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Pension and Employee Benefits: Code, ERISA, & Regulations
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CCH® PENSION AND BENEFITS — 9/8/08

401(k) service providers should disclose compensation and be liable for losses: GAO report

The Government Accountability Office (GAO), following an examination of common 401(k) plan features and the fiduciary obligations they entail under ERISA, recommends an expansion of service provider disclosure and liability obligations.

Fiduciary roles are not always well defined

According to industry research, most 401(k) plans offer a number of common features, such as employer contributions and loans for employees. These features seldom trigger fiduciary obligations set by ERISA because they mainly involve business decisions related to establishing the plan. However, a sponsor’s decisions about investment features, like the menu of investment options, entail important fiduciary obligations under ERISA. ERISA and the regulations there under stipulate certain requirements for these investment decisions, such as diversification among funds and the prudent selection and monitoring of investment options. Various other factors also affect a sponsor’s menu decisions, including the size of the plan and the role of external advisers and other providers.

Plan sponsors face challenges in fulfilling their obligations when fiduciary roles are not clearly defined or when sponsors lack important information about arrangements between service providers, the GAO study showed. Fiduciary roles that are not clearly defined can lead to gaps in plan oversight. For example, 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. Sponsors also have fiduciary obligations when selecting and monitoring one or more service providers.

Labor Department proposes new oversight

To fulfill these obligations, the Labor Department’s guidance indicates that sponsors should obtain information about service providers’ compensation arrangements and potential conflicts of interest that could affect a service provider’s performance. The DOL and various industry practitioners, the GAO acknowledges, have proposed new ways to improve fiduciary oversight that may address some of the challenges of unclear fiduciary roles and providers’ arrangements.

The DOL takes various actions to monitor sponsors’ fiduciary oversight of 401(k) plans and has made some progress on its regulatory initiatives. These actions include investigating reports of questionable 401(k) plan practices, collecting information from plan sponsors, and conducting outreach to educate plan sponsors about their responsibilities. The Labor Department is also proceeding with several initiatives to improve disclosures to participants, plan sponsors, government agencies and the public. For example, the DOL has published proposed regulations on the information that service providers must disclose to plan sponsors (CCH Pension Plan Guide ¶20,537F).

In addition, certain matters that the GAO has asked Congress to consider would help the Labor Department in its efforts to improve sponsors’ fiduciary oversight. In particular, the GAO has asked Congress to amend ERISA to: (1) explicitly require 401(k) service providers to disclose to plan sponsors the compensation they receive from other service providers and (2) give the DOL authority to recover plan losses against certain types of service providers even if they are not currently considered fiduciaries under ERISA.

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