October 20, 2009 (PLANSPONSOR (b)lines) - On October 5, the U.S. Government Accountability Office (GAO) released a report to Congressman Charles Rangel, Chair of the House Ways and Means Committee, providing some important general discussion of plan fees, though any assessment of the report must focus on the actual scope of the analysis.

The report, "Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants," (see More Oversight Could Lower Fees for Retirement Plan Participants ) reflects primarily qualitative information, rather than quantitative information, obtained in a series of interviews of a selected group of market participants (in which this author participated) and federal and state regulators. As such, it does not quantify the actual levels of fees charged in different types of plans, for different types and sizes of employers, whether paid from participant accounts or otherwise. Nor does the report attempt to analyze the reasonability and different types or levels of fees and corresponding services.

The report provides some very helpful general information, however, including information about plan types, investment arrangements (bundled or unbundled, annuity vs. mutual fund, etc.), and regulatory oversight applicable to different arrangements.

The report points out that its fee discussion is unrelated to questions of 403(b) plan compliance with requirements imposed by recent IRS 403(b) regulations. This is important, particularly given some very early market confusion, such as inaccurate claims that the regulations imposed fiduciary duties - claims refuted even by IRS representatives - or that the regulations required employers to select particular investment arrangements or plan structures. Similar claims of state-imposed fiduciary duties, potentially applicable to some plans but inapplicable to many others, have contributed to still more confusion.

The GAO report provides helpful clarity when it clearly distinguishes its general discussion of fees from the topic of plan compliance with federal tax requirements.

Nature of Fees and Fee Disclosure

The report's fee and fee disclosure discussions provide helpful general information but also miss some important points. For example, in its references to the number of providers in a plan, the report fails to note that many public 403(b) plan sponsors whose plans offer multiple providers, and particularly many public schools, enjoy significant state law protections from liability for participant selections of investment providers and products, protections that might not apply if the employer designated a single provider.  

In addition, the report may leave the reader with the mistaken impression that participants in non-ERISA plans are not required to receive any fee disclosures, and that any such disclosures are purely voluntary. Such is not the case with respect to allocated annuity accounts, under which the participant receives either an individual contract or a certificate under a group allocated contract, and individual custodial accounts where the participant is the customer of the investment provider.

As a general matter, plan participants with direct contractual relationships with the investment provider are required to receive specific documentation of fees and other contract provisions, regardless of whether the plan is subject to Title I of ERISA. The annuity contract or certificate itself must clearly identify the fees, as well as the extent to which the fees are either guaranteed or subject to modification. Moreover, in the case of a variable annuity or an individual custodial account, the participant will also receive one or more prospectuses (at the product level and/or at the individual fund level) containing detailed fee information presented in specific standardized formats, to facilitate the very type of apples-to-apples comparisons encouraged by the GAO report. Similar rules extend to other marketing materials for the contracts. Each of these documents is required to be filed with one or more regulators or self regulatory organizations.

As the report discusses, non-ERISA plan investment arrangements that do not include a direct contractual relationship between the participant and the investment provider, such as group unallocated custodial agreements (often used in single provider 403(b), 457(b), or 401(a) plans), may well depend much more heavily on voluntary fee disclosures to participants by the employer or the service provider. Regardless, for both ERISA and non-ERISA plans, the amount and quality of fee disclosure in the marketplace and under individual plans continues to increase, with or without specific regulations.

Finally, while the report listed many of the types of fees that might be assessed under an individual plan, and even provided a limited discussion of bundled and unbundled fees, it provided only a limited discussion of how those fees relate to the types of services selected by the plan sponsor, or to the size and related demographics of the plan. Many investment and service arrangements - including annuities and mutual funds - include different fee levels based upon specific plan demographics, including number of participants, specific services desired, amount of assets in the plan, and availability of other investments under the plan.

These are some of the very same factors that would be taken into account in determining whether fees under an ERISA plan were reasonable, and any determination that failed to consider such relevant factors would necessarily be incomplete.

The report's primary observation on this topic was that it can be very difficult for the Department of Labor to confirm that a plan claiming to be within the safe harbor actually met the exception's qualifications. It is true that an employer is not required to file an annual report for a safe harbor plan under current law. Even without a filing requirement, though, the Department still may be called upon to determine whether the safe harbor has been satisfied. This can occur, for example, in the case of a participant complaint to the Department, in which case the Department must determine, as a threshold question, whether the plan is subject to Title I of ERISA.

In 2007, in response to the issuance of final 403(b) regulations, the Department of Labor essentially confirmed the continued availability of the 403(b) safe harbor. The Department considered whether the safe harbor remained relevant in light of the mandated coordination required in those income tax regulations. After all, those final regulations require employers to assume more active responsibility for, or oversight of, their 403(b) plans, and the safe harbor originally recognized arrangements in which participants maintained primary control over their 403(b) accounts. The Department concluded that it was still possible for a plan to comply with both the final 403(b) regulations and the 403(b) safe harbor as currently configured.

457(b) Contribution Limits

The GAO singled out contribution limits for this particular plan type in order to highlight that the federal government may be losing tax revenue because the IRS has not changed W-2 reporting codes in a number of years. As a result, the IRS cannot distinguish whether the catch-up contributions were made to 457(b) tax-exempt or governmental plans.

- Richard Turner serves as Vice President and Deputy General Counsel for VALIC.

PS