GAO Study Advocates Greater 401(k) Plan Fee Disclosure

December 2006

The Government Accountability Office (GAO) is taking aim at fees charged to participants in 401(k) plans, calling for more disclosure and new regulations that would require service providers such as brokers to tell plan sponsors about any compensation they receive to recommend specific investments.

The request was contained in a report GAO released in November that examined how 401(k) plan fees are determined and who pays them. It cited studies that show 80 percent of plan participants are not aware how much they pay in fees.

GAO called on Congress to consider amending The Employee Retirement Income Security Act of 1974 (ERISA) to require that sponsors disclose fee information on each 401(k) investment option in a plan to participants.

Companies managing mutual funds and other investment products routinely charge investment fees to compensate for the cost of providing services related to operating the fund. Typically, plan participants pay these costs.

In addition, fees for record-keeping, generally paid by plan sponsors, are increasingly being borne by participants. These fees are disclosed to plan participants. But the information required to be disclosed is limited—it does not include all fees—and more importantly does not provide an easy way for participants to compare the costs of various investment options.

So while the Labor Department is authorized to oversee 401(k) plan fees, it lacks information it needs to effectively play its oversight role, the GAO concluded. GAO said the Labor Department should require plan sponsors to report a summary of all fees paid out of plan assets or by participants. In a Highlights report, GAO said the Labor Department generally supported GAO’s recommendations.

Rep. Gordon Miller (D-CA) is among early supporters of more disclosure and warned that many plan participants are unaware of how fees impact their fund returns.

“Even small differences in fees for such purposes as administering 401(k) plans can have substantial effects on retirees’ account balances,” he said in a statement issued from his office. “They need to know exactly what fees they are paying so they can get the best deal.”

The report also said conflicts of interest arise when pension consultants recommend investment options, including mutual funds, to plan sponsors without disclosing they are compensated by plan advisers such as mutual fund companies for making the referrals. The study recommended Congress consider requiring that these financial relationships be disclosed.