Labor  also wanted to ensure that plan officials obtain the information they need  to assess the compensation paid for services rendered to the plan, taking  into consideration revenue-sharing arrangements among plan service  providers and potential conflicts of interest. Labor’s New Reporting Requirements Remain Unclear to Sponsors, but Coordination with Other Regulatory Initiative May Help

		Sponsors Report That Labor’s New Requirements Remain Unclear

Even though Labor has provided guidance on their recent changes to the  Form 5500 Schedule C, plan sponsors and service providers reported that  they were unclear about Labor’s new reporting requirements. Specifically,  plan sponsors and experts told us that they have questions regarding the  distinction between eligible and ineligible indirect compensation, and  several said that they were unclear about what types of compensation  qualified as EIC. Uncertainty Regarding the Reporting of Indirect Compensation May Result in Incomplete Data Being Reported to Labor

Because service providers may have difficulty determining what elements  of compensation qualify as EIC, different interpretations and reporting  practices may ensue and could result in inconsistent and incomplete data  being reported to Labor. In addition, since amounts  categorized as EIC will not be reported, Labor will have no way of using  these data to determine whether the amounts being paid by plans are  reasonable and will be unable to compare these types of compensation  across plans. Labor has  already noted on its Web site that there is flexibility regarding reporting  for the 2009 plan year, stating that as long as sponsors receive a statement  from their service providers that, despite a good-faith effort, they were  unable to provide the newly required information to them, sponsors will  not be required to report those service providers on the Schedule C.

		Coordination with Other Regulatory Initiative Could Alleviate Compliance Burden

According to industry experts and plan sponsors with whom we spoke, the  coordination of one of Labor’s other initiatives on fee disclosure with the  current Form 5500 requirements could make it easier for plan sponsors to  comply. Labor has requirements that govern the entering of a service agreement  between a sponsor and service provider, referred to as the 408(b)(2)  requirements, and has proposed changes to them that have not yet been  finalized. In our discussions with  Labor officials, they noted that the better scenario would have been  publishing the finalized 408(b)(2) regulation before the new Form 5500  requirements and acknowledged the importance of coordinating the  finalization of the proposed regulation with the Form 5500 requirements. Labor Is Unclear about How It Will Use the New Information Reported on the Form 5500, and the Form 5500 May Continue to Not Provide Useful Fee Information to Labor and Others

Labor officials told us that they do not have specific plans for using the  data received as a result of the new requirements, and we found that even  with the changes, the Form 5500 may not be useful to Labor, sponsors, or  others. Labor’s efforts are also meant to effect a behavioral change in plan  sponsors and service providers. Finally, the Form 5500 continues to have limited use for Labor, sponsors,  and participants. As we have previously reported, the form does not  explicitly list all of the fees paid from plan assets. For example, plan  sponsors were not required to report mutual fund investment fees to  Labor, even though they received this information for each of the mutual  funds they offered in the 401(k) plan in the form of a prospectus. Without information on all of the fees charged directly or  indirectly to 401(k) plans, Labor is limited in its ability to identify fees that  may be questionable. Coordinating these initiatives may reduce the burden and  the cost to service providers and clarify for plan sponsors the information  they need for the service provider selection and renewal processes. Recommendations for Executive Action

To minimize the possibility that inconsistent and incomparable  information will be reported on the Schedule C and to ensure that the data  collected results in meaningful information for Labor, sponsors, and  participants, we recommend that the Secretary of Labor take the following  action:    Provide additional guidance regarding the reporting of indirect  compensation and require that all indirect compensation be disclosed on  the Schedule C.
Furthermore, consistent with our previous recommendation, to ensure  comparable disclosure among all types of service providers and ensure  that all investment products’ fees are fairly disclosed, we recommend that  the Secretary of Labor take the following action:    Require asset-based fees that are netted from an investment fund’s  performance (and, as such, are not paid with plan assets) be explicitly  reported on the Form 5500. Private Pensions: Information That Sponsors and Participants Need to  Understand 401(k) Plan Fees. Private Pensions: Changes Needed to Provide 401(k) Plan Participants  and the Department of Labor Better Information on Fees.
Why GAO Did This Study

The Department of Labor (Labor) collects information on fees charged to 401(k) plans primarily through its Form 5500. Labor issued final regulations in November 2007, making changes to, among other things, Schedule C of the Form 5500. Labor put emphasis on reporting the indirect compensation paid to service providers and between service providers, in an effort to capture all of the costs that plan sponsors incur. Congress and others are concerned that Labor's rules could result in duplicative and confusing reporting. Given these concerns, Government Accountability Office (GAO) was asked to examine the new requirements and determine whether Labor's new requirements will provide (1) clear and understandable guidance to plan sponsors and (2) useful information to Labor and others. GAO analyzed Labor's regulations and interviewed Labor and other officials about disclosure and reporting practices.

What GAO Found

Sponsors and service providers report confusion over Labor's new reporting requirements for the Form 5500 Schedule C and over how plan expenses are defined. Specifically, they have questions regarding the distinction between eligible and ineligible indirect compensation, that is, which types of indirect compensation must be reported on the Form 5500 (compensation that qualifies as "eligible" does not have to be reported). Labor's guidance on its Web site thus far has been limited, and, according to sponsors and service providers GAO spoke with, has raised additional questions that remain unanswered. Specifically, Labor has not provided sufficient guidance for sponsors and providers to accurately determine what elements of compensation qualify as eligible indirect compensation (fees or expense reimbursements charged to investment funds and reflected in the value of the investment). Therefore, interpretations have been left up to sponsors and providers and may result in a range of reporting practices, causing Labor to receive inconsistent and incomplete data. In addition to the new Form 5500 requirements, Labor has proposed another regulation on service provider fee disclosure (its 408(b)(2) regulation), but it has not yet been finalized. Sponsors and service providers GAO talked with stressed the importance of coordinating this initiative with the new Form 5500 requirements. Doing so may reduce the burden and the cost to service providers of making changes to their data gathering and reporting systems and clarify for plan sponsors the information they need to understand and compare the fees charged by various service providers. In GAO's discussions with Labor officials, they agreed that there was a need to coordinate the two regulations, and said that although they are working to finalize the proposed 408(b)(2) regulation, it is uncertain when it will be published. Labor officials told GAO that they do not have specific plans for using the data received as a result of the new Form 5500 requirements and will wait to see what information is reported before deciding what to do with the data. Although Labor's new requirements are meant to ensure that plan sponsors obtain the information they need to assess the compensation paid to service providers for services rendered to the plan, the Form 5500 may not provide useful information to Labor and others. Because plan sponsors are likely to report indirect compensation in varying formats, it is unclear how Labor will be able to compare such data across plans. In addition, GAO previously reported that the information provided to Labor on the Form 5500 has limited use for effectively overseeing fees paid by 401(k) plans because it does not explicitly list all of the fees paid from plan assets, yet these types of fees comprise the majority of fees in 401(k) plans. For example, plan sponsors are not required to explicitly report asset-based fees that are netted from an investment fund's performance, even though they receive this information for each of the mutual funds they offer in the 401(k) plan. Thus, despite the changes to the Form 5500, the new information provided may not be very useful to Labor, plan sponsors, and others.