oversight

Defined Contribution Plans: Approaches in Other Countries Offer Beneficial Strategies in Several Areas

Published by the Government Accountability Office on 2012-03-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States Government Accountability Office

GAO          Report to Congressional Requesters




March 2012
             DEFINED
             CONTRIBUTION
             PLANS
             Approaches in Other
             Countries Offer
             Beneficial Strategies
             in Several Areas




GAO-12-328
                                               March 2012

                                               DEFINED CONTRIBUTION PLANS
                                               Approaches in Other Countries Offer Beneficial
                                               Strategies in Several Areas
Highlights of GAO-12-328, a report to
congressional requesters




Why GAO Did This Study                         What GAO Found
Service providers play important roles         In overseeing DC plans and service providers, regulatory agencies in the
in the U.S. defined contribution (DC)          countries GAO reviewed use risk-based approaches to target practices deemed
retirement system since they provide           most likely to harm participants and to develop preventative measures. While the
services, such as administration and           role of service providers varies, DC plans and service providers in the 4 countries
fund management, necessary for                 GAO reviewed are overseen by multiple agencies—primarily a pensions
operating DC plans. Plan sponsors rely         regulator and a securities regulator. In each of these countries, the pensions
on such providers, yet it is unclear how       regulator is the agency that regularly collects data on service provider fees, as
much participants are paying in fees           well as other plan features, which are used to inform their oversight activities. In
for these services. Other countries with
                                               particular, in several of these countries, the pensions regulator uses these data
well-established DC systems face
                                               as part of a risk-based approach to identify service provider practices that may
similar issues and some use a variety
of approaches to oversee DC plans
                                               harm participants, instead of relying only on a compliance-based approach. For
and service providers and actively             example, in Chile, pensions agency officials evaluate key features of the DC
focus on fees charged to participants.         system, such as the service providers’ management of the individual accounts
                                               and the composition and role of the board of directors of the service provider. In
GAO was asked to examine, for                  both Chile and Australia, agency officials said using a risk-based approach
selected countries’ DC systems,                enables the pensions regulator to take proactive measures to ensure the DC
(1) how are service providers overseen         plans are operating in the best interest of participants. These countries have
by regulatory agencies; (2) what key           used risk-based approaches to oversee service providers for a number of years,
strategies are used to improve fee             while the U.S. Department of Labor (Labor) has just begun to develop a risk-
disclosure to participants; and (3) what
                                               based approach in its efforts to oversee U.S. DC plans and service providers.
key strategies are used to reduce
fees? GAO selected Australia, Chile,           Other countries have used key strategies to improve the disclosures participants
Sweden and the United Kingdom                  receive about the fees they pay for their DC plans, including presenting
based on, among other factors, the             disclosures in a consistent, summary format, which has increased transparency.
importance of the DC plans to the              In particular, these countries have made disclosures simpler and more uniform to
country’s retirement system and the            facilitate comparisons, and one has required that providers highlight the long
use of strategies to address service           term impact of fees on participants’ account balances. In addition, some
providers’ fees. GAO reviewed                  countries require that participants receive personalized information about the
research on DC plans; collected and
                                               total amount they pay in fees over a given time period. In Chile, participants not
analyzed available data; and
                                               only receive personalized fee disclosures, but they also receive a statement that
interviewed government officials,
pension experts, service providers, and        tells them what they would have paid had they chosen the lowest-cost option.
other relevant representatives in the          Many of these requirements exceed Labor’s disclosure requirements for U.S. DC
U.S. and selected countries.                   plan participants.
                                               Other countries use several targeted strategies—including consolidating and
What GAO Recommends
                                               streamlining administrative services and establishing low-cost default funds—to
GAO is recommending that Labor                 keep the fees paid by their DC plan participants at reasonable levels. According
consider other countries’ experiences          to officials in the countries GAO reviewed, it was important to use these targeted
as it continues to improve its                 strategies because many of their DC plan participants remain disengaged from
supervision and requirements related           retirement savings issues despite improved disclosures. For example, in Sweden
to fee disclosures. In commenting on a         and the United Kingdom, consolidating administrative functions eliminates the
draft of this report, Labor generally          need for fund managers to maintain individual accounts. Representatives from
agreed with the findings and noted that        service providers in both countries said this structure allows them to significantly
it will consider GAO’s                         lower their fees. In addition, for individuals who do not actively choose where to
recommendations carefully.                     invest their contributions, some countries have established low-cost default
                                               options through a variety of measures, such as creating a nonprofit entity to run
View GAO-12-328. For more information,
contact Charles Jeszeck at (202) 512-7215 or   the default fund under a low-cost mandate, increasing the use of online services,
jeszeckc@gao.gov.                              and eliminating marketing costs. These countries also take other targeted
                                               approaches to lower fees, such as direct regulation of fees.
                                                                                        United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                   3
               Risk-Based Oversight Helps Some Countries’ Regulatory Agencies
                 Monitor Service Providers and Could Inform Labor as It
                 Improves Its Oversight Approach                                          11
               Fee Disclosure Strategies Improved Transparency in Some
                 Countries, and Similar Strategies Could Benefit U.S. Participants        22
               Targeted Strategies Used by Some Countries Lower Fees                      32
               Conclusions                                                                43
               Recommendations for Executive Action                                       44
               Agency Comments and Our Evaluation                                         44

Appendix I     Objectives, Scope, and Methodology                                         48



Appendix II    Key Features of DC Pension Systems in Australia, Chile,
               Sweden and the United Kingdom                                              50



Appendix III   Comments from the Department of Labor                                      55



Appendix IV    GAO Contact and Staff Acknowledgments                                      59



Tables
               Table 1: Labor’s 401(k) Participant Fee Disclosure Requirements             8
               Table 2: Key Features of Case Study Countries’ DC Systems                  10
               Table 3: Key roles of DC Service Providers by Country                      12
               Table 4: Main Features of Alternate Regulatory Approaches                  17
               Table 5: Australia’s Fee Disclosure Requirements                           25
               Table 6: Australia’s Proposed Regulations to Reduce Costs through
                        a Variety of Methods                                              36
               Table 7: Australia’s Proposed MySuper Default Products Will Be
                        Limited to Certain Fees                                           40
               Table 8: Other Strategies That Have Reduced Fees                           43




               Page i                                    GAO-12-328 Defined Contribution Plans
Figures
          Figure 1: Structure of Service Provider Arrangements in 401(k)
                    Plans                                                                            5
          Figure 2: Economic Data for the United States, Australia, Chile,
                    Sweden, and the United Kingdom, 2010                                             9
          Figure 3: Consumer Advisory Warning Box in Australian Product
                    Disclosure Statement                                                            26
          Figure 4: Example of Sweden’s Fee Disclosure Requirements for
                    Premium Pension Participants                                                    28
          Figure 5: Example of Chile’s Fee Disclosure Requirements                                  29
          Figure 6: Example of Labor’s 401(k) Participant Disclosure
                    Requirement Demonstrating the Effect of Fees                                    30
          Figure 7: Example of Annual Fee Disclosure Requirements for
                    401(k) Participants under Labor’s New Regulations                               31
          Figure 8: The Structure of Sweden’s Premium Pension System
                    Helps Lower Administrative and Fund Management Fees                             34
          Figure 9: The United Kingdom Has Structured Its Nationally Available
                    Plan to Reduce Administrative and Fund Management Fees                          35



          Abbreviations
          AFP         Administradoras de Fondos de Pensiones
          DB          defined benefit
          DC          defined contribution
          EBSA        Employee Benefits Security Administration
          ERISA       Employee Retirement Income Security Act of 1974
          GDP         gross domestic product
          IOPS        International Organisation of Pension Supervisors
          Labor       U.S. Department of Labor
          NEST        National Employment Savings Trust
          OECD        Organisation for Economic Co-operation and Development
          SEC         Securities and Exchange Commission
          U.K.        United Kingdom


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          Page ii                                             GAO-12-328 Defined Contribution Plans
United States Government Accountability Office
Washington, DC 20548




                                   March 22, 2012

                                   The Honorable George Miller
                                   Ranking Member
                                   Committee on Education
                                     and the Workforce
                                   House of Representatives

                                   The Honorable Robert E. Andrews
                                   Ranking Member
                                   Subcommittee on Health, Employment,
                                     Labor, and Pensions
                                   House of Representatives

                                   Service providers—companies that employers hire to provide the services
                                   necessary to operate defined contribution (DC) retirement plans, such as
                                   investment management, consulting and financial advice, recordkeeping,
                                   custodial or trustee based services for plan assets, and basic customer
                                   service—play an important role in the U.S. DC system. As employers who
                                   offer DC plans rely on these providers, whose fee arrangements are
                                   becoming increasingly complex, it is unclear how much participants are
                                   paying for their services. Because the amount of a participant’s retirement
                                   savings in a DC plan depends on their investment rate of return net of
                                   fees, higher direct and indirect fees charged by DC plan service providers
                                   can significantly decrease the income available to participants in
                                   retirement. Furthermore, oversight of these companies has become more
                                   complex because their services and activities may fall within the
                                   jurisdiction of multiple regulatory agencies. In order to improve employers’
                                   abilities to adequately oversee service providers and monitor the fees
                                   participants are charged for their services, the U.S. Department of Labor
                                   (Labor) issued an interim final rule in 2010 to increase the transparency of
                                   direct and indirect fees in DC plans to plan sponsors. The final rule will go
                                   into effect in 2012, and its impact remains to be seen. 1

                                   Other countries with well-established DC systems face similar issues, and
                                   some use a variety of approaches to oversee DC plans and service



                                   1
                                    Reasonable Contract or Arrangement Under Section 408(b)(2) - Fee Disclosure, 77 Fed.
                                   Reg. 5632 (2012) (to be codified at 29 C.F.R. pt. 2550).




                                   Page 1                                           GAO-12-328 Defined Contribution Plans
providers and actively focus on fees charged to participants. Congress is
interested in understanding what approaches other countries are using to
address these issues compared to the approaches used in the United
States. In particular, Congress is interested in whether U.S. regulators
can benefit from learning about these alternative approaches as well as
the challenges those countries encounter in utilizing and overseeing
service providers in their DC plans. In light of this, you asked us to
answer the following questions:

1. How are service providers in other countries’ DC systems overseen
   by regulatory agencies?

2. What key strategies are used in other countries to improve fee
   disclosure to participants?

3. What key strategies are used in other countries’ DC systems to
   reduce fees?

To answer these questions, we selected four countries in which to
conduct case studies: Australia, Chile, Sweden, and the United Kingdom
(U.K.). To select these countries, we initially reviewed scholarly and
nonlegal sources describing the DC retirement systems in other
countries. Based on our analysis of relevant research and interviews with
pension experts, we identified 10 countries that had DC systems with key
features designed to address fees. From those 10 countries, we
established selection criteria based on the importance of the DC system
to the country’s retirement system and the use of strategies to address
service providers’ fees, among other factors. By focusing on countries in
which the DC system is an important pillar of the retirement system, we
increased our opportunity to identify practices used in countries with well
developed capital markets and where risks to participants are comparable
to those faced by participants in the United States. For each of the four
countries selected, we reviewed research and other available
documentation and interviewed officials and industry experts to determine
the role that service providers play in these countries’ DC systems and
how they are overseen, and to identify the strategies designed to address
fees. We obtained broad perspectives on the benefits and drawbacks of
the identified strategies from government officials, academics, industry
experts, service providers, and other relevant representatives in each
country. Where possible, we attempted to obtain and analyze available
data on the types and amounts of fees paid in DC plans in those
countries. We did not conduct any independent legal analysis to verify the
information provided by or about those countries laws or regulations.


Page 2                                     GAO-12-328 Defined Contribution Plans
             Appendix I provides additional information on our scope and
             methodology.

             We conducted this performance audit from March 2011 through March
             2012 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.


             Roughly 40 percent of all U.S. workers participate in pension plans
Background   offered by their employers. 2 Under Title I of the Employee Retirement
             Income Security Act of 1974 (ERISA), employers are permitted to offer
             their employees two broad types of retirement plans, defined benefit (DB)
             and DC. Over the past three decades, there has been a general shift by
             employers away from DB plans to DC plans, the most predominant of
             which is the 401(k) plan. According to estimates by industry researchers,
             51 million American workers were active 401(k) plan participants in 2010
             and, by year end, 401(k) plan assets amounted to $3.0 trillion. 3 Unlike DB
             plans, employers that offer 401(k) plans do not promise employees a
             specific benefit amount at retirement—instead, the employee and/or the
             employer contribute money to an individual account held in trust for the
             employee. 4 Participants direct these contributions to mutual funds and
             other financial market investments; the amount available at retirement is
             dependent on, among other things, investment returns net of fees. In this
             way, 401(k) plan participants have more control over their retirement
             assets than DB plan participants but also bear the responsibility for
             ensuring they have adequate retirement savings.




             2
              Employee Benefit Research Institute, Employment-Based Retirement Plan Participation:
             Geographic Differences and Trends, 2010, Issue Brief No. 363 (Washington D.C.: October
             2011).
             3
              Employee Benefit Research Institute, 401(k) Plan Asset Allocation, Account Balances,
             and Loan Activity in 2010, Issue Brief No. 366 (Washington D.C.: December 2011).
             4
              Exemptions to this trust requirement include insurance contracts and plan assets held by
             insurance companies.




             Page 3                                             GAO-12-328 Defined Contribution Plans
Employers who offer these plans are considered plan sponsors and
generally have the responsibility to act prudently and in the best interest
of the plan’s participants as they hire various outside companies to help
run the plan and choose investment options to offer in the plan. 5 Most
401(k) plans allow participants to direct the investment of their
contributions, but their choices are generally limited to those investment
options their plan sponsor chooses to offer. Participants also pay a
number of fees, including expenses, commissions, or other charges
associated with operating a 401(k) plan. 6 Fees are charged by the various
outside companies that the plan sponsor hires to provide a number of
services necessary to operate the plan. Services can include investment
management (e.g., selecting and managing the securities included in a
mutual fund); consulting and providing financial advice (e.g., selecting
vendors for investment options or other services); recordkeeping (e.g.,
tracking individual account contributions); custodial or trustee services for
plan assets (e.g., holding the plan assets in a bank); and telephone or
web-based customer services for participants. An investment company,
bank, advisor, or insurance company may offer any or all of these types
of investment products as plan options to a 401(k) plan. As shown in
figure 1, service providers can be used to provide a number of services
necessary to operate a 401(k) plan.




5
 29 U.S.C. §1104(a). The law establishes that a plan fiduciary includes a person who has
discretionary control or authority over the management or administration of the plan,
including the plan’s assets. Typically, the plan sponsor is a fiduciary under this definition.
ERISA requires that plan fiduciaries carry out their responsibilities prudently and do so
solely in the interest of the plan’s participants and beneficiaries. In accordance with ERISA
and related Labor regulations and guidance, plan sponsors and other fiduciaries must
exercise an appropriate level of care and diligence given the scope of the plan and act for
the exclusive benefit of plan participants and beneficiaries, rather than for their own or
another party’s gain.
6
 We have previously reported that plan sponsors may still pay some plan recordkeeping
fees but participants bear them in a growing number of plans. 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).




Page 4                                                GAO-12-328 Defined Contribution Plans
Figure 1: Structure of Service Provider Arrangements in 401(k) Plans




                                         Note: Services can be bundled or unbundled with investment management services or advisory
                                         services. Under a bundled service arrangement, the plan sponsor hires a company that provides
                                         multiple services directly or through subcontracts. Under unbundled arrangements, the sponsor uses
                                         a combination of service providers.


                                         401(k) service providers are typically overseen by various U.S. federal
                                         and state regulators. Labor’s Employee Benefits Security Administration
                                         (EBSA) has numerous responsibilities related to the oversight of 401(k)




                                         Page 5                                                  GAO-12-328 Defined Contribution Plans
plans and protection of 401(k) participants’ assets, 7 including educating
and assisting plan sponsors and participants, investigating alleged
violations of ERISA, responding to requests for interpretations of ERISA
through advisory opinions and rulings, and making determinations to
exempt transactions that would otherwise be prohibited under ERISA.
However, as we have previously reported, Labor’s civil enforcement
efforts for plan service providers are largely limited by the extent to which
the provider functions as a fiduciary under ERISA, 8 and many providers
are reported to commonly structure their relationships with sponsors in a
manner that avoids being subject to these fiduciary standards. 9 To carry
out its enforcement duties, Labor has offered voluntary compliance
programs and has relied primarily on leads from participants, plan
sponsors, and other agencies to conduct targeted investigations on
specific types of plans and service providers. 10 In addition to Labor’s role,
the specific investment products commonly offered in 401(k) plans fall
under the authority of the applicable securities, banking, or insurance
regulators. These regulators include the Securities and Exchange
Commission (SEC), federal and state banking agencies, and state
insurance commissioners as follows:

•    SEC, among other responsibilities, regulates securities markets and
     issuers, including mutual funds, under various securities laws.

•    Federal agencies charged with oversight of banks—primarily the
     Federal Reserve Board, the Office of the Comptroller of the Currency,



7
 The Employee Benefits Security Administration (EBSA) also has oversight
responsibilities related to other types of DC plans, as well as DB plans. The Internal
Revenue Service also oversees various aspects of 401(k) contributions under the Internal
Revenue Code.
8
 29 U.S.C. § 1002(21)(A). On October 22, 2010, Labor proposed a revised definition of
the term “fiduciary,” 75 Fed. Reg. 65,263 (2010) and, subsequently, by News Release
Number: 11-1382-NAT on September 19, 2011, Labor announced it would “re-propose” its
rule on the definition of fiduciary in early 2012.
9
 GAO, 401(K) Plans: Improved Regulation Could Better Protect Participants from Conflicts
of Interest, GAO-11-119 (Washington, D.C.: Jan. 28, 2011) and Defined Benefit Pensions:
Conflicts of Interest Involving High Risk or Terminated Plans Pose Enforcement
Challenges, GAO-07-703 (Washington, D.C.: June 28, 2007).
10
  GAO, Employee Benefits Security Administration: Enforcement Improvements Made but
Additional Actions Could Further Enhance Pension Plan Oversight, GAO-07-22
(Washington, D.C.: Jan. 18, 2007).




Page 6                                             GAO-12-328 Defined Contribution Plans
     the Federal Deposit Insurance Corporation, and state banking
     agencies—oversee bank investment products.

•    State insurance agencies generally regulate insurance products.
     Some investment products may also include one or more insurance
     elements, which are not present in other investment options.
     Generally, these elements include an annuity feature and interest and
     expense guarantees. 11

Labor published final regulations on October 20, 2010, to improve U.S.
participant fee disclosure, as summarized in table 1. 12 These regulations
require that plan sponsors provide participants core information about
investments available under the plan, including performance and fee
information, prior to investing and at least on an annual basis thereafter,
in a chart or similar format designed to facilitate investment comparisons.
Pursuant to these new regulations, participants will receive information
about pertinent administrative expenses, individual expenses, and
investment-related fees and expenses that they may pay throughout the
year. Participants will also receive quarterly statements on plan fees and
expenses deducted from their accounts along with a description of the
services for which the charge or deduction was made.




11
  An annuity is an insurance agreement or contract that comes in a number of different
forms and can (1) help individuals accumulate money for retirement through tax-deferred
savings, (2) provide them with monthly income that can be guaranteed to last for as long
as they live, or (3) do both. Payments from fixed annuities are generally a set regular
amount, whereas payments from variable annuities may increase or decrease based on
performance of the underlying investments.
12
  Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans;
Final Rule, 75 Fed. Reg. 64,910 (October 20, 2010) (codified at 29 C.F.R. § 2550.404a-5).
A revised and delayed effective date for this regulation was published on July 19, 2011
(76 Fed. Reg. 42539).




Page 7                                             GAO-12-328 Defined Contribution Plans
Table 1: Labor’s 401(k) Participant Fee Disclosure Requirements

Annual statements         Administrative fees. An explanation of the fees and expenses for general plan administrative services and
                          how these fees will affect the balance of a worker’s account. These fees may include legal, accounting,
                          trustee, recordkeeping, and other administrative fees and expenses associated with maintaining the plan
                          Individual fees and expenses. An explanation of any fees and expenses charged to the balance of a
                          worker’s account on an individual basis, rather than on a plan-wide basis. These fees are associated with
                          a service or transaction that an individual may select and may include fees and expenses for plan loans,
                                                                                                                     a
                          processing qualified domestic relations orders, investment advice, and brokerage windows
                          Investment-related fees. For each investment option in the plan, pertinent performance information, fees
                          and expenses, and investment restrictions:
                          •   Variable investments. The amount (in percent and per $1,000) of fund management fees and any
                              shareholder fees
                          •   Fixed investments. The fixed or stated rate of return and any shareholder fees.
                          Statement on effect of fees over time.
Quarterly statements      Administrative fees. Actual type and amount (in dollars) of plan administrative fees charged
                          Individual fees and expenses. Actual type and amount (in dollars) of individual fees and expenses
                          charged
                                          Source: GAO summary of Department of Labor regulations, 75 Fed. Reg. 64,910.
                                          a
                                           Brokerage windows are self-directed investment options in which participants can invest in individual
                                          stocks or mutual funds.


                                          In addition to the United States, the U.K., Australia, Chile, and Sweden
                                          each have extensive DC pension systems. However, in drawing
                                          comparisons between countries, it is important to recognize the significant
                                          social and economic differences that exist among them and with the
                                          United States. While the economies of the U.K., Australia, Chile and
                                          Sweden can be characterized as market-based, the U.K. and Sweden
                                          generally have more extensive and generous social welfare provisions
                                          than that of the United States. 13 As shown in figure 2, the size of each
                                          country’s economy is far smaller than that of the United States as
                                          measured by gross domestic product (GDP). The standard of living, as
                                          measured by GDP per capita, ranges from $15,040 in Chile to $46,860 in




                                          13
                                            While the Organisation for Economic Co-operation and Development (OECD) recently
                                          acknowledged Chile’s efforts to develop its market-based economy, it generally is
                                          understood to have more moderate social welfare policies than the United States. and
                                          publicly spends less on social welfare as a percentage of its GDP. Australia is also
                                          generally considered a market-based economy, but is understood to offer similar social
                                          welfare provisions to that of the U.S. and publicly spends about the same on social
                                          welfare as a percentage of its GDP.




                                          Page 8                                                                  GAO-12-328 Defined Contribution Plans
                                         the United States. 14 In addition, pension assets as a share of GDP varies
                                         from 73 percent in Chile to 239.8 percent in Sweden, and DC assets as a
                                         share of total pension assets from 5.6 percent in Sweden to 100 percent
                                         in Chile.

                                                                                                                      a
Figure 2: Economic Data for the United States, Australia, Chile, Sweden, and the United Kingdom, 2010




                                         a
                                          Total population estimates for these countries in 2011: Australia: 21.8 million, Chile: 16.9 million,
                                         United Kingdom: 62.7 million, United States: 313.2 million, Sweden: 9.1 million (see CIA World
                                         Factbook).


                                         In addition, each country’s DC system is slightly different based on their
                                         different economic and political conditions. Table 2 has key features of
                                         each country’s DC system.




                                         14
                                           GDP per capita is based on purchasing power parity, which equalizes the purchasing
                                         power of different currencies in their home countries by taking into account the relative
                                         cost of living and the inflation rates of different countries, rather than just a nominal GDP
                                         comparison.




                                         Page 9                                                       GAO-12-328 Defined Contribution Plans
Table 2: Key Features of Case Study Countries’ DC Systems

Dollars in billions USD
                                                                                                                                        Approximate total DC
Country       Description of DC system                                  Types of plan(s)                                                      assets in 2010
Australia     Australian employers have been required to                Plans in Australia are generally set up as                                       $853
              make a minimum contribution to a pension                  trusts. There are three types of trust-based
              account based on a percent of employees’                  private pension plans available in the
              salaries, since 1992. The current requirement             Australian market: industry-wide or single-
              is 9 percent.                                             employer plans with nonprofit trustees; retail
                                                                        plans with for-profit trustees; and self-
                                                                        managed accounts, where the individual is
                                                                        his/her own trustee.
Chile         Since 1981, Chilean workers have been                     Workers choose among for-profit pension                                          $148
              required to contribute 10 percent of their                service providers known as AFPs
              salary, plus an additional contribution to cover          (Administradoras de Fondos de Pensiones) for
              certain fees, to a DC pension plan.                       their individual DC pension plans. There are
                                                                        currently 6 AFPs workers can choose from.
Sweden        All Swedish workers and their employers have              Individual accounts in the Swedish system are                                     $62
              been required to contribute a total of 2.5                all part of one plan managed by a
              percent of the covered portion of workers’                government-run clearinghouse, the Swedish
              salaries to individual DC accounts in the                 Pensions Agency.
              Premium Pension System, which was
                                                          a
              introduced in pension reform passed in 1998.
United        Voluntary DC plans make up most of the private            There are two fundamental types of DC                                          $1,320
Kingdom       pension system in the U.K. An individual may be           pension plans available in the U.K. private
              a member of a number of different pension plans           pension system: trust-based schemes, which
              simultaneously. Since 2001, all employers with            are set up by employers, and contract-based
              five or more workers, who were not already                schemes, which may be facilitated by the
              sponsoring a pension plan, have been required             employer but are owned entirely by the
              to designate a stakeholder pension provider and           individual.
                                        b
              offer it to their workers. From 2012 to 2017, all
              employers will be required to automatically enroll
              eligible employees into a pension plan and
              provide a minimum contribution. Employers who
              do not offer a qualifying pension plan will be able
              to auto-enroll their employees into a new national
              DC pension option, called the National
                                                    c
              Employment Savings Trust (NEST).
                                               Source: GAO analysis of foreign documentation and interviews with industry experts
                                               a
                                                An additional 16 percent of the covered portion of workers’ salaries are contributed to notional, or
                                               non-financial, DC plans, which are designed to mimic DC plans where the pension depends on
                                               contributions and investment returns. However, in these notional accounts, the return that
                                               contributions earn is a notional one determined by average earnings growth and adjusted as
                                               necessary, not the product of investment returns in the markets. Moreover, notional DC plans are
                                               basically pay-as-you-go financed (i.e. current contributions pay for current benefits). However,
                                               Sweden also currently has a substantial buffer fund, holding assets equivalent to 25 percent of GDP,
                                               which the regulator projects will co-finance benefits beyond 2040.
                                               b
                                                Stakeholder pensions are a type of low-cost personal pension with limits on the charges that
                                               providers can impose.
                                               c
                                                 The pensions regulator noted that a number of new trust-based plans not associated with particular
                                               employers have been launched to compete with NEST in the new auto-enrollment market.




                                               Page 10                                                                    GAO-12-328 Defined Contribution Plans
Risk-Based Oversight
Helps Some
Countries’ Regulatory
Agencies Monitor
Service Providers and
Could Inform Labor
as It Improves Its
Oversight Approach

Service Providers’ Role   As in the U.S. DC system, service providers in the countries we reviewed
and Oversight             play an important role and perform a range of administrative and
                          investment management functions. The structure and role of service
                          providers in each country’s DC system varies, as described in table 3. For
                          example, in Australia and the U.K., DC plans can be offered through
                          different arrangements and the role of service providers varies
                          accordingly. In some cases, the plan is run by a nonprofit entity managed
                          by a board of trustees with representation from both employers and
                          workers. In other cases, the plan is managed by a for-profit financial
                          service provider with the employer playing little or no role. To address
                          potential conflicts of interest, financial industry representatives in Australia
                          told us that these plans, known as retail plans, have licensed trustees
                          who are legally obliged to act in the best interests of participants, such as
                          by reviewing the use of internal service providers. Agency officials said
                          they look for documentation of this review of the use of service providers.




                          Page 11                                      GAO-12-328 Defined Contribution Plans
Table 3: Key roles of DC Service Providers by Country

                                                                                                                                  Investment    Trustee or
                                                                                                    Recordkeeping                 management   trustee-like
               Key roles of DC service providers                                                       services                     services     services
Australia      In general, trustees of Australian plans have authority to hire
               service providers, but the service providers’ roles vary based on
               the type of plan:
               Industry-wide and single-employer plans: nonprofit entities                                     √                         √
               managed by a board of trustees that typically hire separate
               service providers for recordkeeping and investment
               management services.
               Retail plans: an employee deals directly with a for-profit service
               provider which performs recordkeeping, investment                                               √                         √          √
                                                  a
               management, and trustee services.
               Self-managed plans: set-up by employees and entail
               establishing a trust and a bank account. The trust is required to
               be audited by a third party. Up to four people can be in the
                                                                                                               √                         √
               trust. The employees are the trustees and can select their
               investment options. The employees may hire a financial adviser
               or other experts to select investment options.
Chile          In Chile, service providers play a key role in running the DC
               plans. For-profit pension service providers known as AFPs
               (Administradoras de Fondos de Pensiones) directly manage
               participants’ individual accounts and provide both
                                                                                                               √                         √
               recordkeeping and investment management services. Each
               AFP offers five different investment funds with varying risk
               levels subject to specific regulations. AFPs hire external fund
               managers to provide some of these investment options.
Sweden         The Swedish Pensions Agency, a government agency,
               contracts with service providers to perform investment
                                                                              b
               management for the DC portion of the public pension system.                                                               √
               Nearly 800 investment options are available for participants to
               choose from.
United         In the U.K., the key roles of service providers vary based on the
Kingdom        type of plan:
               Trust-based plans: nonprofit entities typically hire one or more
               service providers for recordkeeping and investment                                              √                         √
               management services. The plan trustees are responsible for
               selecting and vetting the investment options. NEST, a new
               nationally available plan, operates in this way.
               Contract-based plans: an employee deals directly with a for-
               profit service provider which may perform both recordkeeping
               and investment management services. The service provider, in                                    √                         √          √
               conjunction with an advisor or employer if necessary, selects
               which investment options are available to the participant.
                                            Source: GAO analysis of foreign agency documentation and interviews with industry experts.
                                            a
                                            According to agency officials, service providers for retail plans are often part of a conglomerate
                                            where related companies provide services for the plan.
                                            b
                                             The DC portion of the public pension system is known as the Premium Pension.




                                            Page 12                                                                    GAO-12-328 Defined Contribution Plans
In each of the countries we examined, some of the service providers are
large U.S.-based companies. For example, in Australia and the U.K.,
representatives of U.S. service providers we spoke with said they perform
a variety of functions ranging from consulting services to managing the
plan, including both administrative and investment management
functions. In contrast, because of the structure of the DC systems in Chile
and Sweden, U.S. service providers play a more limited role and
generally provide fund management or other consulting services.

While the role of service providers varies, in most of the countries we
reviewed DC plans and service providers are overseen by multiple
agencies—primarily a pensions regulator and a securities regulator, as
described below. Moreover, in Australia and the U.K., where DC plans
can be offered through different arrangements, the oversight structure
differs based on the type of plan.

•     In Australia, for industry-wide, single-employer and retail pension
      plans—called superannuation plans—the pensions regulator licenses
      trustees and oversees their management of the plan, including the
      use of service providers. Self-managed superannuation plans, on the
      other hand, are primarily overseen by the tax authority. In conjunction
      with both of these agencies, the Australian securities regulator
      oversees financial services, including the disclosure of fees for
      superannuation plans.

•     In the U.K., the pensions regulator oversees trust-based plans and
      their use of service providers, while the securities regulator oversees
      the investment funds offered in these plans—particularly
      disclosures—and acts as the primary regulator for individual contract-
      based plans. 15 For other contract-based plans designated by
      employers but administered by for-profit service providers, oversight is
      jointly conducted by both the pensions regulator and the securities
      regulator.

•     In Chile, the pensions regulator intensively oversees plan providers,
      including issuing licenses for them to participate in the system. On an
      ongoing basis, the pensions regulator monitors plan providers for
      compliance with investment option guidelines, reserve requirements,
      fee structure, and other requirements. The Chilean Ministry of Finance


15
    Plans must also register with the tax authority in order to obtain tax benefits.




Page 13                                                 GAO-12-328 Defined Contribution Plans
                            and the Central Bank coordinate with the pensions regulator on
                            certain issues related to investment regulation.

                       •    In Sweden, the pensions regulator administers the plan and
                            establishes terms of participation for investment fund providers. The
                            Swedish securities regulator, meanwhile, oversees the funds offered
                            in the Swedish pension system, along with other investment products
                            and services provided by the financial services industry. In addition,
                            the securities regulator monitors the Swedish Pensions Agency as the
                            annuity provider for the DC system.


Risk-Based Oversight   In each of the four countries we reviewed, regulators use a risk-based
Approach               approach to oversee DC plans and service providers and identify
                       practices that may harm participants. In general, risk-based oversight
                       involves developing a structured approach to identify potential risks faced
                       by the DC system and assessing the processes in place to address those
                       risks. 16 For example, in Chile, agency officials evaluate key features of
                       the DC system, such as the service providers’ management of the
                       individual accounts and the composition and role of the service providers’
                       board of directors and investment committee. Based on this assessment,
                       the regulatory agency decides if supervisory action is necessary and, if
                       so, what type of action—ranging from issuing guidance to imposing
                       sanctions or withdrawing licenses to operate as a DC plan provider—is
                       appropriate.

                       Based on discussions with these countries’ officials and a review of the
                       International Organisation of Pension Supervisors (IOPS) risk-based
                       supervision literature, using a risk-based approach allows regulatory
                       agencies in other countries to identify potential problems before they




                       16
                         Guidelines provided by the International Organisation of Pension Supervisors (IOPS)
                       specify that risk-based pension supervision should be evaluative, data driven, and
                       forward-looking. IOPS, Toolkit for Risk-based Pensions Supervision: Introduction to Risk-
                       based Pensions Supervision (2011). According to an IOPS working paper, the main risks
                       in DC pension systems are those that impact the accumulated pension savings of
                       participants and therefore the amount of pension benefit participants receive in retirement.
                       They include investment risk; high costs, such as excessive fees; operating risks, such as
                       administrating individual accounts; and managing the transition from accumulation to
                       decumulation. John Ashcroft and Fiona Stewart, Managing and Supervising Risks in
                       Defined Contribution Pension Systems, IOPS Working Paper No. 12 (October 2010).




                       Page 14                                              GAO-12-328 Defined Contribution Plans
become widespread and take proactive measures to address them. 17 For
example, in both Chile and Australia, agency officials said risk-based
supervision enables the pensions regulator to implement supervisory
actions proactively to ensure DC plans are operating in the best interests
of participants. A review of supervisory approaches by IOPS also notes
that a risk-based approach is preventative in nature and increases the
likelihood that significant problems will be identified and addressed at an
early stage. For example, in the U.K., as part of their risk-based approach
agency officials said they conduct an annual survey of plan trustees to
help identify potential problems which could include high fees or conflicts
of interest. 18 In addition, in Australia, the pensions regulator’s approach is
forward-looking in that it actively monitors and assesses the performance
and situation of DC plans on an ongoing basis and then estimates the
plans’ capacities to manage risk. 19 Based on this assessment, the
pensions regulator determines what actions need to be taken, such as
more frequent and detailed data collection or working with the plan to
restructure their operations or merge with another plan. 20

In addition, agency officials and a review of supervisory approaches by
IOPS cite a number of other beneficial effects of using a risk-based
approach. For example, using a risk-based approach, regulators can take
the following actions:

•    Allocate scarce resources more efficiently to target key risks. By
     prioritizing risks, the agency can determine which DC plans or service
     providers require more attention and spend minimal effort on issues
     that pose the least threat or likely have little impact. For example, in


17
  IOPS is an independent international body with 70 members and observers representing
about 60 countries and territories. Its purpose is, among other things, to serve as the
standard-setting body on pension supervision and regulation; to promote international
cooperation; to provide a worldwide forum for policy dialogue and exchange of information
on pension supervision; and to participate in the work of relevant international bodies in
the area of pensions.
18
  According to Labor, the Paperwork Reduction Act inhibits EBSA's ability to similarly
collect information.
19
  In October 2002, the Australian pensions regulator first introduced risk assessment and
supervisory response tools that formed the centerpiece of its risk-based approach.
20
  When the Australian pensions regulator identifies a superannuation plan that it
considers too small, it initiates conversations with the plan trustees suggesting merger
opportunities. Such mergers are eligible for tax relief.




Page 15                                              GAO-12-328 Defined Contribution Plans
     Australia, the need for the pensions regulator to monitor a relatively
     large number of institutions may make compliance-based supervision
     either too costly or ineffective. As a result, the pensions regulator
     focuses on identifying higher-risk institutions that require more intensive
     oversight. Likewise, officials from the securities regulator in Sweden
     said the main advantage of risk-based supervision is the more efficient
     use of resources. Specifically, these officials told us that the Swedish
     securities regulator would not be able to conduct in-depth reviews of
     every fund management service provider every year; instead, the
     official believed that investigating only those potentially problematic
     service providers, as indicated by the data the regulator collects, better
     utilized its limited resources. In addition, the U.K. established a new
     risk-based pensions regulator in 2005 after a review of the previous
     regulator revealed inefficiencies with the compliance-based approach.
     In particular, the review found that numerous low-risk cases typically
     overwhelmed the high-risk, high-profile cases.

•    Adapt to the changing nature and complexity of financial risks. By
     evaluating potential risks on an ongoing basis, a risk-based approach
     provides regulators flexibility to adapt to the continuing evolution of
     financial investment options. For example, in Chile, the pensions
     regulator introduced a risk-based approach to adapt to the increasing
     complexity of the financial markets. 21 Chile has gradually been
     relaxing investment regulation and, at the same time, strengthening
     the governance of plan providers by ensuring sound risk management
     practices and internal controls. Such practices include requiring plan
     providers to develop an investment policy and establish committees to
     monitor and address investments and conflicts of interest.
     Furthermore, in Australia, in addition to ongoing oversight of DC
     plans, the pensions regulator conducts ad hoc studies to address new
     and emerging trends, such as a study prompted by the financial crisis
     to increase their monitoring of the liquidity of DC investment funds.

•    Encourage pension plans to have sound risk management practices.
     By assessing the processes in place for the plan to manage key risks,
     the regulator provides an incentive for plans to adopt good practices
     to improve their risk rating. For example, in its supervision of the
     superannuation industry, the Australian pensions regulator’s main


21
  The adoption of a risk-based approach in Chile followed an initial assessment by the
World Bank and The Financial Sector Assessment Program. It was also recommended by
the OECD during Chile’s accession to the organization.




Page 16                                          GAO-12-328 Defined Contribution Plans
      priority during 2010 and 2011 was to encourage more robust
      governance and risk management practices. To do so, it has been
      strengthening the capacity of some of its analysts and utilizing
      industry-wide analysis techniques to advise plans about the particular
      aspects of risk management for which they may lag behind their
      peers, which the regulator has found to be helpful in focusing the
      plans on areas where improvement is needed.

•     Promote trust and confidence in the regulator’s role. Establishing a
      systematic and consistent approach enhances confidence in the
      regulator’s methods and in the pension system in general. For
      example, the Australian pensions regulator’s use of a structured
      framework for risk assessment in pension plans in its risk-based
      approach is reported to have improved the consistency of its oversight
      outcomes by allowing for more standardized reactions to supervisory
      issues across a large number of service providers and supervisors,
      which enhances the pension industry’s confidence in the regulator’s
      methods and procedures.

Table 4 below summarizes the main differences between risk-based and
compliance-based approaches.

Table 4: Main Features of Alternate Regulatory Approaches

 Risk-based                                                   Compliance-based
 Regulators                                                   Regulators
 •  identify potential risks,                                 •  focus on breach of laws, rules, and
 •  assess mitigating factors and proper                         regulations, and
    management of all risks, and                              •  give the same degree of attention to all
 •  target scarce supervisory resources                          funds
    at supervised entities deemed as
    most at risk
 Approach is preventative, forward-                           Approach focuses on a given point in time,
 looking, flexible                                            often relies on complaints
 Supervised pension plans or service       Supervised pension plans or service
 providers have an incentive to strengthen providers focus on compliance with rules
 risk management                           rather than risk management
 Regulators can benchmark supervised                          It is difficult for regulators to get meaningful
 entities and assess overall industry                         comparisons across supervised entities
Source: GAO summary of International Organisation of Pension Supervisors documentation.



IOPS notes that the introduction of risk-based supervision should be
viewed as a movement along a continuum from one extreme of complete
reliance on a compliance-based system to one where the emphasis of



Page 17                                                                  GAO-12-328 Defined Contribution Plans
supervision is a function of risk, as described in the text box below. In
addition, according to IOPS, regulators in many countries have been or
are planning to utilize risk-based supervisory approaches, but
implementation varies. For example, the Chilean pensions regulator has
maintained some compliance procedures around quantitative investment
limits in addition to its assessments of AFPs’ (Administradoras de Fondos
de Pensiones) investment risks. Thus, a risk-based approach may
contain compliance-based elements. IOPS also notes that the regulator’s
active communication with the pension community can help it overcome
the challenges associated with moving to risk-based oversight from
compliance-based oversight. 22

 Moving from Risk-Based to Compliance-Based Supervision
 International Organisation of Pension Supervisors (IOPS) guidance to pensions
 supervisors in its Toolkit for Risk-Based Pensions Supervision, includes a
 discussion about the interaction and complementary nature of risk-based and
 compliance-based supervision. According to IOPS,
           [m]oving towards RBS [risk-based supervision] is often accompanied by
           the deregulation of strict rules and a move towards a more ‘prudential’
           approach to regulation, applying more high level principles. Yet RBS can
           be applied whether a rules‐based or a principles‐based form of regulation
           is in place. There is no one, perfectly deregulated model which all
           countries should be striving towards. Some pension systems (e.g.
           mandatory systems) requiring greater levels of protection are likely to
           apply more comprehensive rules than others. Whether risk is controlled
           via rules or via prudential regulations simply changes the nature and
           focus of the supervisory approach. Likewise, there is no need for an
           either/or choice between RBS and a more traditional or rules-based
           supervisory approach (i.e. simply checking for compliance with
           regulations). RBS does not mean having no rules or compliance
           procedures in place… Both methods can and should be blended
           according to the nature of the pension system which is being overseen.
           The key is to find the mix which is most appropriate according to the
           nature of the pension system, the capacity of the supervisory authority,
           and the level of development of the pension industry
 Source: IOPS Toolkit for Risk-based Pensions Supervision, Module 0.




22
  Active communication could include issuing guidance to regulated pension plans
explaining requirements and good practices, ensuring that communication with regulated
pension plans is ongoing, and working closely with industry professionals such as
accountants and actuaries, which can help regulated pension plans apply standards.




Page 18                                                                GAO-12-328 Defined Contribution Plans
In general, risk-based oversight requires extensive data collection and
analysis to identify individual risks at the entity level, as well as systemic
risks that occur as a result of changes in the financial, economic, or social
environment, and affect all or most of the entities in the DC system.
However, the implementation of a risk-based approach varies and the
regulators in the countries we reviewed adapt it to the unique features of
their DC system, as described in the text box below.




Page 19                                     GAO-12-328 Defined Contribution Plans
Examples of Risk-Based Supervision by Other Countries’ Pensions
Regulators
Australia
The pensions regulator identifies main risk areas and evaluates how plans are
addressing them, which include (1) board membership and management of the
plan, (2) market and investment risk, and (3) operational risk (recordkeeping and
management of outsourcing contracts). For each risk category, the pensions
regulator scores plans from low (zero) to high (4). For example, to assess
investment risk, it evaluates whether the plan has a clear investment strategy. A
plan rated as “extreme risk” would have a high concentration of assets in one
product market and high exposure to volatility. For the board of the plan, the
regulator’s staff evaluates key factors, such as the quality, skills, and experience
of all directors, whether the board meets composition and independence
requirements, and potential conflicts of interest at the board level. In determining
the risk ratings, the regulator’s staff collects and analyzes financial data and other
information on a regular basis. Superannuation plans with at least $50 million in
assets are required to report quarterly performance data, in addition to the
standard annual reporting. The pensions regulator uses quarterly data on returns
to check for unusual trends, which may prompt further investigation. If necessary,
staff also conduct on-site visits with plans and service providers.

Chile
The pensions regulator evaluates key aspects of the DC system, such as
management of the plan provider, investment risk, and operational risk. The
limited number of plan providers, six as of 2011, allows the regulator to closely
monitor the operation and performance of each one, including risk areas
specific to a plan provider. For example, the regulator collects and analyzes
data from plan providers on a daily and ad hoc basis on investment holdings
and other issues. Pension industry representatives said that the regulator’s data
collection efforts help to keep the agency knowledgeable about the system and
well-positioned to act when necessary.

United Kingdom
The pensions regulator uses a standard model for risk assessment, but does
not apply individual risk scores to each plan on an annual basis because of the
large number of plans the agency oversees—nearly 46,000 DC plans and over
1,000 hybrid plans with some DC benefits. Instead, the regulator collects
information annually from large DC plans and up to every 3 years from smaller
DC plans, which inform the regulator’s risk-based approach.
Source: GAO analysis of foreign agency documentation and interviews with officials and industry experts.

Note: The Swedish pensions regulator operates the Swedish Premium Pension system and has
direct agreements with service providers, from which it collects information on service provider fees
and transaction costs, among other things. The Swedish securities regulator takes a risk-based
approach in its oversight of Swedish funds that can be included in the Premium Pension system.




Page 20                                                                     GAO-12-328 Defined Contribution Plans
Labor’s Oversight         In contrast to the other countries we reviewed, in the United States, Labor
Approach: Risk-Based      has not yet targeted enforcement efforts based on broad, ongoing risk
versus Compliance-Based   assessments, or assessments of key areas of noncompliance with
                          ERISA. Rather than using a risk-based approach, Labor has primarily
                          relied on reports or complaints obtained from participants, plan sponsors,
                          the media, and other agencies to conduct targeted investigations on
                          specific topics. As we reported in 2007 and 2011, this approach generally
                          limits Labor to leads identified by these sources and not those potential
                          violations that may be more complex or hidden in nature. 23

                          To address these limitations, in 2011 Labor officials told us that they have
                          taken preliminary actions to develop a more risk-based approach to
                          enforcement. For example, agency officials said Labor has adopted the
                          following measures:

                          •    Labor has begun implementing routine compliance examinations.
                               These examinations will allow Labor to assess the effectiveness of its
                               current enforcement efforts and allow better targeting of its limited
                               resources.

                          •    To address risk assessment trends, Labor has established a National
                               Enforcement Library to serve as a “knowledge management” tool for
                               the agency, which will provide information on current trends and
                               emerging developments in plan investment and management.

                          While Labor is taking preliminary steps to improve its oversight, the more
                          extensive risk-based approaches taken by the countries we reviewed
                          allow them to take preventative measures and address the shortcomings
                          of relying only on complaints. For example, the Chilean pension regulator
                          started introducing a risk-based approach in 2006 to adapt to the
                          increasing complexity of financial markets given that it is not feasible to
                          monitor all the operations of financial institutions. Agency officials said
                          that adopting a risk-based approach allows them to take action that is
                          preventative in nature. Furthermore, in the U.K., officials from the
                          pensions regulator said that they rely, in part, on participant complaints


                          23
                            GAO-07-22 and GAO-11-119. In addition, Labor’s enforcement efforts regarding
                          potential conflicts of interest related to investment advice have not addressed potential
                          violations by non-ERISA fiduciary service providers. This applies to Labor’s civil
                          investigations. However, according to Labor, for its criminal investigations the subject
                          need not be an ERISA fiduciary because an allegation of fraud is sufficient to trigger
                          Labor’s jurisdiction.




                          Page 21                                              GAO-12-328 Defined Contribution Plans
                         and whistle-blowing to identify problems, but this is not effective with DC
                         plans because of the asymmetry in information between service providers
                         and participants. In general, officials said that participants tend to be
                         disengaged and, even if they review disclosures, many lack the
                         knowledge to understand the information provided to them. As a result,
                         officials said that participants do not understand enough about their plans
                         to identify potential problems. By adopting a risk-based approach instead,
                         the pensions regulator, in its view, has been able to identify the greatest
                         risks and work with plans to resolve issues. 24



Fee Disclosure
Strategies Improved
Transparency in Some
Countries, and Similar
Strategies Could
Benefit U.S.
Participants

Fee Disclosure Formats   Some other countries with well-developed DC systems, including Chile,
                         Sweden, and Australia, have taken steps to make fee disclosures simpler
                         and more comparable, requiring that disclosures to participants be
                         presented in consistent, summary formats. Officials in each of these
                         countries told us that improved fee disclosures provide their participants
                         transparency about the fees they are paying for their DC plans, which
                         may help participants make informed decisions about their investments. 25



                         24
                            The U.K. pensions regulator is currently in the process of developing a new regulatory
                         framework for DC plans which will be based on a segmented approach (e.g., larger plans
                         tend to be better run and achieve economies of scale, whereas smaller plans are more
                         likely to have lower governance standards and higher charges).
                         25
                           These officials also noted that the enhanced disclosures may not capture all fees, like
                         transaction costs, and government and industry surveys have shown that some
                         participants do not read the disclosures. Swedish Pensions Agency, Surveys About The
                         Orange Envelope of 2011 (Stockholm, Sweden: April 2011). Social Protection Surveys
                         have been conducted in Chile since 2002 and the last available year is 2009. In addition,
                         the Chilean pensions regulator conducts focus groups.




                         Page 22                                             GAO-12-328 Defined Contribution Plans
Consistent with the approaches taken by these countries, research based
on behavioral economics indicates that useful disclosure approaches
include standardizing the types of fees and the formats in which they are
presented in order to facilitate comparisons across different investment
options. 26 For example, Chile, Sweden, and Australia reported making the
following changes to their fee disclosures to increase transparency from
previous disclosures:

•    To increase awareness of fees among Chilean workers, the Chilean
     pensions regulator requires that statements sent to participants every
     4 months use more understandable vocabulary and provide a
     summary of fees paid in the participant’s statement. The summary
     includes graphics and a table with a comparison of fees across plans,
     as well as a personal pension projection (which translates the current
     account balance into an estimated total benefit amount received at
     retirement given certain assumptions). Fees included in the participant
     statements are expressed as a percentage and in Chilean pesos and
     reflect all administration fees and some fund management fees that a
     participant may pay. 27

•    In Sweden, the Swedish Pensions Agency sends fee information to all
     Premium Pension participants as part of an annual, individualized
     participant statement. This includes the total administration and fund
     management fee that participants paid and summary information on
     fund management fees for each fund a participant is invested in that
     allow comparison among the options chosen. 28 Funds are required to
     report their fees to the Swedish Pensions Agency, and the Swedish
     Pensions Agency consolidates it in a standard format for participants.
     In addition, the Swedish Pensions Agency publishes fund
     management fees for all investment options in the system on its



26
 John A. Turner and Hazel A. Witte, Fee Disclosure to Pension Participants: Establishing
Minimum Requirements, International Centre for Pension Management Sponsored
Research, Joseph L. Rotman School of Management, University of Toronto (Toronto,
Canada: August 2008).
27
  Fees for external fund management that are deducted from the external funds to
determine the fund’s performance are not included in this total, but the Chilean pensions
regulator requires plan providers to report these fees to the regulator and publishes this
information online on a regular basis.
28
  Because the Swedish Pensions Agency charges one administrative charge for all
participants, the fund management fee is the pertinent fee for comparison purposes.




Page 23                                             GAO-12-328 Defined Contribution Plans
     website, which further allows individuals the opportunity to compare
     investment fund fees. A Swedish official noted that transparency is
     higher now than it was 10 years ago and that awareness of the
     importance of fees seems to have increased among participants and
     the media.

•    The Australian government has made improvements to its participant
     disclosures. Participants receive a Product Disclosure Statement
     when they first join an Australian superannuation plan and periodic
     statements at least annually thereafter that itemize fund earnings and
     how much has been taken out of a participant’s account in aggregate
     administrative and investment management fees. 29 As described in
     table 5, 2005 regulations have enhanced and streamlined the fee
     disclosures that participants receive and provide greater certainty and
     consistency by defining the fees and costs that were included in a
     standardized fees and costs template. Officials noted that these
     improved disclosures have increased the transparency and
     comparability of data and felt that participants were more aware of
     cost issues with respect to their superannuation plans. For example,
     Australian officials said that the purpose of requiring the “example of
     annual fees and costs table” in participant disclosures is to create a
     more easily comparable format for fees across different service
     providers.




29
  Self-managed superannuation funds require a lower level of disclosure, but are still
subject to some of the same disclosure requirements as other superannuation plans.




Page 24                                             GAO-12-328 Defined Contribution Plans
Table 5: Australia’s Fee Disclosure Requirements

Product Disclosure     Fees and costs                  A standardized fee template that simplifies the disclosure of fees and costs and
Statements             template                        allows for more effective comparison across products. This template includes
(provided before                                       information about the amount of a fee or cost, how the fee or cost is charged, the
consumer purchases                                     frequency of the payment, its timing, and whether it is negotiable.
product)
                       Additional explanation          A separate section that includes additional important information about fees and
                       of fees and costs               costs, such as adviser compensation, transactional and operational costs, how to
                       section                         negotiate lower fees, and details about any fee changes. This information is kept
                                                       separate in order to preserve the simplicity of the fees and costs template.
                       Example of annual               Provides an illustrative example of fees and charges in a balanced investment
                                                             a
                       fees and costs table            option for a typical account balance and level of contributions (e.g., AUD 50,000
                                                       account balance and an annual contribution of AUD 5,000).
                       Consumer advisory               Emphasizes to consumers the importance of considering the benefit they will
                       warning box                     receive from the services they will pay for. It also shows the compounding value
                                                       of fees and costs and how a small difference in a fund’s investment performance
                                                       or fees can have a significant effect on long-term investment returns.
                       Shorter Product                 Maximum 8-page Product Disclosure Statement with prescribed minimum font
                       Disclosure Statement            size and section headings so consumers can easily find important information in
                                    b
                       requirements                    the Product Disclosure Statement and compare across products.
Periodic statements    Other management                An item that shows the approximate amount, stated in Australian dollars, of
(ongoing disclosures   costs                           management costs that were not paid directly out of a worker’s account but may
provided at least                                      have affected their investments. This may include costs of investing through a
annually)                                              trust or other structure that holds underlying investment assets, which ensures
                                                       that layers of management costs are captured when there is a chain of entities
                                                       involved.
                       Total fees paid by              An item that shows a single dollar amount—in Australian dollars—that includes
                       participant                     the total fees a member or product holder paid during the period. This amount
                                                       does not include transactional and operational costs that may have been
                                                       incurred.
                                            Source: GAO summary of foreign agency documentation.
                                            a
                                             A balanced investment option is defined as the investment option in the plan with an asset mix of 70
                                            percent higher-risk investments and 30 percent lower-risk investments, or the investment option in the
                                            plan that is as close as practicable to this asset mix. This option was considered to be the most
                                            appropriate for comparison purposes across plans. If the plan does not offer a balanced investment
                                            option, the example table is to be based on the plan’s default investment option. If the plan offers
                                            neither, the example should be based on the investment option with the most funds invested.
                                            b
                                             These requirements for superannuation plans are still being implemented. According to the Australian
                                            Securities and Investments Commission, all new plans and certain existing plans had to comply as of
                                            June 22, 2011, but all other Product Disclosure Statements have to comply by June 22, 2012.


                                            As described in table 5, Australian Product Disclosure Statements are
                                            required to include a “consumer advisory warning box” which encourages
                                            consumers to shop around and contains an example that displays the
                                            effect of fees and expenses on a participant’s account. This example,
                                            depicted in figure 3, shows the actual impact of fees over time in
                                            Australian dollar amounts, demonstrating to participants why they should
                                            pay attention to even small differences in fees.



                                            Page 25                                                    GAO-12-328 Defined Contribution Plans
Figure 3: Consumer Advisory Warning Box in Australian Product Disclosure
Statement




Note: Example provided by Mercer Legal Pty Ltd. According to Mercer representatives, the example
includes prescribed wording and format required by Australian law (regulations made under the
Corporations Act 2001) for superannuation product disclosure as of November 2011. Bolded box
added for emphasis.




Page 26                                                 GAO-12-328 Defined Contribution Plans
Personalized Fee   Some countries require that participants receive personalized information
Information        about the total amount they pay in fees over a given time period and a
                   comparison of that personalized information to a benchmark (lowest-cost
                   fee or fee paid by the average participant) for additional context. For
                   example, in Sweden, as shown in figure 4, the participant statement sent
                   annually includes standard information on administrative and fund
                   management fees paid for each fund. 30 The “fund fee percent” is
                   presented for each fund the participant invested in, and an “average
                   pension saver” fund fee percent is provided for comparison. In addition,
                   the total amount subtracted for administrative and fund fees from the
                   participant’s account balance for the year is disclosed.




                   30
                     Transaction fees, however, are directly deducted from the fund returns and reported in
                   aggregate in the Swedish Pensions Agency’s annual report.




                   Page 27                                            GAO-12-328 Defined Contribution Plans
Figure 4: Example of Sweden’s Fee Disclosure Requirements for Premium Pension
Participants




Note: These excerpts from an example of an annual Swedish participant statement simply and clearly
show the total amount—in Swedish kronor—that the participant paid in fees. In addition, the disclosure
document also shows the participant’s fee detail for the specific funds in which a participant has chosen
to invest their Premium Pension contributions, by fund and in total, and provides the total fund fee as a
percent for the average pension saver for comparison purposes. Bolded boxes added for emphasis.




Page 28                                                      GAO-12-328 Defined Contribution Plans
                         In Chile, participants not only receive personalized fee disclosures, but
                         they also receive information about what the participant would have been
                         charged if they belonged to the other five plans, including the lowest-cost
                         option as shown in figure 5. Thus, the participant can see the specific
                         difference in fees they are paying through their plan compared to the
                         lowest-cost option. 31

                         Figure 5: Example of Chile’s Fee Disclosure Requirements




                         Note: Every four months, Chilean participants receive a pension disclosure that includes a table of
                         personalized costs, such as the one seen in this excerpt, which shows—in Chilean pesos and as a
                         percent—the total fees they would pay in any of the plans in which they could invest their pension
                         contributions and the annual difference between the plans’ fees. For the purpose of this example, the
                         Chilean pensions supervisor has provided the table in U.S. dollars based on the exchange rates in
                         November 2011. Bolded box added for emphasis.



Labor’s Fee Disclosure   In their current form, Labor’s fee disclosure improvements will not actually
Requirements             show U.S. participants the effect of fees on their accounts over time.
                         Instead, Labor’s recently issued regulations will require that participant


                         31
                           Because of the small number of plans available to Chilean participants, this type of
                         disclosure is likely clearer than it would be if participants were offered many more choices.




                         Page 29                                                   GAO-12-328 Defined Contribution Plans
disclosures include generic language on the long-term impact of fees and
expenses, including that the cumulative effect of fees and expenses can
reduce the growth of a participant’s account, as shown in figure 6. This
generic language does not include the actual effect of fees over time in
dollar amounts.

Figure 6: Example of Labor’s 401(k) Participant Disclosure Requirement
Demonstrating the Effect of Fees




Note: Labor’s recently issued regulations will require that participant disclosures include generic
language on the long-term impact of fees and expenses, an example of which is shown in this
excerpt. This example states that the cumulative effect of fees and expenses can substantially reduce
the growth of a participant’s account but does not show, in dollar amounts, how a participant’s
account balance could differ given differing fee levels. The link to Labor’s website, which is provided
in this example, does show, in dollar amounts, how a participant’s account balance could differ given
differing fee levels, but participants do not specifically see this level of detail in their fee disclosures.


In addition, the fee disclosures U.S. participants will receive under Labor’s
new fee disclosure requirements do not provide participants the total
amount that they have actually paid in one place, or a cumulative cost
amount. Labor’s new participant disclosure regulations will require that
participants receive quarterly statements on some plan fees and
expenses deducted from their accounts along with a description of the
services for which the charge or deduction was made. However, fund
management fees are not included in this quarterly requirement. For
these fund management fees, as shown in figure 7, participants will
receive annual disclosures that report them as a percentage and as a
dollar amount (based on a $1,000 account balance), but do not
specifically report the dollar amount of fees paid by a participant based on
their account balance. In order to discern their total fee, participants will
have to calculate the fund management fees they paid based on their
account balance and the information provided in the annual disclosure,
and add the fees separately disclosed in their quarterly statements to that
calculated amount.




Page 30                                                       GAO-12-328 Defined Contribution Plans
Figure 7: Example of Annual Fee Disclosure Requirements for 401(k) Participants
under Labor’s New Regulations




Note: Bolded box added for emphasis.


While Labor has made recent improvements to U.S. participants’ fee
disclosures, fee disclosure improvements made by some of the countries
we reviewed may provide more transparent disclosures. U.S. participants
typically do not receive the simple, useful, and more targeted information
about their DC retirement plans and investment options that is provided to
participants in Chile, Sweden, and Australia, which could be why recent
research shows that U.S. participants have misconceptions about the
fees they pay. 32 For example the Australian consumer advisory warning
box shows how a small difference in a fund’s investment performance or
fees can have a significant effect on long-term investment returns. (See
fig. 3.) In addition, participants in Sweden and Chile received
personalized fee information that shows the exact amount, in Swedish
kronor and Chilean pesos, that participants paid, without any need for
calculation on the part of the participant. (See figs. 4 and 5.)


32
  According to a February 2011 survey conducted by AARP, 71 percent of plan
participants thought they paid no 401(k) fees, while only 23 percent knew they paid fees.
In addition, the survey found that 62 percent were unaware of how much they paid in fees
for their plan and 32 percent did not feel knowledgeable about the impact that fees could
have on their retirement savings. AARP, 401(k) Participants’ Awareness and
Understanding of Fees (Washington, D.C.: February 2011).




Page 31                                            GAO-12-328 Defined Contribution Plans
Targeted Strategies
Used by Some
Countries Lower Fees




Consolidating and           Officials in the countries we reviewed told us they have been successful
Streamlining Service        at reducing administrative and fund management fees by consolidating
Providers’ Administrative   and streamlining administrative functions, such as account processing,
                            recordkeeping, and participant communications.33 Moreover, each country
Functions
                            uses a slightly different approach to provide this efficiency. For example,
                            Sweden and the U.K. have each consolidated administrative services into
                            one entity, which has improved administrative efficiency by eliminating



                            33
                              In comparison, the amount of fees a DC plan participant pays in the U.S. can vary
                            considerably across plans. As we previously reported, U.S. participants tend to pay the
                            same types of fees (e.g. investment management and recordkeeping fees), but the
                            amount of those fees depends on a number of factors, which could be related to the
                            employer’s size and actions it takes as a plan sponsor. For example, sponsors may
                            decrease fees by combining or pooling assets to access certain investment products or
                            negotiate with service providers. However, U.S. workers are limited to the plans offered by
                            their employers and some of those plans charge higher fees than others. 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).




                            Page 32                                             GAO-12-328 Defined Contribution Plans
duplicative processing functions and allowed that entity to complete bulk
trades with fund providers.34 Representatives from service providers in
both countries said this structure allows them to significantly reduce their
costs—and thus to lower their fees—because they only receive one
aggregate transfer each day from the administrator, they do not have to
maintain individual accounts, and they do not have to market to
participants. As shown in figure 8, Sweden’s centralized entity is a
government body and it requires that providers rebate a substantial
portion of their charges to participants in order to acknowledge the cost
savings at the fund level of not completing those consolidated
administrative activities.35 Because of this consolidated structure, average
total administration and fund management fees that the participant pays
are about 0.50 percent,36 which have been shown to be lower than the
rest of the Swedish market and low by global standards.37




34
  Sweden’s Premium Pension system represents the only traditional DC portion of the
public DC system. The U.K.’s NEST is a nationally available plan, implemented along with
the U.K.’s auto-enrollment requirements, in order to provide all employers a low-cost plan
in which to enroll their employees. NEST’s trustee body has a public service obligation to
accept any employer who wishes to offer the plan to its employees.
35
  According to the Swedish Pensions Agency, fund providers for the Swedish system are
required to rebate from about 55 to 81 percent of their retail fee based on the type of funds
they offer (equity or bond) and their aggregate market share in the system. Providers send
rebates to the administrative body every 3 months, although it distributes rebates to
affected participants in the following year.
36
  Administrative fees in Sweden have fallen from 0.30 to 0.16 percent between 2001 and
2011. Swedish officials expect to continually lower administrative fees because the
system’s assets will continue to grow, and since administrative costs are typically fixed,
they will decline per participant as the system’s assets grow. Sweden charges fees for
fund management separate from administrative fees, and these fees in January 2012
ranged from 0 to 2.57 percent.
37
  Turner and Witte (2008) and Tapia, W. and J. Yermo (2008), “Fees in Individual Account
Pension Systems: A Cross-Country Comparison”, OECD Working Papers on Insurance
and Private Pensions, No. 27, OECD publishing, © OECD. doi:10.1787/236114516708.




Page 33                                              GAO-12-328 Defined Contribution Plans
Figure 8: The Structure of Sweden’s Premium Pension System Helps Lower Administrative and Fund Management Fees




                                      As described in figure 9, the U.K. has also set up its nationally available,
                                      low-cost plan by consolidating administrative functions, but it has used
                                      one for-profit service provider for administration and a limited number of
                                      additional for-profit service providers for fund management. 38 U.K. plan
                                      representatives said that consolidating administrative functions has
                                      increased their scale and bargaining power, which has allowed them to
                                      attain lower fees from service providers. In addition, the U.K. plan will be
                                      highly automated and provide for many self-service functions, which they
                                      expect will lower costs. This low-cost plan is expected to particularly help
                                      low-income workers employed by small employers, and experts we spoke


                                      38
                                        While the U.K. designed this nationally available plan to be low-cost, decisions about the
                                      plan are made by a trustee body. The original members of the body were appointed by the
                                      government. The choice of future NEST trustee members will be made by the NEST
                                      trustee body and the representative member panel will participate in the recruitment and
                                      appointment of NEST’s trustee members.




                                      Page 34                                             GAO-12-328 Defined Contribution Plans
                                         to noted that they anticipate huge cost savings for those workers if their
                                         employers offer the plan. Total administrative and fund management fees
                                         for this nationally available DC plan will be 0.30 percent, which is
                                         generally lower than fees participants pay for other DC plans offered in
                                         the U.K.—which typically range from 0.40 to 2.00 percent. 39

Figure 9: The United Kingdom Has Structured Its Nationally Available Plan to Reduce Administrative and Fund Management Fees




                                         In contrast to Sweden and the U.K.’s approach to consolidate
                                         administrative functions into one entity, the Australian pensions regulator
                                         has encouraged mergers among superannuation plans that have lowered
                                         administration fees for some participants and has also recently proposed
                                         standardized requirements to streamline administrative services within
                                         each service provider that are intended to lower fees for all participants.


                                         39
                                           The plan also received a loan from the British government that will allow them to spread
                                         startup costs over a certain amount of time for which the plan will charge participants an
                                         additional 1.8 percent of contributions until the loan is paid off. Officials’ calculations
                                         indicate that the total effective charge on participants will be about 0.50 percent per year,
                                         based on the average participant. The officials stated that they expect the loan to be
                                         repaid in about 20 years.




                                         Page 35                                              GAO-12-328 Defined Contribution Plans
For example, Australia will adopt data standards to make superannuation
transactions more timely and efficient, will reduce the number of accounts
per member, and will make other changes, as shown in table 6. Industry
experts thought that modernizing and standardizing administration,
including enhanced use of technology, would effectively decrease fees in
the Australian superannuation system, and a consultant estimated the
new requirements would decrease fees by about 7 percent. Furthermore,
industry officials estimated that the proposed requirements would save
the Australian superannuation system up to AUD 1 billion annually. 40

Table 6: Australia’s Proposed Regulations to Reduce Costs through a Variety of
Methods

 Reform                   Proposed measures
 SuperStream              •     Implement new data and e-commerce standards for
 reforms                        superannuation transactions to improve the quality of data in the
                                system
                          •     Allow the use of tax file numbers as the primary locator of member
                                accounts
                          •     Encourage the use of technology to improve processing efficiency,
                                removing substantial manual processing
                          •     Improve the way plan-to-plan rollovers are processed and the way
                                contributions are made by developing standardized forms and
                                supporting electronic transactions
                          •     Help participants avoid paying unnecessary fees on multiple
                                accounts by streamlining the process to consolidate accounts,
                                such as through automatically consolidating any accounts with
                                less than AUD 1,000 to the current active account unless the
                                member opts out and allowing superannuation plans to search the
                                Australian Taxation Office registers for any lost or unclaimed
                                superannuation and advise the member that they may wish to
                                consolidate their superannuation accounts
                          •     Enhance new employee enrollment process where employees will be
                                able to access a listing of all their superannuation accounts from
                                Australian Taxation Office online to assist with exercising choice
                          •     Establish an advisory governance body to advise on the
                                implementation and maintenance of the standards
 Securing Super           •     Provide better information about the amount and timing of
 reforms                        superannuation payments to employees
                          •     Provide notification from plans to members on whether
                                contributions have or have not been received
Source: GAO summary of Australian government publication.




40
  Super System Review: Review of the Governance, Efficiency, Structure and Operation
of Australia’s Superannuation System (Commonwealth of Australia, June 30, 2010).




Page 36                                                     GAO-12-328 Defined Contribution Plans
Default Options Are      For participants who do not actively choose where to invest their
Designed to Charge Low   contributions, some countries have established default options that lower
Fees                     fees in a variety of ways, such as creating a public option default fund,
                         increasing the use of online services, and eliminating marketing costs.
                         For example, the Swedish government established an independent,
                         nonprofit entity to administer the default investment fund. Officials noted
                         that fund management fees for this fund are low compared to the other
                         funds in the system—the equity portion charges a 0.15 percent fee and
                         the bond portion charges a 0.09 percent fee—because it is a public option
                         mandated by the government to be cost-effective and because it has
                         sufficient size to command low fees from outsourced service providers. 41
                         A default fund official also noted that this low fee is made possible
                         through a government subsidy for the default fund’s startup costs,
                         implemented to lessen the inequities in fees charged across generations.
                         According to this official, 2011 is the second year in a row that the default
                         fund generated a surplus; by 2016, the fund expects to repay the
                         government loan and, as a result, to further decrease fees.

                         Similarly, in Chile, all new entrants are defaulted to the lowest-cost plan
                         provider for 2 years as determined by a bidding process. Most
                         participants do not monitor or actively manage their accounts and officials
                         noted that they tend not to switch service providers to get lower fees. The
                         total cost for the plan provider that won the first bidding process is
                         considerably lower than for some other providers—1.14 percent of
                         salary 42 compared to a range of 1.36 to 2.36 percent of salary for other




                         41
                           In 2010, the investment strategy for the default fund, AP7 Såfa, was updated to take a
                         higher-risk, age-adapted approach since an increasing number of participants were
                         choosing the default option—96 percent of new entrants in 2010, according to a default
                         fund official—and many of those participants were young adults. AP7 Såfa also now offers
                         different risk-level funds (“offensive,” “balanced,” and “cautious”) that do not change based
                         on a participant’s age.
                         42
                           The second bidding process finished in February 2012 and the AFP that won will charge
                         0.77 percent of salary for the 2 years starting August 2012.




                         Page 37                                              GAO-12-328 Defined Contribution Plans
providers. 43 Even though costs for each plan provider differ, service
providers stated that plan investment returns were very similar.
Furthermore, Chilean officials reported that new participants who have no
or low accumulated balances actually achieve a higher return in the low-
cost plan provider than if they had chosen the provider with the best yield,
which showed that these participants could save on fees without
sacrificing returns. However, while the bidding process has lowered fees
for new participants, it has not done so for existing participants because
most have stayed with their current provider even though these providers
did not lower their fees. Officials said they expect future bidding
processes to lead to more competition and, thus, lower fees even further
for future participants or participants who decide to switch providers.

In Australia, government officials and industry experts said recently
proposed requirements for a new, simple, cost-effective default
superannuation product, called MySuper, should result in considerably
lower fees. 44 An industry consultant estimated that the MySuper
proposals could charge around 0.66 percent of assets, which is about 30
percent less than the current industry average. In addition, MySuper
default funds will have a single, diversified investment strategy and a
standard set of fees. As seen in table 7, officials expect to see reduced
fees since certain types of fees will be limited, but they have not explicitly




43
  Fee amounts are effective as of March 2012. Participants paying fees as a percent of
salary pay more upfront as a percent of their account balance than participants paying
asset-based fees, which have a much smoother effect over time. Fees as a percent of
salary in Chile are deducted as an additional amount of a participant’s salary—Chilean
employers are required to remit to a Chilean plan provider (1) 10 percent of a worker’s
salary as a contribution and, (2) on top of that contribution, an additional percent of salary
according to the provider’s fee. For example, if a participant contributed to a provider that
charged a 1.48 percent fee, their employer would remit 11.48 percent of their salary (10
percent contribution plus 1.48 percent fee) to the provider on the participant’s behalf.
While this fee represents a large portion of participants’ account balances in early years, it
represents less of their account balances in later years. Over a participant’s lifetime, this
fee could translate into an approximately 0.58 percent asset-based fee at present values.
44
  If the requirements are finalized, an Australian government release states that, from
October 1, 2013, employers must make contributions for workers who have not chosen
their fund, to a fund offering a MySuper product in order to satisfy superannuation
guarantee obligations, and by July 1, 2017, funds will need to transfer the existing default
balances of workers to a MySuper product.




Page 38                                               GAO-12-328 Defined Contribution Plans
capped fees. 45 All fees must be included under the standard descriptions,
which officials said will allow workers, employers, and market analysts to
compare funds more easily. Employers will have better information to
assist with selecting a default fund and confidence that any MySuper
product will meet minimum standards and offer a cost-effective
superannuation plan for their workers. 46 It will also ensure that workers do
not pay for any additional features or services they do not need or use. In
particular, the MySuper product is restricted from including investment
advice as a standard service, which an industry expert said is not widely
used by participants.




45
  Officials note that funds will be able to offer a discounted administration fee to workers
of particular employers. Funds will also have the flexibility to offer employers with more
than 500 workers a MySuper product tailored to the needs of the particular workplace. To
maintain transparency of these arrangements, the details of all separately tailored
MySuper products and discounted administration fees will be required to be reported to
the pensions regulator and will also need to be separately published by trustees.
46
  Trustees wanting to offer a MySuper product will be required to apply to the pensions
regulator to be authorized for each MySuper product.




Page 39                                              GAO-12-328 Defined Contribution Plans
Table 7: Australia’s Proposed MySuper Default Products Will Be Limited to Certain Fees
              a
Type of fee                   Description                                                 Amount allowed
Administration fee            These are fees for recordkeeping and general No limitation
                              services required for day-to-day
                              administration of the plan. They are typically
                              disclosed as a fixed dollar amount, in
                              Australian dollars.
Investment fee (including a   These fees are typically expressed as a                     Performance-based fees are subject to the following
                                                                                                       b
performance-based fee)        percentage of assets and represent the cost                 limitations:
                              of managing the plan’s assets, including                    •    A reduced base fee that reflects the potential gains
                              custody and indirect expenses.                                   the investment manager receives from
                                                                                               performance-based fees, taking into account any
                                                                                               fee cap;
                                                                                          •    measurement of performance on an after-tax and
                                                                                               after-cost basis;
                                                                                          •    an appropriate benchmark and hurdle for the asset
                                                                                               class reflecting the risks of the actual investments;
                                                                                          •    an appropriate testing period; and
                                                                                          •    provisions for the adjustment of the performance-
                                                                                               based fee to recoup any prior or subsequent under-
                                                                                               performance (for example, high water marks,
                                                                                               clawbacks, vesting arrangements, and rolling
                                                                                                                 c
                                                                                               testing periods).
Buy and sell spreads          Implicit when a fund buys or sells assets, the              Limited to provider’s cost recovery
                              buy and sell spread is the difference between
                              an asset’s entry price and exit price and is a
                              cost incurred by the fund each time it invests
                              or withdraws funds.
Exit fee                      Fees charged when an individual removes                     Limited to provider’s cost recovery
                              his/her investments from the plan (at
                              retirement or to move into another plan).
Switching fee                 Fees charged when the participant changes                   Limited to provider’s cost recovery
                              his/her investment options within the plan.
                                            Source: GAO analysis and summary of Australian government publication.
                                            a
                                             MySuper default products are limited to these fees; MySuper providers are prohibited from charging
                                            any other fees, including hidden fees such as trailing commissions—fees paid to advisors each year
                                            the participant owns the fund so that the advisor will review the participant’s holdings and provide
                                            advice. Plan trustees can charge for certain member-specific costs, such as account splitting
                                            following a family law decision.
                                            b
                                             If a performance-based fee arrangement does not contain each of these provisions, the MySuper
                                            trustee must be able to justify that the differing arrangement continues to be in the best financial
                                            interests of the members of the MySuper product.
                                            c
                                             High water marks provide that payment of performance fees is conditional on exceeding the
                                            maximum fund value for which the fund manager has already received performance fees. Clawbacks
                                            require recent performance fees to be paid back to plan participants if the fund suffers subsequent
                                            significant losses. Vesting arrangements lock performance fees, wholly or partially, for a period of
                                            time to align the fund manager’s interests with the plan participants’ interests. Rolling testing periods
                                            require that performance fees should be calculated on an ongoing basis so a longer period can be
                                            used to assess performance.




                                            Page 40                                                                  GAO-12-328 Defined Contribution Plans
Other Targeted   The countries we reviewed have also taken other targeted approaches
Approaches       which have been effective at lowering fees, such as the following:

                 •    Direct regulation of types or amounts of fees. Chile and Australia have
                      reduced some fees participants pay by directly banning certain fees or
                      types of fees, while the U.K. has seen certain fees decline because of
                      explicit fee caps. Chile officials told us that they banned fees as a
                      percent of assets and fixed fees because some participants’ account
                      balances were severely diminished after periods of little or no
                      contributions. 47 Similarly, Australia has recently moved to restrict
                      commission-based compensation for investment advisors because
                      they noticed that some participants were being charged ongoing fees
                      by advisors to plans but were not receiving ongoing advice. In the
                      U.K., on the other hand, officials recognized that total fees could be
                      lower for participants and implemented certain plans with explicit fee
                      caps. According to officials we spoke to, although not many
                      participants actually utilized these plans, their presence increased
                      competition in the industry and substantially lowered fees. 48

                 •    Direct regulation of certain service provider practices. Australia and
                      Sweden have moved to ban practices that have increased fees.
                      Australia has proposed a ban on “flipping”—when a service provider
                      rolls a participant’s superannuation plan account into a personal plan,
                      for which fees can be 2 to 3 times higher. Government officials
                      focused on this practice because it is typically done without
                      participants’ consent. Sweden also recently banned the practice of
                      investment advisors changing funds for their customers en-masse via
                      computerized systems, which some advisors were doing frequently
                      without providing individualized advice to their customers. According
                      to Swedish representatives, this practice significantly increased
                      transaction costs and inflated fees for some participants.

                 •    Increased education and licensing requirements for certain
                      occupations. In Australia and Chile, increased requirements for
                      education and licensing of different industry stakeholders have



                 47
                   Chile also caps fees for certain drawdown products and fees that service providers can
                 pay to external managers for retail class shares, which have both helped to bring fees
                 down.
                 48
                   Officials noted that legislation requiring advisors to compare plans offered by for-profit
                 providers to these low-cost plans with the explicit fee cap may have helped to lower fees.




                 Page 41                                              GAO-12-328 Defined Contribution Plans
     decreased fees. In Australia, officials told us that increased
     requirements for plan trustees led to significant consolidation among
     certain types of plans. 49 For example, an official told us that nearly
     4,000 of those plans collapsed to 400 or 500 through mergers.
     According to an industry expert, many of these consolidations
     occurred because trustees of certain superannuation plans may have
     decided that they had less expertise in running a superannuation plan
     than running their business. According to agency officials, the
     increased size of plans after consolidation may have led to decreased
     fees. In Chile, on the other hand, increased requirements for pension
     advisors have reduced the number of advisors and have imposed
     stricter rules for switching accounts among AFPs. Prior to the
     increased requirements, Chilean officials told us that advisors often
     used abusive practices to provide incentives for workers to switch
     accounts, such as giving workers part of the advisor’s commission or
     other bribes and filling out the worker’s form with potentially fraudulent
     signatures, which also caused large system costs. One service
     provider noted that the education and licensing requirements
     prohibited these practices and, thus, reduced overall costs in the
     system and fees for participants over time. The stricter rules for
     switching accounts also led to mergers and acquisitions among AFPs
     with less market share, which increased the size of the remaining
     AFPs, allowing them to charge lower fees and still remain competitive.

•    Other strategies. The countries we reviewed have also taken other
     targeted approaches that have reduced fees, which are summarized
     in table 8, but the reduction in fees from any one of these approaches
     may not have been significant for all participants in the DC systems.




49
  Requirements of the trustee board as a whole included that they have appropriate
knowledge, manage conflicts of interest, and have a policy regarding oversight of service
providers.




Page 42                                             GAO-12-328 Defined Contribution Plans
Table 8: Other Strategies That Have Reduced Fees

Country       Strategy                                     Description
Chile         Participants can only invest through         The Chilean system avoids duplicative administrative costs associated with
              one plan (AFP)                               multiple accounts.
United        Pensions Quality Mark                        Introduced by the National Association of Pension Funds, an industry group of
Kingdom                                                    plan professionals and service providers, this voluntary mark sets a standard
                                                           of excellence for employer-offered DC plans that employers can use to
                                                           promote their plan. One component of the mark limits fee levels.
              Efforts to improve participant               The national Money Advice Service, which was started by the U.K. securities
              selection of annuity provider                regulator but has since become an independent organization, publishes
                                                           annuity prices on its website. It also provides information to help participants
                                                           select the type of annuity best suited for them since the data shows that 2 in 3
                                                           participants select their DC plan provider for an annuity even though the cost
                                                           can be up to 40 percent higher than with other providers.
                                           Source: GAO analysis of foreign agency documentation and interviews with industry experts.




                                           The countries we reviewed have taken a variety of steps to oversee
Conclusions                                service providers and improve fee disclosures. However, these nations
                                           typically did not rely primarily on improved transparency to lower fees
                                           paid by participants, but combined transparency improvements with other
                                           targeted approaches to reduce fees. Despite important social, economic,
                                           and institutional differences between the United States and these
                                           countries, the key strategies these countries used to effectively lower fees
                                           offer some potential options for the U.S. experience. Given that a number
                                           of major U.S. service providers operate in several of the countries we
                                           reviewed and have adjusted to the regulatory requirements of these
                                           strategies, similar practices could be feasible in the United States. In
                                           addition, given the size of the U.S. DC system, implementation of some of
                                           the innovative approaches to reduce fees taken by these other countries
                                           may prove to be less expensive and more efficient for U.S. service
                                           providers. As more American workers rely on DC plans for their
                                           retirement savings and since excessive fees can have an adverse effect
                                           on net savings, it is important that Labor continue to address the impact
                                           of fees on participants. Consideration of approaches used by these
                                           countries that have proven to be successful could help Labor in this effort.

                                           Labor could learn from the positive experiences of other countries as it
                                           improves its supervisory approach and refines its participant disclosure
                                           regulations. In particular, regulatory agencies in the countries we reviewed
                                           have developed and already put into practice risk-based supervisory
                                           practices that could help Labor as it moves toward a risk-based approach
                                           in its own enforcement efforts. Given the significant role of service



                                           Page 43                                                                    GAO-12-328 Defined Contribution Plans
                      providers in the U.S. DC system and the complexity of fees charged for
                      their services—including the impact of fees on participants’ account
                      balances—it is important that Labor effectively oversees plans’ use of
                      service providers. Similarly, Labor’s current efforts to improve participant
                      disclosures are a promising development, but may be strengthened by
                      taking steps to evaluate their effectiveness, costs, and potential effect on
                      coverage, and, as necessary, making further improvements. In this respect,
                      the efforts taken by several countries that have improved their disclosures
                      by making them more personalized and significantly highlighting the long-
                      term impact of fees could prove instructive, relevant, and positive to the
                      U.S. experience. If no action is taken to monitor and respond to potential
                      shortcomings in participant disclosures, some participants will continue to
                      be unaware of the fees they are paying and the long-term impact of those
                      fees on their retirement savings.


                      We recommend that the Secretary of Labor take the following two actions:
Recommendations for
Executive Action      •   Consider other countries’ experiences as Labor continues its efforts to
                          develop a risk-based approach in supervising DC plans and their
                          service providers, such as adopting risk-based oversight practices
                          developed by the International Organisation of Pension Supervisors
                          and used by the countries we reviewed that have helped them better
                          oversee their DC plans.

                      •   Consider recent international initiatives to improve fee transparency to
                          assess their relevance and utility for U.S. 401(k) plan participants,
                          such as improvements that provide summarized and personalized fee
                          information and that show the effects of fees over time.


                      We provided a draft of this report to the Departments of Labor, State, and
Agency Comments       the Treasury, and the Securities and Exchange Commission (SEC) for
and Our Evaluation    their review and comment. SEC and the Department of State did not
                      provide comments. The Departments of the Treasury and Labor provided
                      technical comments, which we have incorporated where appropriate. The
                      Department of Labor (Labor) also provided written comments, which are
                      reproduced in appendix III. Overall, Labor generally agreed with our
                      findings and noted that it will consider our recommendations carefully as it
                      derives insights from its own multinational pension research and policy
                      discussions.




                      Page 44                                    GAO-12-328 Defined Contribution Plans
Regarding our recommendation on risk-based supervision, Labor agreed
that other countries’ experiences can sometimes be useful in evaluating
U.S. policies and programs but highlighted some differences that exist
among the private pension systems of the United States, Australia, Chile,
Sweden, and the U.K. In general, we agree that the voluntary and heavily
employer-based U.S. system has its own unique institutional and
operational features—as does each other system we reviewed—and the
diversity of each system makes it impossible to apply risk-based
supervisory principles in a strict, uniform manner. This is why we explain
that risk-based supervision can be, and has been, implemented to varying
degrees along a continuum with compliance-based supervision.
Specifically, Labor pointed out that the U.S. DC system is voluntary and,
unlike its foreign counterparts, U.S. regulators must take account of the
risk that employers will simply decline to sponsor retirement plans. We
note that other countries have implemented risk-based supervision within
voluntary systems and that, even in some of the more compulsory
systems we reviewed, the fund provider or trustee involvement may not
be required. For example, the Australian pensions regulator’s risk-based
approach has not driven away trustees of over 4,000 regulated
superannuation plans even though it is not mandatory for those trustees
to offer plans—it is only mandatory for employers to remit a portion of
their employees’ salaries to those plans.

Labor also noted that U.S. plans are not licensed and that Labor’s foreign
counterparts generally have more discretion to intervene and require
actions as part of supervision of their licensed entities, whereas Labor
generally must establish a violation before it can compel action. While we
understand the distinction Labor makes between a regulator’s authority
over licensed entities versus that over nonlicensed entities, we note that
Labor does have the authority to influence U.S. fiduciaries by providing
guidance, publishing regulations, targeting enforcement efforts, and, if
necessary, seeking legislative changes. Risk-based supervision is
focused on how the regulator can better utilize its limited resources to
oversee regulated entities regardless of the type of retirement savings
vehicle they offer—it does not increase employers’ risks. In fact,
irrespective of the supervisory approach taken, regulators must decide
the level of compliance complexity that the regulated entities must meet.
Consequently, we believe that Labor could encourage employers to
sponsor plans while balancing the complexity of compliance to avoid
excessive burden. Overall, we commend Labor on starting to pursue a
risk-based approach that is suitable to U.S. circumstances as part of its
overall enforcement strategy—in concert with the other enforcement
efforts Labor detailed in its letter.


Page 45                                   GAO-12-328 Defined Contribution Plans
Regarding our recommendation on fee disclosure, Labor agreed that it
will look into the global experiences described in our report for possible
areas of improvement as it monitors the implementation of its new
regulations. Labor commended us on the excellent summary of fee
transparency activities being implemented in the countries we reviewed,
and noted that it is open to learning from global experiences that help
drive down costs and improve retirement saving results for workers.
Although Labor was impressed that regulators in the countries we
reviewed tended to focus on the same issues that Labor did in its recent
efforts to improve fee disclosure, it did not believe it was an appropriate
time to propose changes to recent fee disclosure regulations. We
continue to believe that it is important to look at what has worked well in
other countries as Labor moves forward in evaluating the implementation
of its new regulations. Regarding our fee disclosure findings, Labor was
unclear whether the countries we reviewed had as complex of a fee
structure—particularly with respect to indirect fees—as is common in the
United States, whether the reported amounts for actual fees paid were
precise or estimates, or what such disclosures cost. We note that there
are indeed indirect fees charged in these countries, and that they are
already trying to find ways to disclose to their plan participants actual fees
paid in as precise a way as possible within their cost structures because
they believe that their plan participants benefit from such disclosures. We
continue to believe that Labor should consider our findings as a starting
point for considering whether to require the disclosure of total actual fees
paid within its own parameters, including cost to participants. Finally,
Labor noted that its disclosure regulations require a statement about the
effect of fees over time and a reference to Labor’s website where
examples can be found. As we state in our report, participants continue to
be unaware of the fees they are being charged, which is why we believe it
is more useful for the example to be given directly after such a statement,
as other nations, like Australia, currently do.




Page 46                                     GAO-12-328 Defined Contribution Plans
As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from the
date of this letter. At that time, we will send copies to the Secretaries of
Labor, Treasury, and State, the Chairman of the Securities and Exchange
Commission, and other interested parties. The report also will be
available at no charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions concerning this report, please
contact me at (202) 512-7215. 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 IV.




Charles A. Jeszeck
Director
Education, Workforce,
  and Income Security Issues




Page 47                                     GAO-12-328 Defined Contribution Plans
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              We were asked to answer the following questions: (1) How are service
              providers in other countries’ defined contribution (DC) systems overseen
              by regulatory agencies? (2) What key strategies are used in other
              countries to improve fee disclosure to participants? (3) What key
              strategies are used in other countries’ DC systems to reduce fees?

              To answer these questions, we selected four countries in which to
              conduct case studies: Australia, Chile, Sweden, and the United Kingdom
              (U.K.). To determine which countries should be used as case studies, we
              conducted an initial broad review of DC systems in a larger sample of
              countries. In conducting this initial review, we analyzed relevant nonlegal
              research and interviewed pension experts to identify 10 countries that had
              DC systems with key features designed to address fees. Specifically, we
              obtained comparative and country-specific studies of DC systems
              published by academics; the Organisation for Economic Co-operation and
              Development (OECD), whose review also included non-OECD countries;
              and other industry experts, such as the International Organisation of
              Pension Supervisors. We solicited recommendations from
              representatives of the OECD, government officials, academics, industry
              practitioners, and representatives of industry groups. We then examined
              the characteristics of each country’s DC system for key elements
              designed to address service providers’ costs. From the 10 countries, we
              used the following selection criteria to select 4 countries for in-depth case
              studies:

              •   DC retirement plans are an important pillar of the country’s retirement
                  system. By focusing on countries in which the DC system is an
                  important pillar of the retirement system, we increased our opportunity
                  to identify practices used in countries with well developed capital
                  markets and where risks to participants are comparable to those
                  faced by participants in the United States.

              •   DC retirement plan regulators use explicit strategies to address and
                  oversee service providers’ costs. The selected countries as a group
                  should address all of the key strategies we have identified, although
                  no single country needs to address all of them.

              •   The country was identified through our research and the consensus of
                  external experts as having strong potential for yielding useful lessons
                  for the U.S. experience.




              Page 48                                     GAO-12-328 Defined Contribution Plans
Appendix I: Objectives, Scope, and
Methodology




•   The country’s DC retirement plan is not duplicative. Where similar
    plans exist in multiple countries, we will select the one that best
    addresses the other selection criteria.

For each of the four countries selected, we determined how service
providers are overseen by regulatory agencies and identified the key
strategies designed to improve fee disclosure to participants and reduce
fees by reviewing nonlegal research and other available documentation
and interviewing officials and industry experts. Specifically, we
interviewed industry groups, service providers, and government officials
from each country, as well as academics, representatives from the OECD
and The World Bank, and pension experts based in the United States.
We obtained broad perspectives on the benefits and drawbacks of the
countries’ regulatory oversight activities and the identified key strategies.
Where possible, we attempted to obtain basic demographic data and
available data on the types and amounts of fees paid in DC plans in those
countries from government officials, pension experts, and others we
interviewed. We used these data for the purpose of providing background
information and context, or examples, of the effect of certain strategies on
fees. We performed some basic reasonableness checks of the data
against other sources of information. We did not compare fees across
countries because each country, and sometimes plans within a country,
can charge different fees; instead, we looked at the types and amounts of
fees in each country to gain a better understanding of the effect of key
strategies used to lower fees. We did not conduct an independent legal
analysis to verify the information provided by or about the laws or
regulations of the foreign countries selected for this study. Instead, we
relied on appropriate secondary sources and interviews to support our
work. Following our interviews, we submitted key statements of facts for
review and verification by agency officials in each country and
incorporated technical corrections as necessary.

We conducted this performance audit from March 2011 through March
2012 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.




Page 49                                     GAO-12-328 Defined Contribution Plans
Appendix II: Key Features of DC Pension
               Appendix II: Key Features of DC Pension
               Systems in Australia, Chile, Sweden and the
               United Kingdom


Systems in Australia, Chile, Sweden and the
United Kingdom




               Page 50                                       GAO-12-328 Defined Contribution Plans
                                                             Appendix II                                                                                            3/22/2012




                                                             Australia

At a glance                                                  Pension system highlights
Since 1992, Australia has had a                              Contributions: The current minimum employer contribution rate is 9 percent of
mandatory pension system, known as                           the worker’s earnings. The government has proposed to increase this amount to
superannuation.                                              12 percent. The contribution is required for a band of earnings, which is capped
                                                                                                2
                                                             at about 2.5 times average wages. Employers and participants may also
                                                                                                                       3
Total system assets: Pension assets                          choose to make additional contributions subject to a cap. Individuals can
totaled about $1.04 trillion USD in 2010,                    voluntarily make contributions when they are unemployed.
of which approximately 82 percent were
in defined contribution (DC) plans.                          Investment options: Most plans offer participants a choice of investment
                                                             options. On average, retail plans offer 219 investment options and industry funds
Coverage: Employers are required to                          offer 10 investment options. Participants can choose to receive investment
offer a pension plan to eligible workers                     advice for a fee from their plan or from an external advisor. According to agency
and provide a minimum level of                               officials, one-on-one advice can entail high fees and few participants use it.
contributions. The plan may be defined
benefit (DB) or DC, but the majority of                      Default option: Since 2005, employers have been required to designate a
plans are DC.
               1
                                                             default plan for those participants who do not specify in which plan they want
                                                             their contributions deposited. Australia is in the process of implementing a new
Types of plans in the system                                 set of standards for the default investment option, known as MySuper. Under
Industry-wide or                                             MySuper, all default investment options must be approved by the pensions
single-employer (28% of private plan                         regulator and meet standards for diversification and fees. In addition, the default
assets) The plan is a nonprofit entity                       investment options must be unbundled from additional services, such as
managed by a board of trustees, some of                      investment advice.
which must have equal representation
from employers and participants.                             Leakage: Participants are generally not allowed to access their accounts prior to
Trustees must be licensed by the                             age 55. When workers change jobs they may leave their account at their
government and are subject to a “fit and                     previous plan or roll it over into a new plan. As part of the recommendations
proper” test, which specifies certain
standards, including experience and
                                                             made from a 2010 review of the superannuation system, Australia is considering
educational and technical qualifications.                    implementing a process called “auto consolidation,” which would match a worker
                                                             who is starting a new job to any pre-existing superannuation accounts they may
Retail (34% of private plan assets) A                        already have.
participant deals directly with a for-profit
service provider which manages their                         Drawdown: The minimum age to begin drawing down benefits is currently 55,
account. Within the service provider, the                    set to increase to 60 by 2025. The accumulated benefit can be withdrawn as a
plan is managed by a board of trustees.                      lump-sum or as an annuity. Most benefits are taken as a lump-sum. Participants
Similar to industry-wide and single-                         over age 55 who are still working may start drawing down benefits. Employers
employer plans, trustees must be                             are required to continue to contribute to a worker’s fund until the worker reaches
licensed and are subject to a “fit and
                                                             age 70, or the worker retires or separates from the employer.
proper” test.

Self-managed (38% of private plan
assets) A participant manages his/her
own account, which entails establishing a
trust and a bank account. Up to four
people can be in a trust. The participant
is the trustee and can select investment
options.
Source: GAO analysis of foreign agency documentation and
interviews with Australian officials and industry experts.




                                                             1
                                                               The Australian pensions regulator reports that, as of June 2010, 17.6 percent of superannuation assets for
                                                             entities with more than four members were in DB plans.
                                                             2
                                                               Employers are not required to contribute for workers earning less than about $500 USD a month.
                                                             3
                                                               According to the Australian Tax Office, there is a cap of about $25,600 USD per year on tax deductible
                                                             contributions for participants up to age 50. For participants age 50 and above, the cap is about $51,100 USD.




                                                             Page 51                                                           GAO-12-328 Defined Contribution Plans
                                                           Appendix II                                                                                                  3/22/2012




                                                           Chile

At a glance                                                Pension system highlights
Chile replaced its DB public pension                       Contributions: Workers are required to contribute 10 percent of applicable
system with individual accounts in                         earnings to their individual account—the earnings ceiling is equal to 67.4
1981. Workers who entered the labor                        indexed units (Unidades de Fomento) of accounts that are equivalent to about
market after that date are mandated to                     1,500,000 Chilean pesos, or $2,900 USD a month as of December 2011. In
                               4
join an individual DC account.                             addition to their contribution, participants pay fees to their AFP, which currently
                                                                                                                   6
                                                           range from 1.14 percent to 2.36 percent of earnings.
Total system assets: The value of
                                                           Investment options: Workers can choose between five types of funds, labeled
pension assets totaled $148.4 billion                                                                                                      7
USD in 2010, according to the pensions                     A through E (in descending order of investment risk), offered by each AFP.
regulator.                                                 Each category of funds is subject to limits on the amount of equities that may be
                                                           held corresponding to its risk level. Participants are subject to restrictions on
                                                           which investment funds they may hold based on their age. The 2008 reforms
Coverage: Workers are required to
                                                           created the figure of the pension advisor, a professional who will be able to
contribute to an individual DC account.
About 60 percent of those employed
                                                           advise individuals on a range of issues, including the choice of AFP and
                                                                                                8
participate in the system.
                           5                               investment and drawdown options.

                                                           Default option: For those who do not choose an investment option within an
                                                           AFP, the default option is a lifecycle investment strategy in which allocations to
Type of plan in the system                                 risky funds decrease with age (e.g., B fund for workers under 35, C fund for men
                                                           between 36 and 55 and women between 36 and 50, and D fund for men above
Workers can choose which licensed for-                     55 and women above 50). According to officials, about 25 percent of workers
profit service provider, known as an AFP
                                                           make an active choice.
(Administradoras de Fondos de
Pensiones), manages their individual
                                                           Leakage: Early retirement is permitted at any age provided the accumulated
accounts. Currently, there are six AFPs.
New entrants to the labor force are
                                                           capital can finance a pension above a certain threshold. Otherwise, workers do
defaulted to the AFP with the lowest fee                   not have access to their account balance before normal retirement age, which is
as determined by a bidding process,                        65 for men and 60 for women.
which takes place every 2 years.
                                                           Drawdown: Upon retirement, participants may choose one of two major
Source: GAO analysis of foreign agency documentation and   options: (a) buy an annuity from an insurance company that pays lifetime
interviews with Chilean officials and industry experts.
                                                           benefits; or (b) set up programmed withdrawals with an AFP. Variations on these
                                                           two options include purchasing a deferred annuity, which means setting a future
                                                           date for purchasing an annuity and, until that date, making programmed
                                                           withdrawals from the individual account; or purchasing an immediate annuity
                                                           with a portion of the funds in the individual account and making programmed
                                                                                                    9
                                                           withdrawals with the rest of the funds.

                                                           4
                                                             Additional reforms in 2008 added a Basic Solidarity Pension for individuals with no pensions and a Solidarity
                                                           Pension Payment for those with low pensions, both targeted to the poorest 60 percent of the population.
                                                           5
                                                             This is partly due to the fact that the self-employed (about 25 percent of total employment) were not required to
                                                           contribute and voluntary contributions for this group have been historically low. The 2008 Pension Reform
                                                           determines that contribution for self-employed workers is mandatory. The introduction of the obligation will be
                                                           gradual. During the period 2012 to 2014, the default option will be to contribute with the option to opt-out. It will be
                                                           mandatory for self-employed workers to contribute from 2015 onward.
                                                           6
                                                             Each participant also pays a fee for disability and survivorship insurance, which is currently 1.49 percent of
                                                           earnings.
                                                           7
                                                             Initially, only one type of fund was permitted to be offered by an AFP, which was invested in equities and fixed
                                                           income (current C fund). Since 2000, four additional types of funds have been permitted, ranging from a fixed
                                                           income fund (E Fund) to an aggressive equity fund (A Fund).
                                                           8
                                                             Until recently, plan participants and retirees could get advice from their AFPs or insurance and annuity brokers,
                                                           but the pensions regulator recognized that this advice may not be considered impartial and objective. Under the
                                                           current regulations, the names of pension advisors appear in a joint register kept by the pensions and securities
                                                           regulators, both of which are also responsible for overseeing several aspects of their services. Pension advisors’
                                                           fees are subject to a ceiling.
                                                           9
                                                             For all these pension options, if the worker obtains a pension higher than 150 percent of the minimum pension
                                                           guaranteed by the state and higher than 70 percent of his/her average monthly taxable wage for the previous 10
                                                           years, he/she may use of the sum of money remaining in the individual account as desired (after the calculation of
                                                           the amount needed to obtain the pension has been made and this has been deducted from the accumulated
                                                           balance).

                                                           Page 52                                                               GAO-12-328 Defined Contribution Plans
                                                           Appendix II                                                                                            3/22/2012




                                                           Sweden

At a glance                                                Pension system highlights
In the mid-1990s, Sweden reformed its                      Contributions: Employers and workers are required to contribute 2.5 percent of
mandatory, earnings-related public
                                                           the covered portion of a worker’s salary. In 2011, the ceiling for contributions
pension scheme and added a system
of individual accounts, called the                         was approximately $1,400 USD. Contributions are collected from employers by
Premium Pension system.                                    the national tax authority on a monthly basis.

                                                           Investment options: Participants can choose up to five funds from among
Total system assets: According to                          nearly 800 different funds—at the end of 2010 there were 789 funds
officials, Premium Pension assets totaled                  administered by 94 different fund management companies and the default fund
approximately $62 billion USD in 2010.                               11
                                                           provider. The Swedish Pensions Agency is currently developing a fund
                                                           selection tool to help participants make fund decisions depending on, among
Coverage: Workers and their employers                      other things, their desired investment risk. Participants can choose to receive
are required to contribute a portion of the                investment advice for a fee from external advisers. According to government and
workers’ salaries to individual DC                         industry officials, because of the large number of investment options,
           10
accounts. Self-employed workers are                        participants are increasingly using these advice services but it can be expensive
also required to contribute a portion of
                                                           and undermine the low-cost design of the system.
their salaries to individual DC accounts.
                                                           Default option: For those participants who do not select specific funds, their
                                                           contributions are placed in a default option called the Seventh AP Fund (AP7
                                                           Såfa). AP7 is an independent, government entity operated as a nonprofit with a
Type of plan in the system                                 board of directors appointed by the Swedish government. Since May 2010, AP7
                                                           Såfa defaults participants under the age of 56 into global equity funds and shifts
A government agency, the Swedish
                                                           the accounts for those ages 56 and older by 3 to 4 percent per year into bonds
                                                                                      12
Pensions Agency, administers the DC                        to reduce investment risk.
plan and handles recordkeeping for all
accounts. Any fund provider licensed in                    Leakage: Participants are not allowed to access their Premium Pension
Sweden or registered in their own                          accounts prior to age 61.
country can offer funds in the Premium
Pension system as long as they agree to                    Drawdown: At retirement, participants are required to annuitize their retirement
certain conditions set by the Swedish                      savings and the Swedish Pensions Agency acts as the annuity provider for the
Pensions Agency, including a set rebate                    Premium Pension system. When participants annuitize their benefit, they can
schedule for all funds, based on the                       choose among two options:
funds’ total assets in the Premium
Pension system.                                                          •     variable annuity—participants’ holdings remain invested in their
                                                                               chosen funds and the Swedish Pensions Agency pays their
Source: GAO analysis of foreign agency documentation and                                                 13
interviews with Swedish officials and industry experts.                        benefits from those funds, or

                                                                         •     with profit annuity—participants’ holdings are sold and moved into
                                                                                                                                              14
                                                                               an insurance product that pays at least a set amount per year.




                                                           10
                                                              Employers are also required to contribute to an Income Pension (notional DC) for each worker and may also
                                                           contribute to supplementary Occupational Pensions (which can be DC or DB plans), but for the purpose of this
                                                           report we focused on the Premium Pension system.
                                                           11
                                                              The default fund provider allows participants to opt into and out of some funds they offer, which are based on
                                                           risk-levels (cautious, balanced, and offensive).
                                                           12
                                                              According to a default fund representative, this high-risk approach was chosen because of the low percentage of
                                                           participants’ overall pension invested in the Premium Pension system.
                                                           13
                                                              These annuities do not have a guaranteed value. To calculate the pension for these annuities, the Swedish
                                                           Pensions Agency divides the value of the account by an annuity divisor (based on estimated average life
                                                           expectancy) and credits the outcome with an estimated future interest rate minus administrative costs. The
                                                           Swedish Pensions Agency recalculates the pension amount each year to reflect developments in the value of the
                                                           participants’ chosen funds. For example, if returns in participants’ chosen funds exceed the estimated future
                                                           interest rate, then, generally, the participants’ annual pension amount is increased.
                                                           14
                                                              However, the participants’ annual pension amount may increase above the set amount in any given year.

                                                           Page 53                                                           GAO-12-328 Defined Contribution Plans
                                                           Appendix II                                                                                         3/22/2012




                                                           United Kingdom

At a glance                                                Pension system highlights
Voluntary DC plans make up most of                         Contributions: Employers and workers may make contributions to DC plans.
the private pension system in the U.K.                     While employers have not previously been required to make any contributions,
An individual may be a member of a                         beginning in 2012, they will be required to automatically enroll eligible workers
number of different pension plans                          into a pension plan and provide a minimum contribution. Workers will have the
simultaneously. From 2012 to 2017, all                                                  16
                                                           right to opt-out of the plan. The minimum total contribution of 8 percent of
employers will be required to                              qualifying earnings will be contributed to the selected private pension—4 percent
automatically enroll eligible                              will usually be contributed by employees, which is usually matched by a
employees into a pension plan—                             compulsory 3 percent from the employer and a minimum 1 percent from the
including a new low-cost DC pension                        government, delivered through tax relief.
                                                                                                      17

savings plan called the National
Employment Savings Trust (NEST)—                           Investment options: DC plans typically offer between 5 and 10 investment
and provide a minimum contribution.                        options, but contract-based plans may offer far more than trust-based plans.
Total system assets: According to
                                                           According to a U.K. service provider, approximately 70 percent of DC assets in
officials, pension assets totaled                          the U.K. are in passively managed funds. To choose between the options
approximately $3.3 trillion USD in 2010,                   available to them, participants can receive investment advice from an external
of which approximately 40 percent were                     advisor.
in DC plans.
                                                           Default option: When a default investment option is offered to participants
Coverage: Individuals in the U.K. can                      within a DC plan, it was estimated in 2009 that 81 percent of members invested
voluntarily contribute to pension
                                                           in it. All plans used by employers to satisfy their duties for auto-enrollment will be
arrangements that can be employer-
sponsored (DB or DC) or individually                       required to have a default fund.
arranged (DC). These arrangements are
utilized by about half of the working age
                                                           Leakage: Currently, individuals cannot access their private pension savings until
population, and of those workers only                      they reach the minimum pension age (age 55 as of April 2010).
about 30 percent of participants are
members of DC plans, including public                      Drawdown: When employer plans allow it, individuals can continue working
and private pensions.                                      while receiving pension benefits. While participants were previously required to
                                                           annuitize their pension benefits by age 75, as of April 2011, participants over
Types of plans in the system                               age 55 can now withdraw their pension savings by choosing one or a
Trust-based plans (45% of DC                               combination of the following options:
participants) These are employer-
sponsored plans and are usually                                          •    purchasing an annuity;
nonprofit entities managed by a board of                                 •    investing their funds in a Capped Drawdown account, which
trustees that typically hire one or more                                      allows them to withdraw up to 100 percent of the value of an
service providers for recordkeeping and
                                                                              equivalent annuity as an income from their pension fund while
investment management services. The
trustees are responsible for selecting and                                    leaving the remaining fund invested;
vetting the investment options.                                          •    withdrawing their funds flexibly provided that individuals can
Contract-based plans (55% of DC                                               demonstrate a secured guaranteed lifetime income of at least
participants) For contract-based plans,                                       approximately $31,600 USD per year; or
an employee deals directly with a for-
profit service provider which performs                                   •    withdrawing their funds as a lump-sum when their accumulated
both recordkeeping and investment                                             balance is very small.
                        15
management services. The service
provider selects which investment
options are available to the participant.
These plans are owned entirely by the                      15
                                                              Some service providers outsource one or both of these services. Contract-based schemes are owned entirely by
worker.                                                    the employee, but may be facilitated by the employer. If they are facilitated by the employer, some employers
Source: GAO analysis of foreign agency documentation and
                                                           appoint a committee to oversee the service providers’ arrangements.
                                                           16
interviews with U.K. officials and industry experts.          This is the requirement provided that the employee’s earnings are above the current proposed auto-enrollment
                                                           threshold of about $11,800 USD. Employees with earnings below this level will be permitted to opt in to the
                                                           scheme. There will be a contribution limit of about $6,800 USD a year into NEST.
                                                           17
                                                              Qualifying earnings represent the portion of a worker’s salary over about $9,000 USD and below about $60,400
                                                           USD (as of February 2012). For the first 5 years of auto-enrollment implementation (from October 1, 2012, to
                                                           September 30, 2017) the minimum total contribution is 2 percent and minimum employer contribution is 1 percent.
                                                           For the year after that (October 1, 2017, to September 30, 2018) the minimum percentages move up to 5 and 2,
                                                           respectively. From October 1, 2018, the full 8 percent and 3 percent apply.

                                                           Page 54                                                         GAO-12-328 Defined Contribution Plans
Appendix III: Comments from the
              Appendix III: Comments from the Department
              of Labor



Department of Labor




              Page 55                                      GAO-12-328 Defined Contribution Plans
Appendix III: Comments from the Department
of Labor




Page 56                                      GAO-12-328 Defined Contribution Plans
Appendix III: Comments from the Department
of Labor




Page 57                                      GAO-12-328 Defined Contribution Plans
Appendix III: Comments from the Department
of Labor




Page 58                                      GAO-12-328 Defined Contribution Plans
Appendix IV: GAO Contact and Staff
                  Appendix IV: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Charles A. Jeszeck, (202) 512-7215 or jeszeckc@gao.gov
GAO Contact
                  In addition to the contact named above, Tamara Cross, Assistant
Acknowledgments   Director; Sharon Hermes and Jessica Gray, Analysts-in-Charge; Seyda
                  Wentworth, and Katherine Berman made important contributions to this
                  report. James Bennett, Barbara Bovbjerg, Susannah Compton, Cody
                  Goebel, Kathy Leslie, Ashley McCall, Sheila McCoy, Roger Thomas, and
                  Frank Todisco also provided support.




(131065)
                  Page 59                                GAO-12-328 Defined Contribution Plans
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