GAO Finds Fiduciary Roles Fuzzy

The GAO says plan service providers—including advisers—should better disclose fiduciary and fee agreements.

In a new report, the Government Accountability Office (GAO) reiterated its previous recommendation that Congress amend the Employee Retirement Income Security Act (ERISA) to require 401(k) service providers disclose compensation arrangements and give the Department of Labor (DoL) authority to recover losses against service providers even if they are not considered fiduciaries.

From a survey of subscribers and 2007 PLANSPONSOR Defined Contribution Survey respondents conducted by PLANSPONSOR, which asked sponsors how they select plan features and oversee operations, review industry research, conduct interviews, and review related documents, the GAO found that sponsors face challenges in fulfilling their fiduciary obligations when roles are not clearly defined or when sponsors lack important information about arrangements between service providers. For one, fiduciary roles that are not clearly defined can lead to gaps in plan oversight.

As an example, GAO said the survey found that 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. Most responding sponsors (349 out of 440) said that a committee of the sponsor was the primary decisionmaker for areas like the investment menu or investment goals, but many indicated they also use the services of an outside investment adviser (308).

The GAO noted that plan sponsors also have a fiduciary obligation when they select and monitor outside service providers. The office said it found that undisclosed business arrangements or conflicts of interest may have resulted in financial harm to some plans.

According to the report, the DoL takes various actions to monitor sponsors’ fiduciary oversight of 401(k) plans and has made some progress on its regulatory initiatives. It investigates reports of questionable 401(k) plan practices, collects information from plan sponsors, and conducts outreach to educate plan sponsors about their responsibilities.

The GAO also noted that the DoL is also pursuing several regulatory initiatives to improve disclosures provided to participants, plan sponsors and fiduciaries, government agencies, and the public, such as the recently issued proposed regulations to specify the information that service providers must disclose to plan sponsors (see EBSA Issues New Participant Disclosure Regulations).

However, the GAO said the DoL’s efforts could be further helped if Congress followed through with the office’s previous recommendations for amending ERISA.

Fiduciary Failures

Some pension professionals told the GAO that investment monitoring efforts generally were of good quality, but certain fund characteristics such as risk, or particular plan sizes such as some small plans, were not always monitored adequately.

The survey found that 339 of 440 sponsors have an Investment Policy Statement (IPS), and 208 of 339 respondents said the sponsor’s committee was the primary decisionmaker for establishing a written IPS. However, the GAO noted that despite the advantages of an IPS, it may present difficulties for certain sponsors, such as greater risks of fiduciary breaches and potential liability if the sponsor does not follow it.

In the survey, 362 of 448 sponsors said they benchmark the investment performance of their 401(k) plans. Of those who do benchmarking, 297 respondents said they benchmark each option to the performance of a peer group as one way of monitoring performance.

However, some pension professionals indicated they are concerned that sponsors may rely on the investment provider or recordkeeper to monitor the funds or that sponsors may defer to the provider about the menu, and thus about fund performance and fees.

If a sponsor relies on the provider for fund monitoring, an objective analysis of the funds may not occur, which could result in a prohibited transaction under certain circumstances. In addition, service providers may shape the menu of investments by limiting the menu largely or entirely to the provider’s own proprietary funds, which tend to have greater profit margins or may not always perform as well as funds offered by other investment providers.

Advisers assisting sponsors may also have incentive to not act in the best interest of participants and affect decisions about the investment menu.

To improve fiduciary oversight in these areas, the GAO noted that the DoL has proposed a rule to require pension plan service contracts to disclose additional information, including the extent to which service providers will become fiduciaries for the functions they will perform (see EBSA Releases Proposed Revisions to Provider Fee Disclosures). “If finalized, compliance with this rule could eliminate some of the confusion surrounding the sharing of fiduciary duties between sponsors and their service providers and help sponsors provide better oversight of plan services,” the GAO said.

The GAO report is available here. The Survey of Plan Sponsor Practices is available here.