An Increasing Number of Employees Participate in Defined Contribution Plans, and This Trend Has Been Increasing Since the 1980s

The number of defined contribution plans has increased since 1985, while  the number of defined benefit plans has declined dramatically. Based on industry estimates, equity funds accounted for nearly half of the  401(k) plan assets at the close of 2005. With the growth in 401(k) plans, more workers now bear greater  responsibility for funding their retirement income. According to the most  recent data from Labor, the majority of 401(k) plans are participant- directed, meaning that a participant makes investment decisions about his  or her own retirement plan contributions. Fees are one of many factors—such as the historical performance and  investment risk for each plan option—participants should consider when  investing in a 401(k) plan because fees can significantly decrease  retirement savings over the course of a career. Investment and Record-Keeping Fees Account for Most 401(K) Plan Fees, but Information on These Fees May Be Limited or Unavailable to Participants and Labor

Various fees are associated with 401(k) plans, but investment and record- keeping fees account for most 401(k) plan fees. However, inadequate  disclosure and reporting requirements may leave participants and Labor  without important information on these fees. The information on fees that  plan sponsors are required to disclose to participants does not allow  participants to easily compare the fees for the investment options in their  401(k) plan. In addition, Labor does not have the information it needs to  oversee fees and identify questionable 401(k) business practices. Most 401(k) plan sponsors elect this protection and  therefore must provide, among other information, a description of the  investment risk and historical performance of each investment option  available in the plan and any associated transaction fees for buying or  selling shares in these options. Participants may not have a clear picture of the total fees they pay because  plan sponsors provide this information in a piecemeal fashion. Furthermore, the documents that participants receive do not provide a  simple way for participants to compare fees among the investment options  in their 401(k) plan. As a result, participants may have  more limited investment options and may pay higher fees for these options  than they otherwise would. Labor Has Several Initiatives Under Way to Improve Information It Has on Fees and the Various Business Arrangements Among Service Providers

Labor officials told us about three initiatives currently under way to  improve the disclosure of fee information by plan sponsors to participants  and to avoid conflicts of interest:    Labor is considering promulgating a rule regarding the fee information  required to be furnished to participants in plans where sponsors have  elected liability protection. To better enable the agency to effectively  oversee 401(k) plan fees, we recommended that the Secretary of Labor  should require plan sponsors to report a summary of all fees that are paid  out of plan assets or by participants. With this  shift, participants now bear more responsibility for ensuring they have  adequate income in retirement, emphasizing the importance of having  sufficient information to make informed 401(k) investment decisions.
Why GAO Did This Study

Over the past two decades there has been a noticeable shift in the types of plans employers are offering employees. Employers are increasingly moving away from traditional defined benefit plans to what has become the most dominant and fastest growing type of defined contribution plan, the 401(k). As more workers participate in 401(k) plans, they bear more of the responsibility for funding their retirement. Given the choices facing participants, specific information about the plan and plan options becomes more relevant than under defined benefit plans because participants are responsible for ensuring that they have adequate income at retirement. While information on historical performance and investment risk for each plan option are important for participants to understand, so too is information on fees because fees can significantly decrease participants' retirement savings over the course of a career. As a result of employees bearing more responsibility for funding their retirement under 401(k) plans, Congress asked us to talk about the prevalence of 401(k) plans today and to summarize our recent work on providing better information to 401(k) participants and the Department of Labor (Labor) on fees. GAO's remarks today will focus on (1) trends in the use of 401(k) plans, and (2) the types of fees associated with these plans.

What GAO Found

There are an increasing number of active participants in 401(k) plans than in other types of employer-sponsored pension plans, a trend that has accelerated since the 1980s. Now, 401(k) plans represent the majority of all private pension plans; they also service the most participants and hold the most assets. These plans offer a range of investment options, but equity funds--those that invest primarily in stocks--accounted for nearly half of 401(k) assets at the close of 2005. Most 401(k) plans are participant-directed, meaning that a participant is responsible for making the investment decisions about his or her own retirement plan contributions. Inadequate disclosure and reporting requirements may leave participants without a simple way to compare fees among plan investment options, and Labor without the information it needs to oversee fees and identify questionable 401(k) business practices. The Employee Retirement Income Security Act (ERISA) of 1974 requires 401(k) plan sponsors to disclose only limited information on fees. Participants must collect various documents over time and may be required to seek out some documents in order to get a clear picture of the total fees that they pay. Furthermore, the documents that participants receive do not provide a simple way to compare fees--along with risk and historical performance--among the investment options in their 401(k) plan. The information reported to Labor does not identify all fees charged to 401(k) plans and therefore has limited use for effectively overseeing fees and identifying undisclosed business arrangements among consultants or service providers. As a result, participants may have more limited investment options and pay higher fees for these options than they otherwise would.