GAO reviews 403(b) plan oversight, urges DOL to enhance outreach 

October 18, 2023

A recent Government Accountability Office (GAO) report examining federal agency oversight of Internal Revenue Code (IRC) Section 403(b) plans recommends that the Department of Labor (DOL) provide more targeted educational materials for sponsors and participants. The GAO is an independent, nonpartisan agency in Congress whose responsibilities include reviewing federal government programs and operations and recommending improvements. Building on another report from last year that surveyed 403(b) investment options and fees, the report also examines recent state developments aimed at improving 403(b) plan administration and assembles stakeholder feedback on ways to enhance participant outcomes.

The DOL, IRS, Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) share oversight responsibility for 403(b) plans and associated investment products. GAO’s latest report on 403(b) plans highlights the various ways these agencies work to improve 403(b) participant outcomes through enforcement activity and outreach. Although the report generally takes a positive view of each agency’s efforts, GAO identifies several ways DOL could improve its oversight.

More 403(b)-specific resources. DOL maintains informational websites for sponsors and participants of 401(k) and 403(b) plans. GAO found that DOL’s 403(b) plan resources aren’t as detailed as its 401(k) plan resources and, in some cases, materials targeted to 401(k) plans don’t specifically mention that the content also applies to 403(b) plans. For example, GAO noted that key DOL resources on 401(k) plan fees and a model comparison chart of investment options are relevant to, but silent on, 403(b) plans. GAO indicated that DOL has agreed to review existing educational materials for possible addition of more 403(b)-specific content.

ERISA exemption. DOL’s oversight of 403(b) plans extends only to plans subject to ERISA. Section 403(b) plans sponsored by public educational organizations and certain religious institutions are exempt from ERISA. Most 403(b) plans sponsored by tax-exempt organizations — including private universities — are subject to ERISA; however, an exemption applies if the employer has limited involvement with the arrangement. GAO notes that DOL still lacks authority to collect information necessary to confirm that tax-exempt employers relying on this exemption are complying with applicable regulatory requirements to do so. The report reiterates GAO’s earlier recommendation that Congress give DOL specific authority to monitor these plans’ compliance with the exemption.

GAO’s report highlights the following steps taken by five selected states (California, Connecticut, Delaware, Kansas and Texas) to enhance non-ERISA 403(b) plan oversight and increase transparency:

• Centralizing plan administration and limiting the number of service providers to enable better monitoring of available investment options and reduce fees (however, two of the selected states took the opposite approach by expanding the number of available providers and eliminating fee caps)
• Using a competitive bidding process for vendor selection
• Enacting state laws providing fiduciary standards for plan administrators and requiring annuity providers to act in the “best interest” of participants
• Furnishing participants quarterly statements and comparative investment performance and fee information

The report also summarizes the results of GAO’s survey seeking recommendations from stakeholders on how to improve 403(b) plan participant outcomes. GAO supplemented survey data with a review of nonmonetary provisions in more than a dozen settlement agreements involving ERISA-covered 403(b) plans.

Investment in collective investment trusts. Stakeholders broadly supported allowing 403(b) plans to offer collective investment trusts (CITs) — a type of pooled investment vehicle similar to mutual funds — as investment options. CITs can be a more cost-effective option than traditional mutual funds for defined contribution plans. While SECURE 2.0 amended the IRC to allow 403(b) plan custodial accounts to invest in CITs, federal securities laws still prevent 403(b) plans from offering these investments. (Congress is currently considering a bill (HR 3063) that would amend securities laws to let 403(b) plans offer CITs.)

More federal agency outreach. Stakeholders also recommended that federal agencies provide more outreach to smaller 403(b) sponsors about plan administration and management, including model plan documents, checklists, and information about ERISA applicability.

Non-ERISA 403(b) enhancements. For non-ERISA 403(b) plans, stakeholders also recommended that state policymakers consider the following actions:

• Adopting state-level fiduciary protections
• Requiring sponsors and providers to disclose standardized investment performance and fee information to participants
• Expanding auto-enrollment and auto-escalation features, which may not be permitted by state wage-withholding laws (since these plans can’t take advantage of ERISA preemption)

Review of settlement agreements. Plan fiduciaries in settlements reviewed by GAO agreed to use requests for proposal (RFPs) for selecting plan vendors, hire independent consultants to assist with oversight, offer lower-cost share classes of investment options, negotiate flat recordkeeping fees instead of asset-based fees, and limit cross marketing by plan providers.

• Department of Labor should update educational materials to better inform plan sponsors and participants (GAO, June 21, 2023)
• 403(b) investment options, fees, and other characteristics varied (GAO, Mar. 4, 2022)

• IRS begins rollout of determination letter program to 403(b) plans (June 15, 2023)
• Viewing SECURE 2.0 through a 403(b) lens (May 22, 2023)
• House bill would let 403(b) plans invest in collective trusts (May 16, 2023)