Better information and guidance could improve the oversight of retirement plans and reduce fees for participants, according to a new
American workers increasingly rely on defined contribution plans like 401(k) plans and individual retirement accounts for retirement income. Together with other defined-contribution plans, such as 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.
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, the GAO 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 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.
The Labor Department oversees disclosure for participants of certain DC plans, while the IRS oversees tax laws that underlie all DC plans, but both lack information that could strengthen oversight. The Labor Department 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, the Labor Department 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 the IRS does not oversee fees or fee disclosure, the IRS oversees DC plans compliance with the Tax Code. The IRS does not collect information to easily enforce 457(b) plans contribution limits and detect violations that may reduce federal tax revenue. In addition, the IRS and other regulators do not routinely share information with one another to use resources effectively and help enforce a rule requiring reasonable fees.
The GAO recommended that Congress should consider amending ERISA to require sponsors to disclose fee information to facilitate comparisons, and giving the Department of Labor specific authority over certain plans. The GAO also recommended that the IRS develop guidance on sponsor involvement, collect additional data on 457(b) plans, and share more information with financial regulators. Both the Labor Department and the IRS agreed with the GAOs recommendations, although the IRS stated that it will continue sharing information with regulators using its current methods.
