Comments May Enhance ERISA Council’s Attempt to Streamline Plan Disclosures

This year, the ERISA Advisory Council for the U.S. Department of Labor (DOL), comprising employee benefits professionals and employee representatives, is focusing on “Mandated Disclosures for Retirement Plans.”retirement

Its review—due to be released to the public in final form in late 2017—will address these relevant but often intractable questions for plan sponsors and administrators:

  • Are there duplicative disclosure requirements? Can they be combined to lighten the load for plan sponsors and participants?
  • How can the content of these reports be improved?
  • How well do the disclosures meet the federal readability guidelines?
  • How well do the disclosures promote participants’ understanding of the plan and facilitate their decision-making?
  • Should the disclosures include labels such as “Action Required,” “Action Requested,” “No Current Action Required,” or “For Information Purposes Only”?
  • Would a summary or quick resource guide (QRG) help achieve communication objectives?
  • What is the most effective way to distribute and design the communications material?
  • Does the size of the company affect communications considerations?

This isn’t the first ERISA Advisory Council study of disclosures. Previous councils, as well as a 2013 U.S. Government Accountability Office (GAO) report titled “Clarity of Required Reports and Disclosures Could Be Improved,” have recommended a comprehensive DOL review of its list of required benefit plan disclosures. The GAO report may have said it best when it concluded, “Participant disclosures are numerous and do not always communicate effectively.”

The 2017 ERISA Advisory Council has asked for industry responses to three proposals:

  1. The elimination of the summary annual report (SAR) for health benefit plans not already exempt.
  2. The consolidation of various annual notices into a single notice in a standard format.
  3. The modification of the summary plan description (SPD) requirements to allow for a short reference tool that would be updated annually. The QRG would direct participants to source material from which they can obtain more information.

The council is considering testimony submitted by plan sponsors, administrators, communications experts, and participant representatives, among others. The testimony is listed on the DOL website; it is provided in two sections, one related to health benefit plans and the other to retirement plans.

In this column, we will analyze comment letters received to date relating to retirement plans’ required disclosures.

Comment Letter Summary

In a nutshell, most respondents agree that the SAR for 401(k) plans adds little to no value. However, one commenter stated that the SAR should be eliminated for most defined contribution (DC) plans but maintained for employee stock ownership plans (ESOPs) and money purchase pension plans.

Most commenters agreed that the notices should be given out all at one time or based on life events. Participants become numb to the flood of plan notices they receive each year, and may delete or toss them upon receipt.

Partial list of required notices

  • Defined Benefit Annual Funding Notice
  • Summary Annual Report (SAR)
  • Summary of Material Modification (SMM), if applicable
  • Periodic benefit statements
  • 401(k) safe harbor notices
  • Automatic enrollment notice
  • Qualified default investment alternative (QDIA) notice
  • Internal Revenue Code (IRC) 404(c) notice
  • Joint & survivor notices, where applicable
  • Blackout notice, when applicable

Comments regarding SPDs were mixed, with some commenters stating these should stay as they are, and others saying that SPDs have become overly complicated and should be simplified.

Electronic distribution also drew some conflicting comments. Many noted that most people use some kind of electronic device today, and that electronic communication is becoming the norm. As such, e-communication has become a viable way of distributing plan disclosure information. At the same time, some comments stated that many participants still like to receive important plan information in paper format.

Mixed Opinions

Let’s take a closer look at the two areas that are drawing mixed reviews: electronic disclosure and SPDs.

Electronic disclosure. Both the Internal Revenue Service (IRS) and the DOL have rules that apply to acceptable electronic communication. The DOL stipulates that electronic communication can be used for participants who have online access to the documents at work and can print them free of charge. The DOL safe harbor also extends to individuals without a work-related computer, if additional notice requirements are met.

The comment letters supporting wider electronic disclosure distribution note that most people now routinely use some form of electronic communication. One respondent remarked that a 2015 Pew Research Center study showed that 92% of U.S. adults owned a cellphone and 68% owned a smartphone. The survey also said that 73% of U.S. adults at that time possessed a laptop or desktop computer.

Younger workers prefer receiving notices via text message. Electronic distribution would be more cost-effective for employers, the comments continued.

Those opposed to wider electronic distribution note that the method of delivery should not result in an undue burden on those receiving the information. “Participants should not have to go to a library to read information posted on a website nor should they have to visit a kiosk or other workplace posting to read required disclosures,” said one opponent to changing this format of plan disclosure.

Many employers today are faced with multiple generations in the workplace, each with its preferred communication style. Electronic communication is fast and cost-effective, and active participants are generally reachable online. Terminated and retired participants are reachable to the extent that they provide updated e-mail addresses and have access to the Internet.

Those in these categories without Internet access can be contacted to the extent they provide current mailing addresses. Perhaps applying the IRS rules regarding auto-enrollment in 401(k) plans—participants and beneficiaries receive electronic communication, unless they opt out—provides a viable solution for other types of periodic plan disclosures.

Summary plan description (SPD). The DOL has a list of required items that must be contained in the SPD. They are supposed to be written in a manner understandable to the average plan participant.

Yet over the years, lawsuits and fear of litigation have introduced a lot of legalese into the SPD. It’s generally not possible to draft an SPD to protect the plan sponsor from lawsuits and at the same time make it understandable to the average plan participant.

Some commenters to this year’s ERISA Advisory Council liked the idea of a summary document with quick references to the underlying documents. One commenter suggested that DOL provide a model summary document for plan sponsors to rely on.

Simplification is key; answering questions for participants about why they are receiving information and what they are supposed to do with it is guaranteed to be helpful.

Communicating complicated employee benefit provisions is not easy. Explaining everything in a way that the average plan participant will understand just may not be possible. Different communication channels for different groups likely will have to be used; one size does not fit all. Let’s hope the DOL recognizes this.

Mary B. AndersenMary B. Andersen is president and founder of ERISAdiagnostics Inc., an employee benefits consulting firm that provides services related to Forms 5500, plan documents, summary plan descriptions, and compliance/operational reviews. Andersen has more than 25 years of benefits consulting and administration experience. Andersen is a CEBS fellow and member of the charter class. She also has achieved the enrolled retirement plan agent designation. Andersen is the contributing editor of the Pension Plan Fix-It Handbook.