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. 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, 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. 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 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. 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. Various Ways to Improve Fiduciary Oversight Have Been Proposed

Labor officials and various industry practitioners have proposed new ways to  improve fiduciary oversight. 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. 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. 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.
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.