Private Pensions
Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors Gao ID: GAO-08-774 July 16, 2008American workers increasingly rely on 401(k) plans for their retirement security, and sponsors of 401(k) plans--typically employers--have critical obligations under the Employee Retirement Income Security Act of 1974 (ERISA). When acting as fiduciaries, they must act prudently and solely in the interest of plan participants and beneficiaries. The Department of Labor (Labor) is responsible for protecting private pension plan participants and beneficiaries by enforcing ERISA. GAO examined: (1) common 401(k) plan features, which typically have important fiduciary implications, and factors affecting these decisions; (2) challenges sponsors face in fulfilling their fiduciary obligations when overseeing plan operations; and (3) actions Labor takes to ensure that sponsors fulfill their fiduciary obligations, and the progress Labor has made on its regulatory initiatives. To address these objectives, GAO administered a survey asking sponsors how they select plan features and oversee operations, reviewed industry research, conducted interviews, and reviewed related documents.
Plan sponsors commonly select certain noninvestment and investment features, and their decisions about which investment features to select generally have important fiduciary implications. According to industry research, most 401(k) plans offer a number of common features, such as employer contributions and loans for employees. Some of these decisions seldom involve fiduciary obligations set by ERISA because they are mainly business decisions related to establishing the plan. However, a sponsor's decisions about investment features, like the menu of investment options, entail important fiduciary obligations under ERISA. ERISA and its regulations stipulate certain requirements for these investment decisions, like offering diversified funds and prudently selecting and monitoring investment options. Various other factors also affect a sponsor's menu decisions, including the size of the plan and the role of external advisers and other providers. Plan sponsors face challenges in fulfilling their obligations when fiduciary roles are not clearly defined or when sponsors lack important information about arrangements between service providers. Fiduciary roles that are not clearly defined can lead to gaps in plan oversight. For example, several industry professionals noted situations when sponsors assumed they had delegated fiduciary investment advice for the selection and monitoring of investment funds to a service provider, but the service provider did not acknowledge that fiduciary role. Sponsors also have fiduciary obligations when selecting and monitoring one or more service providers. To fulfill these obligations, Labor's guidance indicates that sponsors should obtain information about service providers' compensation arrangements and potential conflicts of interest that could affect the service provider's performance. Labor and various industry practitioners have proposed new ways to improve fiduciary oversight that may address some of the challenges of unclear fiduciary roles and providers' arrangements. Labor takes various actions to monitor sponsors' fiduciary oversight of 401(k) plans and has made some progress on its regulatory initiatives. Labor's actions include investigating reports of questionable 401(k) plan practices, collecting information from plan sponsors, and conducting outreach to educate plan sponsors about their responsibilities. Labor is also proceeding with several initiatives to improve disclosures to participants, plan sponsors, government agencies and the public. For example, Labor recently published a proposed rule on the information that service providers must disclose to plan sponsors but is trying to resolve several questions before issuing a final rule. In addition, certain matters that GAO has asked Congress to consider would help Labor in its efforts to improve sponsors' fiduciary oversight. We previously suggested that Congress amend ERISA to (1) explicitly require 401(k) service providers to disclose to plan sponsors the compensation they receive from other service providers and (2) give Labor authority to recover plan losses against certain types of service providers even if they are not currently considered fiduciaries under ERISA.
GAO-08-774, Private Pensions: Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors
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Report to the Chairman, Committee on Education and Labor, House of
Representatives:
United States Government Accountability Office:
GAO:
July 2008:
Private Pensions:
Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan
Sponsors:
GAO-08-774:
GAO Highlights:
Highlights of GAO-08-774, a report to the Chairman, Committee on
Education and Labor, House of Representatives.
Why GAO Did This Study:
American workers increasingly rely on 401(k) plans for their retirement
security, and sponsors of 401(k) plans”typically employers”have
critical obligations under the Employee Retirement Income Security Act
of 1974 (ERISA). When acting as fiduciaries, they must act prudently
and solely in the interest of plan participants and beneficiaries. The
Department of Labor (Labor) is responsible for protecting private
pension plan participants and beneficiaries by enforcing ERISA. GAO
examined: (1) common 401(k) plan features, which typically have
important fiduciary implications, and factors affecting these
decisions; (2) challenges sponsors face in fulfilling their fiduciary
obligations when overseeing plan operations; and (3) actions Labor
takes to ensure that sponsors fulfill their fiduciary obligations, and
the progress Labor has made on its regulatory initiatives. To address
these objectives, GAO administered a survey asking sponsors how they
select plan features and oversee operations, reviewed industry
research, conducted interviews, and reviewed related documents.
What GAO Found:
Plan sponsors commonly select certain noninvestment and investment
features, and their decisions about which investment features to select
generally have important fiduciary implications. According to industry
research, most 401(k) plans offer a number of common features, such as
employer contributions and loans for employees. Some of these decisions
seldom involve fiduciary obligations set by ERISA because they are
mainly business decisions related to establishing the plan. However, a
sponsor‘s decisions about investment features, like the menu of
investment options, entail important fiduciary obligations under ERISA.
ERISA and its regulations stipulate certain requirements for these
investment decisions, like offering diversified funds and prudently
selecting and monitoring investment options. Various other factors also
affect a sponsor‘s menu decisions, including the size of the plan and
the role of external advisers and other providers.
Plan sponsors face challenges in fulfilling their obligations when
fiduciary roles are not clearly defined or when sponsors lack important
information about arrangements between service providers. Fiduciary
roles that are not clearly defined can lead to gaps in plan oversight.
For example, several industry professionals noted situations when
sponsors assumed they had delegated fiduciary investment advice for the
selection and monitoring of investment funds to a service provider, but
the service provider did not acknowledge that fiduciary role. Sponsors
also have fiduciary obligations when selecting and monitoring one or
more service providers. To fulfill these obligations, Labor‘s guidance
indicates that sponsors should obtain information about service
providers‘ compensation arrangements and potential conflicts of
interest that could affect the service provider‘s performance. Labor
and various industry practitioners have proposed new ways to improve
fiduciary oversight that may address some of the challenges of unclear
fiduciary roles and providers‘ arrangements.
Labor takes various actions to monitor sponsors‘ fiduciary oversight of
401(k) plans and has made some progress on its regulatory initiatives.
Labor‘s actions include investigating reports of questionable 401(k)
plan practices, collecting information from plan sponsors, and
conducting outreach to educate plan sponsors about their
responsibilities. Labor is also proceeding with several initiatives to
improve disclosures to participants, plan sponsors, government agencies
and the public. For example, Labor recently published a proposed rule
on the information that service providers must disclose to plan
sponsors but is trying to resolve several questions before issuing a
final rule. In addition, certain matters that GAO has asked Congress to
consider would help Labor in its efforts to improve sponsors‘ fiduciary
oversight. We previously suggested that Congress amend ERISA to (1)
explicitly require 401(k) service providers to disclose to plan
sponsors the compensation they receive from other service providers and
(2) give Labor authority to recover plan losses against certain types
of service providers even if they are not currently considered
fiduciaries under ERISA.
What GAO Recommends:
GAO is not making any additional recommendations in this report, but
GAO has previously suggested that Congress consider changes to ERISA
addressing fiduciary roles.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-774]. To view the
survey results, click on [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-08-870SP]. For more information, contact Barbara
Bovbjerg at (202) 512-7215 or bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Sponsors Determine a Number of Common Plan Features, and Their
Decisions about Investment Features Have Important Fiduciary
Implications:
Plan Sponsors Can Face Challenges in Fulfilling Their Fiduciary
Obligations When Business Arrangements Are Unclear or Undisclosed:
Labor Monitors Sponsors' Operation of 401(k) Plans and Has Made
Progress on Recent Regulatory Initiatives:
Concluding Observations:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Investment Funds Available for Participant Contributions,
Expressed as a Percentage of Respondents:
Table 2: Summary of Labor's Disclosure Initiatives:
Figures:
Figure 1: Services That 401(k) Plan Sponsors May Hire Various Outside
Companies to Provide:
Figure 2: Flow of Bundled and Unbundled Plan Services:
Figure 3: Differences in Fiduciary Role and Possible Fee and Service
Arrangements Using an Investment Adviser versus a Broker:
Abbreviations:
CAP: Consultant/Adviser Project:
EBSA: Employee Benefits Security Administration:
ERISA: Employee Retirement Income Security Act of 1974:
IPS: investment policy statement:
Labor: Department of Labor:
OPA: Office of Participant Assistance:
Plansponsor: Plansponsor Magazine:
PSCA: Profit Sharing/401(k) Council of America:
RFI: request for information:
RIA: Registered Investment Adviser:
VFCP: Voluntary Fiduciary Correction Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 16, 2008:
The Honorable George Miller:
Chairman:
Committee on Education and Labor:
House of Representatives:
Dear Mr. Chairman:
Over the past two decades, American workers have become increasingly
reliant on 401(k) plans for their retirement security. These employer-
sponsored pension plans typically allow workers to divert a portion of
their pretax income, often with employer contributions, into an
investment account that can grow tax free until withdrawn in
retirement. According to the Department of Labor (Labor), in 2005,
there were about 436,000 401(k) plans that held about $2.4 trillion in
assets for the retirement savings of more than 54 million plan
participants--more than any other type of employer-sponsored pension
plan in the United States. To administer these plans, the sponsor--
typically the employer offering the 401(k) plan--selects plan features
and other characteristics, including the types of investment options
offered to participants, and monitors the performance of one or more
service providers, such as investment advisers and record keepers. The
Employee Retirement Income Security Act of 1974 (ERISA) imposes
significant fiduciary obligations on plan sponsors and other plan
fiduciaries, requiring them to act prudently and in the interests of
the plan's participants and beneficiaries.[Footnote 1] Labor is
responsible for ensuring that plan sponsors and other plan fiduciaries
fulfill these obligations.
In two recent reports, we asked Congress to consider amending ERISA to
expand Labor's statutory authority over plan service providers and help
ensure that sponsors are properly overseeing plan services.[Footnote 2]
While Congress continues to consider new legislation, Labor has also
tried to address some of these underlying issues through regulatory
initiatives. As Congress considers changes to the law that governs how
these plans are designed, managed, and overseen, GAO was asked to
identify the following:
* common 401(k) plan features, those that typically have important
fiduciary implications, and what factors affect these decisions;
* challenges sponsors face in fulfilling their fiduciary obligations
when overseeing plan operations; and:
* actions Labor takes to ensure that sponsors fulfill their fiduciary
obligations, and the progress Labor has made on its regulatory
initiatives.
To determine common plan features and which decisions typically have
fiduciary implications and related factors, and the challenges sponsors
face in fulfilling their fiduciary obligations, we collected and
analyzed the results of published industry research. We also collected
information on sponsor practices from a range of plan sponsors, service
providers, industry associations, and other industry professionals--
including fiduciary advisers--through interviews and reviews of
documents, such as materials on fiduciary obligations given by service
providers to sponsors. In addition, we administered a survey in
coordination with Plansponsor Magazine (Plansponsor) asking sponsors
how they select plan features and oversee plan operations. The survey
and a more complete tabulation of the results can be viewed at
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-870SP]. The survey
respondents were members of Plansponsor's subscription list, and their
responses cannot be considered representative of the overall population
of 401(k) plan sponsors. We received a total of 448 completed survey
responses after distributing the survey to a population of about
22,000. Because of the methodological limitations of this survey,
information from this survey is anecdotal and represents only the views
of the 448 survey respondents. To determine the actions that Labor
takes to ensure that sponsors fulfill their fiduciary obligations, we
interviewed Labor officials and reviewed Labor's legal and regulatory
authority and its procedures for assuring that plans are meeting the
overall requirements. See appendix I for more details regarding our
scope and methodology. We conducted our review from January 2007
through June 2008 in accordance with generally accepted government
auditing standards.
Results in Brief:
Plan sponsors determine a number of common noninvestment plan features,
but they also make decisions about investment features with important
fiduciary implications. Industry research indicates that most 401(k)
plans offer a number of common features, including an employer
contribution, a loan program, eligibility of employees, and vesting of
benefits. Some selections are primarily business decisions, similar to
whether or not to establish the plan, that seldom involve fiduciary
obligations. About one-half of sponsors responding to our survey said
that a committee of the sponsor and about one-half said that employer
management was the primary decision maker on various noninvestment
features, but this information cannot be considered representative of
all 401(k) plan sponsors.[Footnote 3] However, when a sponsor makes
decisions about investment features--like selecting the menu of
investment options--it acts as a fiduciary and is subject to fiduciary
obligations under ERISA, including the duties to act prudently and
solely in the interest of participants and beneficiaries. In our
survey, most responding sponsors said that a committee of the sponsor
was the primary decision maker for areas like the investment menu or
investment goals. While sponsors that act as a fiduciary for investment
functions must satisfy their fiduciary obligations, they have
considerable latitude in selecting investment options, such as the
number and types of options. Besides ERISA and its regulations, various
other factors affect a sponsor's decision regarding the selection of
the investment menu, including the size of the plan and the role of
external advisers and providers. For example, many sponsors responding
to our survey used a third-party investment adviser.
Plan sponsors face challenges in fulfilling their obligations when
fiduciary roles are not clearly defined or when sponsors lack important
information about arrangements between service providers. Sponsors
often hire outside professionals to manage some or all of a 401(k)
plan's day-to-day operations. Some of these service providers provide
investment advice for a fee, or exercise sufficient control or
discretion over the plan or its assets, thereby becoming fiduciaries
under ERISA. However, fiduciary roles that are not clearly defined
between the sponsor and other plan fiduciaries can lead to gaps in plan
oversight. For example, several industry professionals noted situations
when sponsors assumed they had delegated fiduciary investment advice
for the selection and monitoring of investment funds to a service
provider, but the service provider did not acknowledge that fiduciary
role. Sponsors also have fiduciary obligations when they select and
monitor one or multiple service providers. To fulfill these
obligations, Labor's guidance indicates that sponsors should obtain
information about service providers' compensation arrangements and
potential conflicts of interest that could affect the service
provider's performance. To improve fiduciary oversight in these areas,
Labor has proposed a rule to require pension plan service contracts to
disclose additional information, including the extent to which service
providers will become fiduciaries for the functions they will perform.
[Footnote 4] If finalized, compliance with this rule could eliminate
some of the confusion surrounding the sharing of fiduciary duties
between sponsors and their service providers and help sponsors provide
better oversight of plan services.
Labor takes various actions to monitor sponsors' fiduciary oversight of
401(k) plans and has made some progress on its regulatory initiatives.
Labor investigates reports of questionable 401(k) plan practices,
collects information from plan sponsors, and conducts outreach to
educate plan sponsors about their responsibilities. Labor is also
pursuing several regulatory initiatives to improve disclosures provided
to participants, plan sponsors and fiduciaries, government agencies and
the public. Labor has recently issued proposed regulations to specify
the information that service providers must disclose to plan sponsors.
However, Labor is in the process of resolving several questions before
it can issue final regulations, such as the extent to which providers
within a bundled arrangement--a package of plan services--would be
bound by the disclosure requirements of the regulations. Some of the
matters that GAO has asked Congress to consider, if addressed, would
also help Labor in its efforts to improve sponsors' fiduciary
oversight. For example, we previously suggested that Congress amend
ERISA to explicitly require 401(k) service providers to disclose to
plan sponsors the compensation they receive from other service
providers.[Footnote 5] Furthermore, we found that undisclosed business
arrangements or conflicts of interest may have resulted in financial
harm to some plans.[Footnote 6] Given this risk, we asked that Congress
consider amending ERISA to give Labor greater authority to recover plan
losses against certain types of service providers even if they are not
currently considered fiduciaries under ERISA. These changes would
provide Labor with greater statutory authority over plan service
providers and help ensure that sponsors are properly overseeing plan
services.
Background:
Roughly half of all workers participate in an employer-sponsored
retirement, or pension, plan. Private sector pension plans are
classified as either defined benefit or defined contribution plans.
Defined benefit plans promise to provide, generally, a fixed level of
monthly retirement income that is based on salary, years of service,
and age at retirement, regardless of how the plan's investments
perform. In contrast, benefits from defined contribution plans are
based on the contributions to and the performance of the investments in
individual accounts, which may fluctuate in value. These accounts are
tax-advantaged in that contributions are typically excluded from
current income, and earnings on balances grow tax-deferred until they
are withdrawn.[Footnote 7] One type of defined contribution, or
individual account, plan is the 401(k) plan.
Fiduciary Obligations under ERISA:
In accordance with ERISA and related Labor regulations and guidance,
plan sponsors and other fiduciaries must exercise an appropriate level
of care and diligence given the scope of the plan and act for the
exclusive benefit of plan participants and beneficiaries, rather than
for their own or another party's gain. Responsibilities of fiduciaries
include:
* selecting and monitoring any service providers to the plan;
* reporting plan information to the government and to participants;
* adhering to the plan documents, including any investment policy
statement;
* identifying parties-in-interest to the plan and taking steps to
monitor transactions with them;
* selecting and monitoring investment options the plan will offer and
diversifying plan investments; and:
* ensuring that the services provided to their plan are necessary and
that the cost of those services is reasonable.
ERISA allows plan sponsors to hire companies that will provide services
necessary to operate their 401(k) plan if certain conditions are met.
In general, ERISA prohibits parties-in-interest--such as service
providers, plan fiduciaries, the employer, the union, owners, officers,
and relatives of parties-in-interest--from doing business with the
plan, but provides various exemptions to these prohibited transactions.
[Footnote 8] Some of the exemptions provide for dealings with banks,
insurance companies, and other financial institutions essential to the
ongoing operations of the plan. The Internal Revenue Code sets forth
parallel prohibited transaction provisions with respect to
"disqualified persons," such as service providers, and provides a
parallel conditional exemption for the provision of services. The
exemption requires that: (1) the contract or arrangement must be
reasonable, (2) the services must be necessary to operate the plan, and
(3) the compensation can not exceed what is reasonable for the services
provided.[Footnote 9] Some other prohibited transactions relate solely
to fiduciaries using plan assets in their own interest or acting on
both sides of a transaction involving a plan. Fiduciaries cannot
receive money or any other consideration for their personal account
from any party doing business with the plan related to that business.
In the course of providing services, a service provider may become a
fiduciary by reason of providing investment advice for a fee, or
exercising sufficient control over, or discretion with respect to, the
administration or assets of the plan.[Footnote 10] For example, holding
plan assets in trust to assure that they are used solely to benefit the
participants and their beneficiaries would make the trustee a
fiduciary. An outside professional that provides advice for a fee to
plan sponsors about the selection of funds to be included in the menu
of options made available to participants would also be a fiduciary.
Providers of many other necessary services--such as keeping the record
of participants' individual accounts and providing the investment funds
being made available to plan participants--are typically not
fiduciaries.
The Department of Labor's Role:
Labor's Employee Benefits Security Administration (EBSA) is the primary
agency responsible for protecting private pension plan participants and
beneficiaries from the misuse or theft of their pension assets by
enforcing ERISA, which defines and sets certain standards for employee
benefit plans sponsored by private sector employers. EBSA oversees
401(k) plans because they are considered employee benefit plans under
ERISA. Enacted before the 401(k) provision was added to the Internal
Revenue Code, ERISA establishes the responsibilities of employee
benefit plan decision makers.
EBSA conducts civil and criminal investigations to determine whether
the provisions of ERISA or other federal laws related to employee
benefit plans have been violated. EBSA regularly works in coordination
with other federal and state enforcement agencies, including Labor's
Office of the Inspector General, the Pension Benefit Guaranty
Corporation, the Internal Revenue Service, the Department of Justice
(including the Federal Bureau of Investigation), the Securities and
Exchange Commission, the federal banking agencies, state insurance
commissioners, and state attorneys general.
In addition to its investigations, Benefits Advisors in the field and
in EBSA's Office of Participant Assistance (OPA), help workers get the
information they need to protect their benefit rights and obtain
benefits that have been improperly denied. In fiscal year 2007,
Benefits Advisors recovered over $96 million on behalf of participants
and beneficiaries through informal resolution of participant
complaints. Benefits Advisors also refer cases for investigation. There
were 611 enforcement cases closed in fiscal year 2007 whose original
source was a Benefit Advisor referral. Of these, 451 were 401(k) plan
investigations, including 389 that were closed with monetary results of
over $46 million.[Footnote 11]
EBSA's policy is to resolve 401(k) participant complaints involving
late or unremitted employee contributions at the earliest possible
opportunity. Benefits Advisors are provided with guidance on how to
handle these 401(k) contribution-related complaints. While Benefits
Advisors do not have investigative authority and cannot make formal
demands on employers or plan sponsors, they are authorized to request
that the employer, plan sponsor, or other appropriate third-party
official provide documents or information related to a participant's
complaint on an individual or plan-wide basis. EBSA's Benefits Advisors
may also attempt to resolve the complaints and correct any violations
on a plan-wide basis through informal dispute resolution. If the
complaint involves unremitted or untimely employee contributions,
Benefits Advisors can request information from the plan sponsor and,
after review, advise the plan on the amount of contributions due. In
fiscal year 2007, $5.8 million in pension benefits were restored to
plans by Benefits Advisors as a result of this procedure.
EBSA also has regional initiatives focused on fiduciary oversight.
Several of them have produced results related to 401(k) fiduciary
issues. Even with an initiative focused on settlor fees,[Footnote 12]
one regional office still obtained results related to fiduciary issues
under the project. According to an EBSA official, 401(k) plans have
obtained monetary results related to fiduciary issues in three cases
under the project, totaling more than $8 million.[Footnote 13]
Labor's ERISA Advisory Council, created by ERISA to provide advice to
the U.S. Secretary of Labor, is another resource for Labor. For
example, in 2007, this council formed the Working Group on Fiduciary
Responsibilities and Revenue Sharing Practices to study numerous issues
regarding fiduciary responsibilities arising from the enactment of the
Pension Protection Act of 2006[Footnote 14] and to address issues
relative to the practice of revenue sharing, a now-common practice used
to offset plan expenses with respect to defined contribution 401(k)
plans. The working group's report concluded that there is a role for
Labor to take the lead in formally defining 401(k) terms, such as
"revenue sharing," and that Labor should compile appropriate
terminology in connection with that definition. According to the
report, the provision of concise definitions would be a considerable
step in reducing the confusion about the flows of revenues, fees, and
costs, and could only benefit the plan sponsors, fiduciaries, and
service providers in fulfilling their role to participants.
Plan Services:
Plan sponsors of 401(k) plans often hire various outside companies to
provide a number of services necessary to operate a 401(k) plan. As
shown in figure 1, these services can include investment management
(e.g., selecting and managing the securities included in a bank
collective trust fund); consulting and providing financial advice
(e.g., selecting vendors for investment options or other services);
record keeping (e.g., tracking individual account contributions);
custodial or trustee services for plan assets (e.g., holding the plan
assets in a bank); and telephone or Web-based customer services for
participants.
Figure 1: Services That 401(k) Plan Sponsors May Hire Various Outside
Companies to Provide:
[See PDF for image]
This figure is an illustration depicting services that 401(k) Plan
sponsors may hire various outside companies to provide, as follows:
401(k) plan:
*Financial advice;
* Record keeping;
* Investment management;
* Customer service;
* Plan asset trustee.
Sources: GAO and Art Explosion (clip art).
[End of figure]
The delivery structure for providing plan services can vary. Generally,
there are two structures: "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),
as shown in Figure 2.
Figure 2: Flow of Bundled and Unbundled Plan Services:
[See PDF for image]
This figure is an illustration of the flow of bundled and unbundled
plan services, as follows:
Investment funds:
* Bundled services:
- Record keeper;
- Trustee/custodian;
- Other service providers;
Flow to:
* Bundled plan service provider;
Flow to:
* 401(k) plan sponsor.
Investment funds:
Flow to:
* Unbundled services:
* Record keeper;
* Trustee/custodian;
* Other service providers;
Individually flow to:
* 401(k) plan sponsor.
Sources: GAO analysis of information from industry practitioners and
Art Explosion (clip art).
Note: This figure depicts a simplified example of one possible
arrangement and is not intended to depict all arrangements.
[End of figure]
In a bundled arrangement, a sponsor might delegate the oversight for
the selection and monitoring of plan services, except for the selection
and monitoring of the bundled provider itself. In contrast, in an
unbundled arrangement, the sponsor might retain oversight of the
selection and monitoring for some or all other service providers.
Sponsors Determine a Number of Common Plan Features, and Their
Decisions about Investment Features Have Important Fiduciary
Implications:
Although, when determining a number of common, noninvestment features
and other plan characteristics, plan sponsors are frequently acting as
settlors,[Footnote 15] their decisions about investment features have
important fiduciary implications. Industry research finds that most
401(k) plans offer a number of common noninvestment features such as
employer contributions and loan programs. For example, industry
research shows that at least 94 percent of sponsors offered some type
of employer contribution.[Footnote 16] Like whether or not to establish
a plan, these determinations are primarily business decisions that
seldom involve fiduciary duties. However, when a sponsor makes
decisions about investment features--like selecting the menu of
investment options--it acts as a fiduciary and is subject to fiduciary
obligations under ERISA. While sponsors must act prudently and solely
in the interest of participants and beneficiaries when acting as a
fiduciary for investment functions, they have considerable latitude in
selecting fund options, such as the number and types of options.
Besides ERISA and its regulations, various other factors affect a
sponsor when it makes investment decisions regarding the selection of
the investment menu, including the size of the plan and the role of
external advisers and providers.
Plan Sponsors Determine Some Common Plan Features to Establish the Plan:
Some common plan features and other characteristics include an employer
contribution, a loan program, eligibility of employees, and vesting of
benefits. While an employer contribution and a loan program are
optional, a 401(k) plan is required to have eligibility and vesting
rules.
* An employer contribution can take different forms, such as a matching
contribution and/or nonmatching contribution made regardless of
participant contributions. In industry research we reviewed, at least
94 percent of sponsors indicated that they offer some type of employer
contribution, while 6 percent or fewer do not offer such contributions.
[Footnote 17] Research by the Bureau of Labor Statistics and industry
groups shows the different methods to determine any employer
contribution, such as formulas based on participant contributions,
years of service, company profits, or other means. [Footnote 18]
* A loan program enables participants to take one or more loans from
the contributions in their account. In industry research we reviewed,
at least 84 percent of sponsors include a loan program.[Footnote 19]
* Eligibility of employees refers to the requirements for employees to
become eligible to participate in the plan, such as an age or service
requirement. Sponsors can choose less restrictive requirements for
eligibility than required by law. For example, in industry research GAO
reviewed, about half of respondents to industry research offer
immediate eligibility with no age or service requirements.[Footnote 20]
* Vesting of benefits refers to the length of time before a plan
participant has a nonforfeitable right to an accrued benefit. For
401(k) plans, participant contributions are required to be vested
immediately, but employer contributions may be vested over time
according to plan terms. As with employee eligibility, the law sets the
maximum amounts of time before an employee is vested, but sponsors can
decide on less restrictive vesting provisions. For example, in industry
research GAO reviewed, about 40 percent of respondents have immediate
vesting in employer matching contributions.[Footnote 21]
When making decisions about some noninvestment plan features, sponsors
act as settlors rather than fiduciaries. According to our survey, 186
of 441 sponsors said the sponsor's committee was the primary decision
maker for various noninvestment, settlor decisions, while 205 sponsors
said that company management was.[Footnote 22] Sponsors make many
settlor function decisions, such as those related to establishing,
amending, or terminating a plan. They are considered business decisions
and include the decision to offer a particular type of plan, the levels
of benefits to provide, and the termination of the plan. The fiduciary
obligations under ERISA, including the overarching duties to act
prudently and solely in participants' interest, are seldom involved in
many of these decisions.[Footnote 23]
Sponsors' Decisions about Investment Features Have Important Fiduciary
Implications:
When making decisions about investment features, ERISA's fiduciary
duties apply. As a result, when plan sponsors acting as a fiduciary for
investment functions make such decisions, they must offer prudent,
diversified choices for participants to fulfill the duties of acting
prudently and diversifying plan investments. Several pension
professionals told us, in fact, that the main plan feature with
important fiduciary implications is the investment menu.[Footnote 24]
When developing that menu, sponsors must act for the sole benefit of
participants and beneficiaries, rather than that of their own or
another party. According to our survey, 349 of 440 responding sponsors
said that the sponsor committee or management was the primary decision
maker for selecting the menu of investment options. Industry research
shows that the median number of options was in the range of 11 to 15,
with as many as 24 percent of responding plans offering 20 or more
funds.[Footnote 25]
When acting as fiduciaries for investment functions, sponsors have
considerable latitude in selecting fund options, including the number
and types of funds, from which participants choose. Table 1 shows funds
available for participant contributions, according to research from one
industry group. These funds involve different categories of investments.
Table 1: Investment Funds Available for Participant Contributions,
Expressed as a Percentage of Respondents:
Fund type: Balanced stock/bond fund;
Plan size, by number of participants: 1-49: 52.0;
Plan size, by number of participants: 50-199: 62.8;
Plan size, by number of participants: 200-999: 66.1;
Plan size, by number of participants: 1,000-4,999: 75.3;
Plan size, by number of participants: 5,000+: 65.0;
Plan size, by number of participants: All plans: 64.8.
Fund type: Bond-actively managed, domestic;
Plan size, by number of participants: 1-49: 50.0;
Plan size, by number of participants: 50-199: 62.0;
Plan size, by number of participants: 200-999: 58.8;
Plan size, by number of participants: 1,000-4,999: 69.8;
Plan size, by number of participants: 5,000+: 60.2;
Plan size, by number of participants: All plans: 60.5.
Fund type: Bond-indexed, domestic;
Plan size, by number of participants: 1-49: 25.3;
Plan size, by number of participants: 50-199: 30.2;
Plan size, by number of participants: 200-999: 26.1;
Plan size, by number of participants: 1,000-4,999: 28.0;
Plan size, by number of participants: 5,000+: 43.9;
Plan size, by number of participants: All plans: 30.0.
Fund type: Cash equivalents (CD/money market);
Plan size, by number of participants: 1-49: 53.3;
Plan size, by number of participants: 50-199: 48.8;
Plan size, by number of participants: 200-999: 41.8;
Plan size, by number of participants: 1,000-4,999: 39.6;
Plan size, by number of participants: 5,000+: 48.8;
Plan size, by number of participants: All plans: 45.9.
Fund type: Company stock;
Plan size, by number of participants: 1-49: 4.7;
Plan size, by number of participants: 50-199: 0.8;
Plan size, by number of participants: 200-999: 10.3;
Plan size, by number of participants: 1,000-4,999: 28.6;
Plan size, by number of participants: 5,000+: 56.9;
Plan size, by number of participants: All plans: 19.6.
Fund type: Equity-actively managed, domestic;
Plan size, by number of participants: 1-49: 70.7;
Plan size, by number of participants: 50-199: 78.3;
Plan size, by number of participants: 200-999: 76.4;
Plan size, by number of participants: 1,000-4,999: 87.4;
Plan size, by number of participants: 5,000+: 79.7;
Plan size, by number of participants: All plans: 78.8.
Fund type: Equity-actively managed, international;
Plan size, by number of participants: 1-49: 62.0;
Plan size, by number of participants: 50-199: 76.7;
Plan size, by number of participants: 200-999: 74.5;
Plan size, by number of participants: 1,000-4,999: 85.2;
Plan size, by number of participants: 5,000+: 79.7;
Plan size, by number of participants: All plans: 75.8.
Fund type: Equity-indexed, domestic;
Plan size, by number of participants: 1-49: 53.3;
Plan size, by number of participants: 50-199: 69.8;
Plan size, by number of participants: 200-999: 72.1;
Plan size, by number of participants: 1,000-4,999: 78.0;
Plan size, by number of participants: 5,000+: 87.0;
Plan size, by number of participants: All plans: 71.8.
Fund type: Equity-indexed, international;
Plan size, by number of participants: 1-49: 18.7;
Plan size, by number of participants: 50-199: 14.0;
Plan size, by number of participants: 200-999: 19.4;
Plan size, by number of participants: 1,000-4,999: 14.3;
Plan size, by number of participants: 5,000+: 35.8;
Plan size, by number of participants: All plans: 19.8.
Fund type: Real estate fund;
Plan size, by number of participants: 1-49: 29.3;
Plan size, by number of participants: 50-199: 25.6;
Plan size, by number of participants: 200-999: 15.8;
Plan size, by number of participants: 1,000-4,999: 14.8;
Plan size, by number of participants: 5,000+: 10.6;
Plan size, by number of participants: All plans: 19.1.
Fund type: Other sector fund;
Plan size, by number of participants: 1-49: 12.7;
Plan size, by number of participants: 50-199: 11.6;
Plan size, by number of participants: 200-999: 10.9;
Plan size, by number of participants: 1,000-4,999: 7.7;
Plan size, by number of participants: 5,000+: 4.1;
Plan size, by number of participants: All plans: 9.5.
Fund type: Self-directed (brokerage window)[A];
Plan size, by number of participants: 1-49: 12.0;
Plan size, by number of participants: 50-199: 9.3;
Plan size, by number of participants: 200-999: 12.1;
Plan size, by number of participants: 1,000-4,999: 14.8;
Plan size, by number of participants: 5,000+: 20.3;
Plan size, by number of participants: All plans: 13.6.
Fund type: Self-directed (mutual fund window)[A];
Plan size, by number of participants: 1-49: 8.0;
Plan size, by number of participants: 50-199: 5.4;
Plan size, by number of participants: 200-999: 4.8;
Plan size, by number of participants: 1,000-4,999: 3.8;
Plan size, by number of participants: 5,000+: 6.5;
Plan size, by number of participants: All plans: 5.6.
Fund type: Stable value fund;
Plan size, by number of participants: 1-49: 34.0;
Plan size, by number of participants: 50-199: 55.8;
Plan size, by number of participants: 200-999: 58.8;
Plan size, by number of participants: 1,000-4,999: 69.2;
Plan size, by number of participants: 5,000+: 68.3;
Plan size, by number of participants: All plans: 57.4.
Fund type: Target retirement date;
Plan size, by number of participants: 1-49: 22.0;
Plan size, by number of participants: 50-199: 24.8;
Plan size, by number of participants: 200-999: 37.0;
Plan size, by number of participants: 1,000-4,999: 41.8;
Plan size, by number of participants: 5,000+: 39.0;
Plan size, by number of participants: All plans: 33.4.
Fund type: Other lifestyle fund(s);
Plan size, by number of participants: 1-49: 20.7;
Plan size, by number of participants: 50-199: 24.8;
Plan size, by number of participants: 200-999: 25.5;
Plan size, by number of participants: 1,000-4,999: 22.0;
Plan size, by number of participants: 5,000+: 26.0;
Plan size, by number of participants: All plans: 23.6.
Fund type: Other;
Plan size, by number of participants: 1-49: 18.0;
Plan size, by number of participants: 50-199: 11.6;
Plan size, by number of participants: 200-999: 10.3;
Plan size, by number of participants: 1,000-4,999: 9.3;
Plan size, by number of participants: 5,000+: 11.4;
Plan size, by number of participants: All plans: 12.0.
Source: Profit Sharing/401(k) Council of America.
[A] A self-directed window allows participants to invest in individual
stocks or mutual funds.
[End of table]
ERISA's fiduciary obligations require that fees paid by the plan are
reasonable and that services provided to the plan are necessary. Thus,
sponsors must consider the fees and other characteristics of the funds,
including potential returns and risk. For example, index funds are
passively managed funds with lower management fees than actively
managed funds, for which the investment provider pursues particular
investments in an attempt to obtain higher than average returns.
Similarly, sponsors must prudently select the service providers to the
plan, such as the providers of record keeping services and service
providers that make investment options available to the plan. In our
survey, the primary decision maker for selecting service providers for
investment options was the sponsor committee for 283 of 445 respondents
and sponsor management for 108 respondents. For selecting providers of
record keeping, the primary decision maker was the sponsor committee
for 256 of 445 respondents and sponsor management for 135 respondents.
As with selecting funds, fees are one of many issues--such as
providers' qualifications and quality of services--to consider when
selecting providers.
ERISA's fiduciary duties also apply to a sponsor including a default
option for participants not making an investment choice. These duties
include prudently selecting and monitoring the option based on an
objective, thorough, and analytical process that involves careful
consideration of the quality of competing providers and investment
products, as appropriate. A recent Labor regulation provides certain
fiduciary relief when participants' contributions are invested in
qualified default investment alternatives that include lifecycle funds,
balanced funds, or managed accounts.[Footnote 26] Labor decided on
these alternatives, which combine stocks and fixed income securities
like bonds, based on considerations that included diversification and
adequacy of savings for retirement. Thus, if participants do not
provide instructions on how to invest their contributions, sponsors may
place contributions into a default investment. For example,
participants may not provide investment instructions when automatically
enrolled in a plan by their sponsor.
Once the investment menu is selected, sponsors must monitor the fund
options as part of their fiduciary obligations. Several pension
professionals noted that monitoring funds may involve quantitative
criteria that include investment returns as compared to benchmarks,
risk, and fees, along with qualitative criteria such as the stability
of the provider. In our survey, 362 of 448 sponsors said they benchmark
the investment performance of the 401(k) plan.[Footnote 27] Of those
who do benchmarking, 297 respondents said they benchmark each option to
the performance of a peer group as one way of monitoring performance.
As part of this monitoring of fund options, efforts of sponsors may
include reviewing reports about the performance of the funds, holding
meetings, placing poorly performing funds on a watch list, ultimately
removing funds or replacing them with better options, and documenting
their decisions. Some pension professionals told us that investment
monitoring efforts generally were of good quality overall but that
certain fund characteristics, such as risk, or particular plan sizes,
such as some small plans, were not always monitored adequately.
Some pension professionals are concerned that sponsors may rely on the
investment provider or record keeper to monitor the funds. For example,
one fiduciary adviser noted that research by an industry group showed
that the provider may conduct investment monitoring for as many as 38
percent of respondents. According to this fiduciary adviser, if a
sponsor relies on the provider for fund monitoring and lacks an
independent adviser, an objective analysis of the funds may not occur,
which could result in a prohibited transaction under certain
circumstances. According to our survey, the entity primarily
responsible for monitoring the performance of the plan investments as
compared to investment goals or policy was frequently the plan sponsor
committee (214 of 443 respondents) or an external investment/financial
adviser (107 respondents).
Sponsors may also set investment goals and policies for the 401(k)
plan. Before selecting funds for the menu, sponsors may set investment
goals and policies that affect which particular categories of funds it
can include in the menu. Many pension professionals noted that such
planning by the sponsor should take into account the needs of its
workforce, such as its age profile or level of knowledge about
investments.[Footnote 28] This planning may be documented in a written
investment policy statement (IPS), which 339 of 440 sponsors responding
to our survey have. An IPS is a document that can guide future
decisions by documenting the intended goals and performance of the
plan, as well as the guidelines for selecting, monitoring, and altering
investments.[Footnote 29] According to our survey, 208 of 339
respondents said the sponsor's committee was the primary decision maker
for establishing a written IPS. Despite the advantages of an IPS, the
policy statement may present difficulties for certain sponsors, such as
greater risks of fiduciary breaches and potential liability if the
sponsor does not follow it. Regardless of a plan's goals and policies,
Labor's regulation on investment duties specifies factors for sponsors
to consider for prudent investment decisions, including
diversification, liquidity, return, and risk in relation to the overall
portfolio.[Footnote 30]
The asset size of the plan may affect the investment menu, as sponsors
of larger plans generally have greater internal expertise and/or
capacity for committees to aid in overseeing the plan, as well as more
leverage to negotiate the menu and fees. Of 447 sponsors answering this
question in our survey, 396 had one or more plan committees with
typically three to seven members, while research by an industry group
found 72 percent had committees. For plans with $200 million or more in
assets, 60 of 90 sponsors reported that they have exactly one
committee, and 29 reported having more than one committee. However, for
some employers, particularly smaller businesses, the owner of the
company acts as the fiduciary to decide about the plan investments and
providers but may have less time, knowledge, and resources to make
those decisions. In addition, larger plans typically have more leverage
as they negotiate with providers about fund options and the fees to
operate the plan. Several professionals stated that large and sometimes
medium-sized sponsors have greater ability to prescribe the investment
menu than small sponsors who are more likely to face restricted choices
with requirements to include the investment provider's own funds. For
example, one adviser noted that plans with over $100 million in assets
can generally offer the funds they want in the menu. Plans with more
assets are also better positioned to negotiate lower fees, given the
competition among providers to manage sponsors' pension assets.
[Footnote 31]
Furthermore, advisers assisting sponsors may affect decisions about the
investment menu. While ERISA allows the hiring of external advisers and
other providers, they must be prudently selected and monitored for the
quality of their services and conflicts of interest, among other
things. Of 445 sponsors responding to this survey question, 308 said
they use a third-party investment adviser. According to Labor's
guidance, a plan fiduciary should hire and monitor external experts if
the sponsor lacks the expertise internally. Several types of advisers
are available to assist the sponsor, such as registered investment
advisers, consultants, and insurance or securities brokers. However,
advisers differ in a number of ways, including by the services they
provide, the extent to which they are willing to serve as a fiduciary,
how they are compensated, and whether they are affiliated with a larger
company like an insurance company or a broker-dealer. As a result, some
of these advisers may have incentives not to act solely in the interest
of participants, which may shape the investment menu. In our survey,
for 170 of 438 sponsors, a sponsor committee monitors plan investment
decisions for such potential conflicts of interest, while an external
investment/financial adviser does so for 94 of the sponsors.
As with advisers, other service providers--such as the investment
provider or the record keeper--may shape the menu of investments in
different ways. For example, sponsors or providers can limit the menu
largely or entirely to the provider's own proprietary funds, which tend
to have greater profit margins or may not always perform as well as
funds offered by other investment providers. Also, a number of pension
professionals indicated that sponsors may defer to the provider about
the menu, and thus about fund performance and fees.[Footnote 32]
However, according to our survey, most sponsors said that the sponsor's
committee was the primary decision maker for the investment goals,
menu, and any investment policy statement, with relatively few saying
the primary decision maker was the 401(k) provider.
Plan Sponsors Can Face Challenges in Fulfilling Their Fiduciary
Obligations When Business Arrangements Are Unclear or Undisclosed:
Plan sponsors face challenges in fulfilling their obligations when
fiduciary roles are not clearly defined or when sponsors lack important
information about arrangements between service providers. Fiduciary
roles that are not clearly defined between the sponsor and other plan
fiduciaries can lead to gaps in plan oversight. Sponsors also have
fiduciary obligations when they select and monitor one or multiple
service providers. To fulfill these obligations, Labor's guidance
indicates that sponsors should obtain information about service
providers' compensation arrangements and potential conflicts of
interest that could affect the service provider's performance. To
improve fiduciary oversight in these areas, Labor has proposed a rule
to require pension plan service contracts to disclose additional
information, including the extent to which service providers will
become fiduciaries for the functions they will perform.[Footnote 33] If
finalized, compliance with this rule could eliminate some of the
confusion surrounding the sharing of fiduciary duties between sponsors
and their service providers and help sponsors provide better oversight
of plan services.
A Sponsor's Failure to Clearly Define Fiduciary Relationships Can Lead
to Gaps in Oversight:
Plans may have one or multiple plan fiduciaries, but who is and who is
not a fiduciary is not always apparent. ERISA requires that at least
one fiduciary be named in the plan documents, although others may be
identified voluntarily.[Footnote 34] Depending on how the delivery of
plan services is structured, the sponsor may retain, share, or delegate
certain fiduciary roles with the advisers or other providers it hires.
For example, sponsors may use an officer or company manager, one or
more internal committees, or an outside professional--sometimes called
a third-party service provider--as a fiduciary to manage some or all of
a plan's day-to-day operations. These services can include investment
management, consulting and providing financial advice, record keeping,
custodial or trustee services for plan assets, and telephone or Web-
based customer services for participants. Providers may also assist
sponsors to fulfill their fiduciary obligations by educating sponsors
or helping them comply with ERISA requirements. For example, one
provider we met has informational materials for its clients, including
checklists about fiduciary obligations, sample documents, and
newsletters on regulatory updates.
While ERISA allows a plan sponsor to hire outside professionals to
manage some or all of their plan's day-to-day operations, this does not
relieve the sponsor of all fiduciary obligation. The hiring of any
service provider is itself a fiduciary act, and under ERISA, a sponsor
must act prudently when selecting one or multiple service providers and
monitor their performance. To comply with ERISA, the plan sponsor must
have sufficient information to make informed decisions about the
services, costs and the qualifications of the service providers, and
the quality of the services being provided. The sponsor must ensure
that expenses paid out of plan assets, including fees paid to service
providers, are and continue to be reasonable in light of the level and
quality of services provided. The sponsor must also determine whether
there are conflicts of interest related to service provider
compensation. Conflicts of interest can occur, for example, when a
service provider steers a plan sponsor toward offering investment
options that benefit the service provider but may not be in the best
interest of the plan participants.
Rather than prescribing the specific actions that a sponsor needs to
take when selecting and monitoring one or multiple service providers,
ERISA requires that a prudent process be followed to ensure that the
sponsor's fiduciary obligations are met. According to Labor, prudence
requires expertise in a variety of areas, such as investments. Lacking
that expertise, a fiduciary will want to hire someone with that
professional knowledge to carry out the investment and other functions.
Prudence focuses on the process for making fiduciary decisions. For
instance, in hiring a plan service provider, a fiduciary may decide to
survey a number of potential providers, asking for the same information
and providing the same requirements. By so doing, a fiduciary can make
a meaningful comparison and selection. According to Labor, however,
many of the specific actions that sponsors may take to meet these
duties can vary. Labor recommends that sponsors establish and follow a
formal review process at reasonable intervals.
Sponsors may assume that they have delegated all their fiduciary duties
to an outside professional hired to run the plan, but the sponsor
always retains some fiduciary obligation. While plan sponsors may hire
various advisers and consultants to provide advice on the selection and
monitoring of investment funds, fiduciary duties may be distributed
differently depending on the service arrangement. For example, an
investment adviser who recommends investment funds to a plan sponsor
for a fee, may be a fiduciary under ERISA.[Footnote 35] In contrast, if
the sponsor is selecting funds from a broker and the broker provides no
investment advice, the fiduciary obligations may lie entirely with the
sponsor under ERISA, as shown in figure 3.
Figure 3: Differences in Fiduciary Role and Possible Fee and Service
Arrangements Using an Investment Adviser versus a Broker:
[See PDF for image]
This figure is an illustration of differences in fiduciary role and
possible fee and service arrangements using an investment adviser
versus a broker, as follows:
401(k) sponsor:
* Selection of plan investment options go to Investment funds;
* Advisory or other fees go to Investment advisor (Fiduciary);
* Advice is received from Investment advisor (Fiduciary);
* Optional advisory or other fees go to Investment fund;
* Optional advisory or other fees go from Investment fund to Investment
advisor (Fiduciary);
* Commission or other fees go from Investment funds to Broker
(Nonfiduciary);
* Input from Broker to 401(k) plan sponsor.
Source: GAO analysis of information from industry practitioners.
[End of figure]
Sharing or delegating fiduciary duties among service providers can
contribute to indistinct fiduciary roles if their respective roles are
not well defined. Some sponsors may be more concerned with hiring a
provider to perform a particular service than about determining whether
or not the provider will be acting as a plan fiduciary. For example,
several industry professionals noted situations when sponsors assumed
they had delegated fiduciary investment advice for the selection and
monitoring of investment funds to a service provider, but the service
provider did not acknowledge that fiduciary role. Several pension
practitioners observed that most sponsors, especially sponsors of small
plans, have very little fiduciary knowledge. For example, one attorney
with an employee benefits firm stated that while sponsors may know they
are fiduciaries, without understanding the concept and extra duties of
being responsible for plan assets, they primarily see their function as
hiring service providers who they may view as the "real" fiduciaries. A
number of practitioners have stated that some service providers
understand fiduciary roles better than plan sponsors do but may wish to
avoid the liability associated with certain fiduciary duties, even
though their actions may define them as fiduciaries under the law. This
can lead some sponsors to assume that they have delegated certain
fiduciary duties to a service provider, although the provider may not
acknowledge any fiduciary role. When the service provider is not a
fiduciary, it is not bound by the fiduciary duties to act prudently and
solely in the plan's best interest. For example, according to several
practitioners, Registered Investment Advisers (RIA) are generally
fiduciaries, while some other advisers describe themselves as
consultants in an attempt to avoid fiduciary responsibility.
Because ERISA generally does not require that additional fiduciaries be
named, determinations may not be made unless a lawsuit is filed
claiming that the plan has been harmed. Misunderstanding can also occur
because many large providers offer a range of services that a sponsor
can choose from, including some that involve fiduciary duties and
others that may not.
Sponsors Cannot Fulfill Their Fiduciary Obligations without Disclosures
about Compensation Arrangements and Potential Conflicts of Interest:
Labor's guidance indicates that to fulfill their fiduciary obligations
sponsors should obtain certain information about service providers'
compensation arrangements and potential conflicts of interest. However,
some sponsors do not understand their service providers' revenue
sharing arrangements or may be unaware of potential conflicts of
interest. Research by one industry group found that about 60 percent of
responding sponsors said that providers fully disclosed revenue
sharing. According to pension practitioners, sponsors of large plans,
helped by advisers or consultants, may have a better understanding of
revenue sharing and are negotiating lower fees than in the past, but
sponsors of medium-sized plans generally do not understand how
undisclosed compensation flows between service providers behind the
scenes, even if they understand mutual fund expense ratios.
Significant differences in ways that advisers and other providers are
compensated may have important implications for the sponsor's
oversight, including identifying potential conflicts of interest.
According to an RIA that we spoke with, if the adviser is an RIA hired
by a plan sponsor on a fee-for-service basis, his allegiance may be
different than an adviser who is a broker and receives a commission
based on the value of the investment product that is selected.
Furthermore, other experts noted that a sponsor may opt for what
appears to be a "free" 401(k) plan (with no record keeping fees for the
employer) without understanding that the providers' compensation may be
passed on to participants by embedding fees in the plan's investment
options. "Hidden" fees may also 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. 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. Research by one industry group showed that 36 percent of
responding sponsors either did not know the fees being charged to
participants or thought no fees were charged at all. An RIA told us
that if a "free" 401(k) plan has been selected by the sponsor, it is
unlikely that the sponsor used an RIA to examine the underlying fee
structure. In a situation like this, one practitioner said that it is
more likely that the human resources department, rather than the
finance department, selected the free plan option. In addition to
failing to understand the fee structure, some less knowledgeable staff
may act out of loyalty to their employer without fully understanding
ERISA's fiduciary duty to act in the best interests of the plan.
Consequently, they may select an arrangement that reduces the
employer's fees at the expense of the higher embedded fees paid by
participants, which may involve a fiduciary breach under certain
circumstances.
Various Ways to Improve Fiduciary Oversight Have Been Proposed:
Labor officials and various industry practitioners have proposed new
ways to improve fiduciary oversight. A regulation recently proposed by
Labor could eliminate some of the confusion surrounding fiduciary
obligations. In December 2007, Labor proposed a regulation that would
require, among other things, a service provider of an employee benefit
plan, including 401(k) plans, to state whether it will provide services
to the plan as a fiduciary.[Footnote 36] Labor believes that plan
fiduciaries, including sponsors and service providers, would benefit
from regulatory guidance in this area. According to Labor, the
increased complexity of administering services and benefits for these
plans has made it more difficult for plan sponsors to understand
compensation arrangements between service providers. The proposed
regulation would amend the current regulations under ERISA to clarify
the meaning of a reasonable contract or arrangement between sponsors
(or other fiduciaries) and service providers to include the disclosure
of information concerning all compensation to be received by the
service providers and any conflicts of interest that may have adverse
effects on the cost and quality of plan services. Among the information
that would be required under the proposed provision on conflicts of
interest, is a requirement to determine whether the entity will provide
services to the plan as a fiduciary.
If finalized, compliance with this rule could eliminate some of the
confusion surrounding the sharing of fiduciary duties between sponsors
and their service providers and help sponsors provide better oversight
of plan services. Labor is in the process of analyzing the information
from the public comments it received earlier this year and the hearings
it held regarding this regulation. Labor officials anticipate issuing a
final regulation by the end of this year.
In addition, consulting organizations have suggested other measures to
improve accountability for fulfilling fiduciary obligations, such as
fiduciary training for plan sponsors and auditing plans for fiduciary
compliance.
Labor Monitors Sponsors' Operation of 401(k) Plans and Has Made
Progress on Recent Regulatory Initiatives:
Labor takes various actions to monitor sponsors' fiduciary oversight of
401(k) plans and has made some progress on its regulatory initiatives.
Labor investigates reports of questionable 401(k) plan practices,
collects information from plan sponsors, and conducts outreach to
educate plan sponsors about their responsibilities. Labor is also
pursuing several initiatives to improve disclosures provided to
participants, plan sponsors and fiduciaries, government agencies and
the public. Recently, Labor issued proposed regulations to clarify the
information that service providers must disclose to plan sponsors.
[Footnote 37] However, Labor is in the process of resolving several
questions before it can issue a clear set of final regulations. In
previous reports, we asked Congress to consider certain matters that,
if addressed, could provide Labor with greater statutory authority over
plan service providers and help ensure that sponsors are properly
overseeing plan services.[Footnote 38]
Labor Investigates Fiduciary Breaches and Conducts Outreach to Educate
Plan Sponsors:
Labor uses a variety of methods to ensure that sponsors fulfill their
fiduciary obligations. These include enforcement efforts, such as
investigations of employee benefit plans, and outreach efforts to
educate plan sponsors about their responsibilities.
EBSA's regional offices seek to detect, correct, and deter violations,
such as excessive fees and expenses, and failure by fiduciaries to
monitor ongoing fee structure arrangements. EBSA opened 3,746 civil
investigations and obtained nearly $1.3 billion monetary results in
fiscal year 2007. Over $245 million of those monetary results were
related to 401(k) investigations. These investigations cited
violations, such as failure to act prudently, payment of excessive
administrative expenses, and failure to monitor ongoing arrangements.
We reported in 2007 that EBSA does not conduct routine compliance
examinations, such as evaluations of a company's books, records, and
internal controls. Instead, EBSA uses participant complaints and other
agency referrals as sources of investigative leads and to detect
potential violations. EBSA also identifies leads through informal
targeting efforts by investigators, primarily using data reported by
plan sponsors on their Form 5500 annual returns. During our 2007
review, EBSA officials raised concerns that conducting such
examinations would divert resources from EBSA's current enforcement
practices.[Footnote 39]
When EBSA uncovers a fiduciary breach, it can take several actions
against the fiduciary. These actions can result in a monetary result
for the plan (such as restored plan assets), or an action taken by EBSA
that results in the fiduciary or a service provider being enjoined or
removed (these commonly include compelling the fiduciary to fulfill its
obligations, enjoining the fiduciary from committing a further
violation, compelling the fiduciary to make restitution for the
violation, removing the fiduciary, and/or disallowing the fiduciary
from ever serving in another fiduciary capacity, to name a few).
Labor receives complaints regarding fiduciary breaches in several
areas, such as:
* fees or expenses charged for plan services. This can include the plan
having paid unreasonable/excessive fees or settlor fees.
* situations where the employer has filed for or may file for
bankruptcy. This includes alleged mismanagement and/or misuse of plan
assets combined with the fact that the employer has filed bankruptcy.
* how long an employer may take to deposit participant contributions
into the plan (including participant's loan repayments). This includes
inquiries regarding possible fiduciary violations and missing or
delinquent contributions. Contributions are delinquent when an employer
fails to transmit employee contributions as soon as reasonably
possible.[Footnote 40]
* investment of funds. This includes imprudent investments, those
prohibited by the plan document or failure of the plan administrator to
offer a diversified menu of investment options in a 401(k) plan.
* loans or sales to parties in interest and/or the use of plan assets
for personal or company use. This includes prohibited transactions
related to self-dealing (a fiduciary acting in its own interest); dual
loyalties (representing adverse parties); or receipt of consideration
from a third party, also known as kickbacks.
EBSA also focuses some of its enforcement efforts on compensation
arrangements between pension plan sponsors and service providers hired
to assist in the investment of plan assets. EBSA's Consultant/Adviser
Project (CAP), created in October 2006, is focused on identifying
conflicts of interest and the receipt of indirect, undisclosed
compensation by pension consultants and other investment advisers. Its
investigations determine whether the receipt of such compensation
violates ERISA because the adviser or consultant used its status with
respect to a benefit plan to generate additional fees for itself or its
affiliates.[Footnote 41] According to an EBSA official, the agency has
not yet taken enforcement action against consultants or advisers or
401(k) plan fiduciaries. However, the official told us that by
implementing this initiative, EBSA has demonstrated its concern about
the receipt of indirect, undisclosed compensation by fiduciary
consultants and advisers doing business with 401(k) plans. CAP also
seeks to identify potential criminal violations, such as kickbacks or
fraud.
In addition to its enforcement efforts, EBSA works to educate and
assist employers (particularly small employers), auditors and other
service providers in understanding and complying with their obligations
under the law and related regulations and procedures, including those
related to 401(k) plans.[Footnote 42] EBSA also has a program called
the Voluntary Fiduciary Correction Program (VFCP), which allows plan
officials to disclose and correct certain violations without penalty.
In fiscal year 2007, 1,303 401(k) VFCP applications were received by
EBSA's regional offices, and over $20.7 million was restored to 401(k)
plans as a result of this program. According to EBSA, virtually all
transactions under the VFCP program are related to fiduciary issues.
Labor Has Made Some Progress on Relevant Regulatory Initiatives but
Legislation Could Also Promote Fiduciary Oversight:
Since our November 2006 report, EBSA has made progress on three
regulatory initiatives to improve the transparency of fee and expense
information to participants, plan sponsors and fiduciaries, government
agencies and the public. It began these initiatives, in part, amid
concerns that participants were not receiving information in a format
useful to them when making investment decisions and that plan
fiduciaries were having difficulty getting needed fee and compensation
arrangement information from service providers to fully satisfy their
fiduciary obligations.
EBSA's regulatory initiatives to expand disclosure requirements cover
three distinct areas, (1) disclosures by plan sponsors to participants
to assist in making informed investment decisions; (2) disclosures by
service providers to plan fiduciaries to assist in assessing the
reasonableness of provider compensation and potential conflicts of
interest; and (3) more efficient, expanded fee and compensation
disclosures to the government and the public through a substantially
revised, electronically filed Form 5500 Annual Report.[Footnote 43] At
the time of our last review, EBSA had a proposed rule for its
initiative on disclosures to the government and the public. Table 2
shows the progress EBSA has made since our November 2006 report.
Table 2: Summary of Labor's Disclosure Initiatives:
Disclosure by plan sponsors to participants:
Information gathering 72 Fed. Reg. 20,457;
In April 2007, Labor published a request for information (RFI) to
solicit the views, suggestions, and comments from plan participants,
plan sponsors, plan service providers, and members of the financial
community, as well as the general public, on the extent to which rules
should be adopted or modified, or other actions taken, to ensure that
participants and beneficiaries have the information they need to make
informed decisions about the management of their individual accounts
and the investment of their retirement savings. Labor officials have
stated that they soon plan to publish a proposed regulation that will
govern disclosure by plans to plan participants.
Disclosures by service providers to plan sponsors:
Proposed rule 72 Fed. Reg. 70,988;
On December 13, 2007, EBSA published a proposed rule to amend its
current regulations under section 408(b)(2) of ERISA to clarify the
information fiduciaries must receive and service providers must
disclose for purposes of determining whether a contract or arrangement
is "reasonable," as required by ERISA's statutory exemption for service
arrangements.[A] The regulation would require service providers to
disclose, in writing, to plan fiduciaries of 401(k) plans, all services
to be furnished; all direct and indirect compensation to be received;
and any potential conflict of interest, such as certain third-party
relationships, that could affect their objectivity under a service
contract or arrangement. The information provided must be sufficient
for fiduciaries to make informed decisions about the services that will
be provided, the costs of those services, and potential conflicts of
interest. Labor believes that such disclosures are critical to ensuring
that contracts and arrangements are "reasonable" within the meaning of
the statute.
Disclosure by plan sponsors to Labor and the public:
Final rule 72 Fed. Reg. 64,710;
On November 16, 2007, EBSA published a final rule revising the annual
reporting requirements of plans concerning service provider
compensation. For the most part, the reporting changes, including the
requirement to file forms electronically, go into effect for plan years
beginning on or after January 1, 2009. The new regulations expanded
Schedule C of the Form 5500 so that, in addition to compensation paid
directly by a plan to a service provider, it requires the reporting of
"indirect compensation" paid to those who directly or indirectly
provide services to the plan; All persons receiving $5,000 or more of
total compensation must be identified on Schedule C. In general, the
Schedule requires additional information for any service provider who
is a fiduciary or provides contract administrator, consulting,
custodial, investment advisory, investment management, broker, or
record keeping services. It is expected that existing regulatory
disclosures may be used to meet these requirements, e.g., prospectus,
SEC Form ADV, if they meet certain requirements. Labor's intent is to
ensure that revenue sharing payments and other forms of indirect
compensation, such as float, are reported at least to the plan
administrators if not to Labor.[B]
Source: GAO analysis.
[A] Labor's December 2007, notice of proposed rule making also proposed
a class exemption that would provide relief from certain prohibited
transaction restrictions of ERISA. The proposed class exemption would
relieve the responsible plan fiduciary from any liability for a
prohibited transaction that would result from entering into a contract
or arrangement for the provision of services when the service provider
failed to comply with the proposed regulation.
[B] Float revenue is revenue earned from the short-term investment of
plan assets.
[End of table]
Status of Initiative on Disclosure by Plan Sponsors to Participants:
Labor's request for information (RFI) requested comments on fee and
expense disclosure issues affecting participants and beneficiaries of
401(k)-type plans governed by ERISA. Specifically, Labor sought
information on what administrative and investment-related fee and
expense information participants should consider when investing their
retirement savings, the manner in which the information should be
furnished to participants, and who should provide that information. The
RFI cited our November 2006 report on fees as part of the impetus for
issuing the RFI. However, while we did suggest that Congress consider
amending ERISA to require all sponsors to disclose fee information to
participants in a way that facilitates comparison among the options,
our recommendation to the Secretary of Labor was to require plan
sponsors to report a summary of all fees that are paid out of plan
assets or by participants to Labor. Labor has not yet published a
proposed regulation related to the RFI.
Status of Initiative on Disclosures by Service Providers to Plan
Sponsors:
According to Labor officials, they are in the process of resolving
several questions before Labor can issue final regulations, such as the
extent to which providers within a bundled arrangement--a package of
plan services--would be bound by the disclosure requirements of the
regulations. Labor held a hearing on March 31, 2008, to further develop
the public record regarding the regulation and the class exemption and
to assist the department in understanding the issues involved. Labor
heard testimony from a variety of interested parties, including plan
service providers, industry and participant associations, plan
sponsors, and law firms. According to Labor officials, they are still
reviewing the comments and testimony received.
The Assistant Secretary for the Employee Benefits Security
Administration told Congress that EBSA will work to ensure that the
benefits of the proposed regulation--which may include lower fees,
increased efficiencies, and some reduced costs--will outweigh the costs
of compliance. According to the Assistant Secretary, plan fiduciaries
could be provided an exemption if they enter into contracts that are
not "reasonable" because, unbeknownst to them, the service provider
failed to comply with its disclosure obligations.[Footnote 44] Several
members of Congress sent a letter to Labor expressing their displeasure
over the proposed regulation. Among other things, the letter stated
that Labor, rather than excusing failures with class exemptions for
fiduciaries who fail to receive required disclosures, should update its
guidance on fiduciary responsibility and provide model documents and
explanations of key terms to pension plan officials.
Several members of Congress have introduced bills that would require
various additional disclosures related to individual account plans,
including information from service providers.[Footnote 45] One bill, as
introduced, would require service providers to disclose to the plan
sponsor all fees that workers will pay, including such things as sales
commissions, trading costs, and termination or surrender charges. The
bill would require service providers to outline any financial or other
conflicts of interest to plan sponsors.
Some sponsors, however, have expressed concern about the introduction
of fee disclosure legislation. For example, in our survey, sponsors
expressed concern about the amount and manner in which information is
disclosed to plan participants. Given the complexity of the information
being provided, sponsors felt that disclosures should be simple and
easy to understand. In our survey, sponsors also stated that fees
should be disclosed in a transparent manner and should be readily
identifiable by the plan sponsor and participants. In addition to
concerns about fee disclosures, several sponsors suggested that
disclosures would work best if standardized and that legislation may
help providers be consistent in their data preparation and allow
"apples to apples" comparisons of fee information.
While the Assistant Secretary of Labor for the Employee Benefits
Security Administration has stated that a statutory amendment is not
necessary for the department to complete its work, we continue to
believe that a statutory change is necessary to ensure that these
matters are fully addressed and that the matters that GAO has recently
asked Congress to consider, if addressed, would help Labor in its
efforts to improve sponsors' fiduciary oversight.[Footnote 46] For
example,
* We previously asked 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.
This change would provide Labor with explicit statutory authority over
plan service providers for this purpose and help sponsors properly
oversee plan services.
* In addition, in our 2007 report on conflicts of interest in defined
benefit plans, we found that undisclosed business arrangements or
conflicts of interest may have resulted in financial harm to some
plans.[Footnote 47] Given this risk, we asked that Congress consider
amending ERISA to give Labor authority to recover plan losses against
certain types of service providers even if they are not currently
considered fiduciaries under ERISA. These findings may have similar
implications for defined contribution plans, especially 401(k) plans.
Concluding Observations:
As the retirement security of American workers increasingly depends on
401(k) plans, it is important that plan sponsors fulfill their
fiduciary responsibilities in connection with such plans. Sponsors make
decisions about the investment features of a 401(k) plan that carry
significant fiduciary implications. Some, particularly those with small
plans, may have limited time, specialization, knowledge, and ability to
negotiate about service providers or investment funds. Absent a greater
understanding of how sharing plan functions with their service
providers or delegating functions to them may lead to confusion about
fiduciary roles, some sponsors are likely to remain vulnerable to
advisers or other providers whose compensation and affiliation may
promote interests besides those of the plan, such as higher plan fees.
Since our 2006 report, Labor has made progress on its disclosure
initiatives but some important fiduciary issues have yet to be fully
addressed. In our previous reports, we asked Congress to consider
amending ERISA to (1) explicitly require 401(k) service providers to
disclose to plan sponsors the compensation they receive from other
service providers and (2) give Labor authority to recover plan losses
against certain types of service providers, even if they are not
currently considered fiduciaries to that plan under ERISA. While Labor
has proposed a regulatory change that could eliminate some of the
confusion surrounding certain fiduciary obligations, it is unclear how
closely the final regulation will follow the proposed rule. We continue
to believe that changes to ERISA would help Labor in its efforts to
promote sponsors' fiduciary oversight and be in the best interest of
participants.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Department of Labor (Labor).
Labor provided technical comments, which we have incorporated where
appropriate.
As agreed with your staff, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date. At that time, we will send copies of this report
to the Secretary of Labor, as well as to other interested parties. We
will also make copies available to others upon request. In addition,
the report will be available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov]. If you or your staff have any
questions concerning 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 made key contributions to this report are listed
in appendix II.
Sincerely yours,
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
To determine common 401(k) plan features and which typically have
important fiduciary implications as well as challenges sponsors face in
fulfilling their fiduciary obligations, we collected and analyzed
industry research and information from the Department of Labor (Labor),
such as Bureau of Labor Statistics information, as well as previous GAO
work. Although comprehensive data on 401(k) features is limited,
industry research provides some indication of the prevalence of these
features. The industry research that we reviewed has limitations, such
as the lack of random sampling that prevents results generalizable to
the universe of 401(k) plan sponsors. Thus, we used the following three
sources of industry research that reached different audiences to
corroborate one another, where possible. We also checked the
reliability of the data by interviewing the surveyors about their
methodology.
* Profit Sharing/401(k) Council of America's (PSCA) survey results are
based on responses from 1,000 plan sponsors that have profit-sharing
plans, 401(k) plans, or a combination of both and represent 1 to 5,000-
plus employees. Thirty-nine of 1000 respondents had profit-sharing
plans without a 401(k) component. The survey was mailed, faxed, or made
available online to respondents and conducted from April to June 2007.
The survey provides a snapshot as of the end of 2006. The survey
response rate was 13 percent. 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 302
employers with mostly 1,000 employees or more. Twenty-nine percent
represented Fortune 500 companies. The survey was conducted from March
through June 2007. The survey was online, and paper copies of the
questionnaire that included the survey Web site were also mailed out.
Most respondents completed the survey online. The survey had a 6
percent response rate. Hewitt Associates is a human resources
outsourcing and consulting firm.
* Deloitte Consulting received responses from 830 employers for its
survey that was initially sent to over 3,000 contacts. The survey was
sent by e-mail and made available online to a wide array of sponsors
based on the contacts of Deloitte and partnering organizations, along
with other interested sponsors who became aware of the survey. It is
possible that contacts beyond the initial mailing completed the survey,
so a response rate was not calculated. As with other industry surveys,
Deloitte's survey covers a range of plan sizes but under-represents
small plans, as measured by number of participants. Deloitte is a
professional services organization that provides pension consulting
services.
In addition to analysis of industry research, we conducted a Web-based
survey to learn more about how sponsors select plan features and
oversee plan operations. In conducting our design work, we determined
that a representative survey of sponsors would not be feasible for this
study, given the methodological and administrative challenges
associated with (1) establishing a sampling frame using Labor's Form
5500 data, (2) identifying appropriate points of contact for sponsors
from the universe of over 400,000 plans, and (3) the perceived
sensitivity of the survey's content and the willingness of sponsors to
provide candid responses about their fiduciary obligations. To overcome
the methodological and administrative challenges, we administered our
survey in coordination with Plansponsor Magazine (Plansponsor). The
sponsors who responded to our survey were members of Plansponsor's
subscription list - which contains approximately 41,000 members who
receive the organization's electronic newsletters and magazine.
Plansponsor used two methods for soliciting survey responses from their
subscription list. These methods included the distribution of notices
in their daily newsletter and a more targeted electronic mailing sent
to the sponsors who responded to Plansponsor's 2007 Defined
Contributions Survey. While there is some overlap between the sponsors
that receive the daily newsletter and those who responded to
Plansponsor's 2007 Defined Contributions Survey, Plansponsor estimates
that the daily newsletter was distributed to approximately 41,000
subscribers. The targeted electronic mailing was sent to approximately
5,500 sponsors. Using Plansponsor's distribution estimates, we estimate
the number of 401(k) sponsors that received our survey notification to
be approximately 22,000. We received 448 usable responses to our
survey, representing 594 plans. Labor's Abstract of 2005 Form 5500
Annual Reports shows that there are over 400,000 plans in the United
States.
We do not have evidence to determine the extent to which our survey
respondents are representative of the general sponsor population. Our
respondent population excludes sponsors who do not belong to
Plansponsor's subscriber list. Therefore, the extent to which our
survey results provide useful information about the general population
depends on whether or not there are differences between the excluded
sponsors and those belonging to Plansponsor's subscriber list. For
example, as members of Plansponsor's subscriber list, our survey
respondents are self-selected recipients of a publication that provides
information to managers of pensions and 401(k) retirement plans.
Because of their affiliation with Plansponsor, our survey respondents
are likely to be more informed than the average sponsor, given that
they are actively engaged in learning through the magazine. Although
our survey respondents may be more informed than the average sponsor,
Plansponsor affirms that their membership represents the overall
sponsor demographic.
To minimize the variability of survey results, we took steps in the
development of the questionnaire, the data collection, and data
analysis to minimize nonsampling errors. For example, prior to
administering the survey, the questionnaire was reviewed by an
independent survey expert in our methodology group, as well as an
official from Plansponsor. In addition, we conducted six pretests by
telephone to determine the extent to which (1) the survey questions
were clear, (2) the terms used were precise, (3) respondents were able
to provide the information we were seeking, and (4) the questions were
unbiased. We identified sponsors for the pretest through a series of
questions posted in a survey that Plansponsor administers weekly to its
subscribers. Sponsors were selected for the pretest based upon the
total number of participants and the total amount of assets in the
plan. We made changes to the content and format of the questionnaire
based on the feedback we received.
The Web-based questionnaire was accessible through a secure GAO server.
Sponsors completing the survey created usernames and passwords to
access the survey. Plansponsor notified its subscribers of the survey's
availability in its daily newsletter over a period of several weeks
between March 2008 and May 2008. To solicit additional responses,
Plansponsor sent a targeted electronic mailing to sponsors who
responded to Plansponsor's 2007 Defined Contribution Survey, within the
same period. No follow-up discussions with survey respondents were
conducted for this study.
To further determine which features typically have important fiduciary
implications and factors when making such decisions, as well as
challenges sponsors face in fulfilling their fiduciary obligations when
overseeing plan operations, we identified the relevant laws and
regulations for 401(k) plans under ERISA. We interviewed and collected
documentation from a variety of stakeholders, including plan sponsors,
service providers, fiduciary advisers, industry and consumer
associations, attorneys, and Labor. We also obtained their views on
sponsors' awareness of fiduciary responsibilities and identified any
challenges sponsors might face. We also collected and analyzed
information on plan sponsor oversight from other sources, such as the
reports and testimonies from ERISA Advisory Council working groups.
To determine the actions that Labor takes to ensure that sponsors are
fulfilling their fiduciary obligations and the progress Labor has made
on its regulatory initiatives, we reviewed ERISA and Labor's
regulations to clearly define Labor's authority to oversee the conduct
of 401(k) plan sponsors in fulfilling their key fiduciary obligations.
We reviewed Labor's enforcement strategies for overseeing plan sponsors
(e.g., reviewing the types of complaints about fiduciary breaches). We
reviewed the actions Labor has taken against plan sponsors and the
reasons for such actions. We also reviewed the recent work of other GAO
staff in order to provide an update on Labor's compliance assistance
and outreach efforts; participated in certain fiduciary education
seminars; and conducted follow-up interviews with agency officials
about their current initiatives.
We conducted our review from January 2007 through June 2008 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barbara Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov:
Acknowledgments:
The following team members made key contributions to this report:
Tamara Cross, Assistant Director; Daniel Alspaugh, Analyst-in-Charge;
LaKeshia Allen; Monika Gomez; Matthew Saradjian; Susan Baker; Susannah
Compton; Mimi Nguyen; Walter Vance; and Craig Winslow.
[End of section]
Footnotes:
[1] Under ERISA, a fiduciary is anyone, such as a sponsor, trustee,
investment adviser, or other service provider, to the extent they
exercise any discretionary authority or control over plan management or
any authority or control over the management or disposition of plan
assets, render investment advice respecting plan money or property for
a fee or other compensation, or have discretionary authority or
responsibility for plan administration. 29 U.S.C. § 1002(21)(a).
[2] GAO, Private Pensions: Changes Needed to Provide 401(k) Plan
Participants and the Department of Labor Better Information on Fees,
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-21] (Washington,
D.C.: Nov. 16, 2006) and GAO, Defined Benefit Plans: Conflicts of
Interest Involving High Risk or Terminated Plans Pose Enforcement
Challenges, GAO-07-703 (Washington, D.C.: June 28, 2007).
[3] Respondents to the survey as a whole exclude sponsors who are not
part of Plansponsor's subscription list and recipients of the survey
who chose not to complete it. These other sponsors may differ from our
respondents, such as their knowledge and practices about deciding plan
features or monitoring operations. Thus, the results of our survey may
not represent and cannot be generalized to the population of all 401(k)
sponsors.
[4] 72 Fed. Reg. 70,988 (Dec. 13, 2007).
[5] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-21].
[6] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-703].
[7] Beginning in 2006, plans were permitted to allow employees to
designate some or all of their elective contributions to Roth 401(k)
plans, which are not excluded from current income but allow for tax-
free withdrawals after 5 years of participation and if certain other
conditions related to age, death or disability have been met. Economic
Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, §
617, 115 Stat. 38, 103-06 (codified at 26 U.S.C. § 402A). According to
the industry research that we reviewed, 18 percent or fewer of sponsors
of 401(k) plans also offered a Roth 401(k) opportunity.
[8] 29 U.S.C. § 1106. Prohibited transactions under ERISA included a
sale, exchange, or lease between the plan and party-in-interest;
lending money or other extension of credit between the plan and party-
in-interest; and furnishing goods, services, or facilities between the
plan and party-in-interest. Labor may grant, by regulation, exemptions
to certain prohibited transactions.
[9] 26 U.S.C. § 4975(c) and (d)(2). The Internal Revenue Code imposes a
significant tax on disqualified persons involved in such prohibited
transactions unless they fit within this or various other exemptions.
26 U.S.C. § 4975(a), (b) and (d).
[10] A person is deemed to be providing investment advice only if such
person (1) provides advice as to the value of, or makes recommendations
as to the advisability of investing in, purchasing or selling,
securities or other property, and (2) has direct or indirect
discretionary authority or control over the purchase or sell of
securities or other property for the plan, or regularly provides advice
as to the value of securities or other property, pursuant to a mutual
agreement, arrangement, or understanding, that will serve as a primary
basis for plan investment decisions and is based on the particular
needs of the plan. 29 C.F.R. § 2510.3-21(c) (2007).
[11] Benefits Advisors also provided assistance to 62,000 inquirers
with questions about their pension plans. In fiscal year 2007,
fiduciary related pension issues were discussed 5,980 times with
participants and 1,612 times with employers and other plan officials.
Topics discussed included administrative charges, bankruptcy, employee
contributions, fund investments, abandoned plans, and prohibited
transactions.
[12] Labor has taken the position that there is a class of activities
which relates to the formation, rather than the management, of plans.
These activities, generally referred to as settlor functions, include
decisions relating to the formation, design, and termination of plans
and, with few exceptions, are generally not activities subject to Title
I of ERISA. Expenses incurred in connection with settlor functions
would not be reasonable expenses of a plan.
[13] In two cases the plan fiduciaries selected the plan sponsor to
provide administrative services to its employee benefit plans. As a
result, the sponsor was reimbursed for more than direct and indirect
expenses. In the third case, the plan fiduciaries used plan assets to
settle a legal claim made by former plan participants who alleged the
sponsor failed to make timely distributions of their accounts upon
termination of employment.
[14] Pub. L. No. 109-280, 120 Stat. 780.
[15] Plan sponsors are often characterized as wearing two hats under
ERISA: As the creator of a plan and the trust to fund it, they are
referred to as settlors. As the entity responsible for the
administration of a plan and management of its trust, depending on the
function performed, they often fall within the definition of a
fiduciary under ERISA. Only in the latter capacity are plan sponsors
obligated to make decisions solely in the interest of plan participants
and beneficiaries. Lockheed Corp. v. Spink, 517 U.S. 882, 890-91 (1996).
[16] The 50th Annual Survey of Profit Sharing and 401(k) Plans for 2006
by the Profit-Sharing/401(k) Council of America (PSCA), Trends and
Experience in 401(k) Plans 2007 by Hewitt Associates, and the Annual
401(k) Benchmarking Survey 2005/2006 edition by Deloitte Consulting.
[17] We drew on the following industry research: the 50th Annual Survey
of Profit Sharing and 401(k) Plans for 2006 by the Profit-Sharing/
401(k) Council of America (PSCA), Trends and Experience in 401(k) Plans
2007 by Hewitt Associates, and the Annual 401(k) Benchmarking Survey
2005/2006 edition by Deloitte Consulting. While a new Deloitte survey
is to be issued soon, it was not available at the time of our review.
Where possible, we compared their results for convergence. For more
information, see appendix I.
[18] See, for example, Keenan Dworak-Fisher, "Employer Generosity in
Employer-Matched 401(k) Plans, 2002-03," Bureau of Labor Statistics
Monthly Labor Review (Washington, D.C., July/August 2007).
[19] The 50th Annual Survey of Profit Sharing and 401(k) Plans, Trends
and Experience in 401(k) Plans 2007, and the Annual 401(k) Benchmarking
Survey 2005/2006 edition.
[20] Trends and Experience in 401(k) Plans 2007 and the Annual 401(k)
Benchmarking Survey 2005/2006 edition.
[21] The 50th Annual Survey of Profit Sharing and 401(k) Plans, Trends
and Experience in 401(k) Plans 2007, and the Annual 401(k) Benchmarking
Survey 2005/2006 edition.
[22] Our respondents represent a nonrandom sample of sponsors from the
subscription list of an industry publication. While 448 sponsors
completed our survey, the number of sponsors answering particular
questions varies. Survey responses represent the views of the 448
respondents to our survey and cannot be generalized to the population
of 401(k) plan sponsors. See appendix I for more information about our
survey methodology.
[23] However, once sponsors make these settlor decisions, then the
fiduciary obligations may apply when implementing these decisions.
[24] Sponsors may include other features with fiduciary implications,
such as providing employer stock as a fund option or offering
investment advice to participants. These features have their own
distinct considerations, such as the undiversified nature of employer
stock or differences between education versus advice for plan
participants. Industry research indicates that about half of responding
401(k) sponsors or less offered these features. Also, areas of plan
operations other than investments, such as administration or
communication with participants, may have fiduciary implications. For
example, the sponsor must ensure the timely deposit of employee
contributions to comply with ERISA and related Labor regulations.
[25] The 50th Annual Survey of Profit Sharing and 401(k) Plans, Trends
and Experience in 401(k) Plans 2007, and the Annual 401(k) Benchmarking
Survey 2005/2006 edition.
[26] 72 Fed. Reg. 60,452 (Oct. 24, 2007). According to the regulation,
lifecycle, or target-date, funds combine different funds and
automatically rebalance asset allocations toward more conservative
investments as the participant nears retirement. Balanced funds are
pooled accounts for different risk levels. Managed accounts resemble
lifecycle funds but differ by the potential funds composing the
portfolio and how they are provided. Besides these three alternatives,
the regulation included grandfathered and short-term principal
preservation funds.
[27] Our survey provides anecdotal information that represents the
views of the 448 respondents and cannot be generalized to the
population of 401(k) plan sponsors. See appendix I for more information
about our survey methodology.
[28] For example, some professionals noted that a workforce with
limited knowledge of investments may not be well served by a complex
plan with dozens of funds, including less diversified funds
specializing in particular economic sectors or a self-directed
brokerage allowing investment in individual mutual funds or stocks.
[29] An investment policy statement (IPS) has fiduciary implications
and can help demonstrate the execution of fiduciary obligations,
including following a prudent process and offering diversified funds.
Part of an ERISA fiduciary's duty is to follow plan documents,
including any IPS. 29 U.S.C. § 1104(a)(1)(D). Labor's regulation on
this issue states that a written statement of investment policy is
consistent with ERISA's provisions to have a funding policy but does
not say that one is required. 29 C.F.R. § 2509.94-2 (2007).
[30] 29 C.F.R. § 2550.404a-1 (2007).
[31] In light of the fiduciary obligation to act for the sole benefit
of participants and to pay only reasonable fees, plans over a certain
size may pursue nonretail investment vehicles, including separate
accounts or collective trusts, which typically have lower fees than
retail investment vehicles. However, some professionals noted that
these vehicles with lower fees may not have listings in financial news
for participants or obvious benchmarks for sponsors to monitor fund
performance.
[32] For example, investment providers or record keepers may try to
steer sponsors to funds which result in higher hidden fees for
themselves or other providers, while sponsors have a fiduciary
obligation to pay only reasonable plan expenses.
[33] 72 Fed. Reg. 70,988 (Dec. 13, 2007).
[34] 29 U.S.C. § 1102(a).
[35] A person is deemed to be providing investment advice only if such
person (1) provides advice as to the value of, or makes recommendations
as to the advisability of investing in, purchasing or selling,
securities or other property, and (2) has direct or indirect
discretionary authority or control over the purchase or sell of
securities or other property for the plan, or regularly provides advice
as to the value of securities or other property, pursuant to a mutual
agreement, arrangement, or understanding, that will serve as a primary
basis for plan investment decisions and is based on the particular
needs of the plan. 29 C.F.R. § 2510.3-21(c) (2007).
[36] On December 13, 2007, Labor published a notice of proposed
rulemaking to amend its regulations under section 408(b)(2) of ERISA,
29 C.F.R. § 2550.408b-2, relating to the provision of services to
employee benefit plans. 72 Fed. Reg. 70,988.
[37] 72 Fed. Reg. 70,988 (Dec. 13, 2007).
[38] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-21] and
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-703].
[39] GAO, Employee Benefits Security Administration: Enforcement
Improvements Made but Additional Actions Could Further Enhance Pension
Plan Oversight, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-
22] (Washington, D.C.: Jan. 18, 2007).
[40] In no event is "as soon as reasonably possible" later than the
15TH business day of the month following the month in which the
participant contribution amounts are received by the employer (in the
case of amounts that a participant or beneficiary pays to an employer)
or the 15TH business day of the month following the month in which such
amounts would have been payable to the participant in cash (in the case
of amounts withheld by an employer from a participant's wages). 29
C.F.R. § 2510.3-102(b).
[41] A related objective is to determine whether plan sponsors and
fiduciaries understand the compensation and fee arrangements they enter
into in order to prudently select, retain, and monitor pension
consultants and investment advisers.
[42] One example of EBSA's efforts is its Fiduciary Education Campaign.
Since the campaign was launched in May 2004, EBSA has conducted 24
seminars attended by 2,720 plan sponsors and practitioners. EBSA also
provides a number of tools--such as its interactive ERISA Fiduciary
Advisor on EBSA's Web site--as well as tips for employers on selecting
and monitoring plan service providers. The ERISA Fiduciary Advisor was
launched on October 9, 2007. From the launch date until April 30, 2008,
the site was visited by 16,723 unique visitors.
[43] The Form 5500 includes information on the plan's sponsor and the
number of participants, among other things. 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.
[44] Statement of Bradford P. Campbell, Assistant Secretary of Labor,
Before the Committee on Education and Labor, U.S. House of
Representatives, Oct. 4, 2007. Statement of Bradford P. Campbell,
Assistant Secretary of Labor, Before the Special Committee on Aging,
U.S. Senate, Oct. 24, 2007.
[45] H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act
of 2007, was introduced in Congress on July 26, 2007; H.R. 3765, the
Defined Contribution Plan Fee Transparency Act of 2007, was introduced
on October 4, 2007; and S. 2473, the Defined Contribution Fee
Disclosure Act of 2007, was introduced on December 13, 2007.
[46] Statement of Bradford P. Campbell, Assistant Secretary of Labor,
Before the Committee on Education and Labor, U.S. House of
Representatives, Oct. 4, 2007.
[47] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-703].
[End of section]
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