GAO Calls for Better Participant Fee Disclosure

A new report claims that nearly 40% of participants “do not fully understand and have difficulty using the fee information” mandated by the Labor Department—which, in turn, apparently has some issues with those recommendations.

In the report, “Many Participants Do Not Understand Fee Information, but DOL Could Take Additional Steps to Help Them,” the Government Accountability Office (GAO) states that almost 40% of 401(k) plan participants do not fully understand and have difficulty using the fee information that the Department of Labor (DOL) requires plans to provide to participants in fee disclosures. To arrive at that conclusion, GAO assessed participants’ understanding of samples from several large plans’ fee disclosures (largely mutual fund fee type disclosures) and other information about fees, and asked general-knowledge questions about fees.

From that sampling GAO found that 45% of participants are not able to use the information given in disclosures to determine the cost of their investment fee (suggesting, of course, that 55% can), while 41% of participants incorrectly believe that they do not pay any 401(k) plan fees.

For solutions to close those gaps, the GAO examined practices in “selected countries and the European Union, and suggests that the Labor Department could take some additional steps”—noting that current disclosures are not required to include certain information, such as fee benchmarks and ticker information “that could be helpful for participants,” and suggests that by “requiring such information in disclosures, DOL could help participants better understand and compare their 401(k) plan fees when making investment choices that affect their retirement security.”

Specific Recommendations 

The GAO made five specific recommendations—that the Labor Department (specifically the Employee Benefit Security Administration) should:

1. Require, in a manner deemed effective, that fee disclosures for participant-directed individual retirement accounts use a consistent term for asset-based investment fees (e.g. gross expense ratio) 
2. Require, in a manner deemed effective, that quarterly fee disclosures for participant-directed individual retirement accounts provide participants the actual cost of asset-based investment fees paid
3. Take steps to provide participants important information concerning the cumulative effect of fees on savings over time; e.g., ensuring that disclosures cite a working, specific DOL web address for where such information is shown and requiring that fee disclosures include the agency’s graphic illustration on the cumulative effect of fees
4. Require, in a manner deemed effective, that participant fee disclosures for participant-directed individual retirement accounts include fee benchmarks for in-plan investment options 
5. Require, in a manner deemed effective, that participant fee disclosures for participant-directed individual retirement accounts include ticker information for in-plan investment options, when available

DOL Response

All parties agree that “plan and investment fee information can be complicated, even for financially sophisticated investors,” and the Labor Department cautioned that additional information, in and of itself, is not certain to make a measurable difference. The GAO responded that as “disclosures are the primary way in which 401(k) participants receive investment fee information,” and “until another format or delivery option for disclosing fee information to participants is put forth by DOL, participants will continue to depend on the required participant fee disclosures”—and that changing the disclosures will be “necessary to help ensure participants have the information they need to make informed decisions.”

The Labor Department also stated that the GAO recommendations “pose significant technical and feasibility challenges”—challenges that it cautioned may limit the efficacy of participant fee disclosures. Beyond that, the Labor Department pointed out that implementing those recommendations would require lengthy and resource-intensive notice and comment rulemaking—and that that would require the Department to forgo other regulatory initiatives. Recall again that their recommendations are to include fee benchmarking and tickers in the current disclosure regime.

Scott, Murray Respond

The GAO report was requested by Rep. Bobby Scott (D-VA), who chairs the House Education and Labor Committee, and Sen. Patty Murray (D-WA), who chairs the Senate Health, Education, Labor and Pensions (HELP) Committee. In a press release following the release of the report, Scott and Murray called the report a “wake-up call for the Department of Labor and for consumers who have 401(k) plans.” Scott added, “This report is clear evidence that the Department of Labor should require plan providers to make fee disclosures easier to understand and ensure that participants are fully informed about how these fees impact their savings. Americans are already struggling to stretch their paychecks and save for retirement. Making fee disclosures more accessible is a common sense change that will help more people retire with dignity.”

Echoing those comments, Murray noted that, “People making decisions that will affect their financial security for years to come need to have clear, complete, information. This report is a clear warning this simply isn’t happening with respect to fees for 401(k) plans, which millions of people are relying on for their financial futures.”