These responsibilities include    selecting and monitoring service providers to the plan,  reporting plan information to the government and to participants,    adhering to the plan’s investment policy statement and other plan  documents (unless inconsistent with ERISA),  identifying parties-in-interest to the plan and taking steps to monitor  transactions with them,    selecting 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. In our prior report on 401(k) fees, we found that the fee information that  ERISA requires 401(k) plan sponsors to disclose is limited and does not  provide participants with an easy way to compare investment options. Sponsors Must Consider a Broad Range of Information to Fulfill Their Fiduciary Responsibilities

Plan sponsors, as fiduciaries, must consider plan fee information related to  a broad range of functions. According to Labor, ERISA requires that  sponsors evaluate fee information associated with the investment options  offered to participants and the providers they hire to perform plan services  and consider the reasonableness of the expenses charged by the various  providers of services to the plan. Some pension plan associations and practitioners have made various  suggestions to help plan sponsors collect meaningful information on  expenses. Labor has also undertaken a number of activities related to the  information on plan expenses that sponsors should consider. Sponsors Need Information to Evaluate Fees and Expenses Associated with Investment Options and Plan Services

In order to carry out their duties, plan sponsors have an obligation under  ERISA to prudently select and monitor plan investment options made  available to the plan’s participants and beneficiaries and the persons  providing services to the plan. Plan sponsors should obtain all information on fees and expenses as  well as revenue sharing arrangements with each investment option. Basic Fee Information Is Important for Participants to Make Informed Decisions

Before making informed decisions about their 401(k) plan investments,  participants must first be made aware of the types of plan fees that they  pay. Most industry professionals agree that  information about investment fees—such as the expense ratio, a fund’s  operating fees as a percentage of its assets—is fundamental for plan  participants. According to industry  professionals, participants are often unaware that they pay any fees  associated with their 401(k) plan. Participants Also Need Information on Other Fees That Affect Their Account Balances

Industry professionals also believe that participants need information on  other fees that are not included in the expense ratio but still affect their  account balances. In addition, industry professionals also recommended that certain  investment-specific fees be disclosed, including  redemption fees or sales charges—fees that may be imposed by the  provider as a result of changing investments in a given period,    surrender charges—fees that may be imposed as a result of selling or  withdrawing money from the investment within a given number of  years after investing, and    wrap fees—fees that are assessed on the total assets in a participant’s  account. Some industry professionals recommended that plan participants be  provided information on their returns net of all fees so that they can  clearly see what their investments have earned after fees. Labor also has ongoing efforts designed to help participants and plan  sponsors understand the importance of plan fees and the effect of those  fees on retirement savings. Conclusions

Both 401(k) plan sponsors and participants need fee information in order  to make the most informed decisions. For plan sponsors, requiring that  certain information on fees be disclosed can help them understand what  services they are paying for, who is benefiting, and whether their current  arrangements are in the best interest of plan participants.
Why GAO Did This Study

Employers are increasingly moving away from traditional pension plans to what has become the most dominant and fastest growing type of plan, the 401(k). For 401(k) plan sponsors, understanding the fees being charged helps fulfill their fiduciary responsibility to act in the best interest of plan participants. Participants should consider fees as well as the historical performance and investment risk for each plan option when investing in a 401(k) plan because fees can significantly decrease retirement savings over the course of a career. GAO's prior work found that information on 401(k) fees is limited. GAO previously made recommendations to both Congress and the Department of Labor (Labor) on ways to improve the disclosure of fee information to plan participants and sponsors and reporting of fee information by sponsors to Labor. Both Labor and Congress now have efforts under way to ensure that both participants and sponsors receive the necessary fee information to make informed decisions. These efforts on the subject have generated significant debate. This testimony provides information on 401(k) plan fees that (1) sponsors need to carry out their responsibilities to the plan and (2) plan participants need to make informed investment decisions. To complete this statement, GAO relied on previous work and additional information from Labor and industry professionals regarding information about plan fees.

What GAO Found

Information on 401(k) plan fee disclosure serves different functions for plan sponsors and participants. Plan sponsors need to understand a broad range of information on expenses associated with their plans to fulfill their fiduciary responsibilities. Sponsors need information on expenses associated with the investment options that they offer to participants and the providers they hire to perform plan services. Such information would help them meet their fiduciary duty to determine if expenses are reasonable for the services provided. In addition, sponsors also need to understand the implication of certain business arrangements between service providers, such as revenue sharing. Despite some disagreements about how much information is needed, industry professionals have made various suggestions to help plan sponsors collect meaningful information on expenses. Labor has also undertaken a number of activities related to the information on plan fees that sponsors should consider. Participants need fee information to make informed decisions about their investments--primarily, whether to contribute to the plan and how to allocate their contributions among the investment options the plan sponsor has selected. However, many participants are not aware that they pay any fees, and those who are may not know how much they are paying. Most industry professionals agree that information about an investment option's relative risk, its historic performance, and the associated fees is fundamental for plan participants. Some industry professionals also believe that other fees that are also charged to participants should be understood, so that participants can clearly see the effect these fees can have on their account balances.