Employers’ communication to employees about their retirement plans are designed to comply with various legal requirements.
Americans have over $5 trillion invested in IRAs and annual rollovers into IRAs exceed $300 billion per year.
This much money attracts a lot of attention – not all of it good. Most critically, many of these assets are invested based on advice provided by advisors whose own financial interests may conflict with those of their clients. Indeed, it is estimated that conflicted advice costs Americans’ retirement plans $17 billion per year.
This blog post will discuss current disclosure requirements – and how those requirements still leave a $17 billion/year gap.
Too Much of a Good Thing?
At first glance, retirement plan participants are awash in government-prescribed information about investment choices in their retirement plans and the options available to them upon distribution. This abundance of information is the result of a variety of legal mandates, including requirements under ERISA and the Internal Revenue Code.
Here are some of the legal requirements that contribute to this glut of information:
• Disclosure under Section 408(b)(2) of ERISA is designed to enable plan administrators to demonstrate that the fees paid from plans are reasonable in light of the services provided. This disclosure is focused on investment fund fees, fees charged to participants for plan activity, and benchmarking fund performance.
• Disclosure under Section 404(c) of ERISA focuses on participants’ ability to exercise “control” over their accounts. Section 404(c) compliance requires that plans provide participants with information regarding how they exercise investment control on their account balances in the plan and that plans offer a range of investment options.
• The summary plan description is focused on information about participants’ rights under a plan, such as eligibility and vesting provisions. As a part of describing a plan, SPDs typically describe the plan’s distribution options. And, although the SPD is only required to describe the operation of the plan itself, many SPDs contain detailed descriptions of the tax rules that apply to plan distributions.
• Notices regarding rolling over distributions and tax withholding are required under Section 402(f) of the Internal Revenue Code. These notices explain the rollover rules, describe the effects of rolling an eligible rollover distribution to an IRA or another plan and the effects of not rolling it over, including the automatic 20% withholding.
Information vs Insight
As noted, each of these requirements is designed to meet a specific legal mandate. However, this glut of compliance-driven disclosure creates a number of challenges:
• Each of these regulatory requirements – and the disclosure resulting from them –is based on very specific statutory requirements and each is designed to serve a narrow legal purpose.
• Compliance-driven disclosure focuses exclusively on alternatives within a particular plan. As a result, participants are limited in their ability to compare alternatives within a plan to the rollover options outside of a plan that are promoted by financial services firms.
• It is “safer” for employers and providers to follow model disclosure language generated by regulators. These model disclosure documents may not present this vital information in the most engaging way, but employers and providers have little incentive to be creative and stray away from “safe harbor” disclosures offered by the government.
• The amount of information provided to participants is mind-numbingly overwhelming. This is no accident. It is well understood that providing an overwhelming amount of information is a surefire way to ensure that the information will not be carefully reviewed. Just look at the User Agreement that users mechanically accept when accessing a new website.
• The vast majority of compliance-driven disclosure is required under ERISA. However, ERISA does not apply to retirement plans maintained by governmental entities (such as public universities or school districts) or to church plans (including plans maintained by certain hospitals or educational institutions that have religious affiliations). This leaves a significant segment of the market without access to some of these resources.
Where to Go from Here?
In effect, compliance with the different disclosure requirements under ERISA and the Code gives participants pieces to a puzzle – but participants are not provided support to assemble the disparate pieces of information available. And, there are some key pieces missing.
This gap was one reason for the Department of Labor’s efforts to redefine who is a “fiduciary” under ERISA and to extend fiduciary obligations to advice provided regarding rollovers into IRAs. But, at this time it is not clear if (or when) the new fiduciary rules will be implemented. And, it is not clear if additional regulatory requirements will address these challenges or whether new regulations will simply be more of the same. Employers and their employees contribute over $300 billion per year to DC plans; employers should consider whether they need to take additional action to protect this investment.