403(b) RETIREMENT
PLANS
Department of Labor
Should Update
Educational Materials
to Better Inform Plan
Sponsors and
Participants
Report to the Ranking Member,
Committee on Education and the
Workforce, House of Representatives
June 2023
GAO-23-105620
United States Government Accountability Office
United States Government Accountability Office
Highlights of GAO-23-105620, a report to the
Ranking Member
, Committee on Education
and
the Workforce, House of Representatives
June 2023
403(b) RETIREMENT PLANS
Department of Labor Should Update
Educational
Materials
to Better Inform Plan Sponsors and
Participants
What GAO Found
Millions of teachers and employees of tax-exempt organizations invest in 403(b)
retirement plans. The Department of Labor (DOL), Securities and Exchange
Commission (SEC), and Internal Revenue Service (IRS) take steps to oversee
some 403(b) plans or their investment options, or both. Specifically, DOL
oversees 403(b) plans subject to the Employee Retirement Income Security Act
of 1974, as amended (ERISA), and uses a range of strategies to identify plans to
investigate for compliance with the law. For example, DOL has investigated
instances of self-dealing—when a plan fiduciary uses plan assets for the
fiduciary’s own interest or own account. The SEC’s oversight focuses on
compliance with securities laws and regulations, while the IRS’s oversight
focuses on compliance with the Internal Revenue Code. DOL, SEC, and IRS also
conduct outreach and provide educational materials to 403(b) plan sponsors and
participants. However, DOL’s website does not contain targeted educational
materials that could help participants understand 403(b) plan fees. Updated DOL
information on 403(b) plans could help participants make more informed
decisions.
GAO reviewed how five selected states worked to improve outcomes—including
in some cases reducing fees participants pay—in 403(b) plans that are not
subject to ERISA requirements. Officials in three of the states said they had
consolidated the number of service providers offering investment options, which
strengthened oversight by reducing the number of service providers they had to
oversee. Officials in Connecticut told GAO consolidating service providers also
resulted in lower annual fees for participants (see figure). Officials in four of the
selected states said they enhanced transparency by providing participants with
additional information on plans’ investment options and fees or by making it
available elsewhere.
Connecticut: Average Investment Fees Pre- and Post-2004 Consolidation
Stakeholders and experts identified actions they said could improve 403(b)
participant outcomes. For example, they suggested establishing fiduciary duties
for
non-ERISA plans in some states that are not subject to such protections can
help protect participants’ interests. Also, they said requiring distribution of
standardized information on investment options’ returns and fees for participants
in non-ERISA plans would promote transparency. Multiple experts also
suggested that allowing 403(b) plans to use certain other investment vehicles
could reduce fees.
View GAO-23-105620. For more information,
contact
Tranchau (Kris) T. Nguyen at (202)
512
-7215 or [email protected].
Why GAO Did This Study
Like 401(k) plans, 403(b) plans are
account
-based defined contribution
plans sponsored by employers. Many
403(b)
plans are subject to ERISA
requirements
and are intended to
protect the
interests of plan
participants.
However, some 403(b)
plans are not covered by ERISA.
GAO was asked to review
(1) the
extent
of federal agencies’ 403(b)
plan
oversight, (2) actions by
selected
states t
hat could improve 403(b)
participant outcomes, and (3) options
stakeholders and experts have
identified t
hat could improve
outcomes for 403(b) participants.
GAO analyzed
DOL, SEC, and IRS
data
and documentation; reviewed
documentation
from five selected
states
identified as taking actions to
improve participant outcomes
;
interviewed federal and state agency
officials and experts
; and conducted
and
analyzed results from surveys of
plan sponsors and service providers
about options
to improve participant
outcomes
. The analysis of state
actions and survey results
offer a
range of perspectives on improving
participant outcomes but
are not
generalizable.
What GAO Recommends
GAO recommend
s that DOL update
educational
materials to contain
inform
ation relevant to 403(b) plans,
including information that could
help
participants understand plan fees.
In
commenting on the report, DOL
neither agreed nor disagreed with our
recommendation
. DOL stated that it
would review its relevant publications
to see
if they should more specifically
reference 403(b) plans.
Page i GAO-23-105620 403(b) Retirement Plans
Letter 1
Background 6
Several Federal Agencies Take Steps to Oversee 403(b) Plans
and Investment Options, but DOL Has Limited Educational
Materials Targeted to These Plans 14
Selected States Reported Taking Actions to Strengthen Plan
Oversight and Transparency of Investment Options for Non-
ERISA 403(b) Plans 33
Stakeholders and Experts Identified Multiple Options They Said
Could Improve 403(b) Participant Outcomes 46
Conclusions 59
Recommendation for Executive Action 60
Agency Comments 60
Appendix I Objectives, Scope, and Methodology 62
Appendix II Selected Features of State 403(b) Regulatory Environments 72
Appendix III Results of GAO’s Surveys of 403(b) Plan Sponsors and Service
Providers 82
Appendix IV Comments from the Department of Labor 86
Appendix V GAO Contact and Staff Acknowledgments 87
Tables
Table 1: Selected Disclosure Documents Generally Required by
ERISA That Include Information on Fees That Participants
in 403(b) Plans May Receive 7
Table 2: Most Frequent Violations the Department of Labor (DOL)
Identified for 403(b) Plan Cases Closed, Fiscal Years
2010–2021 17
Contents
Page ii GAO-23-105620 403(b) Retirement Plans
Table 3: Summary of Selected Terms Included in 13 Settlements
Agreements from 2015 through 2022 Involving 403(b)
Plan Sponsors 56
Figures
Figure 1: The Type of Employer and Extent of the Employer’s
Involvement in the Plan Can Determine Whether a 403(b)
Plan Is Subject to ERISA 9
Figure 2: Summary of Federal Roles in Regulating and
Overseeing 403(b) Plans and Investment Options 12
Figure 3: Information on Department of Labor’s (DOL)
Enforcement of 403(b) Plan Cases, Fiscal Years 2010–
2021 16
Figure 4: Educational Materials on the Department of Labor’s
(DOL) Website Regarding Reporting and Coverage for
403(b) Plans 24
Figure 5: Educational Materials on the Department of Labor’s
Website Regarding Reporting and Coverage for 401(k)
Plans 27
Figure 6: Securities and Exchange Commission (SEC)
Educational Materials for 403(b) Plan Sponsors and
Participants 31
Figure 7: Investment Fees Pre- and Post-403(b) Plan
Consolidation, as Reported by Two Selected States 36
Figure 8: Selected Comparative Information Regarding 403(b)
Investment Options Offered in California, as Detailed on
Its Public Website 42
Figure 9: Example of Investment Options’ Fee Information
Provided to Non-ERISA 403(b) Plan Participants 44
Figure 10: Results of GAO Survey of 403(b) Plan Sponsors and
Service Providers Concerning Policy Options to Improve
403(b) Plan Participant Outcomes 83
Page iii GAO-23-105620 403(b) Retirement Plans
Abbreviations
CalSTRS California State Teachers Retirement System
CIT collective investment trust
DOL Department of Labor
EBSA Employee Benefits Security Administration
ERISA Employee Retirement Income Security Act of 1974, as
amended
FINRA Financial Industry Regulatory Authority, Inc.
IRA Individual Retirement Account
IRC Internal Revenue Code
IRS Internal Revenue Service
KBOR Kansas Board of Regents
NAIC National Association of Insurance Commissioners
NTSA National Tax-Deferred Savings Association
Safe harbor Limited Employer Involvement safe harbor
SEC Securities and Exchange Commission
SFRO San Francisco Regional Office
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Page 1 GAO-23-105620 403(b) Retirement Plans
441 G St. N.W.
Washington, DC 20548
June 21, 2023
The Honorable Robert C. “Bobby” Scott
Ranking Member
Committee on Education and the Workforce
House of Representatives
Dear Mr. Scott:
Millions of teachers and employees of tax-exempt organizations save for
retirement through 403(b) plans. The regulation and oversight of these
plans vary based on the extent to which the plan is subject to the
Employee Retirement Income Security Act of 1974, as amended
(ERISA).
1
Some 403(b) plans sponsored by certain private sector tax-
exempt organizations, such as hospitals, are generally covered by ERISA
and subject to its requirements, including those related to fiduciary duties.
However, some 403(b) plans, such as 403(b) plans for public school
teachers, are not subject to ERISA, including ERISA’s fiduciary
requirements, although, these “non-ERISA” plans may be subject to state
consumer protection laws or other state-specific fiduciary laws.
As we reported in March 2022, savings in 403(b) plans amounted to more
than $1.1 trillion in assets in 2020, and about one-half of these assets
were held in non-ERISA plans. Moreover, we found that the fees
participants were paying in both ERISA and non-ERISA 403(b) plans
varied widely from plan to plan.
2
1
ERISA establishes certain minimum standards and requirements for most private sector
employer-sponsored retirement plans. As such, it does not apply to governmental plans,
including federal and state government retirement plans. Title I of ERISA focuses primarily
on the protection of participants’ benefits under a plan and includes requirements
regarding reporting and disclosure, fiduciary responsibility, participation and vesting, and
funding. For example, under ERISA a plan fiduciary must act solely in the interest of
participants and beneficiaries and for the exclusive purpose of providing benefits and
paying plan expenses, among other things.
2
Additionally, our March 2022 report found that several school districts did not know the
number of investment options or the fees associated with the 403(b) plans offered to
participants in their districts. Our survey of 403(b) plan sponsors found that investment
option fees ranged from 0.02 percent to 2.37 percent. See GAO, Defined Contribution
Plans: 403(b) Investment Options, Fees, and Other Characteristics Varied,
GAO-22-104439 (Washington, D.C.: Mar. 4, 2022).
Letter
Page 2 GAO-23-105620 403(b) Retirement Plans
Like 401(k) plans, 403(b) plans are account-based defined contribution
plans sponsored by employers, and generally individuals who participate
in the plans make investment decisions and bear the investment risk.
3
Certain aspects of 403(b) plans’ structure and regulation differ from
401(k) and other defined contribution plans in key ways. For example,
investment options are generally more limited for 403(b) plans than they
are for other defined contribution plans in that amounts contributed into
403(b) accounts may generally be invested only in annuity contracts or
custodial accounts that hold mutual funds.
4
Given questions that have been raised regarding 403(b) plans and the
protections afforded to participants, you asked us to examine these
plans.
5
This report examines: (1) the extent to which federal agencies
conduct oversight of 403(b) plans, (2) actions selected states have
undertaken that could improve 403(b) participant outcomes, and (3)
options stakeholders and experts have identified that could improve
outcomes for 403(b) participants.
To assess the extent to which federal agencies conduct oversight of
403(b) plans, we obtained and analyzed federal agency and regulatory
3
A defined contribution plan is an employer-sponsored account based retirement plan,
such as a 401(k) plan, that allows individuals to accumulate tax-advantaged retirement
savings in an individual account based on employee or employer contributions, or both,
and the investment returns (gains and losses) earned on the account. A defined benefit
plan is an employer-sponsored retirement plan that typically provides a lifelong stream of
payments beginning at retirement, based on a formula specified in the plan that takes into
account factors such as the employee’s salary, years of service, and age at retirement.
See GAO, The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed
to Better Promote Future Retirement Security, GAO-18-111SP (Washington, D.C.: Oct.
18, 2017).
4
See 26 U.S.C. § 403(b)(1) & (7). In addition, 401(k) plans can offer a wider range of
investment products such as treasury notes or collective investment trusts. 403(b) assets
may be invested in tax-preferred fixed or variable annuity contracts. With a fixed annuity,
participants are guaranteed a specified rate of return on their contributions. For an
indexed annuity, the income stream tracks with a specified index, such as the Standard &
Poor’s 500 Index. With a variable annuity, participants can direct their plan contributions to
different investment options, usually mutual funds, to be held in their annuity account. For
annuities, the amount of money participants receive in retirement will vary depending on
various factors, which can include how much participants contribute, the type of
investment options offered by the plan, the options selected by participants, the rate of
return on the investments, and plan fees and expenses. For more information, see
GAO-22-104439.
5
GAO issued a first report on the characteristics of and fees associated with 403(b) plans
in March 2022; see GAO-22-104439.
Page 3 GAO-23-105620 403(b) Retirement Plans
information on the number and types of violations relevant to 403(b) plans
and service providers, investment vendors, broker dealers, or other
service providers for 403(b) plans. Specifically, we obtained information
on these violations from the Department of Labor’s (DOL) Employee
Benefits Security Administration (EBSA); the Securities and Exchange
Commission (SEC); and the Internal Revenue Service (IRS). We also
obtained information on violations from the Financial Industry Regulatory
Authority, Inc. (FINRA), a nongovernmental self-regulatory organization
registered with SEC as a national securities association.
In addition, we reviewed relevant federal laws and regulations. We also
reviewed our prior work that discussed 403(b) plans.
6
We obtained and
analyzed guidance and educational materials provided by DOL and other
relevant federal agencies, such as checklists, guidance documents, and
other types of outreach to 403(b) plan sponsors and participants. We
interviewed officials from DOL, IRS, SEC, and representatives from
FINRA. We compared information we collected to the agencies’ missions
and Standards for Internal Control in the Federal Government.
7
The
Information and Communication component of internal control—
particularly the principle of using quality information—was significant to
this objective.
To describe actions selected states have undertaken that could improve
403(b) participant outcomes, we selected five states for review, spoke
with state officials, and analyzed available information. We aimed to
provide a range of state experiences and regulatory approaches by using
the following criteria to select our states: whether or not the state limits
the number of service providers of investment options (for the purposes of
this report, referred to as open-access versus closed-access system);
recent regulatory activity and reorganization regarding 403(b) plan
administration in the state; and availability of fee data and plan provider
6
In particular, see our September 2009 report. GAO, Retirement Savings: Better
Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for
Participants, GAO-09-641 (Washington, D.C.: Sept. 4, 2009); and GAO-22-104439.
7
See GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: September 2014).
Page 4 GAO-23-105620 403(b) Retirement Plans
information.
8
We selected the following five states: California,
Connecticut, Delaware, Kansas, and Texas. We asked officials in each
selected state to identify relevant state laws. We reviewed available
information including, where feasible, state 403(b) plan fees, policies, and
other documentation from selected states. We did not conduct an
independent legal analysis to verify the information provided about
selected states’ laws, regulations, or policies. We also interviewed
officials in these five states. We submitted key report excerpts to agency
officials in each state, as appropriate, for their review and verification, and
we incorporated their technical corrections as appropriate. These case
studies are not generalizable to the broader universe of 403(b) plans.
To discuss options that could improve outcomes for 403(b) participants,
we interviewed stakeholders and experts in the retirement planning
industry to identify and discuss such options. These stakeholders and
experts included representatives of industry associations, research
organizations, a national teacher’s association, and service providers to
403(b) plans that we identified as being knowledgeable about 403(b)
plans based on their published research or other documentation, or
based on referrals from other organizations that we interviewed.
9
Because we selected stakeholders and experts to interview, information
obtained by these interviews is not generalizable.
To obtain more information about the feasibility and desirability of these
identified options, we also analyzed responses from two surveys of
8
We analyzed two studies that describe the different states’ approaches to regulation of
403(b) broadly as being either open-access or closed-access systems. See TIAA-CREF
Institute, Trends and Issues – Who’s Watching the Door? How Improving 403(b)
Administrative Oversight Can Improve Educators’ Retirement Outcomes (November
2010), accessed June 15, 2022,
https://www.tiaa.org/public/institute/publication/2010/whos-watching-door-how-improving-
403b; and TIAA-CREF Institute, Research Dialogue – 403(b) Plans for Public School
Teachers: How They Are Monitored and Regulated in Each State (March 2013), accessed
June 15, 2022, https://www.tiaa.org/public/institute/publication/2013/403b-plans-public-
school-teachers. We also reviewed a list from the National Tax-Deferred Savings
Association (NTSA) that identifies the 17 state-sponsored 403(b) plans. See Michael
Webb, State Sponsored Plans: A Closer Look (Arlington, Va.: National Tax-Deferred
Savings Association), accessed Aug. 20, 2020, https://www.ntsa-net.org/state-sponsored-
403b-plans-closer-look.
9
In total, we interviewed stakeholders or experts from 23 organizations. Sixteen of these
23 organizations were interviewed in connection with data collection for our March 2022
report (GAO-22-1044339). Some of the information obtained in those interviews
contributed to this report’s findings. In this report, we use the term “several” to refer to
three or four stakeholders and the term “multiple” to refer to five or more stakeholders.
Page 5 GAO-23-105620 403(b) Retirement Plans
403(b) plan sponsors and service providers.
10
Because no
comprehensive source of data on 403(b) plans sponsors or service
providers exists, we used multiple sources to select our survey
populations, as detailed in our March 2022 report, and surveyed these
populations.
11
Our surveys included questions about actions, options, or
policies that federal agencies could undertake to improve outcomes for
403(b) plan participants.
12
Because we actively selected survey
populations and did not generate random samples in some populations,
the results of the surveys are not generalizable.
In addition, to identify illustrative examples of approaches that different
parties have undertaken to address participant concerns in 403(b)
retirement plans, we identified and reviewed 18 settlement agreements
from 2015 onward involving ERISA 403(b) plan participants, sponsors, or
service providers.
13
Because the nature of a settlement agreement
depends on the specific facts and circumstances involved in the dispute,
the results of our review of these settlement agreements are not
generalizable. See appendix I for more details of our objectives, scope,
and methodology.
We conducted this performance audit from December 2021 through June
2023 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
10
The surveys we conducted pertained to both our March 2022 report, GAO-22-104439,
as well as this report.
11
See GAO-22-104439.
12
We analyzed responses from our surveys of a total of 26 403(b) plan sponsors and 19
service providers. For the purposes of this report, we did not count one plan sponsor that
was included in the previous report’s plan sponsor survey reporting totals, because this
plan sponsor did not answer either of the two questions relevant to this report. We did, in
addition to those service providers included in the March 2022 report, include an
additional two service providers who answered both of the relevant questions for this
report but did not otherwise participate in the survey (and its applicable information for the
March 2022 report).
13
To identify settlements for analysis, we searched a legal database for cases concerning
403(b) plans, as well as performed a series of internet searches for 403(b)-related
litigation, looking for cases that were settled, or where a judgment was entered, from 2015
onward. In addition, for context, we interviewed a representative of a plaintiffs’ law firm
involved in some of these cases who supplied us settlement agreements in which the firm
was involved. According to this representative, the first case involving a 403(b) plan
sponsor being sued by participants over alleged excessive fees or poorly performing
investment options was settled in 2015. None of the settlement agreements we reviewed
contained admissions of liability or wrongdoing by the parties.
Page 6 GAO-23-105620 403(b) Retirement Plans
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
403(b) plans sponsored by certain private sector tax-exempt
organizations, such as hospitals, research foundations, and private
educational institutions, are generally covered by ERISA.
14
ERISA
outlines federal requirements that these ERISA 403(b) plans must meet,
including requirements related to fiduciary duties.
15
ERISA plan fiduciaries
must act solely in the interest of participants and beneficiaries and for the
exclusive purpose of providing benefits and paying plan expenses.
16
ERISA also requires that plan fiduciaries act in a manner that generally
avoids conflicts of interest.
17
In other words, plan fiduciaries may not
14
In certain circumstances, a 403(b) plan that meets certain criteria may qualify for a safe
harbor exemption and as such would not be subject to ERISA. In order to fall under what
we will refer to in this report as the “Limited Employer Involvement” safe harbor, employer
involvement in the plan must be limited. See 29 C.F.R. § 2510.3-2(f); see also Department
of Labor (DOL) Field Assistance Bulletin 2007-02 (July 24, 2007).
15
Under ERISA, plan fiduciaries are individuals or entities who (1) exercise discretionary
authority or discretionary control respecting management or a plan or exercise any
authority or control respecting management or disposition of its assets; (2) provide
investment advice for a fee or other compensation, direct or indirect, with respect to any
moneys or other property of the plan or who have any authority or responsibility to do so;
or (3) have any discretionary authority or discretionary responsibility for the administration
of a plan.. According to DOL, plan fiduciaries generally include plan trustees, plan
administrators, and members of a plan’s investment committee.
16
See 29 U.S.C. § 1104.
17
See 29 U.S.C. §§ 1106 and 1108.
Background
ERISA 403(b) Plans
Page 7 GAO-23-105620 403(b) Retirement Plans
engage in transactions on behalf of the plan that benefit the fiduciaries or
other parties related to the plan, such as other service providers.
18
Under ERISA, participants have the right to sue their plan fiduciaries
(which may include the plan sponsor), for breach of fiduciary duty. In
recent years, 403(b) participants have filed legal claims alleging that
403(b) plan sponsors breached fiduciary duties by failing to sufficiently
monitor fees being charged by service providers or the performance of
investment options.
Sponsors of ERISA 403(b) plans are required to provide participants with
certain documents, including a summary plan description, as well as other
documents that contain fee information, such as pension benefit
statements, a summary comparison table that outlines administrative and
individual account expenses, and a summary annual report.
19
These
documents may disclose additional information on fees individual
participants pay, as shown in table 1.
Table 1: Selected Disclosure Documents Generally Required by ERISA That Include Information on Fees That Participants in
403(b) Plans May Receive
Document
Document purpose
Information on fees
Summary plan
description
To explain to participants how the plan
operates, outlining participant rights
and benefits under the plan
May contain information on how various fees such as investment,
recordkeeping, and loan fees are charged to participants.
Pension benefit
statement
To show the account balance due to a
participant
Typically identifies fees, such as for loans, that are directly
attributable to an account during a specific period. Also, may
show investment and record-keeping fees.
Summary annual report
To disclose the financial condition of
the plan to participants
Contains total plan costs incurred by plan participants during the
year.
18
For example, someone in a position of trust, such as a pension plan adviser, may have
competing professional or personal financial interests or incentives. A conflict of interest
could occur should the structure of advisers’ compensation and their other business
arrangements create competing interests that may bias their investment recommendations
to plan sponsors or participants. If left unchecked, conflicts of interest could lead plan
sponsors or participants to select investment options with higher fees or that are not in line
with their retirement goals, which, while beneficial to the service provider, could amount to
a significant reduction in retirement savings over a worker’s career. For more information,
see GAO, 401(k) Plans: Improved Regulation Could Better Protect Participants from
Conflicts of Interest, GAO-11-119 (Washington, D.C.: Jan. 28, 2011).
19
See, for example, 29 C.F.R. § 2550.404a-5.
Page 8 GAO-23-105620 403(b) Retirement Plans
Document
Document purpose
Information on fees
Participant fee
disclosures—
administrative expenses
To disclose a plan’s administrative and
individual fees (e.g., account
maintenance fees, participant loan
fees)
Requires plan administrators to furnish at least annually
information about administrative costs that may be charged to
participants and beneficiaries in participant-directed individual
account plans. Plan administrators also must disclose, at least
quarterly, administrative and individual fees actually paid by
participants and beneficiaries during the preceding quarter.
Participant fee
disclosures—investment
comparison chart
To ensure that participants are
provided sufficient information
regarding the plan’s investment
options, including fees and expenses
Requires plan administrators to furnish information about a plan’s
investment options including historical returns and associated
fees and expenses, which must be presented in a format
intended to facilitate comparisons between investment options.
Investment information must be furnished to participants or
beneficiaries on or before the date they can first direct their
investments, and then annually thereafter. The Department of
Labor (DOL) provides a model comparative chart, which may be
used by the plan administrator to satisfy the requirement that a
plan’s investment information be provided in a comparative
format.
Source: GAO analysis of the Employee Retirement Income Security Act of 1974, as amended (ERISA), and DOL information. l GAO-23-105620
As noted earlier, not all 403(b) plans are subject to ERISA. The type of
employer and, in certain cases, the extent to which the employer is
involved in the plan can determine whether a plan is subject to ERISA.
While ERISA plans must comply with ERISA-specific fiduciary duties,
403(b) plans that are not covered by ERISA (non-ERISA plans) are not
subject to those requirements.
20
In addition, 403(b) plans sponsored by
private sector tax-exempt organizations may qualify for a “Limited
Employer Involvement” safe harbor (safe harbor) exemption and, as such,
would not be subject to ERISA unless the plan fails to meet specific
criteria.
21
To fall under this safe harbor, participation in the plan must be
voluntary, and employers are not allowed to contribute to the plan or
make discretionary determinations in administering the plan, such as
processing distributions, authorizing plan-to-plan transfers, or making
determinations of eligibility for loans or hardship distributions. See figure 1
below for more details.
20
Non-ERISA plans may be required to comply with additional state consumer protection
laws or other state-specific laws.
21
As we reported in September 2009, DOL defined a “safe harbor” for 403(b) plans
sponsored by tax-exempt organizations. Sponsors that follow the safe harbor guidelines
are not considered subject to Title I of ERISA because the plan is considered not to have
been “established or maintained by an employer.” Sponsors of these plans must restrict
their involvement in the plan to certain actions, or they will become subject to Title I of
ERISA. See GAO-09-641.
Non-ERISA 403(b) Plans
Page 9 GAO-23-105620 403(b) Retirement Plans
Figure 1: The Type of Employer and Extent of the Employer’s Involvement in the
Plan Can Determine Whether a 403(b) Plan Is Subject to ERISA
a
A retirement plan, including a 403(b) plan, may be what is commonly known as a “church plan.”
Federal law defines a church plan as a plan established and maintained for its employees or
beneficiaries by a church or by a convention or association of churches that are tax exempt under
Internal Revenue Code section 501(a). This definition includes plans maintained by an organization
whose principal purpose or function is the administration and/or funding of the plan for the employees
of a church or convention or association of churches which is exempt under section 501 of the
Internal Revenue provided that the organization is controlled by or associated with a church or
association of churches (e.g., a pension board that administers benefits for plan participants). See 26
U.S.C. § 414(e) and 29 U.S.C. § 1002(33).
b
In certain circumstances, a 403(b) plan that meets certain criteria may qualify for a safe harbor
exemption and as such not be subject to ERISA. To fall under the Limited Employer Involvement safe
harbor, employer involvement in the plan must be limited. See 29 C.F.R. § 2510.3-2(f); see also
Department of Labor Field Assistance Bulletin 2007-02 (July 24, 2007).
Non-ERISA 403(b) plans are subject to state laws and regulations, which
may vary. For example, some states may have fiduciary laws that apply
to certain 403(b) plans, while other states may not have such
requirements. Different entities within a state may sponsor different
403(b) plans; for example, there may be one 403(b) plan for a state
university system and other plans for K-12 school districts. In other cases,
one 403(b) plan may cover multiple entities within a state. The rules that
govern those 403(b) plans may differ; for example, according to two large
Page 10 GAO-23-105620 403(b) Retirement Plans
providers with whom we spoke, some state regulations may apply to
public universities but not K-12 schools in certain states.
22
States generally take one of two key approaches to regulating non-ERISA
403(b) plans, many of which are for state university and public K-12
school plans. For the purposes of this report, we will refer to these
approaches as “closed- or open-access systems.” Specifically:
• Closed-access system. The plan selects one or a small number of
service providers, known as “vendors,” to offer investment options to
participants. In closed-access systems, plan participants select
options from a range of investment products, offered by the selected
vendor or vendors, which may or may not include the vendors’
proprietary products. Pooling assets together into a more limited
number of investment products may allow the plan sponsor to obtain
administrative cost efficiencies and economies of scale. In closed-
access systems, the relationships between plan sponsors,
participants, and vendor resemble those typical of 401(k) plans,
according to two experts and one stakeholder we interviewed.
• Open-access system. States do not restrict the number of vendors
that can sell investment products to a potential participant. States
using open-access systems may have laws with an “any willing
vendor” provision that requires 403(b) plans for public sector workers
to allow any vendor selected by a participant to provide investment
options for the plan. A participant could be selecting from among
dozens or even hundreds of investment options from potentially
dozens of vendors; in March 2022 we reported that one 403(b) plan
from a sponsor who had responded to our survey had once contained
as many as 1,600 investment options.
23
The relationship between a
participant and a plan’s service providers may, according to several
stakeholders we interviewed, more closely resemble Individual
22
For additional information, see National Tax-Deferred Savings Association, State
Sponsored 403(b) Plans: A Closer Look (Arlington, Va.: 2020). In many states, the primary
retirement savings plan for public sector workers is a defined benefit pension and the
403(b) plan is supplemental.
23
GAO-22-104439.
Page 11 GAO-23-105620 403(b) Retirement Plans
Retirement Accounts (IRA) than what one typically would find in
401(k) plans.
24
Whether a state uses a closed- or open-access system generally
determines if the employer (i.e., the plan sponsor) or the participant
controls the contract with the investment provider (see sidebar). In a
closed-access state, where the state or a designated entity within it acts
as the employer and administrator of the state’s 403(b) plan investment
options, contracts are generally employer controlled, whereas in an open-
access state where participants can work with any vendor, the contracts
are generally participant controlled, according to stakeholders we
consulted.
Employer-controlled vs. Non-employer-controlled 403(b) Contract Systems
According to a service provider and an expert we interviewed, in an employer-controlled
contract, the employer has the unilateral right to move money out of a contract to
another provider or investment. By contrast, in a participant-controlled contract, the
participant controls the movement of assets, and if an employer wants to move assets,
it must obtain the participant’s permission to do so.
In an open-access state, employees generally have the legal right to any provider, as
long as other conditions are met, such as a minimum number of participants opting for
that provider. A closed-access state allows the employer to limit the number of
providers.
According to a large service provider, open states’ contracts are individually participant
controlled; they are not group contracts. For example, a school district in a certain state
may have 30 payroll providers. Managing 30 payroll providers may be unwieldy, so the
school or plan may let them be managed individually. By contrast, a large university is
more likely to choose a dedicated provider for its investment options, according to
experts we spoke with.
Source: GAO interviews with 403(b) plan experts and stakeholders. I GAO-23-105620
In addition, sponsors of non-ERISA 403(b) plans are not subject to
disclosure requirements under ERISA—such as the fee comparison
described in table 1 above—although these plans may be subject to state
laws on disclosures.
25
As a result, the information about fees that
24
In this report, we use the term “several” to refer to three or four stakeholders we
interviewed, the term “multiple” to refer to five or more stakeholders we interviewed.
Though we asked about many of these options in our surveys, we did not systemically ask
all of our interview subjects about each of the options. For more information on our
methodology, see appendix I.
25
See GAO-09-641, which further notes that this applies to all plans not subject to Title I of
ERISA.
Page 12 GAO-23-105620 403(b) Retirement Plans
participants in different state and local government plans receive may
vary, depending on the state and locality in which they are employed. As
mentioned below, broker-dealers that make recommendations to 403(b)
plan participants are covered by SEC rules that mandate other
disclosures and other investor protections.
26
Federal agencies and Financial Industry Regulatory Authority, Inc.
(FINRA) have a role in regulating and overseeing both ERISA and non-
ERISA 403(b) plans or investment options provided to participants, as
described in figure 2.
Figure 2: Summary of Federal Roles in Regulating and Overseeing 403(b) Plans and Investment Options
Federal agency or self-regulatory organization
Role in regulating and overseeing 403(b) plans
The Department of
Labor (DOL)
DOL’s Employee Benefits Security Administration (EBSA) administers and
enforces Title I of ERISA. EBSA’s mission includes ensuring the security of
the retirement, health, and other workplace-related benefits of private-sector
workers and their families. EBSA has stated it accomplishes this mission by
developing regulations, assisting and educating plan sponsors, fiduciaries,
and service providers, as well as enforcing the law. DOL also conducts
enforcement of ERISA through civil and criminal investigations of retirement
and health plans and by encouraging plans to voluntarily remedy any
violations identified by EBSA’s regional office investigative staff, such as by
restoring plan or participant assets, paying for erroneously denied services,
and making needed administrative changes.
26
Broker-dealers are persons or entities who are in the business of buying or selling
securities on behalf of customers, on behalf of their own account, or both. Under
Regulation Best Interest, broker-dealers that make recommendations of securities or
investment strategies to retail customers have a general obligation to act in a retail
customer’s best interest, which is satisfied only if the broker-dealer complies with four
specified component obligations: disclosure, care, conflict of interest, and compliance.
Under the care obligation, broker-dealers must exercise reasonable diligence, care, and
skill when making a recommendation to a retail customer to, among other things,
understand the potential risks, rewards, and costs associated with the recommendation,
and have a reasonable basis to believe that the recommendation could be in the best
interest of at least some retail customers. See 17 C.F.R. § 240.15l-1 (a)(2)(ii)(A). Further,
the broker-dealer must have a reasonable basis to believe the recommendation is in the
best interest of a particular retail customer based on that retail customer’s investment
profile. See 17 C.F.R. § 240.15l-1(a)(2)(ii)(B). In addition, the conflict of interest obligation
requires broker-dealers to establish, maintain, and enforce written policies and procedures
reasonably designed to, among other things, identify and at a minimum disclose, or
eliminate, all conflicts of interest associated with a recommendation and identify and
mitigate (i.e., modify practices to reduce) conflicts of interest at the associated person
level. See 17 C.F.R. § 240.15l-(a)(2)(iii).
Roles of Federal and State
Agencies
Page 13 GAO-23-105620 403(b) Retirement Plans
Federal agency or self-regulatory organization
Role in regulating and overseeing 403(b) plans
Securities and
Exchange Commission
(SEC)
The SEC regulates fee disclosure for some vehicles that are offered as
retirement plan investment options, such as variable annuity products and
mutual funds. The SEC requires these vehicles to disclose fees in a
prospectus, a document that provides key information to help investors make
informed investment decisions. A mutual fund’s prospectus contains fund
information such as the investment objectives or goals, strategies for
achieving those goals, risks of investing in the fund, expenses (including
fees), and past performance. Through Regulation Best Interest, the
Investment Advisers Act of 1940, and the Investment Company Act of 1940,
the SEC regulates certain activities, including providing advice and
recommendations, in connection with securities and investment strategies
involving securities offered by entities registered under the Investment
Company Act of 1940, including mutual funds and variable annuities. The
SEC’s Division of Examinations administers the SEC’s nationwide
examination and inspection program for registered self-regulatory
organizations, broker-dealers, transfer agents, clearing agencies, investment
companies, and investment advisers. The SEC may also bring enforcement
actions under the antifraud provisions of the Securities Act of 1933 and the
Securities Exchange Act of 1934.
The Financial Industry
Regulatory Authority,
Inc. (FINRA)
FINRA is a nongovernmental, self-regulatory organization, authorized by
statute and registered with the SEC as a national securities association.
Among other things, FINRA writes and enforces rules governing the activities
of securities broker-dealer firms and their representatives, and examines
broker-dealers for compliance with FINRA rules and federal securities laws.
FINRA also provides regulatory services to other self-regulatory organizations
such as compliance examinations and enforcement.
Internal Revenue
Service (IRS)
The IRS administers the Internal Revenue Code (IRC), including provisions
related to 403(b) retirement plans. Among its responsibilities, the IRS is to
ensure that taxpayers comply with the tax law, including requirements related
to maintaining a plan’s tax-deferred status. The IRS has an examination
program to ensure employee benefit plans comply with the IRC. During its
examinations of 403(b) plans, the IRS determines whether the plan is
maintained in accordance with IRC requirements, including having a written
plan document, following universal availability rules
a
and ensuring that
elective deferrals do not exceed IRC limits.
Source: GAO analysis of DOL, SEC, FINRA, and IRS information. l GAO-105620
a
26 U.S.C. § 403(b)(12)(A)(ii). According to IRS information, if any employee of the employer
maintaining the 403(b) plan may defer more than $200 of salary into the plan, then all of the
employer’s employees must be given the opportunity to defer more than $200 of salary into the plan
unless a permitted exclusion applies.
In addition to these federal agencies, state insurance officials may also be
in charge of administering and enforcing state laws regarding certain
Page 14 GAO-23-105620 403(b) Retirement Plans
investment options offered in 403(b) plans—including fixed and indexed
annuities—which may vary by state.
27
DOL conducts some oversight through enforcement activities related to
ERISA 403(b) plans and service providers, along with 401(k) and other
ERISA plans and service providers.
28
As we have previously reported,
DOL conducts oversight through enforcement of ERISA plans using a
27
With a fixed annuity, participants are guaranteed a specified rate of return on their
contributions. Indexed annuities are a particular type of annuity that combines features of
securities and insurance products. In this type of annuity, an insurance company promises
that participants’ contributions will grow at a rate of return based on a market index, such
as the Standard & Poor’s 500 Index. According to SEC officials, most fixed and indexed
annuities are not securities and so are not subject to the federal securities laws or SEC
regulation.
28
DOL officials stated that many investigations are directed not at the plan level, but at the
service providers of multiple plans. For example, a national enforcement initiative
investigating issues related to fiduciary service provider compensation and conflicts of
interest in relation to plan assets identified a service provider as having violations in this
area in its administration of a university 403(b) plan and a health care system 403(b) plan.
As noted earlier, non-ERISA plans are not subject to ERISA’s fiduciary requirements,
although these plans may be subject to state consumer protection laws or other state-
specific fiduciary laws. Accordingly, DOL administers and enforces reporting and
disclosure and fiduciary provisions for retirement plans, including ERISA 403(b) plans.
Several Federal
Agencies Take Steps
to Oversee 403(b)
Plans and Investment
Options, but DOL Has
Limited Educational
Materials Targeted to
These Plans
Multiple Federal Agencies
Oversee and Enforce
Different Aspects of 403(b)
Plans and Investment
Options
DOL
Page 15 GAO-23-105620 403(b) Retirement Plans
range of strategies to identify plans to investigate.
29
For example, DOL
targets enforcement investigations for greater impact, by, among other
things, prioritizing plans that have large numbers of participants or
amounts of assets. According to agency officials, DOL includes 403(b)
plans through these larger enforcement investigation strategies rather
than focusing solely on 403(b) plans. These officials told us that DOL
identifies violations in ERISA 403(b) plans through its more general
enforcement investigations for defined contribution plans.
DOL’s enforcement investigations have included ERISA 403(b) plans,
which in some cases have resulted in monetary recoveries. Specifically,
from fiscal years 2010 through 2021, DOL identified violations in about 70
percent of its 454 enforcement investigations of ERISA 403(b) plans.
30
DOL’s actions resulted in more than $35 million in monetary recoveries
from its enforcement investigations of 403(b) plans during this time
period, of which about $13 million, or 38 percent, were from major
cases.
31
According to DOL’s data for fiscal year 2019, the agency
examined less than 1 percent of ERISA 403(b) plans.
32
Figure 3 presents
additional information regarding DOL’s enforcement investigations that
have included 403(b) plans.
29
DOL officials stated the agency has about one investigator for every 10,000 to 12,000
plans. DOL establishes investigation processes and provides policy direction, technical
investigative assistance, and oversight to about 400 enforcement personnel at national
and regional offices. For more information on DOL’s organizational structure and
processes for monitoring and enforcing employer-sponsored retirement plans, see GAO,
Employee Benefits Security Administration: Enforcement Efforts to Protect Participants’
Rights in Employer-Sponsored Retirement and Health Benefit Plans, GAO-21-376
(Washington, D.C.: May 27, 2021).
30
Similarly, according to data provided from DOL, from fiscal years 2010 through 2021,
DOL identified violations in about 77 percent of its closed cases involving 401(k) plans.
31
For 403(b) investigations, 162, or 36 percent, during the time period met participant and
asset thresholds to be classified as major cases. DOL identified major cases as those that
result in a loss recovery plan of $5 million or more; for defined contribution plans with 100–
250 participants, a recovery of 10 percent of plan assets (for which recovery is at least
$500,000), among other conditions. DOL officials said that other criteria besides the
described participant and asset thresholds could constitute a major case.
32
Agency data show that in fiscal year 2019, DOL opened an investigation on 35, or 0.17
percent, of ERISA 403(b) plans.
Page 16 GAO-23-105620 403(b) Retirement Plans
Figure 3: Information on Department of Labor’s (DOL) Enforcement of 403(b) Plan Cases, Fiscal Years 2010–2021
a
Met DOL participant and asset thresholds to be classified as major cases. DOL identified major
cases as those that result in a loss recovery plan of $5 million or more; payments to plan participants
totaling $1 million or more; and for defined contribution plans with 100–250 participants, a recovery of
10 percent of plan assets (for which recovery is at least $500,000), among other conditions. DOL
officials said that other criteria besides the described participant and asset thresholds could constitute
a major case.
Notes: GAO tabulated the total number of plans of a particular plan size using 2019 Form 5500 data.
The Form 5500 data were used to estimate the percentage of plans investigated.
According to DOL’s enforcement data, among the most common
violations found from fiscal years 2010 through 2021 were breaches of
fiduciary duties, imprudent administration, and failure to discharge duties
for the exclusive purpose of providing benefits to participants and
Page 17 GAO-23-105620 403(b) Retirement Plans
beneficiaries.
33
For example, during this time period, DOL identified 200
violations for fiduciary self-dealing, which DOL officials told us could
happen when a fiduciary uses plan assets for the fiduciary’s own interest
or own account. Table 2 presents the results for this and other types of
violations DOL frequently identified during its enforcement investigations
that have included 403(b) plans.
Table 2: Most Frequent Violations the Department of Labor (DOL) Identified for 403(b) Plan Cases Closed, Fiscal Years 2010–
2021
Violation type Explanation of violation type
Number of cases
cited with that
violation
Not providing benefits
prudently and for exclusive
purpose of providing benefits
to participants and
beneficiaries
See 29 U.S.C. §
1104(a)(1)(A), (B)
The fiduciary did not discharge duties solely in the interests of the participants
and beneficiaries, for the exclusive purpose of providing benefits to participants
and their beneficiaries and defraying reasonable expenses of administering the
plan, and with the care, skill, prudence, and diligence under the circumstances
that a prudent person acting in a like capacity and familiar with such matters
would use.
321
Other substantive imprudence
See 29 U.S.C. § 1104
(a)(1)(B)
Not acting in accordance with the care, skill, prudence, and diligence under the
circumstances that a prudent person acting in a like capacity and familiar with
such matters would use.
255
Fiduciary self-dealing
See 29 U.S.C. §1106(b)(1)
Fiduciaries dealt with plan assets for their own self-interest, among other things.
200
Other 406(b)(2)
See 29 U.S.C. §1106(b)(2)
The fiduciary acted in any transaction involving the plan on behalf of a party
whose interests were adverse to the interests of the plan or the interests of its
participants or beneficiaries.
199
Plan assets not to inure to
benefit of employer See 29
U.S.C. § 1103(c)(1)
The assets of a plan were used improperly for the benefit of an employer or were
not held for the exclusive purpose of providing benefits to participants in the plan
and their beneficiaries and defraying reasonable expenses of administering the
plan.
172
Delinquent contributions See
29 U.S.C. § 1106(a)(1)(D)
Failure to timely remit contributions to the plan.
172
Disclosure violation
See e.g., 29 U.S.C. §
1021(a); 29 C.F.R. §
2520.104b-2
Summary plan description or other required information not furnished to
participants and beneficiaries.
60
Failure to establish trust See
29 U.S.C. § 1103(a)
Assets of an employee benefit plan were not held in trust by one or more trustees,
who are to be named in the plan or trust instrument or appointed by a person who
is a named fiduciary.
56
Source: GAO analysis of DOL data. | GAO-23-105620
33
DOL officials stated that the types of violations identified for 403(b) plan administration
were similar for 401(k) and other defined contribution plans.
Page 18 GAO-23-105620 403(b) Retirement Plans
Note: The table presents information on cases that DOL closed during the time period; there may be
some cases conducted during this time frame that have identified violation but are still open.
DOL’s enforcement efforts do not include verifying whether certain 403(b)
plans comply with the conditions of the safe harbor. As previously noted,
403(b) plans from private sector tax-exempt organizations that fall within
the conditions for the Limited Employer Involvement safe harbor are
exempt from ERISA.
34
In our September 2009 report, we found that DOL
did not have the specific authority to collect information to help ensure
that sponsors of certain 403(b) plans protect participants’ interests—
including those of tax-exempt organizations—and may fall outside the
safe harbor.
35
We recommended that Congress consider giving DOL
specific authority to collect information to systematically monitor safe
harbor 403(b) plans. Such authority would allow DOL to identify and
determine whether any such plans are operating outside the safe harbor
conditions and are subject to ERISA and the protections it affords to
participants.
36
As of March 2023, Congress has not addressed this
matter. We continue to believe that giving DOL this specific authority
would help the agency conduct its oversight.
SEC’s examination and enforcement activities focus on overseeing
investment vehicles, like mutual funds and variable annuities, and
ensuring that broker-dealers and associated persons involved in the sales
of 403(b) investment options comply with applicable federal securities
laws and regulations.
37
These efforts include helping to ensure that the
34
See 29 C.F.R. § 2510.3-2(f).
35
GAO-09-641.
36
For example, DOL might be able to coordinate with the IRS to help identify private
sector tax-exempt organizations that sponsor a 403(b) plan and may be using the Limited
Employer Involvement safe harbor. Specifically, using information from certain tax filings,
including Form W-2, Employer Identification Number (EIN), and Exempt Organizations
Business Master File Extract data, agencies could identify if an organization is a tax-
exempt, nongovernmental, and nonchurch entity with a 403(b) plan. In addition to these
data, ERISA 403(b) plans annually file a Form 5500 while non-ERISA safe harbor plans
do not. By combining these data, DOL could identify 403(b) plans sponsored by tax-
exempt organizations that do not file the Form 5500. These plans would include those
potentially using the safe harbor. DOL and IRS officials said the agencies share some
information and may refer specific cases as part of their oversight responsibility for 403(b)
plans, but these efforts do not include information to systematically identify plans
potentially using the safe harbor.
37
In some cases, the results of SEC examinations are referred to the SEC’s Division of
Enforcement for potential enforcement activity. This report discusses and covers the
SEC’s oversight through its examination process, and selected results of SEC
enforcement activities are also provided.
SEC
Page 19 GAO-23-105620 403(b) Retirement Plans
recommendations and actions of registered broker-dealers who may be
selling those securities to 403(b) plan participants comply with applicable
requirements. For example, the SEC oversees whether conflicts of
interest when a broker-dealer recommends a security are properly
disclosed, and mitigated (that is, reduced) or eliminated, if necessary, in
the sale of a security.
38
The SEC also oversees whether fees in
connection with the sale of a security are properly disclosed.
39
According to SEC officials and agency documentation, the agency
completes about 3,000 examinations each year, and many of these
examinations of broker-dealers and investment advisers involve
investment products included in 403(b) plan accounts. SEC officials told
us the agency generally does not collect data to identify whether 403(b)
investment options or service providers were involved in any specific SEC
examination of an SEC registered entity because examinations are
generally scoped to look at broader compliance issues or investment
options, or both.
40
The SEC also has filed enforcement actions related to misconduct by
403(b) providers. For example, in July 2022, the SEC announced fraud
charges against a life insurance company for providing account
statements to about 1.4 million variable annuity investors that included
materially misleading statements and omissions concerning investor fees.
As described in the SEC’s order, since at least 2016, the insurance
company gave investors the false impression that their quarterly account
statements listed all fees paid during the period. The SEC’s investigation
found that, in reality, the statements listed only certain types of fees that
investors infrequently incurred and that more often than not the
statements had $0.00 listed for fees. The insurance company agreed to
pay $50 million to harmed investors, most of whom are public school
teachers and staff members, to settle the charges.
Additionally, in July 2020, the SEC charged a financial services company
in a pair of actions for failing to disclose to teachers and other investors
practices that generated millions of dollars in fees and other financial
38
According to SEC officials, retirement products offered by vendors without any
recommendation are not subject to Regulation Best Interest.
39
See 17 C.F.R. § 240.15l-1(a)(2)(i)(A)(2); SEC v. Capital Gains Research Bureau, Inc.,
375 U.S. 180, 194 (1963).
40
Accordingly, the SEC’s examinations include examinations of broker-dealers and
investment advisers.
Page 20 GAO-23-105620 403(b) Retirement Plans
benefits for the company. In the first action, according to documentation
we reviewed, the SEC found that the financial services company failed to
disclose that its parent company paid a for-profit entity owned by Florida
K-12 teachers’ unions to promote the financial services company and its
parent company services to teachers. In the second action, the SEC
found that the financial services company failed to disclose conflicts of
interest regarding its receipt of millions of dollars of financial benefits that
directly resulted from advisory client mutual fund investments that were
generally more expensive for clients than other mutual fund investment
options available to clients. SEC officials said they expect these actions
will result in significant savings for thousands of teachers.
FINRA’s oversight activities focus on ensuring that broker-dealers and
their associated persons—who may be involved in the sales of 403(b)
investment options—comply with applicable FINRA rules and federal
securities laws and regulations.
41
For example, FINRA’s efforts include
oversight of broker-dealers’ compliance with FINRA Rule 2330, which
requires broker-dealers, when recommending purchases or exchanges of
deferred variable annuities, to meet specified obligations. These
obligations include appropriately informing customers (including those
who are participants in 403(b) plans) about any applicable fees, among
other things.
42
FINRA representatives told us that since 2005, FINRA has
41
FINRA is a nongovernmental, self-regulatory organization, authorized by statute and
registered with the SEC as a national securities association.
42
FINRA Rule 2330 governs recommended purchases and exchanges of deferred
variable annuities and recommended initial subaccount allocations. Further, Rule 2330
applies to 403(b) plans where a firm or its representatives makes recommendations to an
individual plan participant regarding a deferred variable annuity. The rule specifies that no
member or person associated with a member shall recommend to any customer the
purchase or exchange of a deferred variable annuity unless such member or person
associated with a member has a reasonable basis to believe, among other things, that (1)
the customer would benefit from certain features of deferred variable annuities, such as
tax-deferred growth, annuitization, or a death or living benefit; and (2) the customer has
been informed in general terms of various features of deferred variable annuities, such as
the potential surrender period and surrender charge, potential tax penalty if customers sell
or redeem deferred variable annuities before reaching the age of 59½, investment
advisory fees, and market risk, among other things.
FINRA
Page 21 GAO-23-105620 403(b) Retirement Plans
brought 28 disciplinary actions against broker-dealers and associated
persons that mention 403(b) retirement accounts.
43
According to FINRA representatives, the largest sanction imposed
against a broker-dealer was an $8 million fine plus payment of $89 million
in restitution to affected customers for violations. These violations
included the firm’s failure to identify and apply sales charge waivers to
eligible retirement accounts, including 403(b) accounts, and weaknesses
in the broker-dealers’ supervisory systems. Ten of the disciplinary actions
resulted in bars against individuals and 12 involved charges against
individuals for forging customer signatures or otherwise altering 403(b)
account-related documents, according to FINRA representatives.
According to FINRA representatives, two of the 28 cases that mention
403(b) plans involved violations of FINRA’s rule regarding selling variable
annuities (FINRA Rule 2330). One, a March 2021 settlement with a firm,
resulted in a censure and fine of $15,000 for violations including FINRA
Rule 2330. The other was an August 2015 decision by FINRA’s Office of
Hearing Officers against a different firm, imposing a $50,000 fine for
violations of FINRA rules, including FINRA Rule 2330, as well as
applicable costs for the proceeding.
The IRS’s oversight activities focus on ensuring that 403(b) plans comply
with Internal Revenue Code requirements through its examination
program for 403(b) plans. For example, The IRS ensures that participants
are not contributing to tax qualified retirement plans, including 403(b)
plans, in higher-than-permissible amounts. IRS data indicate the agency
completed 1,912 examinations involving 403(b) plans from fiscal years
2011 through 2020. Its examinations identified tax compliance issues in
43
FINRA representatives compiled and provided GAO summary data in May 2022 that
they stated were those cases that mentioned 403(b) plans from 2005 onward from
FINRA’s publicly available enforcement database. GAO conducted its own search of the
database and identified 32 documents that mentioned 403(b) plans from 2005 through
December 2022. According to FINRA representatives, there are more entries in the
FINRA database than the number of cases because a few cases have more than one
related document (e.g., Complaint and Offer of Settlement or Decision) in the database.
IRS
Page 22 GAO-23-105620 403(b) Retirement Plans
about 82 percent of these examinations.
44
IRS officials stated that the IRC
is complicated and highly nuanced, and that it is challenging for a plan or
service provider to be in full compliance with all of its provisions. The top
three tax compliance issues IRS examinations identified during the time
period were universal availability (328 instances), non-return unit 403(b)
plan, other concern (261 instances), and excessive contributions (209
instances).
45
In addition, IRS officials told us that if the agency discovers
a possible breach of fiduciary duty by a 403(b) plan under ERISA, the IRS
has a program to refer the issue to DOL.
46
As part of their oversight activities, DOL, SEC, and IRS provide outreach
and educational materials to 403(b) plan sponsors and participants.
47
However, we found that DOL’s guidance on retirement plans focused
primarily on 401(k) plans and that references to 403(b) plans may not be
easily identified by plan sponsors and participants.
44
According to IRS officials, the agency has identified higher rates of tax compliance
issues in 403(b) plans than in 401(k) plans. Officials stated that the higher rate of tax
compliance issues among 403(b) plans may be due to small employers that have a more
difficult time understanding and complying with the relevant laws. IRS officials told us the
issues the agency generally sees in smaller 401(k) and 403(b) plans are specific to each
type of plan.
45
According to IRS information, under the universal availability requirement, if any
employee of the employer maintaining the 403(b) plan may defer more than $200 of salary
into the plan, then all of the employer’s employees must be given the opportunity to defer
more than $200 of salary into the plan unless a permitted exclusion applies. Non-return
unit plans are those that have compliance or tax qualification requirements that did not file
a Form 5500; IRS officials stated these were often small 403(b) plans that had difficulty
understanding and complying with the requirements for operating a 403(b) plan, and noted
not all—particularly non-ERISA plans—were required to file a Form 5500. Excess
contributions are contributions to a participant’s 403(b) retirement account in excess of the
limit on annual additions (the combination of all employer contributions and employee
elective salary deferrals to all 403(b) accounts.
46
IRS officials stated that the IRS has had a list of referrals to DOL since the beginning of
2021. However, the list is not broken down by plan type so it cannot specifically identify
403(b) plans. Officials said the IRS began tracking referrals in 2021 because of a request
by DOL. However, IRS officials stated it does not see a business need to track referrals
since it does not impact the agency’s examination cases.
47
We did not review FINRA because its activities are oriented toward the rules and
regulations applicable to registered broker-dealers and their associated persons. FINRA
representatives did tell us that they have a department focused on investor education and
a wholly owned subsidiary, the FINRA Investor Education Foundation, that focuses on
financial well-being more broadly.
Federal Agencies Provide
Outreach and Educational
Materials, but DOL Has
Limited Information
Targeted to 403(b) Plans
Page 23 GAO-23-105620 403(b) Retirement Plans
DOL’s benefits advisors conduct education and outreach events for
workers, employers, and plan sponsors. DOL data indicate that the
agency conducted 20,673 outreach events of various types from fiscal
year 2012 through March of fiscal year 2022. About 4,190 (or 20 percent)
of these events were public awareness events.
48
Agency officials told us
these events are not specific to 403(b) plans, and are aimed at enhancing
a general understanding of retirement and other workplace-based
benefits.
49
DOL officials told us that the audiences at its outreach events—small
businesses and participants—are not familiar with the law, so the
outreach is done at a basic level with information that applies across
defined contribution plans and other workplace-based benefits.
50
DOL
officials said attendees can ask questions related to their specific types of
plans, and stated this approach is effective given their limited resources.
In addition to outreach efforts, DOL also provides guidance and
educational materials on its website related to 403(b) plans, as shown in
figure 4.
48
In addition, DOL conducted 13,091 participant outreach events between fiscal years
2012 and 2022. DOL officials said compliance assistance event audiences include
fiduciaries, service providers, and employers. Other outreach events are participant
assistance activities, including rapid response events designed to educate employees
facing job loss about their rights. DOL officials also told us the agency fields around
200,000 inquiries from the general public per year. Fewer than 1,000 of those inquiries per
year concern 403(b) plans, according to DOL officials.
49
As we reported in May 2021, EBSA dramatically increased the number of dedicated
worker events in fiscal year 2020, designed to educate employees facing job loss, among
other items. See GAO-21-376.
50
Five of the 25 plan sponsors that responded to our survey stated that they would like
more information regarding whether ERISA applies to certain 403(b) plans, and also
stated they would like more information regarding the applicability of safe harbors. For full
results of our surveys of 403(b) plan sponsors and service providers, see appendix III.
DOL
Page 24 GAO-23-105620 403(b) Retirement Plans
Figure 4: Educational Materials on the Department of Labor’s (DOL) Website Regarding Reporting and Coverage for 403(b)
Plans
Page 25 GAO-23-105620 403(b) Retirement Plans
Notes: DOL’s website for 403(b) plans is at https://www.dol.gov/agencies/ebsa/employers-and-
advisers/plan-administration-and-compliance/retirement/reporting-and-coverage-for-403b-plans.
Figure information is current as of April 2023.
Specifically, the website includes three Field Assistance Bulletins on
403(b) plans,
51
and a number of publications intended to educate plan
fiduciaries and participants on defined contribution plans and other
workplace-based plans more generally, such as publications entitled
Meeting Your Fiduciary Responsibilities and Reporting and Disclosure
Guide for Employee Benefit Plans.
52
However, we found that the educational materials on DOL’s website lack
the same level of detailed information on 403(b) plans as for 401(k) plans.
Moreover, this information may not provide details that 403(b) plan
sponsors or participants find useful for making informed decisions
involving plan fees. For example, EBSA’s website, Understanding Your
Retirement Plan Fees, and its brochure, What You Should Know About
Your Retirement Plan, refer only to 401(k) plan fees.
53
In addition, another
guide EBSA developed to help participants understand their plan fees, A
Look at 401(k) Plan Fees, does not reference 403(b) plans. However,
many of the fees described in this guide, such as administrative fees and
expense ratios, are also applicable to 403(b) plans.
Similarly, our review of other content on the agency’s website found that
much of its educational materials could be relevant to several types of
retirement plans, including ERISA 403(b) plans. However, these materials
do not highlight 403(b) plans or make these commonalities among
retirement plans clear to readers. For example, the information in EBSA
guides for plan sponsors, such as FAQs about Retirement Plans and
ERISA and Target Date Retirement Funds –Tips for ERISA Plan
Fiduciaries, are also applicable to any 403(b) plan sponsor looking for
51
See Department of Labor, Field Assistance Bulletin 2007-02 (July 24, 2007); Field
Assistance Bulletin 2009-02 (July 20, 2009); and Field Assistance Bulletin 2010-01 (Feb.
17, 2010).
52
DOL’s 403(b) website is at https://www.dol.gov/agencies/ebsa/employers-and-
advisers/plan-administration-and-compliance/retirement/reporting-and-coverage-for-403b-
plans.
53
See https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-
center/publications/understanding-your-retirement-plan-fees and
https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-
center/publications/what-you-should-know-about-your-retirement-plan.pdf.
Page 26 GAO-23-105620 403(b) Retirement Plans
guidance in complying with ERISA, but DOL does not make this clear.
54
DOL’s website provides a disclosure tool for 401(k) plans that contains
material that could also be used or adapted for use by 403(b) plans, as
well as a model comparative chart to satisfy a requirement that
information on a plan’s investment options be provided in a comparative
format.
55
DOL included these documents on its 401(k) website, as shown
in figure 5, but does not include them on its 403(b) website.
54
See https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-
center/faqs/retirement-plans-and-erisa-compliance.pdf and
https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/fact-
sheets/tips-for-selecting-and-monitoring-service-providers.pdf.
55
See https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-
and-compliance/retirement. For the chart, see
https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-
center/publications/providing-information-in-participant-directed-plans-model-chart.doc.
Page 27 GAO-23-105620 403(b) Retirement Plans
Figure 5: Educational Materials on the Department of Labor’s Website Regarding Reporting and Coverage for 401(k) Plans
Notes: DOL’s 401(k) website is at
https://www.dol.gov/agencies/ebsa/key-topics/retirement/401k-plans. Figure information is current as
of April 2023.
Page 28 GAO-23-105620 403(b) Retirement Plans
Several experts and stakeholders we interviewed told us that additional
educational materials targeted to 403(b) plans could help plan sponsors
or participants better understand the nuances of these plans and help
them make informed decisions to ensure their retirement objectives are
met. For example, two industry stakeholders, along with one industry
expert, suggested that small plan sponsors could obtain information on
leading industry practices on plan management, including how to
navigate relationships with third-party administrators or other service
providers.
The mission of DOL’s EBSA is, among other things, to ensure the
security of the retirement benefits of America’s workers and their families.
The agency states it accomplishes this mission, in part, by assisting and
educating workers, plan sponsors, fiduciaries, and service providers.
Additionally, federal standards for internal control state that organizations
should provide quality information to external stakeholders, and that
effective information and communication, including quality information to
external parties, are vital for an organization to achieve its objectives.
56
This includes providing quality information to clarify requirements and
responsibilities. In this case, DOL’s online materials to assist and educate
plan sponsors, fiduciaries, service providers, and participants do not
reference 403(b) plans—plans that millions of teachers and employees of
nonprofits depend on for their retirement.
DOL officials told us that the agency’s 401(k) publications could help
ERISA 403(b) plan sponsors, participants, and other interested parties to
evaluate fees and expenses in those plans. DOL officials told us they
would consider reviewing the relevant publications on its 403(b) website
to assess whether the agency should include more content targeted to
403(b) plans.
DOL can update its educational materials specific to 403(b) plans to help
403(b) plan sponsors and participants make informed investment
decisions. Such information could include a checklist or evaluative tools
for 403(b) plans that plan sponsors and participants could use to assess
403(b) plan fees. Additionally, providing explicit references to 403(b)
plans in its existing online educational materials would help 403(b) plan
56
See GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: September 2014). We assessed DOL’s informational materials against
internal control principles 13.01 and 15.01.
Page 29 GAO-23-105620 403(b) Retirement Plans
sponsors and participants identify resources intended to help them make
informed decisions in the context of complex investment options.
The SEC has developed targeted outreach and informational materials for
403(b) plan sponsors and participants. Specifically, in 2019, according to
SEC officials, the SEC announced a new, nationwide Teachers’ Initiative,
led by the SEC’s Division of Enforcement in partnership with the SEC’s
Office of Investor Education and Advocacy.
57
SEC officials told us it would
build on a San Francisco Regional Office Teacher Investment Outreach
program, as detailed in the sidebar.
58
According to SEC documentation,
the initiatives will increase proactive outreach to teachers to educate them
about savings and investment, investment fees and expenses, retirement
programs specific to educators, and the red flags of investment fraud.
The SEC’s San Francisco Regional Office Outreach Activities Related to 403(b)
Plans
In 2017, the Securities and Exchange Commission’s (SEC) San Francisco Regional
Office (SFRO) staff launched the Teacher Investment Outreach Initiative to better
understand the investment education needs of public school employees and to provide
tools to help them with their investment decisions. According to SEC officials, in
researching this topic, SFRO staff uncovered several challenges in this area, including:
• investment education tools with incomplete information;
• overwhelming investment product choices offered by employers;
• aggressive marketing efforts by some of the vendors offering investment products;
• possible conflicts of interest due to affiliations between plan administrators and
vendors; and
• no fiduciary requirement on 403(b) plans.
As part of these local outreach efforts, according to SEC officials, since 2017 SFRO
staff have attended industry conferences, education workshops, benefits fairs, union
events and hosted three Retirement Investment Summit on Education (RISE of
California) events geared toward getting the word out to California educators who were
investing in 403(b)s, as well as industry stakeholders in this space. SEC officials stated
that by 2018, staff in other SEC regional offices launched similar outreach efforts.
Source: GAO interviews of SEC officials. | GAO-23-105620
57
https://www.sec.gov/news/press-release/2019-85.
58
In addition, according to SEC officials, since 2019, the SEC’s SFRO and Los Angeles
Regional Office staff have engaged in quarterly meetings with various federal and state
regulators relating to activities and issues in the non-ERISA 403(b) space in California
through the Teacher Investment Regulatory Roundtable. These meetings are used to
share information on what each agency or entity is seeing and doing in this area and to
discuss regulatory gaps and overlap among regulators in the non-ERISA 403(b) space.
According to SEC officials, other participants include representatives from DOL,
Consumer Financial Protection Bureau, California Office of the Attorney General, the
California Department of Insurance, the California Department of Financial Protection and
Innovation, and FINRA.
SEC
Page 30 GAO-23-105620 403(b) Retirement Plans
In addition to these outreach efforts, the agency also has provided
teacher-oriented investor education materials through a website with
consumer protection information, including information regarding 403(b)
plans that is specifically aimed at teachers, as shown in figure 6.
Page 31 GAO-23-105620 403(b) Retirement Plans
Figure 6: Securities and Exchange Commission (SEC) Educational Materials for 403(b) Plan Sponsors and Participants
Note: Figure information current as of March 2023.
Page 32 GAO-23-105620 403(b) Retirement Plans
On the SEC’s websites, including Investor.gov, a number of guides are
available, including A Guide for Teachers: Saving and Investing for K-12
Educators and Tips for Teachers: Investing for Retirement – Updated
Investor Bulletin.
59
The SEC’s San Francisco Regional Office also
developed a flyer for outreach to teachers. The document notes:
“Investment options and costs can vary and be complicated. Don’t
assume that your employer has screened or approved any particular
investment product or any firm or professional that sells 403(b)
investments. This is why it’s so important to do some homework on your
own to be sure your investment choices are the best for you, in light of
your personal circumstances and financial objectives.”
In addition to its website, SEC officials also noted that the agency
provides teacher-orientated investor education materials through social
media. Officials told us continued public education efforts are important,
in light of recent enforcement outcomes and a perceived lack of education
regarding 403(b) investment options among some 403(b) participants.
IRS officials told us the agency focuses on providing information on
403(b) tax compliance issues. To provide outreach to tax professionals,
the agency provides information specific to 403(b) plan administration at
industry events, and offers educational materials and services to increase
understanding and compliance by tax-exempt organizations, public
schools and universities, and others who might offer these plans.
60
To support its efforts to educate plan sponsors and participants, the IRS
has several publications on its website. These publications may help
403(b) plan sponsors and participants understand how to comply with
IRC requirements, such as plan contribution limits. For example, in
November 2022, the IRS issued updated guidance to allow plan sponsors
59
See https://www.investor.gov/additional-resources/general-resources/publications-
research/publications/guide-teachers-saving and https://www.sec.gov/oiea/investor-alerts-
and-bulletins/tips-teachers-investing-retirement-investor-bulletin.
60
For example, IRS officials said they presented information regarding the IRS’s 403(b)
plan determination program and plan pre-approval program at events at four retirement
industry conferences and events in 2022.
IRS
Page 33 GAO-23-105620 403(b) Retirement Plans
to obtain preclearance from the IRS that their proposed 403(b) plan
documents meet IRC requirements.
61
Other IRS materials relevant to 403(b) plans include IRS Publication 571,
IRC 403(b) Tax-Sheltered Annuity Plans webpage, the IRS 403(b) Plan
Checklist, and the IRS Retirement Plans FAQs regarding 403(b) Tax-
Sheltered Annuity Plans.
62
For example, the IRS’s Plan Checklist notes
the importance for plan administrators to review the requirements for
operating the 403(b) plan each year. It also asks 403(b) plan sponsors to
confirm that the plan’s operations are based on a written plan document,
and that any elective deferrals are within deferral limits for that year.
Officials we interviewed from the five selected states—California,
Connecticut, Delaware, Kansas, and Texas—reported taking a range of
actions to improve participant outcomes. We reviewed how five selected
states worked to improve outcomes—including in three cases reducing
fees participants pay—in 403(b) plans that are not subject to ERISA
requirements. For example, officials in four of the five selected states
reported taking one or more actions to strengthen plan sponsors’
oversight. In addition, officials in four of the five selected states said they
took action to enhance transparency.
63
Officials in four of the five selected states reported taking action to
improve participant outcomes in non-ERISA 403(b) plans by
strengthening the oversight of plan investment options. In particular,
61
IRS Rev. Proc. 2022-40 permits the submission of determination letter applications for
403(b) individually designed plans. Among other things, this revenue procedure also
modifies the circumstances under which a plan is considered to have been issued an
initial plan determination.
62
See https://www.irs.gov/pub/irs-pdf/p571.pdf, https://www.irs.gov/retirement-plans/irc-
403b-tax-sheltered-annuity-plans, https://www.irs.gov/pub/irs-pdf/p4546.pdf, and
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-
annuity-plans.
63
We did not conduct an independent legal analysis to verify the information provided
about the laws, regulations, or policies of the countries selected for this study. For more
information on non-ERISA 403(b) plan administration and oversight in each of the five
selected states, including other information regarding, for example, how often the state
recompetes its service contracts and whether the state has adopted elements of ERISA
as best practices, see appendix II.
Selected States
Reported Taking
Actions to Strengthen
Plan Oversight and
Transparency of
Investment Options
for Non-ERISA 403(b)
Plans
Strengthening Oversight
Page 34 GAO-23-105620 403(b) Retirement Plans
officials in these states reported strengthening oversight by (1)
centralizing the administration of non-ERISA 403(b) plans in their state
using a closed system with a limited number of service providers, (2)
enacting laws or regulations to help ensure the plan is operated in the
best interest of participants, or (3) adopting a request for proposal
process (RFP) for selecting vendors.
64
Officials in three of the five selected states—Connecticut, Delaware, and
Kansas—reported centralizing the administration of 403(b) plans and
limiting the number of service providers used by a plan, measures that
can strengthen plan oversight.
65
An expert and two stakeholders we
interviewed said limiting the number of providers creates a more direct
and active role for the plan sponsor in vetting investment options offered
to participants and ensuring options are economically beneficial to
participants.
66
Stakeholders and plan sponsors stated this consolidation may result in a
more simplified process and lower fees for participants. For example,
according to documentation we reviewed and state officials we spoke
with, Connecticut had 66 vendors offering hundreds of investment
options, and then in 2002, after the legislature transferred authority over
the plan to the Office of the State Comptroller, narrowed the list of
authorized providers to six. Over time the state has consolidated its plan
further to have one service provider offering 14 investment options.
Connecticut officials said centralized administration of the plan has
resulted in significant cost savings for participants.
Several stakeholders noted that a centralized structure allows for the
hiring of expert staff to administer and oversee the plan and ensure
investment options meet participants’ interests. For example, an official in
64
For detailed information on each of these selected states’ actions, see appendix II.
65
For Kansas, this refers to the plan provided for Kansas Board of Regents employees.
We also note that while California is an open-access system state, it has a statewide
California State Teachers Retirement System (CalSTRS) Pension2 plan.
66
According to documentation provided by a selected state, historically, 403(b) plan
sponsors typically offered individual or participant-controlled contracts, meaning the
participant was the contract holder and only the participant could transfer assets to a new
contract. A state official noted that participant-controlled contracts made it administratively
difficult to monitor the plan and could interfere with the plan sponsor’s ability to exercise its
fiduciary duty to remove unsuitable investments. Therefore, the official said, the industry
has been reducing the number of approved service providers and moving toward group or
employer-controlled contracts for 403(b) plans.
Centralizing Program
Administration
Page 35 GAO-23-105620 403(b) Retirement Plans
Delaware reported that the state became a closed-access system in 2016
and now uses a plans management board to manage and administer the
state’s 403(b) plan. The state official said that by centralizing the program
structure, the state, via the Plans Management Board, is able to select
service providers, including investment options vendors, for the plan
based on fees, among other things. The official from Delaware stated the
plan was able to achieve economies of scale by plan consolidation,
resulting in lower fees for participants. As a result, the official said in
recent years the board reduced fees for the plan’s investment options
from a maximum of 4.17 percent annually to between 0.05 to 0.87
percent annually for its participants. As part of its contract, the plan’s
service provider sends participants quarterly statements of investment
fund performance and administrative and investment option fees similar
to those required under ERISA.
Figure 7 provides details on the reduction in fees that two states reported
when moving toward a closed, consolidated system.
67
67
In addition to Connecticut and Delaware, a Kansas official also reported reducing certain
fees for investment options for the plan provided for employees of the Kansas Board of
Regents and educational institutions under the Board’s management. For more
information, see appendix II.
Page 36 GAO-23-105620 403(b) Retirement Plans
Figure 7: Investment Fees Pre- and Post-403(b) Plan Consolidation, as Reported by Two Selected States
Notes: Connecticut state officials stated that data regarding preconsolidation administrative fees were
not available. Post consolidation in 2004, Connecticut’s plan investment fees ranged from 0.02
percent to 0.58 percent, and according to plan documentation resulted in a weighted average
expense ratio that includes the proportion of the funds’ assets across all investment option allocations
of 0.42 percent. Post consolidation the administrative fee is 0.0285 percent, according to state
documentation. Delaware’s 403(b) data included high and low fees pre and post consolidation, but
not an average across all investment options. Delaware officials stated that preconsolidation
participants paid between $0 and $65 per participant as an administrative fee. Because the
administrative fee is a flat charge per participant account, we did not include it in the graphic. Post-
consolidation, Delaware participants paid an up to 0.13 percent maximum per participant
administrative fee.
In contrast to centralizing the program administration, the other two
selected states—California and Texas—reported using an open-access
system that allows participants to select from a broader range of
investment providers. For example, in 2019 Texas moved to an open-
access system and removed investment option fee caps. These changes
would provide teachers access to a greater number of investment options
Page 37 GAO-23-105620 403(b) Retirement Plans
and services and investment products that may have higher returns,
according to the bill sponsor’s statement of intent accompanying the
enacted legislation. Specifically, according to the bill sponsor statement
supporting the 2019 change, the legislation was intended to repeal
authority that the Teachers Retirement System Board in Texas previously
held, including its authority to cap fees. According to the bill sponsor’s
statement, limiting fees could reduce investment product offerings and a
company’s ability to offer services that provide valuable advice and
educational tools that can assist teachers in making appropriate choices
for their retirement income.
As another example, an industry association guide for plan sponsors
noted there is a 25 percent greater participation rate in 403(b) plans with
15 or more investment providers compared to plans with only one
provider.
68
Further, the guide noted that decreasing the number of plans,
or consolidating all participants into a single plan type, minimized the
number of advisers available to assist participants with information about
their 403(b) plans. The guide stated that this may have contributed to
declines in plan participation.
69
Officials in three of the selected states—Connecticut, Delaware, and
Kansas—reported taking recent actions to enhance participant
protections, which can strengthen oversight. These reported actions
included establishing fiduciary duties for plan sponsors or administrators
or enacting state regulations requiring vendors of annuities, including
those offered as 403(b) plan investment options, to act in the best interest
of participants. The sidebar provides information on the various types of
standards of care, such as fiduciary standards, that may be afforded
through law or regulation at the federal or state level to protect
participants’ interests.
68
See National Tax-Deferred Savings Association, 403(b) Plan Sponsor Guide: A
Comprehensive Guide for Public Education 403(b) Retirement Plans, accessed March 3,
2022, https://ntsa-cres.org/wp-content/uploads/2019/04/CRES-403b-Plan-Sponsor-Guide-
All-Version-2.pdf.
69
However, according to one selected state, participation has increased since the plan’s
consolidation. An official from Delaware reported that in March 2015, as the state began
its RFP process toward plan consolidation, there were 13 vendors, and 5,700 participants
were contributing to the State’s 403b plan. As of April 2023, there were more than 6,600
participants actively contributing to the plan.
Enacting Statutory and
Regulatory Protections for
Participants
Page 38 GAO-23-105620 403(b) Retirement Plans
Types of Standards of Care
Fiduciary: Fiduciary standards, such as those provided by ERISA or by state law, are
generally designed to ensure certain parties act prudently and solely in the interest of
plan participants and beneficiaries, typically including avoiding conflicts of interest, and
further specifying that the fiduciary is to diversify plan investments so as to minimize the
risk of large losses and to only pay reasonable expenses to administer the plan and
invest its assets.
Best interest: Best interest standards, such as those provided by SEC Regulation Best
Interest or state law, are generally designed to enhance and clarify the standards of
conduct applicable to broker-dealers and investment advisers, help retail investors
better understand and compare the services offered, and make an informed choice of
the relationship best suited to their needs and circumstances, particularly at the point in
time that a recommendation is made.
Suitability: Some states may have laws that seek clear standards for annuity sales so
consumers understand the products they purchase, are made aware of any material
conflicts of interest, and are assured those selling the products do not place their
financial interests above consumers’ interests.
These definitions are provided solely for the purpose of clarity in this report and may not
be generalizable to other discussions of these terms.
Source: GAO review of Department of Labor (DOL), Securities and Exchange Commission (SEC), and National Association of
Insurance Commissioners documentation. | GAO-23-105620
For example, a state official reported that Delaware created a state board
overseeing non-ERISA 403(b) plan administration, with fiduciary duties
including selecting investment options and monitoring fees and
administrative costs. The legislation establishing Delaware’s Plans
Management Board states that the board and its members shall
discharge their duties solely in the interests of the participants and
beneficiaries of the plan, and each shall act with the care, skill, and
diligence of a prudent person acting in a like capacity and familiar with
such matters.
70
Similarly, an official in Kansas reported the state adopted a law that
applies fiduciary duties to the Kansas Board of Regents’ 403(b) plan.
71
That plan’s investment policy also states, in part, that the board shall
address its fiduciary obligations by acting with skill, care, prudence, and
70
The Delaware official cited the Plans Management Board, Del. Code Title 29 Ch. §
2722. The board also has a policy document that states, for example, that no fees shall be
paid by the plan unless they are direct expenses of the plan, no fees shall be paid unless
they are reasonable, and expenses for salaries and benefits for staff who support the
plans, including the state’s 403(b) plan, may be allocated proportionally across the plans
based on asset values.
71
A Kansas official cited GC Kansas Uniform Trust Code, K.S.A. 58a-101, et seq.
Page 39 GAO-23-105620 403(b) Retirement Plans
diligence in all matters relating to the plan, and performing its duties in the
interests of the participants and their beneficiaries.
However, officials told us that some state laws designed to protect plan
participants do not apply to 403(b) plans. For example, according to a
Connecticut Office of the State Comptroller official, state law specifies
that Connecticut’s Retirement Commission shall have general supervision
of the operation of the retirement system, will conduct the business and
activities of the system, and each trustee shall be a fiduciary with respect
to the retirement system. However, this law does not specifically apply to
the state’s 403(b) plan, as it is under the supervision of the State
Comptroller’s Office, according to this official.
72
As another example, an
industry expert said that in California, sponsors of 457(b) plans are
subject to fiduciary duties under state law, but sponsors of non-ERISA
403(b) plans in the state are not.
73
According to this expert, having
fiduciary duties apply to these 403(b) plans in California would lead to
better outcomes for participants.
Other stakeholders and an expert we interviewed said that upholding
fiduciary duties at the state level presents challenges. Two stakeholders
and an expert stated that some school districts, especially smaller school
districts, may not have the resources or necessary technical expertise to
assume a fiduciary-like role and administer the plan in the best interest of
participants. According to one of these stakeholders that represented
public school teachers, especially in K-12 education and for other non-
ERISA plans, the employers left employees to largely figure things out on
their own. Even if they were paying reasonable fees, participants could
wind up in investments that were not a good fit, the stakeholder said. The
stakeholder stated that in some cases 403(b) participants have been
invested 100 percent in fixed annuities early in their careers, and this may
72
Further, annuities included as a 403(b) plan investment option may be exempt from
certain protections. Department of insurance officials in Texas noted that a provision in
state law designed to ensure agents act in the best interest of participants when selling
annuities does not apply to 403(b) plans. For more information on this and other selected
states’ laws governing fixed and indexed annuities, see appendix II.
73
In a 457 plan, both sponsors and participants are typically permitted to make pre-tax
contributions. 457 plans can be open to all employees at a state or local government.
Other 457 plan types exist for managerial or highly compensated employees and are
unfunded. For more information, see GAO-09-641.
Page 40 GAO-23-105620 403(b) Retirement Plans
not provide sufficient long-term investment returns compared to other
investment options.
Officials in four of the five selected states—California, Connecticut,
Delaware, and Kansas—reported strengthening plan oversight by using a
request for proposal (RFP) process.
74
This process provides the plan
sponsor with competitive bids they can compare across providers when
selecting investment options for the plan. For example, Connecticut’s
contract for a third party administrator to provide services and work
directly with the investment providers for its 403(b) plan is rebid every 5
years, a process known as “recompeting.” The stated purpose of
Connecticut’s RFP is to solicit proposals from qualified firms to obtain the
highest-quality services at the most favorable cost.
75
Officials in four of the selected states—California, Connecticut, Delaware,
and Kansas—reported taking action to improve participant outcomes in
non-ERISA 403(b) plans by enhancing transparency of the plan’s
investment offerings in one or both of two key ways: (1) compiling a
publicly available registry of administrative fees and expense ratios for
investment options, or (2) requiring plan administrative and investment
options’ fees be provided to participants.
76
Officials in three of the five selected states—California, Connecticut, and
Kansas—reported enhancing transparency by adopting measures to
collect and make publicly available information on non-ERISA 403(b)
investment option fees.
77
For example:
74
An RFP is a competitive bid process to select providers. Plan sponsors that use an RFP
process generally consider competitive bids from service providers based on service types
and levels, fees, and other considerations. For California, this refers to the CalSTRS
Pension2, and for Kansas, this refers to the plan provided for employees of the Kansas
Board of Regents and educational institutions under the Board’s management. The extent
to which other plans in California or Kansas conduct an RFP is unknown.
75
Officials also noted that the plan requires that any revenue paid to a record keeper, as
well as any distribution or service fees and revenue sharing for sales fees paid to a record
keeper, be reimbursed to the plan; amounts in excess of needs are distributed to
participants.
76
As noted earlier, sponsors of ERISA plans generally must provide all participants with a
series of disclosures including a summary plan description, pension benefit statements,
and a summary annual report.
77
For Kansas, this refers to the plan provided for employees of the Kansas Board of
Regents and educational institutions under the Board’s management.
Adopting a Request for
Proposal Process in Selecting
Service Providers
Enhancing Transparency
Registry of Investment Options
and Fees
Page 41 GAO-23-105620 403(b) Retirement Plans
• California has developed a public website, 403bCompare.com, of free
information about 403(b) vendors and the products offered. The
website includes information for each investment option’s annual
administrative expenses, expense ratio,
78
and—for mutual funds and
variable annuities—a measure that compares the relative cost of
different investment options.
79
In July 2021, the website listed annual
expense ratios ranging from 0.02 percent to 3.74 percent. Figure 8
presents a selection of comparative information from the website.
78
Individual investment options available to participants commonly express fees through
an expense ratio, which are typically the largest fees borne by a participant. An expense
ratio measures how much of a fund’s assets are used for management, administrative,
and other operating expenses charged by the fund manager and incurred by the fund. An
expense ratio is a fund’s operating expenses divided by the average dollar value of its
assets under management. Operating expenses reduce the fund’s assets, thereby
reducing the return to investors.
79
California is an open-access state, and in October 2022, according to one expert,
provided comparative information on 51 vendors offering 131 distinct products with over
10,000 investment options. Of those investment options, 43 percent are mutual funds, and
57 percent are annuity products, of which 21 percent are variable annuities, 18 percent
are indexed annuities, and 18 percent are fixed annuities.
Page 42 GAO-23-105620 403(b) Retirement Plans
Figure 8: Selected Comparative Information Regarding 403(b) Investment Options Offered in California, as Detailed on Its
Public Website
Page 43 GAO-23-105620 403(b) Retirement Plans
Notes: Individual investment options available to participants commonly express fees through an
expense ratio, which are typically the largest fees borne by a participant. An expense ratio measures
how much of a fund’s assets are used for management, administrative, and other operating expenses
charged by the fund manager and incurred by the fund. An expense ratio is a fund’s operating
expenses divided by the average dollar value of its assets under management. Operating expenses
reduce the fund’s assets, thereby reducing the return to investors. A surrender fee is a fee for selling
or withdrawing money from an investment within a set period of time—which can significantly lower a
participant’s account balance should the participant decide to deselect the annuity or investment
option before the phase-out period is complete. Figure information is current as of February 2023.
As another example, the State of Connecticut Defined Contribution Plans
publishes quarterly reports on its website that provide detailed information
on its 403(b) plan’s investment options’ 1-year, 3-year, 5-year, and 10-
year performance to date, along with the expense ratios of each of the
investment options.
80
Officials in four of the five selected states—California, Connecticut,
Delaware, and Kansas—reported they enhanced transparency by
distributing information on plan administrative and investment options’
fees directly to participants or making it available online.
81
For example,
Delaware’s contract with its service provider specifies that fee information
will be provided to participants on a quarterly basis in their participant
account statements. In addition, one of the Kansas Board of Regents
plan’s service providers provides quarterly fee reports to participants.
These reports display information on the fees for each of the plan’s
investment options, shown as expense ratios, as well as the investment
options’ returns, as shown in figure 9. In addition, according to an official
for this provider, the quarterly reports show fees assessed to a
participant’s account, along with transaction details and a description of
any administrative or personalized service fees that apply to specific
features and investments that a participant requests, such as a loan
origination fee.
82
80
A Connecticut official told us that the state has combined the assets for its 403(b), 457,
and 401(a) plans to achieve efficiencies in plan administration and fees; therefore its
quarterly report is applicable to all three of its defined contribution plans, including its
403(b) plan. For more information, see appendix II.
81
California’s information applies only to the statewide CalSTRS Pension2 plan. The
practices of other plan sponsors in the state are generally unknown.
82
A Kansas Board of Regents official also stated the Voya quarterly statements provide
the appropriate fee information, and participant fee disclosure statements are made
available online each quarter, to comply with DOL’s participant fee disclosure regulations,
even though the plan is not an ERISA plan. Additionally, for the plan’s other service
provider, TIAA, participants are referred to the website (i.e., microsite and TIAA.org) rather
than sending fee disclosures, as the Kansas Board of Regents plans are non-ERISA.
Information on Plan and
Investment Fees Provided to
Participants
Page 44 GAO-23-105620 403(b) Retirement Plans
Figure 9: Example of Investment Options’ Fee Information Provided to Non-ERISA 403(b) Plan Participants
Notes: An expense ratio measures how much of a fund’s assets are used for management,
administrative, and other operating expenses charged by the fund manager and incurred by the fund.
An expense ratio is a fund’s operating expenses divided by the average dollar value of its assets
under management. Operating expenses reduce the fund’s assets, thereby reducing the return to
investors.
Information on investment fees can be helpful to plan sponsors and
participants because it enables them to make comparisons across similar
investment options and determine if such fees are reasonable. For
example, as we previously reported, a representative from a large 403(b)
plan told us that information on investment fee expense ratios is a key
Page 45 GAO-23-105620 403(b) Retirement Plans
factor in determining which investments their plan chooses to include to
ensure that participants’ savings are not eroded by high fees.
83
Several stakeholders have noted that it is challenging to educate
participants about their 403(b) plan’s investment options, including the
options’ fees. For example, at an October 2022 panel organized by the
SEC, panelists noted that participants using California’s 403bCompare
website may still have to research investment options provided by dozens
of providers. Each of these providers, in turn, may offer multiple
investment options, which can result in a large number of options for a
participant to compare. In addition, one panelist noted that certain fees for
more complex investment options, such as variable annuities, can be
difficult to identify. For example, this panelist stated, any surrender fee
associated with a variable annuity investment option would not be
included in the expense ratio fee.
84
This panelist further noted that, in
addition to the expense ratio fee, the participant would need to identify
multiple other fees to determine the total cost of the variable annuity
investment, including an additional management fee and the mortality and
expense charge; in one example, these additional fees would have added
an additional 1.2 percent annual cost on top of the investment’s 1 percent
expense ratio.
83
GAO-22-104439.
84
A surrender fee is a fee for selling or withdrawing money from an investment within a set
period of time—which can significantly lower a participant’s account balance should the
participant decide to deselect the annuity or investment option before the phase-out period
is complete.
Page 46 GAO-23-105620 403(b) Retirement Plans
Stakeholders and experts we interviewed identified multiple options that
they said could potentially improve 403(b) participant outcomes. These
options aim to enhance fiduciary protection for some participants in non-
ERISA plans, better inform participants about the fees and expenses they
are paying, provide plan participants with a means to access investment
options with lower fees and expenses, or raise plan participation rates.
Several of these options were also included in our surveys of 403(b) plan
sponsors and service providers as described below.
85
Multiple stakeholders we interviewed told us that applying additional
participant protections such as fiduciary duties or best interest standards
to non-ERISA 403(b) plans would help ensure that plan sponsors and
service providers act in the best interest of plan participants.
86
State laws
generally govern most aspects of non-ERISA 403(b) plans, and there is
variation in state laws. In our March 2022 report, we estimated that non-
ERISA plans contain about 43 percent of all 403(b) plan assets. While
some of our selected case study states reported adopting fiduciary duties
or best interest standards for non-ERISA 403(b) plans, others did not.
Stakeholders from participant advocacy groups and plan sponsors we
spoke with also said that state laws often do not afford participants
sufficient protections against paying excessive fees or being steered
toward investment options that may not be in their best interest. One
industry expert suggested that investment options in some 403(b) plans
85
For a complete list of the options discussed in our surveys, see appendix III.
86
In this report, when discussing experts and stakeholders, we use the term “several” to
refer to three or four stakeholders we interviewed and the term “multiple” to refer to five or
more stakeholders we interviewed. In our interviews with experts and stakeholders we
asked open-ended questions to identify their suggestions for policy options. For more
information on our methodology, see appendix I.
Stakeholders and
Experts Identified
Multiple Options They
Said Could Improve
403(b) Participant
Outcomes
Stakeholders Suggested
Enhancing Participant
Protections and
Standardizing Disclosures
for Non-ERISA Plans,
Among Other Options
Apply Additional Participant
Protections to non
-ERISA
Plans
Page 47 GAO-23-105620 403(b) Retirement Plans
are often marketed at benefits fairs, fostering a retail atmosphere that
may not lend itself to participants obtaining good information.
87
Attaching fiduciary responsibilities to plan sponsors or designees could
improve participant outcomes by providing them access to investment
options with better performance and reasonable fees, according to
several stakeholders we interviewed. They said that fiduciary duties
would require sponsors or designees to take a more active role in
screening out service providers or investment options that under-perform
or carry excessive fees.
Several stakeholders noted that when non-ERISA 403(b) plan sponsors
are not subject to fiduciary responsibilities, individual participants are
often left on their own to select from a large number of investment
options. These options may include higher-cost products than are
typically found in the ERISA 403(b) market. A National Bureau of
Economic Research paper from 2019 found that broker-dealers selling
annuities, a major component of many 403(b) plans, sold products with
risk-adjusted returns that were 0.25 percent higher when they were
subjected to fiduciary duties, and that clients had access to annuities with
lower fees and higher investment quality ratings in such situations.
88
However, other stakeholders noted that some non-ERISA plan sponsors
may not have the capacity to fulfill fiduciary duties. In particular, these
stakeholders said that this role would be a challenge for K-12 school
districts sponsoring 403(b) plans. Two stakeholders and one industry
expert noted that, in many cases, elected school board members or office
managers for school districts would likely lack the expertise to evaluate
service providers, fees, or investment options on their own. Furthermore,
87
We defined “stakeholders” as individuals or entities with knowledge in the subject matter
but with a financial or advocacy interest in one or more aspects of 403(b) plans. Some of
these stakeholders represented 403(b) plan sponsors, others represented service
providers, while still others represented groups of participants. We defined “experts” as
individuals or entities with knowledge in the subject matter but without a specific financial
or advocacy stake, including academics who study the industry, state regulators (who are
also not themselves sponsors of or service providers to 403(b) plans), and companies
who furnish analysis of these plans to client but are not themselves involved in the
industry directly. For more information, consult appendix I.
88
According to the research. See Vivek Bhattacharya, Gaston Illanes, and Manisha Padi,
Fiduciary Duty and the Market for Financial Advice (National Bureau of Economic
Research, Cambridge, Mass.: May 2019).
Page 48 GAO-23-105620 403(b) Retirement Plans
several stakeholders also said that non-ERISA plan sponsors assuming
fiduciary duty could put them at risk of lawsuits.
89
Several stakeholders noted that the lack of a fiduciary duty or other
requirements to operate in the best interest of participants can result in
conflicts of interest among administrators or service providers and
operate to the detriment of plan participants. For example, stakeholders
told us that plan administrators may fail to disclose relationships they
have with service providers. If plan administrators receive a portion of
those fees, they may have a financial incentive for plan participants to pay
higher fees. A 2020 National Bureau of Economic Research paper found
that sales of variable annuities—a major component of many 403(b)
plans–-are nearly four times as sensitive to the financial interests of
brokers as those of investors, while finding a strong positive correlation
between the expenses associated with a variable annuity and
commission rates for brokers.
90
As described earlier, the SEC has identified instances of undisclosed
conflicts of interest related to non-ERISA 403(b) plans. For example, in
July 2020, the SEC found that a vendor of annuity products failed to
disclose conflicts of interest to K-12 teachers participating in 403(b) and
other defined contribution retirement plans in Florida. These plans
generated millions of dollars of fees and other financial benefits to the
vendor and companies affiliated with that vendor.
Annuity products are commonly offered in 403(b) plans. The National
Association of Insurance Commissioners has made efforts to help states
establish best interest standards and ensure uniform disclosure
89
As discussed below, ERISA 403(b) plans have been the subject of recent lawsuits.
90
According to the research, a 1 percentage point increase in broker commissions for the
sale of a variable annuity is associated with an 18 percent increase of the sales of the
annuity while a one percentage decrease in the net present value of future expenses is
associated with a 4.9 percent increase in sales of that annuity. See Mark L. Egan, Shan
Ge, and Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty – Evidence
from Variable Annuities (revised) (Cambridge, Mass.: National Bureau of Economic
Research, November 2021).
Page 49 GAO-23-105620 403(b) Retirement Plans
requirements; however, these efforts do not apply to annuities purchased
in connection with 403(b) plans, as described in the text box.
91
Participant Protections for Certain Annuity Investment Options in 403(b)
Portfolios May Vary
Participant protections for different annuity investment options vary because some
annuities are covered by federal securities laws and others are subject to state laws
and regulations, which may vary.
Fixed annuities and most indexed annuities are chiefly regulated by state insurance
commissions, and state laws covering annuities vary. The National Association of
Insurance Commissioners (NAIC) has issued model regulations intended to harmonize
regulations for annuities across states that elect to adopt these regulations.
• If adopted by a state, NAIC’s Annuity Disclosure Model Regulation (MDL-245,
2015) requires insurers of annuities to provide, among other things, contact
information, a description of the contract and its benefits, and any applicable
surrender charges. A surrender charge is a fee charged for selling or withdrawing
money from an investment within a set period of time, often phased out over a
number of years.
• If adopted by a state, NAIC’s Suitability in Annuity Transactions Model Regulation
(MDL-275, 2020) requires, among other things, insurers to maintain a supervisory
system to ensure that they act in the best interest of consumers when making
recommendations to purchase annuities, specifies obligations of reasonable care,
and requires a description of the scope of the relationship between the insurer and
the purchaser, and disclosure of any potentially material conflicts of interest.
However, NAIC officials stated that both of these model regulations exclude any
annuities purchased in connection with 403(b) plans. According to these officials,
annuities offered through 403(b) plans were excluded from the model regulations
because they are classified as employer-sponsored plans, even though several experts
and stakeholders told us that it was common for vendors of annuities to market them
directly to 403(b) participants.
Source: GAO review of Securities and Exchange Commission, Financial Industry Regulatory Authority, and NAIC documentation, and
GAO interviews with NAIC officials. | GAO-23-105620
Several industry stakeholders suggested applying best interest standards
to transactions that are not specifically covered by Regulation Best
Interest. For example, one industry representative suggested that some
large vendors often apply the same protocols required by Regulation Best
Interest to transactions with retail 403(b) participants regardless of
whether the regulation specifically applies to those transactions because
it is easier to give participants standardized advice; this in effect defaults
91
Generally, variable annuities are regulated by the SEC and FINRA as securities,
meaning that they have prospectus disclosure requirements, and the broker-dealers who
recommend them to retail customers are subject to the standards of Regulation Best
Interest, and other FINRA rules.
Page 50 GAO-23-105620 403(b) Retirement Plans
to what this representative characterized as the more rigorous Regulation
Best Interest standard.
Multiple stakeholders noted that requiring plan sponsors and service
providers to provide standardized information on investment options’ fees
and returns to non-ERISA 403(b) plan participants would increase
transparency. In particular, several stakeholders said that, in their view,
some participants in non-ERISA 403(b) plans did not receive sufficient
disclosures that would enable them to make informed investment
decisions.
In addition, efforts to promote transparency of fees at the plan and
investment level were two of the most frequently cited options supported
by 403(b) plan sponsors who responded to our survey.
92
Specifically, 13
of 25 plan sponsors and seven of 21 service providers reported that they
were in favor of federal agencies promoting transparency of plan-level
fees or charges. Eleven of 26 plan sponsors and six of 21 service
providers reported that they were in favor of federal agencies promoting
transparency of investment-level fees or charges.
93
To increase transparency, multiple stakeholders suggested that
participants in non-ERISA 403(b) plans should receive disclosures or
participant statements similar to those required by ERISA with respect to
fees and expenses. They said that such disclosures could include, for
example, a summary table comparing the plan’s investment options and
expense information regarding those options as well as an accounting of
fees charged by record keepers and other service providers.
Multiple stakeholders we interviewed noted that standardized disclosures
for non-ERISA 403(b) plans would simplify the administration of these
plans and allow participants to more easily compare investment options,
which could lower fees. According to two large service providers, the
variation across state disclosure requirements has resulted in an unwieldy
and burdensome administration of those accounts. To reduce
administrative complexity, they suggested harmonizing disclosure
92
Plan-level expenses include fees for recordkeeping and administrative services,
investment consulting fees, and legal and audit fees. Investment-level expenses include
investment management fees, marketing and distribution fees, and trading or transaction
costs.
93
For these and the results detailing other measures identified by our survey of 403(b)
plan sponsors and participants as helpful in enhancing protections for 403(b) participants,
see appendix III.
Standardize Disclosures to
Increase Transparency of
Information on Fees and
Investment Options for
Non-
ERISA Plans
Page 51 GAO-23-105620 403(b) Retirement Plans
requirements for non-ERISA 403(b) plans at the federal level. For
example, one industry expert we interviewed said that standardized
disclosure requirements would allow participants to more easily compare
providers or investment options and would help accelerate changes that
would lower fees. Another industry expert suggested that a standardized
text box that summarizes fee information, similar to what appears in
consumer credit card statements, would be helpful to 403(b) participants
when they compare the fee structures of different providers or learn which
types of services they were receiving accounted for the largest share of
the fees they were paying. As our prior work has shown, seemingly small
fees, such as a 1 percent annual charge, can significantly reduce plan
participants’ retirement savings, even as investment returns may grow the
savings overall.
94
Multiple stakeholders we interviewed said that 403(b) plans should be
allowed to contain a broader range of investment options, either to
facilitate more diversified portfolios for participants or to lower fees and
expenses. Investment options available to 403(b) plans are generally
more limited than 401(k) plans. Specifically, 403(b) plans are generally
only allowed to invest in annuities and regulated investment company
stock (or mutual funds) held in custodial accounts. In contrast, 401(k)
plans can offer a wider range of investment products, such as collective
investment trusts (CIT) and real estate investment trusts. Recently,
Congress enacted legislation that changed the IRC in such a way to
facilitate greater inclusion of CITs in 403(b) plans, but additional changes
to federal securities laws—specifically, those that require certain 403(b)
plan investments to be registered as securities—would still need to be
amended for 403(b) plans to allow CITs in a manner consistent with the
recently enacted legislation.
95
94
For examples of prior work, see GAO-22-104439 and GAO, Private Pensions: Changes
Needed to Provide 401(k) Plan Participants and the Department of Labor Better
Information on Fees, GAO-07-21 (Washington, D.C.: Nov. 16, 2006).
95
Section 128 of SECURE 2.0 Act of 2022 (SECURE 2.0) amended the IRS’s Internal
Revenue Code (IRC) to allow 403(b)(7) plans greater flexibility in investing in
CITs, effective Jan. 1, 2023. However, Section 128 of SECURE 2.0, as enacted, did not,
simultaneously, amend the Securities Act of 1933 (specifically, Section 3(a)(2)), the
Securities Exchange Act of 1934 (specifically, Section 3(a)(12)(C)) and The Investment
Company Act of 1940 (specifically, Section 3(c)(11)), to allow 403(b)s to have CITs. See
26 U.S.C. § 403(b)(7).
Expand Investment Option
Types to Include Collective
Investment Trusts
Page 52 GAO-23-105620 403(b) Retirement Plans
CITs were commonly cited by both stakeholders we spoke with and
survey respondents as being helpful for inclusion in 403(b) plans.
96
Specifically, 22 of 46 respondents (10 of 25 plan sponsors and 12 of 21
service providers) expressed an interest in increased flexibility to include
CITs among the available investment options. According to research from
Morningstar, CITs have substantially lower fees than mutual funds.
97
Morningstar’s research found that the average asset-weighted expense
ratio for actively managed CITs was 0.369 percent when compared with a
0.647 percent ratio for actively managed mutual funds. Similarly, it
reported that passively managed CITs had a 0.048 percent expense ratio
versus a 0.077 expense ratio for passively managed mutual funds, and
overall it found that CITs carried lower expenses than mutual funds that
employed the same investment strategy about 91 percent of the time.
98
According to participants in an industry panel, CITs can also carry tax
advantages when investing in international assets versus mutual funds.
According to one industry source, defined contribution retirement plans,
mostly 401(k) plans, hold a total of about $3 trillion worth of assets in
CITs.
However, one stakeholder and an industry expert expressed concerns
about CITs. Specifically, a stakeholder representing participant groups
noted that CITs are less regulated than mutual funds and less transparent
in their operations and therefore more difficult to research for retail
investors. Similarly, an industry expert noted that CITs did not have to
publicly disclose information about fees or expenses, although this expert
acknowledged that their fees are generally lower than those of mutual
funds. In addition, according to an industry report, defined contribution
plan participants with assets invested in CITs may have to liquidate their
96
CITs, also sometimes known as Collective Investment Funds, are pooled investment
vehicles organized as trusts administered by a bank that holds co-mingled assets
established under a plan that details the terms of asset management. They are designed
to enhanced investment management by combining assets from different accounts into a
single fund with a specific investment strategy; they may lower operational and
administrative expenses associated with investing fiduciary assets. CITs sponsored by
national banks are regulated by the Office of the Comptroller of the Currency, part of the
Department of the Treasury.
97
Morningstar, CITs: A Welcome Addition to 403(b) Plans (Chicago, Ill.: June 2020).
98
Passively managed mutual funds, such as index funds, aim to maximize returns over the
long run by buying and selling securities less often. By contrast, actively managed funds
often seek to outperform a benchmark (usually measured by an index) by doing more
frequently sales and purchases of securities.
Page 53 GAO-23-105620 403(b) Retirement Plans
holdings to roll over those assets into holdings allowed in an individual
account such as an IRA when changing employers.
99
Several stakeholders told us that federal agencies are missing
opportunities to provide additional outreach to plan sponsors, particularly
smaller plan sponsors. Such outreach could help plan sponsors better
administer their 403(b) plans and understand the rules that govern those
plans. For example, one stakeholder representing participants said small
K-12 school districts or other small 403(b) plan sponsors could benefit
from information about managing their plans and informing their
participants about various investment options. These stakeholder
observations are similar to what some K-12 school district 403(b) plan
sponsors had reported in our prior work about being unaware of
investment options or fees for their plans.
100
Many of our survey respondents indicated that federal agencies could
provide additional information in materials such as model plan
documents, checklists, or additional information about the applicability of
ERISA to certain 403(b) plans.
101
As noted earlier, DOL’s website
provides certain materials designed to help 401(k) plan sponsors, such as
the Understanding Retirement Plan Fees and Expenses document for
401(k) fees that could help sponsors understand fees, which could also
be relevant to 403(b) plan sponsors.
102
As part of this effort, two
stakeholders and one industry expert stated that some plan sponsors
would be interested in learning from federal agencies, whether or not
those agencies had a direct regulatory role in their plans and whether the
practices were tied to ERISA compliance. Another stakeholder suggested
that guidance on new regulations specify whether the new regulation
99
BenefitsPro, Collective Investment Trust Considerations for Plan Sponsors (March
2022).
100
GAO-22-104439.
101
Specifically, 14 of 46 respondents, including five of 25 plan sponsors and nine of 21
service providers, reported being in favor of agencies furnishing additional information, or
providing clarity or outreach regarding whether ERISA applies to certain 403(b) plans. In
addition, 19 of 45 respondents—including nine of 25 plan sponsors and 10 of 21 service
providers—responded that federal agencies could provide additional informational
materials, such as model plan documents or checklists, for 403(b) plans. For these and
the results detailing other measures identified by our survey of 403(b) plan sponsors and
participants as helpful in enhancing protections for 403(b) participants, see appendix III.
102
See https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-
center/publications/understanding-retirement-plan-fees-and-expenses.pdf.
Conduct Outreach to Plan
Sponsors
Page 54 GAO-23-105620 403(b) Retirement Plans
applies only to ERISA 403(b) plans or to both ERISA and non-ERISA
plans.
A majority of respondents to our survey of 403(b) plan sponsors and
service providers said that expanding the use of automatic enrollment and
automatic escalation features in 403(b) plans could improve participant
outcomes; several stakeholders we interviewed cited the value of
automatic enrollment in particular. Allowing these non-ERISA plans to use
both automatic enrollment and automatic escalation were the two most
frequently cited options to improve participant outcomes by our survey
respondents.
103
While automatic enrollment and auto escalation are widely used by 401(k)
plans, some states prohibit the use of these features in non-ERISA 403(b)
plans.
104
Specifically, according to two industry stakeholders we
interviewed, as well as an industry report,
105
laws governing wage
garnishment in several states generally limit or prohibit automatic
enrollment for certain non-ERISA 403(b) plans.
106
In contrast to some
non-ERISA 403(b) plans, 403(b) plans and other defined contribution
plans subject to ERISA are allowed to use automatic enrollment and
automatic escalation under federal law. Research by one of the largest
403(b) service providers has shown that the adoption of automatic
enrollment results in a substantial increase in the proportion of employees
participating in retirement saving plans, and that automatic enrollment
combined with automatic escalation leads to increased savings when
103
Specifically, 26 of 46 respondents (12 of 25 plan sponsors, and 14 of 21 service
providers) reported being in favor of flexibility to allow for auto-enrollment in 403(b) plans
where auto-enrollment reportedly is not currently permitted. Meanwhile, 24 of 46
respondents (11 of 26 plan sponsors and 13 of 21 service providers) reported being in
favor of allowing automatic escalation of 403(b) plan contributions.
104
According to a study by the Plan Sponsor Council of America, about 60 percent of
401(k) plans used automatic enrollment in 2019 compared with 24.4 percent for 403(b)
plans. These data cover both ERISA and non-ERISA 403(b) plans. Plan Sponsor Council
of America, 2020 403(b) Plan Survey, Reflecting 2019 Plan Experience (2020: Arlington,
Va.) and 63rd Annual Survey: PSCA’s Annual Survey of Profit Sharing and 401(k) Plans,
Reflecting 2019 Plan Experience (2020: Arlington, Va.).
105
National Tax-Deferred Savings Association, NTSA The Source: For 403(b) and 457(b)
Plans, 8
th
ed. (Arlington, VA: 2020).
106
According to the IRS, there may be some situations where non-ERISA plans sponsored
by churches and organizations controlled by or associated with churches are permitted to
apply automatic contribution arrangements for its employees. See Pub. L. No. 114-113 §
336(c), 129 Stat. 2242, 3110-12 (2015).
Allow for Automatic Enrollment
and Automatic Escalation for
Non-ERISA 403(b) Plans
Page 55 GAO-23-105620 403(b) Retirement Plans
compared with automatic enrollment alone.
107
Stakeholders we
interviewed agreed that automatic enrollment would lead to increased
participation rates.
108
In addition to options identified by stakeholders and experts we
interviewed, we also found, by looking at settlement agreements,
examples of actions that 403(b) plan sponsors agreed to undertake to
address concerns raised by 403(b) participants. In these settled cases,
plan participant plaintiffs alleged that plan sponsors breached their
fiduciary obligations, resulting in, among other things, excessive fees or
charges to administer the plan, or offering investment options that either
performed poorly or charged excessive fees to participants.
109
We
reviewed a total of 18 settlement agreements from 2015 through 2022
involving ERISA-covered plan participants, of which 13 provided for one
107
A 2021 study by Vanguard Research indicates that participation rates in defined
contribution plans that used automatic enrollment were 91 percent, compared with 28
percent for defined contribution plans where enrollment was voluntary. Vanguard
Research, Automatic Enrollment: The Power of the Default (February 2021), accessed
November 16, 2022. A different Vanguard Research study showed that the median
deferral level for eligible employees (including nonparticipants) in plans that had automatic
escalation was 8.0 percent compared with 7.0 percent for plans with automatic enrollment
but voluntary escalation and 6.0 percent for eligible employees in plans with only voluntary
enrollment. See Vanguard Research, Automatic Escalation and DC Savings Rates
(October 2021), accessed April 6, 2023, https://institutional.vanguard.com/insights-and-
research/perspective/automatic-escalation-and-dc-saving-rates.html. For more information
about the effects of automatic enrollment on participation in defined contribution retirement
plans in some other countries, see GAO, Retirement Security: Recent Efforts by Other
Countries to Expand Plan Coverage and Facilitate Savings, GAO-22-105102
(Washington, D.C.: August 2022).
108
In 2022 SECURE 2.0 was enacted, requiring certain new 403(b) plans to meet
automatic enrollment requirements for plan years beginning after December 31, 2024.
Pub. L. No. 117-328, div. T, § 101(a) 136 Stat. 4459, 5275-77. However, these
requirements do not apply to governmental or church plans, among others.
109
Because the nature of a settlement agreement depends on the specific facts and
circumstances involved in a dispute, the results of our review of these settlement
agreements are not generalizable. In order to identify 403(b) cases for our analysis, we
interviewed a representative of a law firm who has served as plaintiff’s counsel for several
403(b) cases, who provided us with some settlement agreements, did internet searches
for 403(b)-related litigation, and searched a legal database for litigation involving 403(b)
plans, looking specifically for cases that were settled, or where a judgment was entered
between 2015 and 2022. For more information about how we searched and selected
these cases, see appendix I.
Some 403(b) Plan
Sponsors Have Agreed to
Take Certain Actions to
Lower Fees and Address
Other Participant
Concerns
Page 56 GAO-23-105620 403(b) Retirement Plans
or more actions that plan sponsors agreed to take to address participant
concerns in addition to monetary awards.
110
Table 3 indicates settlement agreements we reviewed that contain
nonmonetary terms. Other nonmonetary provisions included provisions
concerning frozen assets and revenue sharing.
111
Table 3: Summary of Selected Terms Included in 13 Settlements Agreements from 2015 through 2022 Involving 403(b) Plan
Sponsors
Plan sponsor type (year of
settlement)
Agreement to
use request for
proposal to
select
providers
Agreement to
use consultant
to manage fees
or investment
options
Agreement to
offer lower-
fee products
Agreement to
seek flat
recordkeeping
fee
Agreement to
prohibit
cross-
marketing
Other
a
Health Care #1 (2015)
●
●
●
●
○
○
Higher Education #1 (2019)
●
●
●
○
○
●
Higher Education #2 (2019)
●
○
○
○
○
○
Higher Education #3 (2019)
●
●
●
●
●
●
Higher Education #4 (2019)
●
●
●
●
●
●
Higher Education #5 (2019)
●
●
○
●
○
●
Higher Education #6 (2020)
●
●
●
●
●
●
Higher Education #7 (2020)
●
●
●
○
○
○
Higher Education #8 (2021)
●
○
●
●
●
●
Health Care #2 (2021)
●
●
○
○
○
○
Higher Education #9 (2021)
●
●
●
●
●
●
Higher Education #10 (2021)
●
○
○
○
○
○
Higher Education #11 (2022)
●
●
○
○
●
○
Legend:
● Contains
○ Does Not Contain
Source: GAO Analysis of Selected Settlement Agreements involving 403(b) Plans. l GAO-23-105620
110
All 18 of those settlements included monetary awards ranging from $225,000 to
$32,000,000. None of the settlement agreements we reviewed contained admissions of
liability or wrongdoing by the parties. Five of those 18 settlements were settled on wholly
monetary terms; four of the five were plans involving health care workers and the fifth
involved higher education workers. We focused our review on the 13 settlements
containing one or more nonmonetary terms for our subsequent analysis.
111
“Frozen assets” in this context refers to investment options that are no longer open to
new contributions by participants, possibly because one or more investment providers has
been de-selected by the plan sponsor. Revenue sharing generally refers to indirect
payments made from one service provider to another service provider in connection with
services provided to the plan, rather than payments made directly by the plan sponsor for
plan services.
Page 57 GAO-23-105620 403(b) Retirement Plans
Notes: We examined a total of 18 settlement agreements; five of the 18 settlement agreements we
analyzed contained only monetary settlement terms, and we excluded them from this table. Four of
those five settlements involved health care workers and the fifth involved higher education workers.
Because the nature of a settlement agreement depends on the specific facts and circumstances
involved in a dispute, the results of our review of these settlement agreements are not generalizable.
a
Other provisions included in nonmonetary settlement agreements pertain to restrictions on the use of
revenue sharing and the disposition of frozen assets.
As shown in table 3, we examined five specific types of nonmonetary
actions that plan sponsors agreed to take in the settlement agreements.
Specifically:
Using request for proposal (RFP) process to select service
providers. Plan sponsors in all 13 of the settlement agreements we
reviewed agreed to use an RFP process to select service providers for
the plan.
112
In some cases these terms specified a minimum number of
providers—often at least three—that are required to be considered as
part of that process.
Two stakeholders we interviewed told us that an RFP process can offer a
level playing field between potential vendors with reduced opportunities
for bias or favoritism. They said the process can also focus the vendor
selection process on an agreed-upon set of criteria, such as lower fees.
Using consultants to manage fees or investment options. Plan
sponsors in 10 of the 13 settlement agreements we reviewed agreed to
use independent consultants to monitor one or more aspects of the plan.
Specifically, the plan sponsors agreed to use consultants to help manage
one or more of the following: the plan’s menu of investment options; the
plan’s roster of service providers; or the fees the plan pays to those
service providers. In some cases, the settlement indicated that the plan
sponsor already retained a consultant and pledged to continue using
either that consultant’s services or those of another consultant.
Several stakeholders we interviewed expressed concerns that some
403(b) plan sponsors did not have enough knowledge of the retirement
plan industry to prudently manage these plans or their investment options
without hiring outside help. Further, as mentioned above, some of the
plan sponsors who responded to our survey reported not being aware of
investment options available in their plan. These stakeholders told us that
112
According to stakeholders with whom we spoke, plan sponsors that use an RFP
process generally consider competitive bids from service providers based on service
levels, fees, types of investments available, or promised investment returns.
Page 58 GAO-23-105620 403(b) Retirement Plans
consultants could help plan sponsors investigate and pursue
opportunities to reduce plan costs, such as accessing different investment
options that carry lower fees, as discussed below.
Revising plan’s investment offerings to include lower fee options.
Plan sponsors in eight of the 13 settlement agreements we reviewed
agreed to examine the plan’s current menu of investment options and, if
feasible, offer investment options that had lower fees and expenses
associated with them. Such changes included, for example, offering share
classes that are lower cost among the investment options.
113
One of the
settlement agreements specified that the plan fiduciaries should consider
including CITs, to the extent they are permitted, for inclusion among the
plan’s investment options.
Charging flat fees for recordkeeping services. Plan sponsors in seven
of the 13 settlement agreements we reviewed included a provision that
any contract for recordkeeping services charge a flat per-participant fee
rather than an asset-based fee that increases with the amount of one’s
account balance.
114
According to one stakeholder representing 403(b)
participants that we interviewed, the costs associated with recordkeeping
do not necessarily scale up with the amount of assets in the plan. This
stakeholder explained that, as a result, asset-based charges can lead to
recordkeeping fees for large accounts that are high relative to the cost of
providing those services. An industry report indicates that the trend in
113
These changes could include offering institutional-grade mutual funds instead of retail-
grade mutual funds. Institutional-grade mutual funds typically contain shares of securities
in classes available only to institutional, as opposed to individual, or retail investors and
generally require a large minimum investment. Institutional share classes typically have
lower expense ratios than other kinds of shares. As such, institutional-grade mutual funds
will generally have lower expense ratios than retail-grade mutual funds. Similarly, the plan
could include more passively managed mutual funds, which tend to have lower fees than
more actively managed funds. Passively managed mutual funds are structured to replicate
a given index, such as the Standard & Poor’s 500 or Russell 2000, and its performance,
and managers do not actively pick stocks or make buying selling decisions. Managers of
actively managed funds conduct research and may engage in market timing in an attempt
to outperform such indices.
114
Our review of selected states found that Kansas has implemented some per-participant
fee structures.
Page 59 GAO-23-105620 403(b) Retirement Plans
defined contribution retirement plans as far back as 2015 has been
moving away from asset-based recordkeeping fees.
115
Limiting cross-marketing of other products or services. Plan
sponsors in six of the 13 settlement agreements we reviewed agreed to
include a requirement in contracts with service providers that limits or
restricts their use of participant data to market another investment or
insurance product or service unrelated to the plan.
116
Some of these
agreements specified IRAs, life or disability insurance, and wealth
management services as products that service providers might sell or
market to plan participants. According to one stakeholder we interviewed,
service providers sometimes gain access to data regarding a participant’s
investment history or major life events and use those data as part of an
attempt to sell other products to those customers.
DOL is one of several federal agencies that provides oversight and
guidance—including educational materials—for 403(b) retirement plans.
Collectively, 403(b) plans hold more than $1 trillion in assets. DOL’s role
focuses only on plans covered by ERISA, which amounted to more than
$600 billion in assets as of 2019. DOL provides guidance and educational
materials that help 401(k) plan sponsors and participants make informed
decisions. However, DOL does not provide the same level of detailed
information regarding 403(b) plans as it does for 401(k) plans. For
example, the primary resource DOL provides to help participants
understand their fees does not reference 403(b) plans. As our prior work
has shown, seemingly small fees, such as a 1 percent annual charge, can
significantly reduce plan participants’ retirement savings, even as
investment returns may grow the savings overall. In addition, guides DOL
has posted to the 401(k) portion of its website to help plan sponsors
understand their fiduciary responsibilities and disclosure requirements
could also be beneficial to 403(b) plan sponsors. DOL could better ensure
that 403(b) plan sponsors and participants have the information they need
115
NEPC, NEPC 2015 Defined Contribution Plan and Fee Survey: What a Difference a
Decade Makes (Boston, Mass.: October 2015).
116
These practices have also attracted regulatory scrutiny. For example, one service
provider agreed to pay nearly $100 million in restitution to retirement plan participants for
misleading those participants into moving money from their employer-sponsored
retirement accounts, including 403(b) accounts, into higher-fee accounts offered by the
service provider, following investigations by the SEC and the New York Office of the
Attorney General. According to the SEC, the provider did not adequately disclose the full
nature and extent of their conflicts of interest when it recommended that a client roll over
retirement assets. See https://www.sec.gov/news/press-release/2021-123 for more
information.
Conclusions
Page 60 GAO-23-105620 403(b) Retirement Plans
to make better management and investment decisions regarding their
plans by providing materials comparable to those posted on its 401(k)
website. Updating DOL’s educational materials with information relevant
to 403(b) plans would help ERISA 403(b) plan sponsors and participants
understand and evaluate fees and expenses in those plans, and select a
403(b) investment option that meets their financial goals.
The Secretary of Labor should update educational materials provided on
the agency’s 403(b) website to ensure these materials include information
relevant to 403(b) plans for plan sponsors and participants. For example,
these updates could include adding information with direct references to
403(b) plans to help participants understand their 403(b) plan fees.
(Recommendation 1)
We provided a draft of this report to the Department of Labor (DOL); the
Securities and Exchange Commission (SEC), and the Department of the
Treasury (Treasury), including the Internal Revenue Service (IRS). DOL
provided formal comments on the draft report.
In its comments, reproduced as appendix IV, DOL neither agreed nor
disagreed with our recommendation. In addition, DOL noted it has a
webpage dedicated to 403(b) plan issues and noted that the information
in its 401(k) publications could be helpful to ERISA-covered 403(b) plan
sponsors, participants and other interested parties evaluating fees and
expenses in those plans. DOL stated that the agency’s rule applicable to
participant-directed individual account plans, which requires disclosure of
certain plan and investment-related information including a comparative
chart or similar format designed to facilitate a comparison of each
investment option available under the plan, applies to ERISA-covered
403(b) plans as well as 401(k) plans. The agency stated that in
accordance with our recommendation, it would review the relevant
publications with an eye to seeing whether the agency should be more
specific about referencing 403(b) plans.
In addition, DOL, SEC, and IRS provided technical comments, which we
incorporated as appropriate.
117
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
117
We also provided the Financial Industry Regulatory Authority, Inc. (FINRA) a copy of
the draft report for technical comments, and it provided technical comments, which we
incorporated as appropriate.
Recommendation for
Executive Action
Agency Comments
Page 61 GAO-23-105620 403(b) Retirement Plans
report date. At that time, we will send copies to the appropriate
congressional committees, the Secretary of Labor, the Chair of the
Securities and Exchange Commission, the Commissioner of Internal
Revenue, and other interested parties. In addition, the report will be
available at no charge on the GAO website at https://www.gao.gov.
If you or your staff have any questions about this report, please contact
us at (202) 512-7215 or [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made key contributions to this report
are listed in appendix V.
Sincerely yours,
Tranchau (Kris) Nguyen, Director
Education, Workforce, and Income Security Issues
Appendix I: Objectives, Scope, and
Methodology
Page 62 GAO-23-105620 403(b) Retirement Plans
This report examines (1) the extent to which federal agencies conduct
oversight of 403(b) plans, (2) actions selected states have undertaken
that could improve 403(b) participant outcomes, and (3) options
stakeholders and experts have identified that could improve outcomes for
403(b) participants.
To assess the extent to which federal agencies conduct oversight of
403(b) plans, we obtained and analyzed federal agency information on
the number and types of violations relevant to 403(b) plans and service
providers, investment vendors, broker dealers, or other service providers
for 403(b) plans from the Department of Labor (DOL), the Securities and
Exchange Commission (SEC), and the Internal Revenue Service (IRS),
as well as from the self-regulatory organization, the Financial Industry
Regulatory Authority, Inc. (FINRA). We reviewed relevant federal laws
and regulations that pertain to the administration and oversight of 403(b)
plans, including those pertaining to the sales of the types of investment
options included in 403(b) plans.
1
We examined disclosure requirements
for ERISA and non-ERISA plans and other sources of fee information
including the prospectuses for variable annuities and mutual funds that
may comprise 403(b) plan investment options. We also interviewed
agency officials regarding their oversight activities.
To determine the extent of DOL’s monitoring and enforcement of 403(b)
plans, we reviewed enforcement data from DOL’s Employee Benefits
Security Administration (EBSA) from fiscal years 2010 through 2021—the
most recent year for which data are available—regarding DOL’s
investigations of ERISA 403(b) plans. We also determined the share of
DOL investigations that met DOL’s criteria for being a major case,
2
from
fiscal years 2010 through 2021, the most recent year for which these data
are available, by comparing DOL case information by plan size with
GAO’s tabulation of assets in the plan size category for calendar year
2019, using 2019 Form 5500 data.
1
See, e.g., 17 C.F.R. § 240.15l-1; 29 C.F.R. § 2550.404a-5.
2
DOL has identified major cases as those that result in a loss recovery plan of $5 million
or more; payments to plan participants totaling $1 million or more; and for defined
contribution plans with 100–250 participants, a recovery of 10 percent of plan assets
(recovery is at least $500,000), among other conditions. DOL officials said that other
criteria besides the described participant and asset thresholds could constitute a major
case.
Appendix I: Objectives, Scope, and
Methodology
Methodology to Assess
Federal Agencies’ Efforts
to Conduct Oversight of
403(b) Plans
Appendix I: Objectives, Scope, and
Methodology
Page 63 GAO-23-105620 403(b) Retirement Plans
We also obtained and analyzed available data and information regarding
enforcement activities from other federal agencies and a regulator. More
specifically, from the IRS, we obtained and analyzed data including those
from examinations involving 403(b) plans from fiscal years 2011 through
2020—the most recent year for which data were available—identifying the
most common types of violations it identified for 403(b) plans. From the
SEC, we reviewed public information regarding outcomes from
examinations involving providers of 403(b) plans.
3
From FINRA, we
obtained and analyzed data including a summary provided by FINRA of
disciplinary actions that mention 403(b) plans from 2005 through May
2022.
4
To ensure the DOL, FINRA, and IRS data we used were reliable, we
reviewed technical documentation and contacted knowledgeable officials
and regulators with specific questions about the data. We determined that
the data were sufficiently reliable for the purposes of reporting on the
number of investigations and outcomes of enforcement actions involving
ERISA 403(b) retirement plans.
5
To determine what is known about the use of the Limited Employer
Involvement safe harbor (safe harbor) exemption by nongovernmental
tax-exempt 403(b) plans, we reviewed relevant federal regulations and
3
SEC officials said the agency generally does not collect data to determine or identify
whether 403(b) investment options or service providers were involved in any specific SEC
examination. As such, we excluded the SEC from our data reliability checks.
4
These data are FINRA-compiled summary data provided to GAO in May 2022 that
FINRA representatives stated were those cases that mentioned 403(b) plans from 2005
onward from FINRA’s publicly available enforcement database. GAO pulled its own data
for 2005 onward from FINRA’s public database and identified 32 documents that
mentioned 403(b) plans from January 2005 through December 2022. According to FINRA
representatives, there are more entries in the FINRA database than the number of cases
because a few cases have more than one related document (e.g., Complaint and Offer of
Settlement or Decision) in the database.
5
With respect to GAO’s tabulation of assets in ERISA 403(b) plans in fiscal year 2019 to
determine approximate DOL major case thresholds, we performed a data reliability
assessment of the Form 5500 variables we included in our analyses. We reviewed
technical documentation, conducted electronic data tests for completeness and accuracy,
and contacted knowledgeable officials with specific questions about the data. We
determined that the data we used were sufficiently reliable for this purpose. According to
SEC officials, the agency completes about 3,000 examinations each year, and many of
these examinations involve investment products included in 403(b) plan accounts. SEC
officials said the agency generally does not collect data to determine or identify whether
403(b) investment options or service providers were involved in any specific SEC
examination. As such, we excluded the SEC from our data reliability checks.
Appendix I: Objectives, Scope, and
Methodology
Page 64 GAO-23-105620 403(b) Retirement Plans
guidance regarding the Limited Employer Involvement safe harbor.
6
We
interviewed DOL officials regarding their oversight efforts for the safe
harbor for 403(b) plans and reviewed relevant previous GAO work that
discussed 403(b) plans.
7
To examine guidance and outreach provided by federal agencies related
to 403(b) plans, we reviewed relevant materials from DOL, SEC, IRS, and
FINRA, such as checklists, guidance documents, and other types of
outreach to 403(b) plan sponsors and participants. We also interviewed
agency officials regarding their efforts to provide outreach to plan
sponsors, participants, and the public. We assessed agencies’
enforcement and outreach and public information against federal internal
control standards.
8
To describe actions selected states have undertaken that could improve
403(b) participant outcomes, we conducted case studies of five states.
We selected states with the aim of providing a range of approaches
regarding how a state structures its relationship with service providers
and the type of disclosures provided to participants. We aimed to provide
a range of state experiences and regulatory approaches by using the
following criteria to select our states: open-access versus closed-access
system; recent regulatory or restructuring activity regarding 403(b) plan
administration in the state; any notable experiences or outcomes;
6
See 29 C.F.R. § 2510.3-2(f); see also Department of Labor Field Assistance Bulletin
2007-02 (July 24, 2007).
7
In particular, see GAO, Defined Contribution Plans: 403(b) Investment Options, Fees,
and Other Characteristics Varied, GAO-22-104439 (Washington, D.C.: Mar. 4, 2022); and
Retirement Savings: Better Information and Sponsor Guidance Could Improve Oversight
and Reduce Fees for Participants, GAO-09-641 (Washington, D.C.: Sept. 4, 2009).
8
See GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: September 2014). We assessed DOL’s informational materials against
internal control principles 13.01 and 15.01.
Methodology to Describe
State Actions that Could
Improve Participant
Outcomes
Appendix I: Objectives, Scope, and
Methodology
Page 65 GAO-23-105620 403(b) Retirement Plans
availability of fee data; and general transparency.
9
We developed an
initial list of seven case studies. This list was later narrowed to five due to
a lack of information and responses by two selected states.
10
We selected
the following five states: California, Connecticut, Delaware, Kansas, and
Texas. These case studies are not generalizable to the broader universe
of 403(b) plans.
As part of our case studies, we interviewed officials and state plan
sponsors or administrators of 403(b) plans in California, Connecticut,
Delaware, Kansas, including the California State Teachers’ Retirement
System, Connecticut’s Office of the State Comptroller, Delaware’s Office
of the State Treasurer and the Attorney General’s Office, and the Kansas
Board of Regents. We also interviewed a representative from the Texas
Teachers Retirement System who was knowledgeable about the state’s
statutory changes. We also obtained and reviewed available information
on plan fees, policies, and other plan documentation from all five states,
as feasible.
11
In addition, to obtain information regarding fixed and indexed annuities
since they are regulated at the state level, we obtained contacts for each
state’s insurance commission from a national association representing
9
We analyzed two studies that describe the different states’ approaches to regulation of
403(b) as, broadly, as being either open access or closed access systems. See TIAA-
CREF Institute, Trends and Issues – Who’s Watching the Door? How Improving 403(b)
Administrative Oversight Can Improve Educators’ Retirement Outcomes (November 2010)
accessed June 15, 2022, https://www.tiaa.org/public/institute/publication/2010/whos-
watching-door-how-improving-403b and 403(b) Plans For Public School Teachers: How
They Are Monitored Regulated in Each State (March 2013) accessed June 15, 2022 at
https://www.tiaa.org/public/institute/publication/2013/403b-plans-public-school-teachers.
We also reviewed a list from the National Tax-Deferred Savings Association (NTSA) that
identifies the 17 state-sponsored 403(b) plans. See Michael Webb, State Sponsored
Plans: A Closer Look (Arlington, Va.: National Tax-Deferred Savings Association),
accessed Aug. 20, 2020, https://www.ntsa-net.org/state-sponsored-403b-plans-closer-
look.
10
In October 2022 we elected to drop Pennsylvania as a case study, and in March 2023
we elected to drop Florida as a case study, due to lack of sufficient information and
response from the state.
11
We obtained information selected states by, where feasible, obtaining and analyzing
information regarding each state’s regulatory structure for 403(b) retirement plans from a
number of sources, including laws, regulations, and other relevant information from states’
public websites, as well as obtaining information from interviews with state stakeholders
and experts. In some cases, our review of available information and interviews with state
officials, as feasible, did not find any information regarding selected criteria, in which case
we will report that that state was “none identified” for that particular criterion.
Appendix I: Objectives, Scope, and
Methodology
Page 66 GAO-23-105620 403(b) Retirement Plans
state insurance commissioners. We sent a written list of questions to
each state insurance commissioner. We received responses from the
following four of our five selected states’ insurance commissions: the
California Department of Insurance, the State of Connecticut Insurance
Department, the Delaware Department of Insurance, and the Texas
Department of Insurance.
We did not conduct an independent legal analysis to verify the information
provided about the laws, regulations, or policies of the states selected for
this study. Rather, we corroborated our review of states’ laws with
interviews and other secondary sources such as documentation regarding
state agency policies and procedures. We provided a summary of this
information to agency officials for their review and corroboration.
12
We
incorporated technical corrections as appropriate.
To identify options stakeholders have identified that could improve
outcomes for 403(b) participants, we conducted interviews with
stakeholders and experts in the retirement planning industry. These
stakeholders and experts included representatives of industry
associations, research organizations, and service providers to 403(b)
plans. We identified these representatives as being knowledgeable about
403(b) plans based on their published research or other documentation,
or based on referrals from other organizations we interviewed.
In total, we interviewed representatives of 23 organizations, including 16
in connection with data collection for our March 2022 report, and seven
organizations, including one national teacher’s association, in connection
with this engagement.
13
We defined “stakeholders” as individuals or
entities with knowledge in the subject matter but with a financial or
advocacy interest in one or more aspects of 403(b) plans. Some of these
stakeholders represented 403(b) plan sponsors, others represented
service providers, while still others represented groups of participants. We
defined “experts” as individuals or entities with knowledge in the subject
matter but without a specific financial or advocacy stake, including
academics who study the industry, state regulators (who are also not
themselves sponsors of or service providers to 403(b) plans), and
12
For the Texas case study, a representative knowledgeable about the state’s regulatory
changes reviewed and confirmed a summary of the state law prior to regulatory changes
in 2019; we also relied on information from our September 2009 report, GAO-09-641, and
other information.
13
GAO-22-104439.
Methodology to Identify
Options Stakeholders
Have Identified that Could
Improve Participant
Outcomes
Appendix I: Objectives, Scope, and
Methodology
Page 67 GAO-23-105620 403(b) Retirement Plans
companies who furnish analysis of these plans to clients but are not
themselves involved in the industry directly. As explained below, we relied
on open-ended questions in interviews with experts and stakeholders to
help us develop the list of policy options we subsequently asked about in
the survey; as such, we did not systematically prompt all the experts and
stakeholders for responses with respect to each of the options discussed
in this report. Because we selected stakeholders and experts to interview,
information obtained by these interviews is not generalizable. In this
report, when discussing expert and stakeholder opinions, we used the
term “several” to refer to situations where three or four stakeholders we
interviewed cited a particular policy option and the term “multiple” (or, in
one case, the term “commonly cited”) to refer to situations where five or
more stakeholders we interviewed cited a particular policy option.
14
To identify options stakeholders might identify to improve options for
participants, we analyzed responses from selected questions in two
surveys of 403(b) plan sponsors and service providers we conducted for
our March 2022 report. For this report, we asked two questions about a
series of policy options and whether implementing those options might
improve outcomes for 403(b) plan participants; one focused on federal
oversight actions while the other focused more broadly on policy options
or practices. The two questions contained a total of 13 policy options and
two open-ended spaces where respondents could propose other ideas for
improving 403(b) plan participants. We developed this set of policy
options via reading reports from expert institutions and one government
advisory panel. We also developed them via interviews with experts and
stakeholders knowledgeable in the industry, based on their published
research or other documentation, or based on referrals from other
organizations we interviewed. To ensure that these questions were well-
understood by our survey participants, we pretested our surveys with
three 403(b) plan sponsors, two 403(b) service providers, one
stakeholder representing 403(b) participant groups, one stakeholder
representing the retirement planning industry, and one other expert
knowledgeable in the field prior to finalizing the survey.
No comprehensive sources of data on sponsors of or service providers
for 403(b) plans exist. As such we used multiple methods to identify our
survey populations: one population consisted of four sets of 403(b) plan
14
We note that of all policy options cited by experts and stakeholders, six represents the
highest number cited in our interviews.
Appendix I: Objectives, Scope, and
Methodology
Page 68 GAO-23-105620 403(b) Retirement Plans
sponsors and another consisted of 403(b) record keepers, third-party
administrators, vendors, and consultants.
In total, we received completed surveys from 26 sponsors of 403(b) plans
after reaching out to 64 such plan sponsors. However, one of those
403(b) plan sponsors did not participate in the two survey questions we
cover in this report, meaning we had 25 survey respondents in this
category. Among those 25 respondents were 10 state sponsors, two
public university system plans, seven large school districts, one small
school district, and five tax-exempt organizations. Among the four sets of
403(b) plan sponsors, we obtained the following response rate:
• Nine of 14 state-sponsored 403(b) plans, based on research compiled
by and identified in a list published by the National Tax Deferred
Savings Association (we excluded two state-sponsored plans that
were no longer in existence, but did include one plan, discontinued in
2020, whose sponsor filled out a survey);
15
• Five of 11 of the largest 403(b) plan sponsors, as identified by
Pensions and Investments (we excluded one such plan that also
appeared on the list of state-sponsored plans above, to avoid double
counting);
16
• Four of 14 small 403(b) plan sponsors, as identified by a random
sample of plans from DOL’s 2018 5500 filings of 99 or fewer
participants and plans from the Form 5500 filings with $1 million or
less in total assets (excluding two entities for no longer having 403(b)
plans, one entity for appearing to no longer exist, and two other
entities for having plan assets above the $1 million threshold);
17
and
• Seven of 26 K-12 school districts, by the following methods:
• Five of the 10 largest districts as measured by the number of
students in the district and selected by a certainty sample,
• One of the 20 districts randomly selected out of the remaining
districts in 50 states plus the District of Columbia, as measured by
15
The National Tax-Deferred Savings Association is an industry group whose members
include 403(b) and 457 plan sponsors and service providers.
16
Pensions and Investments is a news publication written for pension, portfolio, and
investment management executives in the institutional investment market.
17
As explained above, this figure excludes one 403(b) plan sponsors who did not answer
the two questions we discuss in this report, but otherwise participated in the survey.
Appendix I: Objectives, Scope, and
Methodology
Page 69 GAO-23-105620 403(b) Retirement Plans
number of students in the district by the National Center for
Education Statistics (NCES), and
• One sponsor of a plan that covers multiple K-12 school districts.
We excluded five K-12 school districts from an initial list of 30, because
plan administrators told us that the district did not have a 403(b) plan,
because school officials had no contact information for administrators or
any participant information, or because the district appeared not to exist
anymore. We included one plan sponsor whose plan covers multiple K-12
districts mentioned above after initially reaching out to them as a service
provider.
In addition, we selected respondents from a group of large record
keepers, third-party administrators, consultants, and vendors, which we
collectively refer to as “service providers” when discussing the results of
this survey. As with the plan sponsors, no comprehensive source of data
on such entities or their roles in 403(b) plans exists, so we used multiple
sources to select our target population, including:
• J.P. Morgan published a white paper listing the top 10 vendors of
variable annuities, a key component of 403(b) plan assets.
18
We
received five responses from this group and excluded two entities who
indicated to us that they were not 403(b) service providers; our
response rate from this group was five of eight.
• Pensions and Investments produces an annual list of the most-used
managers, consultants, and custodians for both defined contribution
and defined benefit plans, and the September 30, 2020 issue listed 14
entities. We received four responses from this group and excluded
three entities who indicated to us that they were not 403(b) service
providers; our response rate from this group was four of 11.
• The Plan Sponsor Council of America, a trade association
representing sponsors of retirement plans, conducts a periodic survey
of plan sponsors and has a question on that survey that asks its
members to name their service provider. This list yielded the names of
seven entities who did not already appear on one of the above lists.
We received four responses from this group and excluded one entity
who indicated to us that they were not 403(b) service providers; our
response rate from this group was four of six.
18
J.P. Morgan, Variable Annuity Market Trends (New York: North American Equity
Research, 2020).
Appendix I: Objectives, Scope, and
Methodology
Page 70 GAO-23-105620 403(b) Retirement Plans
• Interviews with experts in the 403(b) field identified 18 other parties.
We received eight survey responses from this group. We excluded
three of these potential respondents—one because they said they
were neither a 403(b) record keeper nor administrator, one because
they told us they were exiting the 403(b) business, and one because
we determined they would be more appropriately classified as a plan
sponsor; our response rate from this group was eight of 15.
We reached out to a total of 49 potential respondents, of which we
excluded nine for the reasons described above. We received a total of 21
respondents from record keepers, administrators, consultants, or
vendors.
19
Our response rate across all of all above groups was 21 of 40.
We conducted our surveys from May 2021 to May 2022. No authoritative
list of plan sponsors or service providers exists. Therefore, we selected
our survey populations as described above, and we did not have the
ability to generate a random sample of the populations, or any subset
thereof, and our survey results are not generalizable.
To further identify approaches different parties have undertaken or could
undertake to improve outcomes for participants in 403(b) retirement
plans, we also analyzed settlement agreements of cases involving 403(b)
plan sponsors and participants from 2015 onward.
20
We performed a
series of internet searches for 403(b)-related litigation, looking for cases
that were settled, or where a judgment was entered, from 2015 onward.
We searched for information in the Westlaw database regarding cases
involving different kinds of 403(b) plan sponsors, looking specifically for
cases that were settled, or where a judgement was entered, between
2015 and 2022.
21
We included search criteria to capture cases involving
19
This figure includes two service providers that did not respond to survey questions
pertaining to our March 2022 report, GAO-22-104439, but did answer the two questions
related to this report. This total does not include one respondent that had been identified
as a service provider and that we later identified as a multiemployer plan sponsor for a set
of multiple K-12 school districts. That response is included in our population of plan
sponsors, as discussed above.
20
We interviewed a representative of a law firm that has served as plaintiff’s counsel for
several of these 403(b) cases who told us that the first case involving a 403(b) plan
sponsor being sued by participants over excessive fees or poorly performing investment
options was settled in 2015. This representative also provided us with some settlement
agreements.
21
Our searches did not identify any cases where a final judgment where defendants were
found to have either breached or not breached their fiduciary duties under ERISA, was
entered.
Appendix I: Objectives, Scope, and
Methodology
Page 71 GAO-23-105620 403(b) Retirement Plans
one or more non-ERISA 403(b) plans, but its searches did not turn up any
cases involving non-ERISA 403(b) plans. The settlement agreements are
specific to the facts and circumstances of each case, and our settlement
agreements all pertained to ERISA 403(b) plans. Therefore, the analysis
did not include 403(b) plans sponsored by either governmental (e.g.,
public school districts) or church entities, since those plans are generally
not subject to ERISA; all of the settlements we found were with tax-
exempt entities in either the higher education or health care sectors.
We reviewed a total of 18 settlements, 13 of which included at least one
nonmonetary settlement term, and discussed some of the nonmonetary
terms that appeared in those settlements.
22
Because the nature of a
settlement agreement depends on the specific facts and circumstances
involved in the dispute, the results of our review of these settlement
agreements are not generalizable.
We conducted this performance audit from December 2021 through June
2023 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
22
The other five settlements we examined contained only monetary settlement terms.
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 72 GAO-23-105620 403(b) Retirement Plans
We reached out to state officials in five selected states—California,
Connecticut, Delaware, Kansas, and Texas—who identified relevant state
laws and provided documentation on state non-ERISA 403(b) plan
regulations and policies. We interviewed state officials in California,
Connecticut, Delaware, and Kansas.
1
We also interviewed other
knowledgeable stakeholders and experts, including an official from Texas
who understands the state’s regulatory environment.
In addition, because fixed and indexed annuities may be subject to laws
administered by state insurance commissions, we obtained contacts in
each state’s insurance commission from a national association
representing state insurance commissioners and sent a shorter set of
questions for response to State insurance commissioners. We received
responses from four of our five selected states’ insurance commissions.
We aimed to provide a range of state experiences and regulatory
approaches by using the following criteria to select our states: open-
access versus closed-access system;
2
recent regulatory activity and
reorganization regarding 403(b) plan administration in the state; and
availability of fee data and plan provider information.
3
We did not conduct
an independent legal analysis to verify the information provided about the
laws and regulations of the states selected for this study. Rather, we
relied on interviews with state officials and secondary sources such as
documentation regarding state agency policies and procedures. We
submitted key report excerpts to agency and plan officials in each state,
1
These state officials were also the state’s 403(b) plan sponsors or administrators.
2
We analyzed two studies that describe the different states’ approaches to regulation of
403(b) as, broadly, as being either open access or closed access systems. See TIAA-
CREF Institute, Trends and Issues – Who’s Watching the Door? How Improving 403(b)
Administrative Oversight Can Improve Educators’ Retirement Outcomes (November
2010); and TIAA-CREF Institute, Research Dialogue – 403(b) Plans for Public School
Teachers: How They Are Monitored and Regulated in Each State (March 2013). We also
reviewed a list from the National Tax-Deferred Savings Association that identifies the 17
state-sponsored 403(b) plans. See Michael Webb, State Sponsored Plans: A Closer Look.
(Arlington, Va.: National Tax-Deferred Savings Association), accessed Aug. 20, 2020,
https://www.ntsa-net.org/state-sponsored-403b-plans-closer-look.
3
Among our selected states, Connecticut and Delaware’s 403(b) plan generally applies
statewide for eligible employees; California’s applies to the CalSTRS Pension2 retirement
plan offered statewide to participants; Kansas’s applies to employees in higher education;
and we did not identify state laws or regulations that applied to a uniform group of
participants in Texas.
Appendix II: Selected Features of State
403(b) Regulatory Environments
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 73 GAO-23-105620 403(b) Retirement Plans
as appropriate, for their review and verification. These case studies are
not generalizable to the broader universe of 403(b) plans.
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 74 GAO-23-105620 403(b) Retirement Plans
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 75 GAO-23-105620 403(b) Retirement Plans
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 76 GAO-23-105620 403(b) Retirement Plans
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 77 GAO-23-105620 403(b) Retirement Plans
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 78 GAO-23-105620 403(b) Retirement Plans
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 79 GAO-23-105620 403(b) Retirement Plans
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 80 GAO-23-105620 403(b) Retirement Plans
Appendix II: Selected Features of State 403(b)
Regulatory Environments
Page 81 GAO-23-105620 403(b) Retirement Plans
Appendix III: Results of GAO’s Surveys of
403(b) Plan Sponsors and Service Providers
Page 82 GAO-23-105620 403(b) Retirement Plans
Our survey of 25 403(b) plan sponsors and 21 403(b) service providers
outlined a series of potential policy options that might improve outcomes
for participants in 403(b) plans.
1
In connection with our March 2022
report, we conducted two surveys—one of 403(b) plan sponsors and the
other of 403(b) service providers, that variously act as record keepers,
administrators, consultants, or product vendors for 403(b) plans.
2
Among
the topics we asked respondents were two questions about a series of 13
policy options that appear below.
3
The survey results are shown in figure
10.
1
For the purposes of this report, we did not count one plan sponsor that was included in
the previous report’s plan sponsor survey reporting totals, because this plan sponsor did
not answer either of the two questions relevant to this report. We did, in addition to those
service providers included in the March 2022 report, include an additional two service
providers who answered both of the relevant questions for this report but did not otherwise
participate in the survey (and its applicable information for the March 2022 report). In
order to ensure that these questions were well-understood by our survey participants, we
pretested our surveys with three 403(b) plan sponsors, two 403(b) service providers, one
stakeholder representing 403(b) participant groups, one stakeholder representing the
retirement planning industry, and one other expert knowledgeable in the field prior to
finalizing the survey.
2
We asked survey respondents a series of questions regarding different characteristics of
the 403(b) plans that the respondents either sponsored or provided services for, including
the investment options found in those plans and their fee structures, and reported this
information in our March 2022 report, GAO-22-104439.
3
Since we actively selected survey populations and did not generate random samples of
plan sponsor or service provider populations, the results of the surveys are not
generalizable.
Appendix III: Results of GAO’s Surveys of
403(b) Plan Sponsors and Service Providers
Appendix III: Results of GAO’s Surveys of
403(b) Plan Sponsors and Service Providers
Page 83 GAO-23-105620 403(b) Retirement Plans
Figure 10: Results of GAO Survey of 403(b) Plan Sponsors and Service Providers Concerning Policy Options to Improve
403(b) Plan Participant Outcomes
Note: ERISA refers to the Employee Retirement Income Security Act of 1974, as amended.
Automatic Enrollment. The two most popular options across all 46
survey respondents both involved facilitating automatic enrollment and
automatic escalation in 403(b) plans. According to several stakeholders in
the industry, state laws pertaining to wage garnishments may prevent
Appendix III: Results of GAO’s Surveys of
403(b) Plan Sponsors and Service Providers
Page 84 GAO-23-105620 403(b) Retirement Plans
plan sponsors not subject to the Employee Retirement Income Security
Act of 1974, as amended (non-ERISA plans) from using automatic
enrollment or automatic escalation. (ERISA preempts such state laws
when it applies, so this issue does not apply with respect to 403(b) plans
covered by ERISA.) This pair of policy options was the most suggested
one among our service provider respondents in particular.
Promoting Fee Transparency. The next two of the 13 policy options
concerned promoting transparency of fees—one of the options specified
fees at the plan level (e.g., record-keeping and administrative services)
while the other specified fees at the investment level (e.g., charges for
maintaining plan assets, or trading or transaction costs). These two
options were the most popularly selected among plan sponsor
respondents in particular.
Expanding Investment Options. The next two of the 13 policy options
pertained to expanding the available menu of investment options in
403(b) plans. One of the options specified collective investment trusts
(CIT) while the other concerned alternative investment vehicles, which
could include real estate investment trusts or private equity funds.
4
Outreach. The next four of the 13 policy options pertained to various
forms of outreach that federal agencies could conduct to assist 403(b)
plan sponsors, particularly small 403(b) plan sponsors, with administering
their plans. Two of those concerned the applicability of the requirements
of ERISA to 403(b) plans, as we heard from several stakeholders that not
all plan sponsors fully understood whether ERISA applied to their plans.
The third option was more general, calling for outreach to small plan
sponsors concerning market regulation. The final, and most popular,
option among this group of four was a request for federal agencies
provide additional informational materials governing plan structure, model
plan documents, or checklists.
Additional 403(b) Participant Protections. The next two options we
asked about concerned additional protections for plan participants in non-
ERISA 403(b) plans. The first of those concerned conflicts of interest,
4
A real estate investment trust is a company that owns income-generating real estate,
allowing individual investors to earn a share of the income produced by commercial real
estate without directly owning commercial real estate. Many real estate investment trusts,
like mutual funds, are publicly traded and regulated by the SEC. According to
stakeholders we interviewed, real estate investment trusts are a common component of
defined benefit retirement plans, are sometimes found in 401(k) plans, and can be used to
diversify a retirement plan’s portfolio.
Appendix III: Results of GAO’s Surveys of
403(b) Plan Sponsors and Service Providers
Page 85 GAO-23-105620 403(b) Retirement Plans
while the second concerned applying other protections currently part of
ERISA more broadly.
Additional Flexibilities in Use of Service Providers. The final option
we included in the survey concerns the ability of some sponsors of 403(b)
plans to hire service providers to administer a plan while still meeting the
requirements described in what we describe elsewhere in this report as
the Limited Employer Involvement safe harbor.
5
DOL regulations currently
do not allow plans making use of this safe harbor to hire a third-party
administrator to manage the plan, as DOL considers that action to be
incompatible with the meaning of “Limited Employer Involvement.”
Several industry stakeholders discussed some of the challenges that plan
sponsors or participants may face with respect to those plans. For
example, two industry stakeholders discussed how participants might
face challenges in finding fee information about investment options in
their 403(b) plans. Two other industry stakeholders talked about the limits
these plan sponsors face in attempting to improve aspects of their plans
within the parameters of the safe harbor.
5
DOL defined a “safe harbor” for 403(b) plans sponsored by tax-exempt organizations.
See GAO-09-641. Plans that meet the conditions described in the safe harbor are not
considered subject to Title I of ERISA because they are not considered to have been
“established or maintained by an employer.” To fall under this safe harbor, participation in
the plan must be voluntary and employers are not allowed to contribute to the plan or
make discretionary determinations in administering the plan, such as processing
distributions, authorizing plan-to-plan transfers, or making determinations of eligibility for
loans or hardship distributions.
Appendix IV: Comments from the Department
of Labor
Page 86 GAO-23-105620 403(b) Retirement Plans
Appendix IV: Comments from the
Department of Labor
Appendix V: GAO Contact and Staff
Acknowledgments
Page 87 GAO-23-105620 403(b) Retirement Plans
In addition to the individual named above, Sharon Hermes (Assistant
Director), Michelle Munn (Analyst in Charge), Andrew Bellis, and Timothy
Young made key contributions to this report. Nora Boretti, Ted Burik,
Holly Dye, Avani Locke, Abigail Loxton, Jessica Mausner, Jason Palmer,
Jessica Rider, Joy Solmonson, Curtia Taylor, Frank Todisco, Walter
Vance, and Adam Wendel also contributed to this report.
Appendix V: GAO Contact and Staff
Acknowledgments
GAO Contact
Staff
Acknowledgments
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