GAO Finds Conflicts of Interest in Sale of Certain Retirement Investments

The Department of Labor’s most recent fiduciary proposal seeking to limit conflicts of interest in providing retirement advice has been stayed nationally by a federal court in Texas; now a federal watchdog is calling on the IRS to heighten oversight of retirement investment advice.

In a report released to the public Wednesday, the Government Accountability Office found that fiduciary oversight of individual retirement accounts and other areas related to retirement investing, including mutual funds, are rife with conflicts of interest that should be addressed by the IRS, in some cases in coordination with the DOL.

The GAO, an independent, nonpartisan federal agency that works for Congress, was commissioned to review the topic in the aftermath of a 2018 federal appeals court ruling that invalidated the DOL’s 2016 fiduciary proposal. Representative Robert Scott, D-Virginia, was among the members of Congress to request the review; he had been critical of the U.S. 5th Circuit Court of Appeals’ decision to vacate the fiduciary proposal. Senators Patty Murray, D-Washington, and Bernie Sanders, I-Vermont, also commissioned the GAO report.

The report, like the overturned 2016 DOL rule, applied to retirement plans governed by the Employee Retirement Income Security Act and to IRAs, governed by the tax code.

The more-than-100-page report, based on research conducted from November 2020 through July 2024, drew on a review of 2,000 conflict disclosures and “our calls posing as potential clients to 75 financial professionals,” the GAO wrote.

In its review, the GAO found multiple conflicts of interest from financial professionals providing fiduciary investment advice in areas including proprietary products, payments from third parties and compensation arrangements.

In a summary, the GAO reported conflicts of interest in these areas:

• Mutual funds that compensate sellers lead to lower average returns. The GAO took aim at mutual funds, one of the most popular retirement investment vehicles, for underperforming in cases where advisers are compensated for selling such funds. The agency used Morningstar Inc. analysis to come to the conclusion, noting that the results “could reduce retirement savings’ growth over time and could make a difference of tens of thousands of dollars for investors in actively managed domestic equity funds at retirement.”
• Conflict-of-interest disclosures are unclear for end investors. In its review of more than 2,000 conflict-of-interest disclosures, the GAO found conflicts for advisers in recommending one product over another. While firms make those conflicts available to investors, the watchdog felt that “investors may not review or understand” the documents. Furthermore, the GAO’s undercover calls did not result in helpful guidance or disclosure related to the conflicts, it reported.
• Fiduciary oversight of IRAs from regulators is not strong enough. By law, the IRS is the authority tasked with overseeing firms and financial professionals acting as fiduciaries for IRAs. When fiduciaries engage in prohibited transactions, they must report them to the IRS and pay an applicable excise tax. However, according to the GAO, the IRS relies on the DOL to refer prohibited transactions that are not self-reported. That is problematic, however, in that the “DOL does not have authority to audit IRAs for prohibited transactions and, therefore, is generally unable to refer IRA fiduciaries to IRS for excise tax enforcement.”

On this last point, the GAO made two recommendations to the IRS to help reduce conflicts of interest.

First, it called on the regulator to develop and implement a process “independent of DOL referrals” to identify non-exempt prohibited transactions by IRA fiduciaries. The report mentioned looking at Form 5330 filing compliance during income tax audits of financial services firms. Form 5330 is a filing to report and pay excise tax related to employee benefit plans.

Second, the GAO called on the IRS to work with the DOL “through formal means,” such as a memorandum of understanding, on better flagging non-exempt prohibited transactions.

The DOL’s most recent fiduciary proposal, the Retirement Security Rule, sought to bring all retirement-related investment advice, including for IRA rollovers, annuity sales and plan investment menu guidance, under ERISA. The U.S. District Court for the Northern District of Texas stayed that rule nationally on July 29, halting it before its September 23 effective date.