Investment Fees Account for Most 401(k) Plan Fees and Are Usually Borne by Plan Participants

Investment fees—which are charged by companies that manage mutual  funds or other investment products for all services related to operating the  fund—comprise the majority of fees in 401(k) plans and are typically  borne by participants. Plan record-keeping fees generally account for the  next largest portion of plan fees. These fees cover the cost of various  administrative activities carried out to maintain participant accounts. Although plan sponsors often pay for record- keeping fees, participants bear them in an increasing number of plans. In addition to investment and record-keeping fees, there are a number of  other fees charged to administer the plan as a whole, including  trustee fees that are charged by an individual, bank, or trust  company to securely maintain plan assets;    audit fees that are imposed by a service provider in connection  with the annual audit that is required of ERISA-covered plans with  more than 100 participants;  legal fees that are charged by an attorney or law firm to provide  legal support for administrative activities, such as ensuring the  plan is in compliance with ERISA or representing the plan in a  divorce settlement;  investment consulting fees that are charged by an advisor, often a  pension consultant, hired to help the plan sponsor select funds for  the plan and to monitor investments; and  communication fees that cover the cost of educating participants  about the plan. Required Disclosures Provide Limited Fee Information to Assist Participants in Comparing Investment Options

The fee information that ERISA requires 401(k) plan sponsors to disclose  is limited and does not provide participants with an easy comparison of  investment options. Although they often contain some information on fees, these documents  are not required to disclose the fees borne by individual participants. Additional fee disclosures are required for certain—but not all—plans in  which participants direct their investments. These disclosures are  provided to participants in a piecemeal fashion and do not provide a  simple way for participants to compare plan investment options and their  fees. Labor Has Authority over 401(k) Plan Fees and Certain Types of Business Arrangements, but Lacks Information for Effective Oversight

Labor has authority under ERISA to oversee 401(k) plan fees and certain  types of business arrangements involving service providers, but lacks the  information it needs to provide effective oversight. However, the information reported to Labor does not  identify all fees charged to 401(k) plans and therefore has limited use for  effectively overseeing fees and identifying undisclosed business  arrangements among consultants or other service providers. Labor has several  initiatives underway to improve the information it has on fees and the  various business arrangements among service providers. Labor does this in a number of ways, including collecting  information on fees from plan sponsors, investigating participants’  complaints or referrals from other agencies on questionable 401(k) plan  practices, and conducting outreach to educate plan sponsors about their  responsibilities. 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.
Why GAO Did This Study

American workers are increasingly relying on 401(k) plans, which allow pre-tax contributions to individual accounts, for their retirement income. As workers accrue earnings on their investments, they also pay a number of fees that may significantly decrease their retirement savings. Because of concerns about the effects of fees on participants' retirement savings, GAO examined (1) the types of fees associated with 401(k) plans and who pays these fees, (2) how information on fees is disclosed to plan participants, and (3) how the Department of Labor (Labor) oversees plan fees and certain business arrangements. GAO reviewed industry surveys on fees and interviewed Labor officials and pension professionals about disclosure and reporting practices.

What GAO Found

Investment fees, which are charged by companies managing mutual funds and other investment products for all services related to operating the fund, comprise the majority of fees in 401(k) plans and are typically borne by participants. Plan record-keeping fees generally account for the next largest portion of plan fees. These fees cover the cost of various administrative activities carried out to maintain participant accounts. Although plan sponsors often pay for record-keeping fees, participants bear them in a growing number of plans. The information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options. The Employee Retirement Income Security Act of 1974 (ERISA) requires that plan sponsors provide participants with certain disclosure documents, but these documents are not required to contain information on fees borne by individual participants. Additional fee disclosures are required for certain--but not all--plans in which participants direct their investments. These disclosures are provided to participants in a piecemeal fashion and do not provide a simple way for participants to compare plan investment options and their fees. Labor has authority under ERISA to oversee 401(k) plan fees and certain types of business arrangements that could affect fees, but lacks the information it needs to provide effective oversight. Labor collects information on fees from plan sponsors, investigates participants' complaints or referrals from other agencies on questionable 401(k) plan practices, and conducts outreach to educate plan sponsors about their responsibilities. However, the information reported to Labor does not include all fees charged to 401(k) plans and therefore has limited use for effective oversight and for identifying undisclosed business arrangements among service providers. Without disclosing these arrangements, service providers may steer plan sponsors toward investment products or services that may not be in the best interest of participants and may cause them to pay higher fees. Labor has several initiatives underway to improve the information it has on fees and the various business arrangements among service providers.