Private Pensions
Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees Gao ID: GAO-07-21 November 16, 2006American workers are increasingly relying on 401(k) plans, which allow pre-tax contributions to individual accounts, for their retirement income. As workers accrue earnings on their investments, they also pay a number of fees that may significantly decrease their retirement savings. Because of concerns about the effects of fees on participants' retirement savings, GAO examined (1) the types of fees associated with 401(k) plans and who pays these fees, (2) how information on fees is disclosed to plan participants, and (3) how the Department of Labor (Labor) oversees plan fees and certain business arrangements. GAO reviewed industry surveys on fees and interviewed Labor officials and pension professionals about disclosure and reporting practices.
Investment fees, which are charged by companies managing mutual funds and 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. Although plan sponsors often pay for record-keeping fees, participants bear them in a growing number of plans. The information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options. The Employee Retirement Income Security Act of 1974 (ERISA) requires that plan sponsors provide participants with certain disclosure documents, but these documents are not required to contain information on fees borne by individual participants. Additional fee disclosures are required for certain--but not all--plans in which participants direct their investments. These disclosures are provided to participants in a piecemeal fashion and do not provide a simple way for participants to compare plan investment options and their fees. Labor has authority under ERISA to oversee 401(k) plan fees and certain types of business arrangements that could affect fees, but lacks the information it needs to provide effective oversight. Labor collects information on fees from plan sponsors, investigates participants' complaints or referrals from other agencies on questionable 401(k) plan practices, and conducts outreach to educate plan sponsors about their responsibilities. However, the information reported to Labor does not include all fees charged to 401(k) plans and therefore has limited use for effective oversight and for identifying undisclosed business arrangements among service providers. Without disclosing these arrangements, service providers may steer plan sponsors toward investment products or services that may not be in the best interest of participants and may cause them to pay higher fees. Labor has several initiatives underway to improve the information it has on fees and the various business arrangements among service providers.
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Director: Team: Phone:GAO-07-21, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees
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Report to the Ranking Minority Member, Committee on Education and the
Workforce, House of Representatives:
United States Government Accountability Office:
GAO:
November 2006:
Private Pensions:
Changes Needed to Provide 401(k) Plan Participants and the Department
of Labor Better Information on Fees:
GAO-07-21:
GAO Highlights:
Highlights of GAO-07-21, a report to Ranking Minority Member, Committee
on Education and the Workforce, House of Representatives
Why GAO Did This Study:
American workers are increasingly relying on 401(k) plans, which allow
pre-tax contributions to individual accounts, for their retirement
income. As workers accrue earnings on their investments, they also pay
a number of fees that may significantly decrease their retirement
savings.
Because of concerns about the effects of fees on participants‘
retirement savings, GAO examined (1) the types of fees associated with
401(k) plans and who pays these fees, (2) how information on fees is
disclosed to plan participants, and (3) how the Department of Labor
(Labor) oversees plan fees and certain business arrangements. GAO
reviewed industry surveys on fees and interviewed Labor officials and
pension professionals about disclosure and reporting practices
What GAO Found:
Investment fees, which are charged by companies managing mutual funds
and 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. Although plan sponsors often pay for record-keeping fees,
participants bear them in a growing number of plans. The information on
fees that 401(k) plan sponsors are required by law to disclose is
limited and does not provide for an easy comparison among investment
options. The Employee Retirement Income Security Act of 1974 (ERISA)
requires that plan sponsors provide participants with certain
disclosure documents, but these documents are not required to contain
information on fees borne by individual participants. Additional fee
disclosures are required for certain”but not all”plans in which
participants direct their investments. These disclosures are provided
to participants in a piecemeal fashion and do not provide a simple way
for participants to compare plan investment options and their fees.
Labor has authority under ERISA to oversee 401(k) plan fees and certain
types of business arrangements that could affect fees, but lacks the
information it needs to provide effective oversight. Labor collects
information on fees from plan sponsors, investigates participants‘
complaints or referrals from other agencies on questionable 401(k) plan
practices, and conducts outreach to educate plan sponsors about their
responsibilities. However, the information reported to Labor does not
include all fees charged to 401(k) plans and therefore has limited use
for effective oversight and for identifying undisclosed business
arrangements among service providers. Without disclosing these
arrangements, service providers may steer plan sponsors toward
investment products or services that may not be in the best interest of
participants and may cause them to pay higher fees. Labor has several
initiatives underway to improve the information it has on fees and the
various business arrangements among service providers.
Figure: Effect of a 1-Percentage Point in Higher Annual Fees on a
$20,000 401(k) Balance Invested over 20 years:
[See PDF for Image]
Source: GAO analysis.
[End of Figure]
What GAO Recommends:
Congress should consider amending ERISA to require sponsors to disclose
fee information on each 401(k) investment option in the plan to
participants and to require that 401(k) service providers disclose to
plan sponsors the compensation providers receive from other service
providers. In addition, GAO recommends that Labor require plan sponsors
to report a summary of all fees paid out of plan assets or by
participants. Labor generally agreed with the findings and conclusions
of our report.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-21].
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]
Contents:
Letter:
Results in Brief:
Background:
Investment Fees Account for Most 401(k) Plan Fees and Are Usually Borne
by Plan Participants:
Required Disclosures Provide Limited Fee Information to Assist
Participants in Comparing Investment Options:
Labor Has Authority over 401(k) Plan Fees and Certain Types of Business
Arrangements, but Lacks Information for Effective Oversight:
Conclusions:
Matters for Congressional Consideration:
Recommendation for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Labor:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Payers of Major 401(k) Plan Fees, 2005:
Table 2: Required Disclosure Documents to All Participants:
Table 3: Required Timing of Disclosure Documents with Fee Information:
Figures:
Figure 1: 401(k) Plan Average Asset Allocation in 2005:
Figure 2: Flow of Bundled Plan Services:
Figure 3: Flow of Unbundled Plan Services:
Figure 4: Investment Fees as a Percentage of Total Plan Fees, 2005:
Figure 5: Plan Record-Keeping Fees as a Percentage of Total Plan Fees,
2005:
Abbreviations:
AARP: American Association of Retired Persons:
EBSA: Employee Benefits Security Administration:
ERISA: Employee Retirement Income Security Act:
FDIC: Federal Deposit Insurance Corporation:
FRB: Federal Reserve Board:
NASD: National Association of Securities Dealers, Inc.
OCC: Office of the Comptroller of the Currency:
PSCA: Profit Sharing/401(k) Council of America:
SEC: Securities and Exchange Commission:
United States Government Accountability Office:
Washington, DC 20548:
November 16, 2006:
The Honorable George Miller:
Ranking Minority Member:
Committee on Education and the Workforce:
House of Representatives:
Dear Mr. Miller:
American workers are increasingly relying on 401(k) plans for their
retirement incomes. Named after section 401(k) of the Internal Revenue
Code, 401(k) plans are private pension plans that allow workers to save
for retirement by diverting a portion of their pre-tax income into an
investment account that can grow tax-free until withdrawn in
retirement. Participation in 401(k) plans rose from fewer than 8
million participants in the mid-1980s to about 47 million participants
in 2005, and assets in these plans increased by more than twenty fold
during the same period, from less than $100 billion to more than $2
trillion.[Footnote 1] As workers 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.
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. 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.
Concerns have been raised that employers sponsoring the plans and plan
participants may not be aware of all of the fees being charged to them
or whether companies providing services to the plan have undisclosed
business arrangements with other service providers that could
negatively affect participants. In light of the potential effects of
fees on plan participants' retirement savings, the Ranking Member of
the House Committee on Education and the Workforce asked GAO to
examine:
² the types of fees associated with 401(k) plans and who pays these
fees,
² how information on fees is disclosed to plan participants, and:
² how the Department of Labor (Labor) oversees plan fees and certain
types of business arrangements.
To identify the fees associated with 401(k) plans and how they are
charged to plan sponsors and plan participants, we interviewed
officials from Labor, the Federal Deposit Insurance Corporation (FDIC),
the Federal Reserve Board (FRB), the Securities and Exchange Commission
(SEC), and the Treasury Department's Office of the Comptroller of the
Currency (OCC); met with service providers and other industry
professionals; and collected information about the range of fees and
how they are charged to plan sponsors and participants. We also
reviewed several industry surveys of 401(k) sponsors. To examine how
well fees are disclosed to participants, we identified the legal and
regulatory disclosure requirements; met with 401(k) plan practitioners;
and reviewed sample disclosure documents. To examine Labor's role in
overseeing plan fees and any undisclosed business arrangements among
service providers, we reviewed Labor's and other agencies' legal and
regulatory authority and Labor's procedures for assuring that plans are
meeting overall legal requirements, including the reporting of
information on the form plan sponsors are required to submit to Labor,
Form 5500. We also interviewed officials from four of Labor's field
offices and reviewed Labor's current initiatives related to 401(k)
plans. We conducted our review from January 2006 through October 2006
in accordance with generally accepted government auditing standards.
See appendix I for more detail regarding our scope and methodology.
Results in Brief:
Various fees are associated with 401(k) plans, but investment and
record-keeping fees account for most 401(k) plan fees and are borne by
both plan participants and sponsors. Investment fees--such as those
charged by mutual fund advisors to select securities for the fund--
account for the largest portion of total fees in most plans. For
example, a 2005 industry survey estimated that investment fees made up
about 80 to 99 percent of plan fees, depending on the number of
participants in the plan. Plan record-keeping fees--those associated
with maintaining participants' accounts, such as processing their fund
selections and preparing and mailing account statements--are the second-
largest portion of plan fees. 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 comprise 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. Plan record-keeping fees
are charged as a percentage of a participant's assets, a flat fee, or a
combination of both. Although plan sponsors pay these fees in a
considerable number of plans, they are increasingly being paid by
participants.
The information on fees that the Employee Retirement Income Security
Act (ERISA) of 1974[Footnote 2] requires 401(k) plan sponsors to
disclose is limited and does not provide an easy comparison of
investment options. All 401(k) plans are required to provide
information on plan operations, participant accounts, and the plan's
financial status, which may include some information related to fees.
ERISA also requires 401(k) plan sponsors that have elected liability
protection from participants' investment decisions to provide
additional fee information. Most 401(k) plan sponsors elect this
protection and therefore must provide information such as transaction
fees related to each available investment option. Other plans that do
not elect this protection may also provide access to fee information
via such documents as 401(k) account statements and fund prospectuses.
According to industry professionals, because plan sponsors provide this
information in a piecemeal fashion, participants may not receive a
clear picture of the total fees that they pay. In order to get a
complete picture of fees, participants must collect various documents
over time and may be required to seek out some documents. Furthermore,
the documents that participants receive do not provide a simple way for
participants to compare fees--along with risk and historical
performance--among the investment options in their 401(k) plan.
Labor has authority under ERISA to oversee 401(k) plan fees and certain
types of business arrangements involving service providers, but lacks
the information it needs to provide effective oversight. Under ERISA,
Labor is responsible for enforcing the requirements that plan sponsors
(1) ensure that fees paid with plan assets are reasonable and for
necessary services; (2) be prudent and diversify the plan's investments
or, if plan sponsors elect liability protection, provide a broad range
of investment choices for participants; and (3) report information
known on certain business arrangements involving service providers.
Labor does this in a number of ways, including collecting information
on fees from plan sponsors, investigating participants' complaints or
referrals from other agencies on questionable 401(k) plan practices,
and conducting outreach to educate plan sponsors about their
responsibilities. Despite the agency's efforts, the information
reported to Labor, such as information reported on Form 5500, does not
include all fees paid by 401(k) plans. For example, plan sponsors are
not required to report mutual fund investment fees to Labor on the Form
5500 even though they receive this information from the mutual fund
companies in the form of a prospectus. Without information on all fees,
Labor's oversight is limited because it is unable to identify fees that
may be questionable. In addition, Labor and plan sponsors may not have
information on arrangements among service providers that, according to
officials at Labor, could steer plan sponsors toward offering
investment options that benefit service providers but may not be in the
best interest of participants. For example, a service provider that
assists a plan sponsor in selecting investment options for the plan may
also be receiving compensation from mutual fund companies for
recommending their funds. The service provider may not disclose this
business arrangement to the plan sponsor, and as a result, participants
may have more limited investment options and pay higher fees for these
options than they otherwise would. Labor has several initiatives
underway to improve the information it has on fees and the various
business arrangements among service providers.
To ensure that plan participants, sponsors, and the Department of Labor
have more information on the fees associated with 401(k) plans,
Congress should consider amending ERISA to require all plan sponsors of
participant-directed plans to disclose fee information on each 401(k)
investment option to participants in a way that facilitates comparison
among the options. In addition, Congress should consider amending ERISA
to explicitly require 401(k) service providers to disclose to plan
sponsors the compensation they receive from other service providers.
Finally, to better enable Labor to effectively oversee 401(k) plan
fees, we are recommending that the Secretary of Labor require plan
sponsors to report a summary of all fees that are paid out of plan
assets or by participants. In response to our draft report, Labor
generally agreed with our findings and conclusions. Specifically, Labor
stated that it will give careful consideration to GAO's recommendation
that plans be required to provide a summary of all fees that are paid
out of plan assets or by participants. Labor and SEC also provided
technical comments on the draft, which we incorporated as appropriate.
Background:
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.[Footnote 3] 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,[Footnote 4] life insurance separate accounts, and certain pooled
investment products (see fig. 1). Other plan assets were invested in
company stock; stable value funds,[Footnote 5] including guaranteed
investment contracts; balanced funds;[Footnote 6] bond funds; and money
funds.
Figure 1: 401(k) Plan Average Asset Allocation in 2005:
[See PDF for image]
Source: Investment Company Institute.
[End of figure]
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).
Figure 2: Flow of Bundled Plan Services:
[See PDF for image]
Source: GAO analysis of information from Profit Sharing/401(k) Council
of America.
[End of figure]
Figure 3: Flow of Unbundled Plan Services:
[See PDF for image]
Source: GAO analysis of information from Profit Sharing/401(k) Council
of America.
[End of figure]
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.[Footnote 7] 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.[Footnote 8] 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.[Footnote 9]
* 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.[Footnote 10]
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 Account for Most 401(k) Plan Fees and Are Usually Borne
by Plan Participants:
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 Together Account for
Nearly All of Plan Fees:
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.[Footnote 11] 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.[Footnote 12] 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.
Figure 4: Investment Fees as a Percentage of Total Plan Fees, 2005:
[See PDF for image]
Source: HR investment Consultants.
[End of figure]
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.
Figure 5: Plan Record-Keeping Fees as a Percentage of Total Plan Fees,
2005:
[See PDF for image]
Source: HR Investment Consultants.
Note: While these data include primarily record keeping, they include a
negligible amount of other administrative fees, according to the
survey's author.
[End of figure]
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.
These fees generally comprise a much smaller percentage of total plan
fees than investment and plan record-keeping fees.
Participants Bear Most Investment Fees and an Increasing Number of
Participants Bear Plan Record-Keeping Fees:
Participants pay for the majority of investment fees and a greater
number bear plan record-keeping fees. As shown in table 1, a 2005
industry survey of 401(k) plan sponsors found that plan participants
paid investment fees in almost 62 percent of plans with 5,000 members
or fewer. This arrangement was even more common in plans with over
5,000 members where participants bear investment fees in about 71
percent of all plans. For both size plans, plan sponsors and
participants shared investment fees in about 10 percent to 12 percent
of plans. Another industry survey of plan sponsors with 1,000 employees
or more also found that plan participants paid investment fees in the
majority of plans in 2005.
Table 1: Payers of Major 401(k) Plan Fees, 2005:
Investment fees;
Plans with fewer than 5,000 participants: Participants (percent): 61.8;
Plans with fewer than 5,000 participants: Sponsor (percent): 27.5;
Plans with fewer than 5,000 participants: Participants and sponsors
(percent): 10.6;
Plans with more than 5,000 participants: Participants (percent): 71.5;
Plans with more than 5,000 participants: Sponsor (percent): 16.2;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 12.3.
Plan record-keeping fees[A];
Plans with fewer than 5,000 participants: Participants (percent): 32.5;
Plans with fewer than 5,000 participants: Sponsor (percent): 58.3;
Plans with fewer than 5,000 participants: Participants and sponsors
(percent): 9.2;
Plans with more than 5,000 participants: Participants (percent): 50.4;
Plans with more than 5,000 participants: Sponsor (percent): 34.6;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 15.0.
Audit fees;
Plans with fewer than 5,000 participants: Participants (percent): 16.0;
Plans with fewer than 5,000 participants: Sponsor (percent): 82.5;
Plans with fewer than 5,000 participants: Participants and sponsors
(percent): 1.5;
Plans with more than 5,000 participants: Participants (percent): 33.3;
Plans with more than 5,000 participants: Sponsor (percent): 62.2;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 4.4.
Communication to employees;
Plans with fewer than 5,000 participants: Participants (percent): 20.0;
Plans with fewer than 5,000 participants: Sponsor (percent): 70.5;
Plans with fewer than 5,000 participants: Participants and sponsors
(percent): 9.5;
Plans with more than 5,000 participants: Participants (percent): 34.3;
Plans with more than 5,000 participants: Sponsor (percent): 49.6;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 16.1.
Investment consulting fees;
Plans with fewer than 5,000 participants: Participants (percent): 33.0;
Plans with fewer than 5,000 participants: Sponsor (percent): 60.0;
Plans with fewer than 5,000 participants: Participants and sponsors
(percent): 7.0;
Plans with more than 5,000 participants: Participants (percent): 39.0;
Plans with more than 5,000 participants: Sponsor (percent): 52.8;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 8.1.
Legal fees;
Plans with fewer than 5,000 participants: Participants (percent): 10.3;
Plans with fewer than 5,000 participants: Sponsor (percent): 84.7;
Plans with fewer than 5,000 participants: Participants and sponsors
(percent): 5.0;
Plans with more than 5,000 participants: Participants (percent): 20.7;
Plans with more than 5,000 participants: Sponsor (percent): 66.7;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 12.6.
Trustee fees;
Plans with fewer than 5,000 participants: Participants (percent): 29.4;
Plans with fewer than 5,000 participants: Sponsor (percent): 66.6;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 4.0;
Plans with fewer than 5,000 participants:Participants (percent): 47.2;
Plans with more than 5,000 participants: Sponsor (percent): 43.2;
Plans with more than 5,000 participants: Participants and sponsors
(percent): 9.6.
Source: Profit Sharing/401(k) Council of America (PSCA).
[A] In some cases, plan record-keeping fees are charged as a percentage
of assets.
[End of table]
Participants generally pay investment fees indirectly. The investment
returns that participants receive reflect their share of the fund's
assets after investment fees and other expenses have been subtracted.
Investment fees are reported as a percentage of the fund's overall
assets, also known as the expense ratio.
The 2005 survey of plan sponsors also found that participants bear a
plan's record-keeping fees in about 50 percent of plans with 5,000
participants or more. Plan sponsors paid record-keeping fees in about
35 percent of these plans and share fees with participants in about 15
percent. The opposite is true for plans with fewer than 5,000
participants, where plan sponsors paid record-keeping fees in 58
percent of cases. However, many of the industry professionals whom we
spoke with said plan participants bear a greater portion of these fees
than they did in the past. According to these professionals, record-
keeping fees have shifted to participants because companies changed the
way they charge record-keeping fees and many plan sponsors wanted to
reduce their share of plan fees. Originally, record-keeping fees were
explicit fees billed to the plan sponsor. When the use of mutual funds
in 401(k) plans started to grow, some funds were marketed to sponsors
as having no record-keeping fees. In these cases, record keepers were
compensated out of the investment funds' operating expenses for their
services, such as maintaining individual account records for its retail
investors and consolidating participant requests to buy or sell shares.
Some sponsors may have been unaware that record-keeping fees were taken
out of participant assets. Others were aware that the fees were passed
on to participants.
Record-keeping fees may be charged as a percentage of assets, or based
on the number of transactions or the number of participants in the
plan. Some industry professionals told us that fees charged as a
percentage of assets may not reflect actual costs to the service
provider since the fees grow regardless of the level of service
provided. The professionals said service providers may charge record-
keeping fees to participants as a flat fee and as an asset-based fee in
plans with low assets. An asset-based fee would not generate enough
revenue to cover record-keeping fees in these plans, so a flat fee is
added. As plan assets grow, the revenue generated by asset-based fees
eventually covers plan record-keeping fees, and the flat fee may be
dropped. Other industry professionals said record-keeping fees may vary
if they are offered by insurance companies or banks that can use fee
structures unique to their industry.
Required Disclosures Provide Limited Fee Information to Assist
Participants in Comparing Investment Options:
The fee information that ERISA requires 401(k) plan sponsors to
disclose is limited and does not provide participants with an easy
comparison of 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. Additional fee disclosures are required for
certain--but not all--plans in which participants direct their
investments. These disclosures are provided to participants in a
piecemeal fashion and do not provide a simple way for participants to
compare plan investment options and their fees.
Disclosures Provide Limited Information on Fees to Participants in a
Piecemeal Way:
ERISA requires that plan sponsors provide all participants with a
summary plan description, account statements, and the summary annual
report, but these documents are not required to disclose information on
fees borne by individual participants. Table 2 provides an overview of
each of these disclosure documents, and the type of fee information
that they may contain.
Table 2: Required Disclosure Documents to All Participants:
Disclosure document: Summary plan description;
Document purpose: To explain to participants how the plan operates;
Information on fees: May contain information on how various fees--such
as investment, record-keeping, and loan fees are charged to
participants--but not required by ERISA to do so.
Disclosure document: Account statement;
Document purpose: To show the account balance due to a participant;
Information on fees: Typically identifies fees, such as for loans, that
are directly attributable to an account during a specific period. Also,
may show investment and record-keeping fees, but not required by ERISA
to do so.
Disclosure document: Summary annual report;
Document purpose: To disclose the financial condition of the plan to
participants;
Information on fees: Contains total plan costs incurred by plan
participants during the year.
Source: GAO analysis.
[End of table]
These required documents apply to all 401(k) plans, including plans in
which participants have no control over investment decisions.
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, among other information, a
description of the investment risk and historical performance of each
investment option available in the plan and any associated transaction
fees for buying or selling shares in these options.[Footnote 13] Upon
request, 404(c) plans must also provide participants with, among other
information, the expense ratio for each investment option. To meet
certain 404(c) requirements, such plans distribute prospectuses or fund
profiles. The prospectuses and fund profiles are not meant to be
comprehensive for the entire 401(k) plan, but rather are relevant for
individual investment options in the plan.
According to the most recent Form 5500 data, 54 percent of 401(k)
plans--representing 64 percent of 401(k) participants--classify
themselves as 404(c).[Footnote 14] However, the data also show that 87
percent of 401(k) plans--representing 92 percent of 401(k)
participants--direct their 401(k) investments. These data suggest that
some participant-directed plans are not 404(c) and, thus, not required
to disclose to participants certain fee information such as the expense
ratio of each investment option.
Plan sponsors may voluntarily provide participants with more
information on fees than ERISA requires, according to plan
practitioners. 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. Also,
according to plan practitioners, plan sponsors are not required to
provide record-keeping or other fee information in their account
statements, although many do so. In addition, plan sponsors are not
required to provide the investment fees for the investment options in
the summary plan document, but they may provide this information as
well. Still, absent requirements to do so, some plan sponsors may not
identify all the fees participants pay.
Participants may not be aware of the different fees that they pay, yet
are responsible for directing their investments within the plan.
According to industry professionals, participants can be unaware that
they pay any fees for their 401(k) investments and are particularly
unaware of investment fees that are typically not quantified on account
statements. In a nationwide survey, more than 80 percent of 401(k)
participants report not knowing how much they pay in fees.[Footnote 15]
Some industry professionals said that making participants who direct
their investments more aware of fees would help them make more informed
investment decisions.
Information on fees is disclosed to participants in a piecemeal way. In
order to get a more complete picture of fees, participants must collect
various documents over time. As shown in table 3, disclosure documents
with fee information are generally provided to participants at
different times.
Table 3: Required Timing of Disclosure Documents with Fee Information:
Disclosure document: Summary plan description;
Timing requirement: Within 90 days of being covered by the plan, then
every 5 or 10 years depending on changes.
Disclosure document: Account statement;
Timing requirement: Generally, within 30 days of a written request[A].
Disclosure document: Summary annual report;
Timing requirement: Annually.
Disclosure document: Prospectus or fund profile[B];
Timing requirement: Immediately following initial investment.
Source: GAO analysis.
[A] The Pension Protection Act of 2006 requires quarterly account
statements beginning in 2007.
[B] Required only for 404(c) plans and for securities regulated by the
SEC.
[End of table]
Some documents that contain fee information are provided to
participants automatically, whereas others, such as prospectuses or
fund profiles, may require that participants seek them out. According
to industry professionals, participants may not know to seek such
documents out.
Participants Cannot Easily Compare Investment Options Based on Fee
Information Provided:
ERISA does not require that plan sponsors provide participants who are
responsible for directing their investments with fee information that
could assist them in comparing the plan's investment options. To
identify the fee information for comparing investment options,
participants must sift through multiple documents that are not always
disclosed to them automatically. For example, to piece together certain
fees associated with a plan's investment options, a participant often
must collect multiple prospectuses or fund profiles. Furthermore,
because ERISA does not require that these documents be provided
automatically to all participants, some participants may need to
request them but may not know to do so. According to industry
professionals, 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 which facilitates comparison.
Participants can use fees along with other information, such as risk
and historical performance, to compare different investment options. In
some cases, differences in fees across products can be explained by
their investment focus or other features. For example, mutual funds
with shares in international stock generally charge higher fees than
mutual funds with shares in domestic stock because international funds
generally incur additional investment management costs. Higher costs
can also arise if an investment option has additional features. For
example, a provider may charge an additional fee to include certain
benefit features, such as providing the participant with an option to
convert a 401(k) account balance into a retirement annuity. Industry
associations have considered different ways to present comparative
information about a plan's investment options to participants in a
single document, but the industry does not have a standard way of doing
so. These associations have generally suggested annually providing key
information--such as the investment objective, fees, and other key
features--associated with each plan's investment options in a table to
help participants compare among them.
Industry professionals suggested that comparing the expense ratio--a
fund's operating fees as a percentage of its assets--across investment
options is the most effective way to compare options' fees. The expense
ratio can be used to compare investment options because it includes
investment fees that account for most of the fees borne by participants
and is generally the only fee measure that varies by option. Fund
options with relatively high fees, such as actively managed funds, tend
to have larger expense ratios than funds which are not actively
managed. Also, fund options that are only available to institutional
investors tend to have lower expense ratios than other types of funds.
Most 401(k) investment options have expense ratios that can be
compared, but this information is not always provided to participants.
According to industry data, at least 69 percent of 401(k) assets are
invested in options, such as mutual funds, that are generally required
to present the expense ratio in a prospectus.[Footnote 16] Participants
who do not belong to 404(c) plans are not required to receive
prospectuses and therefore may not receive the expense ratio
information. In addition, investment options besides mutual funds, such
as guaranteed annuity contracts, may not be required to produce
prospectuses that include expense ratios, but according to industry
professionals, such options have expense ratio equivalents that
investment industry professionals can identify. However, participants
who do not receive this information cannot compare the investment
options' expense ratios.
Because differences in fees can have large impacts on returns over
time, industry professionals recommend considering expense ratios when
making investment decisions. However, they point out that expense
ratios should not be considered in isolation; rather, they should be
considered in light of other important investment factors, such as risk
and historical performance.
Labor Has Authority over 401(k) Plan Fees and Certain Types of Business
Arrangements, but Lacks Information for Effective Oversight:
Labor has authority under ERISA to oversee 401(k) plan fees and certain
types of business arrangements involving service providers, but lacks
the information it needs to provide effective oversight. Labor collects
information on fees from plan sponsors, investigates participants'
complaints or referrals from other agencies on questionable 401(k) plan
practices, and conducts outreach to educate plan sponsors about their
responsibilities. However, the information reported to Labor does not
identify all fees charged to 401(k) plans and therefore has limited use
for effectively overseeing fees and identifying undisclosed business
arrangements among consultants or other service providers. Certain
business arrangements that are undisclosed may lead to participants
paying higher fees for products or services that do not offer any
additional value or benefit than other lower cost alternatives. Labor
has several initiatives underway to improve the information it has on
fees and the various business arrangements among service providers.
Labor Collects Information on Fees, Investigates Complaints and
Referrals, and Conducts Outreach to Educate Plan Sponsors:
Under ERISA, Labor is responsible for enforcing the requirements that
plan sponsors (1) ensure that fees paid with plan assets are reasonable
and for necessary services, (2) diversify the plan's investments or
provide a broad range of investment choices for participants, and (3)
report information known on certain business arrangements involving
service providers. Labor does this in a number of ways, including
collecting information on fees from plan sponsors, investigating
participants' complaints or referrals from other agencies on
questionable 401(k) plan practices, and conducting outreach to educate
plan sponsors about their responsibilities.
Information on Fees:
Labor collects information on fees charged to 401(k) plans primarily
through the Form 5500. The form includes information on the plan's
sponsor, the features of the plan, and the number of participants. The
form also provides more specific information, such as plan assets,
liabilities, insurance, and financial transactions. Filing this form
satisfies the requirement for the plan administrator to file annual
reports concerning, among other things, the financial condition and
operation of plans. Labor uses this form as a tool to monitor and
enforce plan sponsors' responsibilities under ERISA.[Footnote 17] The
reporting form is not routinely provided to participants, but ERISA
requires that it be made available upon request.
Generally, information on 401(k) fees is reported on two sections of
the Form 5500, Schedule A and Schedule C.[Footnote 18] Schedule A is
used to report fees and commissions paid to brokers and sales agents
for selling insurance products. Schedule C includes information on the
fees paid directly or indirectly to service providers for all other
investment products. Schedule C also identifies service providers with
fees in excess of $5,000 by name.
Investigations:
Labor officials told us that complaints from plan participants provide
the most effective leads on plan sponsors' violations of ERISA, but
that Labor receives very few complaints related to excessive 401(k)
plan fees. In fiscal year 2005, Labor received only 10 inquiries or
complaints related to 401(k) fees. A Labor official told us that most
plan participants likely do not understand much about plan fees and are
thus unlikely to complain about them. In addition to responding to
complaints, Labor also receives referrals from various entities, such
as other federal agencies. For example, federal banking regulators like
the Federal Reserve Board will review bank operations as part of their
oversight and may uncover instances where a bank that provides services
to a 401(k) plan is violating ERISA requirements. Several federal
banking regulators have a written agreement to refer such cases to
Labor, but Labor receives fewer than 100 referrals per year from these
and other entities, such as state insurance and securities agencies. A
Labor official told us that only one of the referrals that the agency
has closed over the past 5 years was directly related to fees.[Footnote
19]
Labor uses the Form 5500 in its investigations, but according to agency
officials, this effort does not find many fee violations because it is
difficult to identify unreasonable fees. Officials stated that they
conduct few investigations based solely on the 401(k) fee information
provided on Form 5500 but may review the fees charged to the plan as a
part of investigations into other problems, such as not depositing
participants' contributions into their accounts in a timely manner. In
addition, Labor may audit the Form 5500 to ensure that appropriate fees
are disclosed.
Labor officials told us that it is difficult to discern whether a fee
is reasonable or not on its face, and therefore, investigators rarely
initiate an investigation into a fee's reasonableness. Plan fees can
vary widely based on the types of services offered, and a "boutique"
plan may have high fees but offer many services that a plan sponsor has
determined are in the interest of the plan's participants. In the rare
instance that a fee appears egregious, Labor will generally enlist the
services of a "fee expert" to make that determination, because
according to one official, Labor is unable to do so itself. A fee
expert will conduct a benchmarking study or request estimates from
other service providers to get a sense of the market rate for certain
services.
Labor's most recent in-depth review of fees identified some plans with
high fees but determined that they were not unreasonable or in
violation of ERISA. Labor last undertook a comprehensive review of
401(k) fees in 1997, in response to media, industry, and government
concern that participants were potentially being charged excessive
fees. According to a Labor official, 50 401(k) plans were investigated
to analyze plans' compliance with certain ERISA requirements related to
fees, such as ensuring that fees charged to the plan are
reasonable.[Footnote 20] The plans were selected based on various
factors including anecdotal evidence of high fees and a listing in an
industry journal of plans that had recently contracted with service
providers. Labor found that the plan sponsors had complied with these
ERISA requirements. In some cases, Labor did determine that
participants were paying high fees. It referred these cases--which
included insurance products and international equity funds--to a fee
expert from academia for further analysis to determine if the fees were
unreasonably high. The expert determined that the fees were high, but
not unreasonable. Labor uncovered some violations unrelated to fees and
notified the plans of needed corrective actions.
In fiscal year 2006, seven of Labor's regional offices had ongoing
enforcement projects related to fees, but none were exclusive to 401(k)
plans. We spoke with four offices about their specific projects, the
reasons for their initiation, and their findings to date. According to
agency officials, most of the investigations under these projects were
initiated due to allegations related to defined benefit plans. The
projects focused on specific areas, such as bank trust department
investigations, settlor fees, or intermediary investment fees and
practices.[Footnote 21]
Outreach:
Labor has launched a nationwide campaign to improve workers' health and
retirement security by educating employers and service providers about
their fiduciary responsibilities under ERISA.[Footnote 22] Its
fiduciary education program includes nationwide educational seminars
with fees among the topics covered. Labor's campaign also includes
several educational publications on topics such as understanding fees
and selecting service providers. For example, one of the publications,
Understanding Retirement Plan Fees and Expenses, is designed to help
plan sponsors better understand and evaluate their plans' fees and
expenses.[Footnote 23] Another, A Look at 401(k) Plan Fees for
Employees, highlights the most common fees that may be paid by plans
and is geared toward plan participants.
Limited Information on Fees Paid by Plans Hinders Labor's Ability to
Effectively Oversee Fees:
The information reported to Labor on the Form 5500 has limited use for
effectively overseeing fees paid by 401(k) plans because it does not
explicitly list all of the fees paid from plan assets. For example,
plan sponsors are not required to report mutual fund investment fees to
Labor, even though they receive this information for each of the mutual
funds they offer in the 401(k) plan in the form of a prospectus. In
addition to disclosing this information to sponsors of 401(k) plans,
mutual fund companies are required to file this information with the
SEC, which regulates mutual funds.[Footnote 24] While prospectuses are
provided to SEC on a fund-by-fund basis, neither SEC nor Labor have
readily available information to be able to link individual fund
information to the various 401(k) plans to which the funds may be
offered as investment options.[Footnote 25] Furthermore, prospectuses
provide fees as an expense ratio, which is deducted from plan assets
when investment returns are calculated, and as such are not explicitly
stated.[Footnote 26] Without information on all of the fees charged
directly or indirectly to 401(k) plans, Labor is limited in its ability
to identify fees that may be questionable.
Industry experts told us that additional information could be reported
on the Form 5500 to give Labor a more precise idea of the cost of
administering a defined contribution plan and 401(k) plan fees. The
ERISA Advisory Council Working Group reported that the Form 5500, as
currently structured, does not reflect the way that the defined
contribution plan fee structure works, because only those fees that are
billed explicitly and are paid from plan assets are deemed reportable.
Many of the fees are associated with the individual investment options
in the 401(k) plan, such as a mutual fund; they are deducted from
investment returns and not reported to plan sponsors or on the Form
5500. The Advisory Council concluded that Form 5500s filed by defined
contribution plans are of little use to policy makers, government
enforcement personnel, plan sponsors, and participants in terms of
understanding the cost of a plan. The Advisory Council recommended that
Labor modify the Form 5500 and the accompanying schedules so that all
fees incurred either directly or indirectly by these plans can be
reported or estimated. This information then could be used to compare
fees for research or regulatory purposes.
Labor and Plan Sponsors Lack Information on the Various Business
Arrangements among Service Providers:
Many opportunities exist for business arrangements to go undisclosed,
given the various parties involved in today's 401(k) arena. Problems
may occur when pension consultants or other companies providing
services to a plan also receive compensation from other service
providers. Without disclosing these arrangements, service providers may
be steering plan sponsors toward investment products or services that
may not be in the best interest of participants. In addition, plan
sponsors, being unaware, are often unable to report information about
these arrangements to Labor on Form 5500 Schedule C.
SEC recently identified certain undisclosed arrangements in the
business practices of pension consultants that the agency referred to
as conflicts of interest. Plan sponsors pay pension consultants to give
them advice on matters such as selecting investment options for the
plan and monitoring their performance and selecting other service
providers, such as custodians, administrators, and broker-dealers. The
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.[Footnote 27]
For example, the report revealed that more than half of the pension
consultants examined had compensation arrangements with brokers who
sell mutual funds. The report highlighted concerns that these
arrangements may provide incentives for pension consultants to
recommend certain mutual funds to a 401(k) plan sponsor and create
conflicts of interest that are not adequately disclosed to plan
sponsors. Plan sponsors may not be aware of these arrangements and thus
could select mutual funds recommended by the pension consultant over
lower-cost alternatives. As a result, participants may have more
limited investment options and may pay higher fees for these options
than they otherwise would.
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. For
example, a mutual fund normally provides record-keeping services for
its retail investors, i.e., those who invest outside of a 401(k) plan.
The same mutual fund, when associated with a plan, might compensate the
plan's record keeper for performing the services that it would
otherwise perform, such as maintaining individual participants' account
records and consolidating their requests to buy or sell
shares.[Footnote 28]
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. Labor's position is that plan
sponsors must know about these fees in order to fulfill their fiduciary
responsibilities. However, if the plan sponsors do not know that a
third party is receiving these fees, they cannot monitor them, evaluate
the worthiness of the compensation in view of services rendered, and
take action as needed.
Labor Has New Initiatives to Improve Information on Fees:
Labor officials told us about three initiatives currently underway to
improve the disclosure of fee information by plan sponsors to
participants and to avoid conflicts of interest. For one initiative,
Labor is considering the development of a proposed 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 define the critical information on fees that plan
sponsors should disclose to participants and the best way to do so.
They are deliberating on what fee information should be provided to
participants and in what format to enable participants to easily
compare the fees across the plan's various investment options.
The second initiative proposes changes to the Form 5500 Schedule A and
instructions to improve the disclosure of insurance fees and
commissions and identify insurers who fail to supply information to
plan sponsors. According to a 2004 ERISA Advisory Council
Report,[Footnote 29] many employers have difficulty obtaining timely
Schedule A information from insurers. Labor proposes to add a checkbox
to the form to permit plan sponsors to identify situations in which the
insurance company has failed to provide Schedule A information. The
form would also have space to indicate the type of information that was
not provided. Because plan sponsors must submit a separate Schedule A
for each insurance contract, Labor would be able to identify which
insurance companies are failing to satisfy their disclosure obligations
under ERISA and its regulations.[Footnote 30]
The second initiative also proposes changes requiring plan sponsors to
report additional information on fees on Schedule C of Form 5500.
Consistent with recommendations made by the ERISA Advisory Council
Working Groups and GAO, Labor issued a proposed rule on July 21, 2006,
to revise the Schedule C and accompanying instructions to clarify that
the plan sponsor must report any direct and indirect compensation
(i.e., money or anything else of value) it pays to a service provider
during the plan year. Also, a new section would be added requiring that
the source and nature of compensation in excess of $1,000 received from
parties other than the plan or the plan sponsor, such as record-
keepers, be disclosed for certain key service providers, including,
among others, investment managers, consultants, brokers, and trustees
as well as all other fiduciaries. Labor officials told us that the
revision aims to improve the information plan sponsors receive from
service providers. The officials acknowledge, however, that this
requirement may be difficult for plan sponsors to fulfill without an
explicit requirement in ERISA for service providers to give plan
sponsors information on the fees they pay to other providers.
The third initiative involves amending Labor's regulations under
section 408(b)(2) of ERISA to define the information plan sponsors need
in deciding whether to select or retain a service provider. According
to Labor, plan sponsors need information to assess the reasonableness
of the fees being paid by the plan for services rendered and to assess
potential conflicts of interest that might affect the objectivity with
which the service provider provides its services to the plan. The
proposed change to the regulation is intended to make clear what plan
sponsors need to know and, accordingly, what service providers need to
provide to plan sponsors.
In addition to these three initiatives, Labor has a model fee
disclosure worksheet available on its Web site. The worksheet was
developed to help plan sponsors analyze and compare fees during their
negotiations with service providers. Labor worked with several industry
groups to develop this worksheet as a result of the problems it
identified during its 1997 investigations on 401(k) fees. Labor
officials told us that this worksheet or a similar tool could be used
to facilitate plan sponsors attainment and analysis of fee information
and that plan service providers could also use the worksheet to
disclose their fee arrangements when soliciting potential clients.
Conclusions:
As American workers take increasing responsibility for the adequacy of
their retirement savings through 401(k) plans, they need to be more
aware of the fees that they pay. ERISA does not explicitly require plan
sponsors to disclose comprehensive information on fees to participants,
yet even small fees can significantly affect retirement savings over
the course of a career. Information about investment options'
historical performance is useful, but alone does not provide
participants with enough information for making informed investment
decisions. Giving participants key information on fees for each of the
plan's investment options in a simple format--including fees,
historical performance, and risk--will help participants make informed
investment decisions within their 401(k) plan. In choosing between
investment options with similar performance and risk profiles but
different fee structures, the additional provision of expense ratio
data may help participants build their retirement savings over time by
avoiding investments with relatively high fees.
Amending ERISA and updating regulations to better reflect the impact of
fees and undisclosed business arrangements among service providers will
help Labor provide more effective oversight of 401(k) plan fees.
Without such changes, Labor will continue to lack comprehensive
information on all fees being charged directly or indirectly to 401(k)
plans. In addition, some conflicts of interest that affect the fees
that participants pay may continue to go unnoticed because service
providers are not required to inform plan sponsors of the compensation
they receive from other service providers. As a result, Labor may not
be able to identify instances in which service providers might be
steering plan sponsors to overpriced investment options or services
that are not in the best interest of plan participants. Further,
requiring plan sponsors to report more complete information to Labor on
fees--those paid out of plan assets or 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.
Matters for Congressional Consideration:
To ensure that participants have a tool to make informed comparisons
and decisions among plan investment options, Congress should consider
amending ERISA to require all sponsors of participant-directed plans to
disclose fee information of 401(k) investment options to participants
in a way that facilitates comparison among the options. This
information could be provided via expense ratios and be communicated
annually in a single document alongside other key information about the
investment options such as historical performance and risk. Providing
such a disclosure to participants who are responsible for directing
their 401(k) investments would ensure that they have another important
tool to make informed comparisons and investment decisions among the
plan's options.
To allow plan sponsors, and ultimately Labor, to provide better
oversight of fees and certain business arrangements among service
providers, Congress should consider amending ERISA to explicitly
require that 401(k) service providers disclose to plan sponsors the
compensation that providers receive from other service providers.
Recommendation for Executive Action:
To better enable the agency to effectively oversee 401(k) plan fees,
the Secretary of Labor should require plan sponsors to report 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.
Agency Comments:
We provided a draft of this report to Labor and SEC. Labor provided
written comments, which appear in appendix II. Labor's comments
generally agree with the findings and conclusions of our report.
Specifically, Labor stated that it will give careful consideration to
GAO's recommendation that plans be required to provide a summary of all
fees that are paid out of plan assets or by participants. Labor and SEC
also provided technical comments on the draft, which we incorporated as
appropriate.
Labor described a number of details related to its ongoing regulatory
initiatives and outreach activities, many of which we also cited in the
section of our report on Labor's authority and oversight. In its
written comments, Labor also suggested an additional technical change
on legal fees for plan design, which we have made to the final report.
Unless you publicly announce its contents earlier, we plan no further
distribution until 30 days after the date of this report. At that time,
we will send copies of this report to the Secretary of Labor, the
Chairman of the SEC; appropriate congressional committees; and other
interested parties. In addition, the report will be available at no
charge on GAO's Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me 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 report. GAO staff who have made major
contributions to this report are listed in appendix III.
Sincerely,
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
To identify the major fees associated with 401(k) plans and how they
are charged to plan sponsors and plan participants, we interviewed
officials from Labor, the Federal Deposit Insurance Corporation (FDIC),
the Federal Reserve Board (FRB), the Securities and Exchange Commission
(SEC), and the Treasury Department's Office of the Comptroller of the
Currency (OCC); met with service providers and other industry
professionals; and collected information about the range of fees and
how they are charged to plan sponsors and participants. We also
reviewed several major 2005 industry surveys of 401(k) sponsors
including surveys by HR Investment Consultants, the Profit Sharing and
401(k) Council of America (PSCA), and Hewitt Associates. Since the
survey response rates are low, the data may not be generalizable. To
assess reliability of the survey data, we contacted the authors of each
survey and collected information on the methodology that was used to
complete it.
* The results of HR Investment Consultants' survey are based on
responses from 125 vendors that service 401(k) plans. This response
represents about 85 percent of the assets invested in 401(k) plans.
Company officials said they survey vendors because they are generally
more knowledgeable than employers about plan fees. The survey was e-
mailed to respondents as an attachment in 2004 and the results were
updated in 2005. The authors were not able to provide a response rate,
but said the survey was completed by most respondents. HR Investment
Consultants provides a range of services to employers offering
participant-directed retirement plans.
* PSCA's survey results are based on responses from 1,106 plan sponsors
that have profit-sharing plans, 401(k) plans, or a combination of both
and represent 1 to 5,000-plus employees. The survey was mailed or faxed
to respondents and conducted from March 2006 to May 2006. The survey
provides a snapshot as of the end of 2005. The survey response rate was
21 percent. PSCA officials were able to provide us with data that
excluded profit-sharing plans only. PSCA is a national, nonprofit
association of 1,200 companies and their 6 million plan participants.
According to PSCA, it represents the interests of its members to
federal policy makers and offers assistance with profit sharing and
401(k) plan design, administration, investment, compliance, and
communication.
* Hewitt Associates' survey results are based on responses from 458
employers with 1,000 employees or more. Nineteen percent of the
respondents represented Fortune 500 companies. The survey was conducted
from mid-March through April 2005. The survey and a link to a Web site
were e-mailed to respondents whose email addresses were available so
they could complete the survey on the Web or on paper. The other
surveys were mailed with a stamped and addressed enveloped. The survey
had a 9 percent response rate. Hewitt Associates is a human resource
outsourcing and consulting firm.
To assess how fees are disclosed to plan participants, we reviewed
relevant laws and regulations, spoke with agency and industry
officials, and reviewed sample disclosure documents. To understand
requirements to disclose information about fees to participants, we
reviewed ERISA and relevant regulation sections such as 404(c) and
spoke with agency officials described above.
To identify the content and frequency of fee-related disclosures
typically made to 401(k) plan participants, we spoke with plan
practitioners and reviewed documents including sample disclosure
documents. Specifically, we interviewed an array of service providers
that serve plans of varying sizes including members of the American
Bankers Association, American Benefits Council, American Council of
Life Insurers, American Society of Pension Professionals & Actuaries,
Securities Industry Association, Society of Professional Administrators
and Record Keepers, as well as several plan consultants. We also
interviewed officials from three plan sponsors. However, because we
could not readily obtain a representative sample of service providers
or plan sponsors, the information obtained does not represent the views
of all service providers or plan sponsors. In addition, we reviewed a
limited number of sample disclosure documents made to participants.
Because the documents do not reflect a representative sample, we
supplemented the information with Labor documents, including those from
the 2004 ERISA Advisory Council's Working Group on Fee and Related
Disclosures to Participants, to determine the type of disclosures
typically made to participants.
To understand participants' awareness of fees and related disclosures,
we spoke with the American Association of Retired Persons (AARP) in
addition to the agency and other industry professionals listed above.
We also reviewed AARP's nationwide survey of plan participants
regarding plan fees and assessed its methodology. The survey reached
plan participants aged 25 or older during November and December 2003.
The total sample of over 1,200 respondents was stratified by age and
geographic region and then weighted by age, region, and gender to
create a representative sample of the total population.
To assess Labor's role in overseeing plan fees and certain types of
business arrangements, we reviewed Labor's and other agencies' legal
and regulatory authority and Labor's procedures for assuring that plans
meet overall legal requirements. We reviewed the information required
to be reported on the Form 5500, and several reports produced by
federal agencies, trade associations, participant groups, and industry
experts, regarding retirement plan fees and business arrangements among
service providers. In addition to interviewing Labor officials in the
national office about the their enforcement and outreach efforts, we
also interviewed officials from Labor's regional offices located in
Atlanta, Georgia; Philadelphia, Pennsylvania; San Francisco,
California; and Chicago, Illinois about their ongoing enforcement
projects related to fees. We spoke with officials from the four offices
about their specific projects, the reasons for their initiation, and
the findings to date. Finally, we inquired about Labor's past
initiative specific to 401(k) fees and reviewed Labor's current
initiatives related to 401(k) plans.
[End of section]
Appendix II: Comments from the Department of Labor:
U.S. Department of Labor Assistant Secretary for Employee Benefits
Security Administration:
Washington, D.C. 20210:
November 1, 2006:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Bovbjerg:
Thank you for providing the Department of Labor (Department) the
opportunity to offer remarks concerning the Government Accountability
Office's (GAO) draft report entitled "Private Pensions: Changes Needed
to Provide 401(k) Plan Participants and the Department of Labor Better
Information on Fees" (GAO-07-21). This letter provides the Department's
response to the recommendations contained in the draft report.
The GAO report concluded that as "American workers take increasing
responsibility for the adequacy of their retirement savings through 401
(k) plans, they need to be more aware of the fees that they pay." To
ensure that participants have the necessary information and tools to
make informed decisions concerning the investment options available in
their 401(k) plans, GAO recommends that action be taken by Congress and
by the Department. Specifically, the report suggests that Congress
consider amending the Employee Retirement Income Security Act of 1974
(ERISA) "to require all sponsors of participant-directed plans to
disclose fee information of 401(k) investment options to participants
in a way that facilitates comparison among the options[,]" for example,
by providing expense ratios annually in a single document. The report
also requests that Congress consider amending ERISA "to explicitly
require 401(k) service providers to disclose to plan sponsors the
compensation they receive from other service providers."
In addition to these recommendations to Congress, the GAO report
recommends that the Secretary of Labor "require plan sponsors to report
a summary of all fees that are paid out of plan assets or directly by
participants." The GAO believes that this reporting requirement will
better enable the Department to oversee 401(k) plan fees.
As recognized in your report, the Department currently is pursuing a
variety of regulatory initiatives focused on improving the transparency
of fee and expense information at both the plan fiduciary and the
participant level. As discussed below, two of these initiatives focus
on the information that should be disclosed to plan sponsors and
fiduciaries. The other initiative involves a review of the information
required to be disclosed to employees in participant- directed
individual account plans.
With regard to the disclosure of fee-related information to plan
sponsors and fiduciaries, the Department is considering an amendment to
its regulation under section 408(b)(2) of ERISA.[Footnote 31] The
amendment would help ensure that, at the time of selection or renewal
of a service provider, plan fiduciaries have sufficient information
concerning the compensation to be paid to the service provider and the
revenue sharing arrangements of the service provider to be able to
assess both the reasonableness of the compensation being paid by the
plan for the specific services and potential conflicts of interest that
may exist on the part of the service provider. The Department believes
that this information will assist a plan fiduciary in discharging his
or her responsibilities consistent with ERISA.
In addition to taking steps to ensure that plan fiduciaries obtain the
information that they need when entering into or renewing service
arrangements, the Department is considering revisions to the Form 5500
Annual Report that will complement the information obtained by plan
fiduciaries as part of the service provider selection or renewal
process. In this regard, the Department published, for public comment,
a number of changes to the Form 5500, including changes that would
expand the information required to be reported on the Schedule C
(Service Provider Information)[Footnote 32] Among other things, the
proposed changes to the Schedule C are intended to assist plan
officials in assessing the reasonableness of compensation paid for
services and potential conflicts of interest that might affect those
services. The Department currently is in the process of reviewing
public comments on the proposed Schedule C and other changes to the
Form 5500.
The Department also is reviewing what regulatory steps might be taken
to improve the disclosure of plan fee and expense information to plan
participants and beneficiaries in the context of participant-directed
individual account plans. As noted in your report, plan and investment-
related expenses are often charged against the account of the
individual participant. Accordingly, understanding what and how
expenses affect participant accounts and retirement savings is of
critical importance to plan participants and beneficiaries. This
initiative is intended to explore what steps might be taken to ensure
that participants have the information they need to make informed
decisions about their plan and available investment options, without
imposing undue compliance costs, given that any such costs are likely
to be charged against the individual accounts of participants and
affect their retirement savings. As part of this review, the Department
will give careful consideration to GAO's recommendation that plans be
required to provide a summary of all fees that are paid out of plan
assets or directly by participants.
As also recognized in your report, the Department has long been
committed to assisting plan sponsors, plan fiduciaries, and plan
participants and beneficiaries in understanding the importance of plan
fees and expenses and the effect of those fees and expenses on
retirement savings. The Department has developed, and currently makes
available on its website, a variety of educational materials
specifically designed to help plan sponsors, fiduciaries, participants,
and others understand the complexities of the various fee and
compensation arrangements involved in today's pension benefit plan
programs and, in particular, 401(k) plans. The Department's brochure
entitled "A Look at 401(k) Plan Fees for Employees" is targeted to
participants and beneficiaries of 401(k) plans that are responsible for
directing their own investments. For employers and other plan
fiduciaries, the Department provides the following materials:
"Understanding Retirement Plan Fees and Expenses," "Tips for Selecting
and Monitoring Service Providers for Your Employee Benefit Plan," and
"Selecting and Monitoring Pension Consultants - Tips for Plan
Fiduciaries." In addition to these various publications, the Department
currently is conducting a series of educational programs, relating to
both pension and health plans, intended to educate plan sponsors and
fiduciaries about their obligations and duties under the law. A
critical component of these programs is providing an understanding of
the importance of selecting service providers for the plan and the role
of fee and compensation considerations in that selection process. In
this regard, the Department has conducted 17 fiduciary education
programs, entitled Getting it Right -Understanding Your Fiduciary
Responsibilities, in different cities throughout the United States.
Similarly, the Department has conducted more than 40 health benefits
education seminars, covering nearly every state, that also focus on the
fiduciary considerations attendant to the selection of service
providers. The Department will continue providing seminars in
additional locations under each Program.
The Department also has provided guidance regarding certain fees that
may not be charged in any amount to plans. In an advisory opinion and a
Field Assistance Bulletin (AO 2001-01A and FAB 2002-02), the Department
has distinguished "settlor" activities, which relate to the
establishment, design, and termination of plans, from plan management
activities, which are fiduciary or administrative in nature. The
Department maintains that the plan sponsor, rather than the plan,
should bear the cost of settlor functions. In this regard, we note that
on page 12 of the draft report, the reference to legal fees being
charged to help with plan design should be deleted.
In addition to its outreach programs, the Department provides a model
form on its website that is specifically designed to assist plan
fiduciaries and service providers in exchanging complete disclosures
concerning the costs involved in service arrangements. This "401(k)
Plan Fee Disclosure Form" is the product of a coordinated effort of the
American Bankers Association, Investment Company Institute, and the
American Council of Life Insurers. The Department, in connection with
the regulatory initiatives described above, is exploring possible
improvements to this tool, as well as other resources that may be
useful for plan fiduciaries, participants and beneficiaries, and
service providers in this context.
We appreciate having had the opportunity to review and comment on this
draft report. Please do not hesitate to contact us if you have
questions concerning this response or if we can be of further
assistance.
Sincerely,
Signed by:
Bradford P. Campbell:
Acting Assistant Secretary:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barbara D. Bovbjerg (202) 512-7215 or bovbjergb@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Tamara Cross, Assistant
Director, Daniel Alspaugh, Monika Gomez, Joel Green, Susan Pachikara,
Dayna Shah, Roger Thomas, Rachael Valliere, and Walter Vance made
important contributions to this report.
FOOTNOTES
[1] For 2005 estimates, see Sarah Holden and Jack VanDerhei, "401(k)
Plan Asset Allocation, Account Balances, and Loan Activity in 2005,"
Research Perspective, vol. 12, no. 1, (2006).
[2] 29 U.S.C. §§ 1001-1461.
[3] 26 U.S.C. § 401(k) sets out requirements for plans to qualify for
tax-deferred treatment. Roth contributions to 401(k) plans were created
under the Economic Growth and Tax Relief Reconciliation Act of 2001
effective for plan years beginning on or after January 1, 2006. This
new account type was subsequently made permanent under the Pension
Protection Act of 2006. Designated Roth contributions are a new type of
contribution that can be accepted by new or existing 401(k) plans. If a
plan adopts this feature, employees can designate some or all of their
elective contributions as Roth contributions (which are included in
gross income) rather than pre-tax elective contributions.
[4] A collective investment fund is a trust managed by a bank or trust
company that pools investments of retirement plans or other large
institutional investors.
[5] The stable value funds typically offered as 401(k) investment
options by insurance companies and banks generally provide a guaranteed
rate of return over a specific period of time, such as 3 to 5 years.
[6] Balanced funds are pooled accounts invested in both stocks and
bonds.
[7] Any person who makes investment decisions with respect to a
qualified employee benefit plan's assets is generally a fiduciary. The
duties the person performs for the plan rather than their title or
office determines whether that person is a plan fiduciary. 29 U.S.C. §
1002(21)(A).
[8] IRS also oversees various aspects of 401(k) contributions under the
authority of the Internal Revenue Code.
[9] 15 U.S.C. § 78a. Generally, public offerings and the sale of
securities must be registered with the SEC.
[10] The variable annuity contract "wraps" around investment options,
often a number of mutual funds. Participants select from among the
investment options offered, and the returns to their individual
accounts vary with their choice of investments. If registered
securities make up the underlying investments, they are regulated by
the SEC.
[11] Fees related to marketing and compensating brokers to sell the
fund are known as 12b-1, or distribution fees, and are limited by the
National Association of Securities Dealers, Inc. (NASD) to a maximum of
1 percentage point of the total expense ratio per year.
[12] Mutual funds that use brokers to sell shares may also impose a
sales fee or "load" when a fund is bought, transferred, or sold to
compensate the broker. SEC does not limit the size of the sales load a
fund may charge, but the NASD does not permit exceeding 8.5 percent of
the purchase price. A "front-end load," is incurred when a mutual fund
is purchased and reduces the amount available to purchase fund shares.
A "back-end load" is a fee that is charged when a mutual fund is sold
or transferred. Back-end loads generally decrease over time in steps
until they are eventually eliminated.
[13] ERISA Section 404(c) generally provides relief for plan
fiduciaries of certain individual account plans, such as 401(k) plans,
from liability for the results of investment decisions made by plan
participants and beneficiaries, under conditions specified in 29 C.F.R.
§ 2550.404c-1.
[14] The actual percentage of plans that qualify under 404(c) is
unclear because the information is self-reported.
[15] AARP Public Policy Institute, "Pension Participant Knowledge About
Plan Fees," Data Digest (November 2004).
[16] Mutual funds provide prospectuses. Other investment options, such
as company stock, may not provide prospectuses.
[17] 29 U.S.C. § 1023.
[18] In addition to Schedule A and C, Labor also uses Schedules H and I
to identify fee issues.
[19] Since fiscal year 2004, Labor has closed about 35 additional
investigations each year that were referred from federal and state
agencies. These referrals involved some sort of fiduciary breach and
may have involved 401(k) plans.
[20] Labor also selected 10 403(b) plans, which are similar to 401(k)
plans but offered only to employees of public schools and certain
nonprofit organizations.
[21] The goal of the bank trust department investigations project is to
identify and investigate plans sponsored by banking institutions with a
potential for fiduciary breaches and self dealing. Investigations in
the settlor fee project examine the extent to which plans pay certain
expenses that improperly confer a benefit on the plan sponsor. In some
instances, the fees on their face may appear to be reasonable expenses,
but should have been paid by the plan sponsor, rather than the plan.
The main objective of the intermediary investment fees and practices
project is to identify and correct violations stemming from abuses in
fee arrangements, including hidden fees, excessive fees, and 12b-1
fees.
[22] Labor's fiduciary education program is intended to provide
employers and plan officials with an understanding of the law and their
responsibilities and focuses on steps for avoiding the most common
problems Labor encounters in its enforcement activities. Labor's
educational seminars help plan sponsors understand rules and meet their
responsibilities to plan participants. Seminars are also targeted to
small businesses that are considering starting a pension plan.
[23] For this and other publications related to 401(k) fees, see
www.dol.gov/ebsa.
[24] For investors outside of a 401(k) plan, the SEC requires the
mutual fund to provide the prospectus directly to participants.
However, in a 401(k) plan, the SEC requires the mutual fund to provide
the prospectus to the plan sponsor. Sponsors of 404(c) plans are
required to provide participants with a prospectus only upon request.
[25] Mutual fund prospectuses are filed with the SEC and are available
to the public from SEC's Electronic Data Gathering, Analysis, and
Retrieval system. The filings are not exclusive to those mutual funds
offered as part of a 401(k) plan. Plan sponsors are not required to
include prospectus fee disclosures with their Form 5500 filings.
Further, it is not an agency practice for SEC to provide prospectus
information to Labor, nor would such a practice benefit Labor unless
the information was then consolidated with the corresponding Form 5500
filings for plans that offered the mutual fund.
[26] Further, under generally accepted accounting principles, the fees
paid for mutual fund services are combined with a fund's gains and
losses and reflected only, and indirectly, in the income section in a
plan's Statement of Income and Expenses.
[27] Office of Compliance Inspections and Examinations, Staff Report
Concerning Examinations of Select Pension Consultants (U.S. Securities
and Exchange Commission: May 16, 2005).
[28] These fees are known as subtransfer agent fees.
[29] Final Report of the 2004 ERISA Advisory Council Working Group,
Health and Welfare Form 5500 Requirements (Nov. 10, 2004).
[30] 29 U.S.C. § 1023(a)(2).
[31] Section 408(b)(2) provides a statutory exemption from ERISA's
prohibited transaction rules for qualifying service contracts or
arrangements between plans and service providers, which are "parties in
interest" to plans under ERISA.
[32] See 71 Fed. Reg. 41616 (July 21, 2006).
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