acting reasonably,
prudently, and solely in the interest of plan participants. Although
SEC's proposed regulations on late trading and market timing could have
more adversely affected some plan participants than other mutual fund
investors, EBSA was not involved in drafting the regulations because it
does not regulate mutual funds.
In another example of how EBSA and SEC enforcement responsibilities can
intersect, SEC recently found that potential conflicts of interest may
affect the objectivity of advice pension consultants are providing to
their pension plan clients.[Footnote 19] The report also raised
important issues for plan fiduciaries who often rely on the advice of
pension consultants in operating their plans. Recently, EBSA and SEC
issued tips to help plan fiduciaries evaluate the objectivity of advice
and recommendations provided by pension consultants.
Concluding Observations:
Americans face numerous challenges to securing their economic security
in retirement, including the long-term fiscal challenges facing Social
Security; the uncertainty of promised pension benefits; and the
potential volatility of the investments held in their defined
contributions plans. Given these concerns, it is important that
employees' benefits are adequately protected. EBSA is a relatively
small agency facing the daunting challenge of protecting over $4
trillion in assets of pension and welfare benefits for millions of
Americans. Over the years, EBSA has taken steps to strengthen its
enforcement program and leverage its limited resources. These actions
have helped better position EBSA to more effectively enforce ERISA.
EBSA, however, continues to face a number of significant challenges to
its enforcement program. Foremost, despite improvements in the
timeliness and content of the Form 5500, information currently
collected does not permit EBSA and the other ERISA regulatory agencies
to be in the best position to ensure compliance with federal laws and
assess the financial condition of private pension plans. Given the ever-
changing complexities of employee benefit plans and how rapidly the
financial condition of pension plans can deteriorate, it is imperative
that policymakers, regulators, plan participants, and others have more
timely and accurate Form 5500 information. In addition, there is a
legitimate question as to whether information currently collected on
the Form 5500 can be used as an effective enforcement tool by EBSA or
whether different information might be needed. Without the right
information on plans in a timely manner, EBSA will continue to have to
rely on participant complaints as a primary source of investigations
rather than being able to proactively identify and target problems
areas. Second, in some instances, EBSA's enforcement efforts continue
to be hindered by ERISA, the very law it is charged with enforcing. For
example, because of restrictive legal requirements, EBSA continues to
be hindered in assessing penalties against fiduciaries or others who
knowingly participate in a fiduciary breach. Congress may want to amend
ERISA to address such limits on EBSA's enforcement authority. Finally,
the significant changes that have occurred in pension plans, the
growing complexity of financial transactions of such plans, and the
increasing role of mutual funds and other investment vehicles in
retirement savings plans require enhanced coordination of enforcement
efforts with SEC. Furthermore, such changes raise the fundamental
question of whether Congress should modify the current ERISA
enforcement framework. For example, it is important to consider whether
the current division of oversight responsibilities across several
agencies is the best way to ensure effective enforcement or whether
some type of consolidation or reallocation of responsibilities and
resources could result in more effective and efficient ERISA
enforcement. We look forward to working with Congress on such crucial
issues.
Mr. Chairman, this concludes my statement. I would be happy to respond
to any questions you or other members of the committee may have.
Contact and Acknowledgments:
For further information, please contact me at (202) 512-7215. Other
individuals making key contributions to this testimony included Joseph
Applebaum, Kimberley Granger, Raun Lazier, George Scott, and Roger
Thomas.
FOOTNOTES
[1] Certain transactions are prohibited under the law to prevent
dealings with parties who may be in a position to exercise improper
influence over the plan. In addition, fiduciaries are prohibited from
engaging in self-dealing and must avoid conflicts of interest that
could harm the plan.
[2] Prior to 1979, there was overlapping responsibility for
administration of the parallel provisions of Title I of ERISA and the
Internal Revenue Code (IRC) by the Department of Labor and IRS,
respectively.
[3] See GAO, Pension Benefit Guaranty Corporation Single-Employer
Program: Long-Term Vulnerabilities Warrant High-Risk Designation, GAO-
03-1050SP (Washington, D.C.: Jul. 23, 2003).
[4] In 2002, we reported that the financial collapse of the Enron
Corporation and other large firms and the effects on workers and
retirees had raised questions about retirement funds being invested in
employer securities and the laws governing such investments. We
recommended that the Congress consider amending ERISA to require plan
sponsors to provide defined contribution plan participants with an
investment education notice that includes information on the risks of
certain investments such as employer securities and the benefits of
diversification. See GAO, Private Pensions: Participants Need
Information on the Risks of Investing in Employer Securities and the
Benefits of Diversification, GAO-02-943 (Washington, DC: Sept. 6, 2002).
[5] A MEWA is a welfare benefit plan or any other arrangement (other
than an employee welfare benefit plan), which is established or
maintained for the purpose of offering or providing a welfare benefit
to employees of two or more employers. Typically, such arrangements
often involve small employers that are either unable to find or cannot
afford the cost of health care coverage for their employees.
[6] See GAO, Employee Benefits: States Need Labor's Help Regulating
Multiple Employer Welfare Arrangements, GAO/HRD-92-40 (Washington,
D.C.: Mar. 10, 1992).
[7] See GAO, Pension Plans: Stronger Labor ERISA Enforcement Should
Better Protect Plan Participants, GAO/HEHS-94-157 (Washington, D.C.:
August 8, 1994).
[8] In April 2005, the Department of labor published in the Federal
Register a revised VFCP that according to EBSA, simplified and expanded
the original program.
[9] See GAO, Pension and Welfare Benefits Administration: Opportunities
Exist for Improving Management of the Enforcement Program, GAO-02-232
(Washington, DC: March 15, 2002).
[10] See, GAO, Employee Benefit Plans: Efforts to Streamline Reporting
Requirements and Improve Processing of Annual Plan Data, GAO/ HEHS-98-
45R (Washington, DC: Nov. 14, 1997).
[11] See GAO, Private Pensions: Government Actions Could Improve the
Timeliness and Content of Form 5500 Pension Information, GAO-05-491
(Washington, DC: June 3, 2005).
[12] See GAO-05-491.
[13] Under ERISA, investments held by certain regulated institutions,
such as banks and insurance companies, may be excluded from the scope
of a plan audit. The resulting lack of audit work can result in an
auditor disclaiming an opinion on the plan's financial statements. See
GAO, Employee Benefits: Improved Plan Reporting and CPA Audits Can
Increase Protection under ERISA, GAO/AFMD-92-14 (Washington, D.C.:
April 9, 1992) and Employee Benefits: Limited Scope Audit Exemption
Should Be Repealed, GAO/T-AIMD-98-75 (Washington, D.C.: February 12,
1998).
[14] See U.S. Department of Labor Office of Inspector General-Office of
Audit, EBSA Needs Additional Authority to Improve the Quality of
Employee Benefit Plan Audits. (Washington, D.C.: Sept. 30, 2004).
[15] See GAO/HEHS-94-157.
[16] EBSA can also seek removal of a fiduciary for breaches of
fiduciary duty or seek other sanctions.
[17] See GAO, Pension Plans: Additional Transparency and Other Actions
Needed in Connection with Proxy Voting, GAO-04-749 (Washington, D.C.:
August 10, 2004).
[18] See GAO, Mutual Funds: SEC Should Modify Proposed Regulations to
Address Some Pension Plan Concerns, GAO-04-799 (Washington, D.C.: July
9, 2004).
[19] See SEC, Staff Report Concerning Examinations of Select Pension
Consultants, The Office of Compliance Inspections and Examinations
(Washington, D.C.: May 16, 2005).
