The US Government Accountability Office (GAO) periodically publishes independent in-depth studies of issues of importance to the 401k planning community. These studies are available for free download to anyone. We provide here summaries of several recent 401k GAO studies that are worth reading:
- Income Security: Older Adults and the 2007-2009 Recession
- Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits
- Defined Contribution Plans: Key Information on Target Date Funds as Default Investments Should Be Provided to Plan Sponsors and Participants
- 401(k) Plans: Several Factors Can Diminish Retirement Savings, but Automatic Enrollment Shows Promise for Increasing Participation and Savings
- Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants
- 401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings
- Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors
- Information That Sponsors and Participants Need to Understand 401(k) Plan Fees
- 401(k) Plan Participants and Sponsors Need Better Information on Fees
Income Security: Older Adults and the 2007-2009 Recession
The recession of 2007 to 2009 has been the most severe in this country since the 1930s. After adjusting for inflation, gross domestic product declined by 5.1 percent and the national unemployment rate peaked at 9.5 percent. While the recession officially ended in June 2009, our economy has experienced a weak recovery, with unemployment still above 9 percent. While the recession has affected all age groups, older adults–particularly those close to or in retirement–may face a greater burden because they may not have the same opportunities to recover from its effects. For example, older adults–generally those 55 and older–may have insufficient time to rebuild their depleted retirement savings due to sharp declines in financial markets and home equity, and they may experience increased medical costs. Also, as our previous work has shown, older workers are less likely to be unemployed than workers in younger age groups, but when older workers lose a job they are less likely to find other employment. These challenges have intensified older adults’ concerns about having sufficient savings now and adequate income throughout retirement. Given your interest in the status of older adults and the effect of the recent recession, we examined the following: (1) What changes have occurred in the employment status of older adults, generally those 55 and older, with the recession? (2) How have the incomes and wealth of older adults in or near retirement changed with the recession? (3) What changes have occurred in the costs of medical care, the purchasing power of Social Security benefits, and mortality rates for older adults in recent years?.
(1) Since 2007, unemployment rates doubled and remained higher than before the recession for workers aged 55 and older. While these rates were not as high as for other age groups, of more concern is that once older workers lose their jobs they are less likely to find other employment. In fact, the median duration of unemployment for older workers rose sharply from 2007 to 2010, more than tripling for workers 65 and older and increasing to 31 weeks from 11 weeks for workers aged 55 to 64. In addition, the proportion of older part-time workers who indicated they would prefer full-time work nearly doubled during this time. Unemployment rates increased for all groups during the recession and remained lowest for whites. (2) Household income fell by 6 percent for adults aged 55 to 64, but increased by 5 percent for adults 65 and older. Median household net worth fell during the recession for older adults. Poverty rates increased for adults aged 55 to 64, but declined for those 65 and older, while low incomes were more prevalent in older age groups than in younger ones. In addition, poverty rates were higher than the rates based on official levels when medical costs were factored in. The percentage of adults who began drawing Social Security benefits at age 62 rose during the recession, as did awards of Social Security Disability Benefits and applications for Supplemental Security Income benefits. Food insecurity also rose among older adults during the recession. (3) Medical costs continued to rise faster than other costs, and older adults continued to spend more on medical care than those in younger age groups. The purchasing power of Social Security benefits was maintained with cost-of-living adjustments and, for those receiving benefits in 2009, was increased with a one-time $250 Recovery Act payment in 2009. Mortality rates for older adults continued a long-term decline during 2007 through 2009.
GAO-12-76 October 17, 2011
Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits
Despite sizeable tax incentives, private pension participation has remained at about 50 percent of the workforce. For those in a pension plan, there is concern that these incentives accrue primarily to higher income employees and do relatively little to help lower income workers save for retirement. The financial crisis and labor-market downturn may have exacerbated these difficulties. Therefore, we examined (1) recent trends in new private pension plan formation, (2) the characteristics of defined contribution plan participants contributing at or above statutory limits, (3) how suggested options to modify an existing credit for low-income workers might affect their retirement income, and (4) the long-term effects of the recent financial crisis on retirement savings. To answer these questions, GAO reviewed reports, federal regulations, and laws, and interviewed academics, agency officials, and other relevant experts. We also analyzed Department of Labor and 2007 Survey of Consumer Finance (SCF) data, and used a microsimulation model to assess effects of modifying tax incentives for low-income workers. We incorporated technical comments from the departments of Labor and Treasury, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation as appropriate.
Net new plan formation in recent years has been very small, with the total number of single employer private pension plans increasing about 1 percent from about 697,000 in 2003 to 705,000 in 2007. Although employers created almost 180,000 plans over this period, this formation was largely offset by plan terminations or mergers. About 92 percent of newly formed plans were defined contribution (DC) plans, with the rest being defined benefit (DB) plans. New plans were generally small, with about 96 percent having fewer than 100 participants. Regarding the small percentage of new DB plans, professional groups such as doctors, lawyers, and dentists sponsored about 43 percent of new small DB plans, and more than 55 percent of new DB plan sponsors also sponsored DC plans. The low net growth of private retirement plans is a concern in part because workers without employer-sponsored plans do not benefit as fully from tax incentives as workers that have employer-sponsored plans. Furthermore, the benefits of new DB plans disproportionately benefit workers at a few types of professional firms. Most individuals who contributed at or above the 2007 statutory limits for DC contributions tended to have earnings that were at the 90th percentile ($126,000) or above for all DC participants, according to our analysis of the 2007 SCF. Similarly, consistent with findings from our past work, high-income workers have benefited the most from increases in the limits between 2001 and 2007. Finally, we found that men were about three times as likely as women to make so-called catch-up contributions when DC participants age 50 and older were allowed to contribute an extra $5,000 to their plans. We found that several modifications to the Saver’s Credit–a tax credit for low-income workers who make contributions to a DC plan–could provide a sizeable increase in retirement income for some low wage workers, although this group is small. For example, under our most generous scenario, Saver’s Credit recipients who fell in the lowest earnings quartile experienced a 14 percent increase in annual retirement income from DC savings, on average. The long-term effects of the financial crisis on retirement income are uncertain and will likely vary widely. For those still employed and participating in a plan, the effects are unclear. Data are limited, and while financial markets have recovered much of their losses from 2008, it is not fully known yet how participants will adjust their contributions and asset allocations in response to market volatility in the future. In contrast, although data are again limited, the unemployed, especially the long-term unemployed, may be at risk of experiencing significant declines in retirement income as contributions cease and the probability of drawing down retirement accounts for other needs likely increases. The potential troubling consequences of the financial crisis may be obscuring long standing concerns over the ability of the employer-provided pension system in helping moderate and low-income workers, including those with access to a plan, save enough for retirement.
GAO-11-333 March 30, 2011
Defined Contribution Plans: Key Information on Target Date Funds as Default Investments Should Be Provided to Plan Sponsors and Participants
To promote the adoption of appropriate default investments by retirement plans that automatically enroll workers, in 2007 the Department of Labor (DOL) identified three qualified default investment alternatives. One of these options–target date funds (TDF)–has emerged as by far the most popular default investment. TDFs are designed to provide an age-appropriate asset allocation for plan participants over time. Because of recent concerns about significant losses in and differences in the performance of some TDFs, GAO was asked address the following questions: (1) To what extent do the investment compositions of TDFs vary; (2) what is known about the performance of TDFs; (3) how do plan sponsors select and monitor TDFs that are chosen as the plan’s default investment, and what steps do they take to communicate information on these funds to their participants; and (4) what steps have DOL and the Securities and Exchange Commission (SEC) taken to ensure that plan sponsors appropriately select and use TDFs? To answer these questions, GAO reviewed available reports and data, and interviewed TDF managers, plan sponsors, relevant federal officials, and others.
Target date funds vary considerably in asset structures and in other ways, largely as a result of the different objectives and investment philosophies of fund managers. In the years approaching the retirement date, for example, some TDFs have a relatively low equity allocation–35 percent or less–so that plan participants will be insulated from excessive losses near retirement. Other TDFs have an equity allocation of 60 percent or more in the belief that relatively high equity returns will help ensure that retirees do not deplete savings in old age. TDFs also vary considerably in other respects, such as in the use of alternative assets and complex investment techniques. In addition, allocations are based in part on assumptions about plan participant actions–such as contribution rates and how plan participants will manage 401(k) assets upon retirement–which may differ from the actions of many participants. These investment differences and differences between assumed and actual participant behavior may have significant implications for the retirement security of plan participants invested in TDFs. Recent TDF performance has varied considerably, and while studies show that many investors will obtain significantly positive returns over the long term, a small percentage of investors may have poor or negative returns. Between 2005 and 2009 annualized TDF returns for the largest funds with 5 years of returns ranged from +28 percent to -31 percent. Although TDFs do not have a long history, studies modeling the potential long-term performance of TDFs show that TDFs investment returns may vary greatly. For example, while one study found that the mean rate of return for all individual participants was +4.3 percent, some participant groups could experience significantly lower returns. These studies also found that different ratios of investments affect the range of TDF investment returns and offer various trade-offs. While some plan sponsors conduct robust TDF selection and monitoring processes, other plan sponsors face challenges in doing so. Plan sponsors and industry experts identified several key considerations in selecting and monitoring TDFs, such as the demographics of participants and the expertise of the plan sponsor. Some plan sponsors may face several challenges in evaluating TDFs, such as having limited resources to conduct a thorough selection process, or lacking a benchmark to meaningfully measure performance. Although plan sponsors may use various media in an effort to inform participants about funds offered through the plan, some plan sponsors and others noted that participants typically understand little about TDFs. DOL and SEC have taken important steps to improve TDF disclosures, participant education, and guidance for plan sponsors and participants. For example, both agencies have proposed regulations aimed at helping to ensure that investors and participants are aware of the possibility of investment losses and have clear information about TDF asset allocations. However, we found that DOL could take additional steps to better promote more careful and thorough plan sponsor selection of TDFs as default investments, and help plan participants understand the relevance of TDF assumptions about contributions and withdrawals. GAO recommends that DOL take actions to assist plan sponsors in selecting TDFs to best suit their employees, and to ensure that plan participants have access to essential information about TDFs. DOL raised a number of issues with our recommendations, and we amended one of them in response to their comments.
GAO-11-118 January 31, 2011
Over the past 25 years, the number of defined benefit (DB) plans has declined while the number of defined contribution (DC) plans has increased. Today, DC plans are the dominant type of employer-sponsored retirement plans, with more than 49 million U.S. workers participating in them. 401k plans currently cover over 85 percent of active DC plan participants and are the fastest growing type of employer-sponsored pension plan. Given these shifts in pension coverage, workers are increasingly relying on 401k plans for their pension income. Recently, policy makers have focused attention on the ability of 401k plans to provide participants with adequate retirement income and the challenges that arise as 401k plans become the predominant retirement savings plan for employees. As a result, GAO was asked to report on (1) challenges to building and maintaining of savings in 401k plans, and (2) recent measures to improve 401k participation and savings levels.
There are challenges to building and saving through 401k plans. While low participation rates may be due, in part, to the fact that some workers participate in DB plans, there is also a large portion of workers who do not have access to an employer-sponsored retirement plan, as well as some who do not enroll in such a plan when an employer offers it. We found that for those who did participate, their overall balances were low, particularly for low-income and older workers who either did not have the means to save or have not had the opportunity to save in 401k’s for much of their working lifetimes. There are also challenges workers face in maintaining savings in 401k plans. For example, 401k leakage–actions participants take that reduce the savings they have accumulated, such as borrowing from the account, taking hardship withdrawals, or cashing out the account when they change jobs–continues to affect retirement savings and increases the risk that 401k plans may yield insufficient retirement income for individual participants. Further, various fees, such as investment and other hidden fees, can erode retirement savings and individuals may not be aware of their impact. Automatic enrollment of employees in 401k plans is one measure to increase participation rates and saving. Under automatic enrollment, which was encouraged by the Pension Protection Act of 2006 and recent regulatory changes, employers enroll workers into plans automatically unless they explicitly choose to opt out. Plan sponsors are increasingly adopting automatic enrollment policies, which can considerably increase participation rates, with some plans’ rates reaching as high as 95 percent. Employers can also set default contribution rates and investment funds. Though target-date funds are a common type of default investment fund, there are concerns about their risks, particularly for participants nearing retirement.
GAO-10-153T October 28, 2009
Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants
American workers increasingly rely on defined contribution (DC) plans like 401(k) plans and individual retirement accounts (IRA) for retirement income. Together with other DC plans–401(a), 403(b), and 457 plans–these accounts hold about $7.1 trillion. As workers accrue earnings on their investments, they also pay a number of fees that may significantly decrease retirement savings over the course of a career. GAO examined: (1) the types of fees charged to participants and investments of various DC plans; (2) how DC plan sponsor actions affect participant fees; (3) how fee disclosure requirements vary; and (4) the effectiveness of DC plan oversight. GAO reviewed laws and regulations and consulted with experts, federal officials, service providers, and six plan sponsors.
Participants in DC plans and IRAs generally pay the same types of fees, regardless of the plan in which they are enrolled, such as investment management fees. However, participants in some plans are more likely to invest in products that may have higher fees. For example, we found that participants in 403(b) plans and individual IRAs are more likely to invest in products like individual variable annuities or retail mutual funds, which frequently charge more than other investments. According to experts, one reason for the different investments is that many 403(b) plan sponsors do not make group products available to participants. DC plan sponsors generally take certain actions that decrease participants’ fees. Sponsors can help reduce participants’ fees by, for example, offering cheaper investment products in which participants may choose to invest, like low-cost mutual funds. Sponsors may also pool assets to obtain pricing advantages. 401(k) and 401(a) plan sponsors frequently pool participants’ assets to realize lower fees in mutual funds, but sponsors of 403(b) plans often do not. Instead, many 403(b) plan sponsors keep sponsor involvement to a minimum, which limits the opportunities to pool assets and decrease fees. Fee disclosure requirements vary depending on plan regulations and investment regulations. Sponsors of plans subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA)–which was enacted in part to protect the interests of employee benefit plan participants–are required to disclose certain documents to participants, which may or may not describe fees. For plans not subject to these laws, such as state and local government plans, some states impose disclosure requirements, and some do not. Fee disclosure requirements also vary based on the type of investment product in which participants invest. The Securities and Exchange Commission regulates some investment products, like mutual funds, while others are regulated by states’ insurance agencies. Because different regulators require different disclosures, participants in DC plans and IRAs can invest in similar products but receive different information on fees. Labor oversees disclosure for participants of certain DC plans, while IRS oversees tax laws that underlie all DC plans, but both lack information that could strengthen oversight. Labor is responsible for enforcing requirements for disclosure–which may include fees–and the requirement that fiduciaries for some plans must ensure reasonable fees, and has proposed regulations to improve fee disclosure. However, Labor does not have the specific authority to collect information to help ensure that sponsors of certain 403(b) plans continue to protect participants’ interests. While IRS does not oversee fees or fee disclosure, IRS oversees DC plans’ compliance with the tax code. IRS does not collect information to easily enforce 457(b) plans’ contribution limits and detect violations that may reduce federal tax revenue. In addition, IRS and other regulators do not routinely share information with one another to use resources effectively and help enforce a rule requiring reasonable fees.
GAO-09-641 September 4, 2009
401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers’ Retirement Savings
Under federal regulations, 401(k) participants may tap into their accrued retirement savings before retirement under certain circumstances, including hardship. This “leakage” from 401(k) accounts can result in a permanent loss of retirement savings. GAO was asked to analyze (1) the incidence, amount, and relative significance of the different forms of 401(k) leakage; (2) how plans inform participants about hardship withdrawal provisions, loan provisions, and options at job separation, including the short- and long-term costs of each; and (3) how various policies may affect the incidence of leakage. To address these matters, GAO analyzed federal and 401(k) industry data and interviewed federal officials, pension experts, and plan administrators responsi- ble for managing the majority of 401(k) participants and assets.
The incidence and amount of the principal forms of leakage from 401(k) plans–that is, cashouts of account balances at job separation that are not rolled over into another retirement account, hardship withdrawals, and loans–have remained relatively steady, with cashouts having the greatest ultimate impact on participants’ retirement preparedness. Approximately 15 percent of participants initiated some form of leakage from their retirement plans, according to an analysis of U.S. Census Bureau survey data collected in 1998, 2003, and 2006. In addition, the incidence and amount of hardship withdrawals and loans changed little through 2008, according to data GAO received from selected major 401(k) plan administrators. Cashouts of 401(k) accounts at job separation can result in the largest amounts of leakage and the greatest proportional loss in retirement savings. Most plans that GAO contacted used plan documents, call centers, and Web sites to inform participants of the short-term costs associated with the various forms of leakage, such as the tax and associated penalties. However, few plans provided them with information on the long-term negative implications that leakage can have on their retirement savings, such as the loss of compounded interest and earnings on the withdrawn amount over the course of a participant’s career. Experts that GAO contacted said that certain provisions had all likely reduced the overall incidence and amount of leakage, including those that imposed a 10 percent tax penalty on most withdrawals taken before age 59?, required participants to exhaust their plan’s loan provisions before taking a hardship withdrawal, and required plan sponsors to preserve the tax-deferred status of accounts with balances of more than $1,000 at job separation. However, experts noted that a provision requiring plans to suspend contributions to participant accounts for 6 months following a hardship withdrawal may exacerbate the long-term effect of leakage by barring otherwise able participants from contributing to their accounts. GAO also found that some plans are not following current hardship rules, which may result in unnecessary leakage.
GAO-09-715 August 28, 2009
Fulfilling Fiduciary Obligations Can Present Challenges for 401(k) Plan Sponsors
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.
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.
GAO-08-774 July 16, 2008
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.
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.
GAO-08-222T October 30, 2007
401(k) Plan Participants and Sponsors Need Better Information on Fees
According to Labor’s most recent data, there are an estimated 44 million active participants in 401(k) plans. As participants accrue earnings on their investments, they also pay a number of fees, associated with 401(k) plans. Over the course of the employee’s career, fees may significantly decrease retirement account balances. For plan sponsors, understanding the fees they are being charged helps fulfill their fiduciary responsibility to act in the best interest of plan participants. GAO’s prior work on 401(k) fees found that fee disclosures are limited and do not allow an easy comparison of investment options. GAO previously made recommendations to both Congress and Labor on ways to improve the disclosure of fee information to both plan participants and sponsors. 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 about the way fee information could be disclosed to benefit 401(k) participants and sponsors, focusing on 1) the information on fees that could be most useful for plan participants and plan sponsors and 2) how such information could be effectively presented. To complete this statement, GAO relied on previous work and also utilized information from Labor and from industry experts on the subject of fee disclosure to participants.
Fee disclosure serves different functions for plan participants and sponsors. Studies have shown that 401(k) participants often lack basic knowledge about the fees associated with their plan. Participants need information about the direct expenses that could be charged to their accounts. As we previously recommended and most experts agree, the expense ratio–a fund’s operating fees as a percentage of its assets–is a fundamental piece of information for participants. Plan sponsors, in contrast, need a range of fee information to fulfill their fiduciary responsibilities. Sponsors need additional information on service providers, investment options, and revenue sharing arrangements to assist them in monitoring plan fees and determining whether they continue to be reasonable in light of the services provided. Labor 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. Whether participants receive only basic expense ratio information or more detailed information on fees, presenting the information in a clear, easily comparable format can help participants understand the content of the disclosure. GAO’s prior reports found that certain practices help people understand complicated information. For example, using clear language and a straightforward layout in a brief document can enhance the accessibility of financial information. Also, providing graphics and less text can both attract recipient attention and make detailed information more quickly and easily understandable.
GAO-08-95T October 24, 2007