More Oversight Could Lower Fees for Participants

A U.S. Government Accountability Office (GAO) report suggests that if federal regulators gather more information from certain types of retirement savings plans and issue more guidance about plan sponsor involvement, it could result in participants paying lower fees.

The GAO pointed out that while participants in DC plans and IRAs generally pay the same types of fees, regardless of the plan, participants in some plans are more likely to invest in products that may have higher fees. As an example, the agency said it 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. For 403(b) plans, one reason for this is that sponsors traditionally have not made group products available to participants.

The office said sponsors can help reduce participants’ fees by, for example, offering cheaper investment products in which participants may choose to invest, such as low-cost mutual funds. Sponsors might also pool assets to obtain pricing advantages, such as 401(k) and 401(a) plan sponsors frequently do, while 403(b) plans do not, the report noted. Pointing specifically to 403(b) plans, traditionally minimal sponsor involvement limits the opportunities to pool assets and decrease fees, the report said.

It will take time to see if—or how much—newly effective 403(b) plan regulations will take care of the issues for 403(b) plans presented by the report.

The GAO also pointed out that 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 (ERISA) 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, according to the report. The Securities and Exchange Commission (SEC) regulates some investment products, such as mutual funds, while others are regulated by states’ investment regulators. Because different regulators require different disclosures, participants in DC plans and IRAs can invest in similar products but receive different information on fees.

The GAO contended that both the Department of Labor, which oversees disclosure for participants of certain DC plans, and the IRS, which oversees tax laws that underlie all DC plans, lack information that could strengthen oversight. The DoL has proposed regulations to improve fee disclosure (see “DoL Set to Drop Investment Advice Regulations”); however, it does not have the specific authority to collect information to help ensure that sponsors of certain 403(b) plans continue to protect participants’ interests, the GAO pointed out.

While the IRS oversees DC plans’ compliance with the tax code, it does not collect information to easily enforce 457(b) plans’ contribution limits and detect violations that may reduce federal tax revenue. In addition, according to the GAO report, 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.

Recommendations to Reduce Fees

In its report, “Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants,” the GAO recommended that to encourage plan sponsors to take actions that result in retirement plan participants paying lower fees, the commissioner of Internal Revenue Service (IRS), together with the secretary of labor, provide guidance designed for sponsors of all types of DC plans to suggest ways sponsors can cost-effectively decrease participants' fees.

To be able to provide improved oversight and ensure participants are not violating tax deferral limits, the commissioner of the IRS should collect information to allow them to easily differentiate between types of 457 plans, the office said. Certain IRS officials have recently indicated that more guidance on Section 457 plans is coming (see “IRS To Release 457 Plan Guidance”).

To help ensure that information about service providers' violations is shared with financial regulators, the GAO recommended that the Commissioner of the Internal Revenue Service work with financial regulators to establish a formal memorandum of understanding to help instruct agents and that would be appropriate for limited occasions when information on service providers can be shared without revealing protected taxpayer information. In addition, the agencies should periodically review and update the memorandum, as appropriate.

According to the report, the DoL and IRS agreed with the GAO's recommendations, but the IRS said it will continue sharing its information with regulators using its current methods.

The GAO report is available here.