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Retirement Planning > Saving for Retirement > 403(b) Plans

GAO to DOL: Pay More Attention to 403(b) Plans

By Allison Bell

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What You Need to Know

  • Critics have complained about high fees and disclosure problems at 403(b) plans.
  • The Labor Department, the SEC, FINRA and the IRS all help regulate the plans.
  • The GAO says the Labor Department should make its 403(b) plan resources more like its 401(k) plan resources.

A new government report could eventually lead to big changes by some of the 403(b) retirement plans that serve public school teachers and other employees of tax-exempt employers.

A U.S. Government Accountability Office team recommended that the U.S. Labor Department work on its own to improve how it explains 403(b) plans on its website.

The team also listed ideas for improving 403(b) plans that likely would require congressional action, such as encouraging the plan managers to hire outside investment consultants and applying a fiduciary standard of care to all 403(b) plan managers.

Today, plan sponsors and participant advocates told the GAO, “State laws often do not afford participants sufficient protections against paying excessive fees or being steered toward investment options that may not be in their best interest,” according to Tranchau Nguyen, who led the report team. Nguyen is the GAO’s director for education, workforce and income security issues.

What It Means

The recommendations in the new GAO report could vanish; kick around Washington for years and bring about modest changes; or serve as a catalyst for major retirement plan legislation.

403(b) Plans

A 403(b) plan is a tax-deferred, defined contribution retirement plan organized under section 403(b) of the Internal Revenue Code.

Congress passed the law that made the plans available to employees of nonprofit corporations in 1958, and it made the plans available to educators in 1961, according to a 403(b) plan guide posted by the IRS.

Originally, the plans could invest only in annuities. Many still operate on an annuity-based framework.

Congress let the plans invest in mutual funds in 1974. It opened up the plans to employees of religious organizations in 1982.

The plans held about $1.1 trillion in participant assets in 2020, and about half of the assets were in plans not subject to the Employee Retirement Income Security Act of 1974, the law that applies a fiduciary standard and other requirements to managers of retirement plans based on section 401(k) of the Internal Revenue Code.

In recent years, participant advocacy groups, plaintiffs’ lawyers and the U.S. Securities and Exchange Commission have attacked some 403(b) plan sponsors over allegations that the plans spent too much on fees, failed to disclose fees adequately or erred in other ways.

The GAO Report

The GAO is an arm of Congress that helps members of Congress keep track of what’s going on in the rest of the government.

The GAO prepared the new 403(b) plan report at the request of Rep. Robert Scott, D-Va., the highest-ranking Democrat on the House Education and the Workforce Committee.

The report team based much of the report on interviews with state officials in California, Connecticut, Delaware, Kansas and Texas.

The GAO Findings

The GAO team found that the reasons for 403(b) plans falling under ERISA or not falling under ERISA were complicated and that, in many cases, non-ERISA plans face fiduciary rules, fee disclosure requirements and other rules set by states.

In some states, the team noted, the plan controls the participant’s relationship with the investment provider. In other states, participants can work with any investment product vendor.

Fee levels, investment performance and other measures differ widely from plan to plan, the GAO team discovered.

The Labor Department’s Employee Benefits Security Administration, the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Internal Revenue Service all play roles in overseeing 403(b) plans and 403(b) plan investment menus.

Between 2010 and 2021, EBSA conducted 454 enforcement investigations of ERISA 403(b) plans. It identified violations at 70% of the plans and collected $35 million in enforcement-related payments.

Only 60 of the violations found were disclosure violations. At 321 plans, investigators found that the “fiduciary did not discharge duties solely in the interests of the participants and beneficiaries, for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan, and with the care, skill, prudence and diligence under the circumstances that a prudent person acting in a like capacity and familiar with such matters would use.”

The SEC oversees broker-dealers that work with 403(b) plans, and the variable annuities and mutual funds on the plan investment menus. It told the GAO that “many” of the 3,000 investigations it conducts each year relate to activities involving 403(b) plans, but it had no 403(b) plan investigation data.

Since 2005, FINRA has brought 28 disciplinary actions against broker-dealers and associated persons that mention 403(b) retirement accounts, according to the GAO team. Two involved violations of FINRA variable annuity sales rules.

The IRS looks at whether 403(b) plan participants are complying with tax-related rules, such as maximum contribution rules. The agency completed 1,912 examinations involving 403(b) plans from 2011 through 2020, and 82% of the examinations turned up compliance problems.

The 403(b) plan program is complicated, and it’s “challenging for a plan or service provider to be in full compliance with all of its provisions,” according to the GAO summary of the IRS perspective.

GAO Recommendations

The GAO team suggested that the Labor Department provides less information about 403(b) plans than about 401(k) plans, and that some sections of its website that talk about 401(k) plan rules fail to mention what rules apply to 403(b) plans.

The department should start by offering the same kinds of tools and information for 403(b) plan sponsors and participants that offers for 401(k) plan sponsors and participants, the team said.

The team did not recommend other changes itself, but it described ideas identified by the stakeholders and experts interviewed for the report.

“For example, they suggested establishing fiduciary duties for non-ERISA plans in some states that are not subject to such protections can help protect participants’ interests. Also, they said requiring distribution of standardized information on investment options’ returns and fees for participants in non-ERISA plans would promote transparency,” the team said.

Experts also called for letting the plans put assets in collective investment trusts and other investment vehicles, such as real estate investment trusts.

Working with investment management and fee management consultants is another way for 403(b) plan managers to improve their performance, the GAO team said.

“Several stakeholders we interviewed expressed concerns that some 403(b) plan sponsors did not have enough knowledge of the retirement plan industry to prudently manage these plans or their investment options without hiring outside help,” the team concluded.

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Allison Bell

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