Promoting Retirement Literacy and Security by Streamlining Disclosures to Participants and Beneficiaries
This report was produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, usually referred to as the ERISA Advisory Council (the "Council"). This report examines Promoting Retirement Literacy and Security by Streamlining Disclosures to Participants and Beneficiaries. The ERISA Advisory Council was created by ERISA to provide advice to the Secretary of Labor. The contents of this report do not represent the position of the Department of Labor (DOL).
The 2009 ERISA Advisory Council ("Council") reached a consensus to focus on the issue of promoting retirement literacy and security by streamlining disclosures to participants and beneficiaries. The Council studied the efficacy of ERISA's reporting and disclosure schemes as well as problems and costs related to such disclosures. Testimony to the Council was provided on July 23, 2009, and September 15, 2009, by eighteen witnesses.
After much discussion and debate concerning the issues presented and the extent the Council believes the Department of Labor ("DOL") needs to address ERISA's disclosure requirements, the Council submits the following recommendations to the Secretary of Labor for consideration.
Recommendation 1: The DOL should amend its electronic disclosure regulations to provide a safe harbor for pension plan administrators who comply with the Treasury Department's electronic disclosure requirements.
Recommendation 2: The DOL should review all pension plan disclosures required under Title I of ERISA and determine whether there are opportunities for streamlining such requirements.
Recommendation 3: The DOL should encourage pension plan administrators to furnish participants and beneficiaries with a "quick start" guide that would help participants and beneficiaries get oriented to their plans. Prospectively, the concept of a quick-start guide could serve as a basis for a new streamlined, electronic-focused disclosure regime that is founded on the concept of progressive access.
Recommendation 4: The DOL should form an interagency working group that would adopt regulations and propose legislation, both of which would replace the current participant disclosure requirements (including statutory requirements) with respect to pension plans in its entirety with a new streamlined, electronic-focused system.
*Kevin A. Wiggins, Issue Chair
*Sewin Chan, Issue Vice-Chair
Elizabeth J. Dill, Council Chair
*Marc LeBlanc, Council Vice Chair
Mary Nell Billings
Randy G. DeFrehn
*Karin S. Feldman
Theda R. Haber
Richard J. Helmreich
Stephen W. McCaffrey
Michael F. Tomasek
*Served on report drafting committee
The number of ERISA's required disclosures have increased dramatically since 1974. This increase has placed a heavy burden on plan administrators and resulted in confusion to participants. Many plan administrators furnish participants required disclosures for the sole purpose of legal compliance. Many participants rarely read the notices they receive, often because they feel overwhelmed with too many notices. The numerous disclosures required by other laws, such as the Internal Revenue Code, only add to the problems. Yet, because the notices are required by law, there is little that can be done short of legislation.
The Council believes that ultimately Congress should address this issue. In a formal response to a question from the Council, the Office of Regulations and Interpretations for the Employee Benefits Security Administration ("EBSA") agreed "that disclosures under ERISA and the Internal Revenue Code would … benefit from a comprehensive review." Only Congress has the authority to effect any comprehensive change that may be deemed desirable after such a review.
Over the years, Congress has imposed many notice requirements on a piecemeal basis. The Pension Protection Act ("PPA") of 2006 alone created at least ten new participant notice requirements. The Council speculates that Congress has often imposed new disclosure requirements without regard to the cumulative burden that the new requirements impose when added to existing disclosure requirements. The Council believes that the best long-term solution would be for Congress to review all existing disclosure requirements imposed on plan administrators, including those required by ERISA, the Internal Revenue Code, and other laws; analyze which disclosure requirements should be retained and which, if any, should be repealed; and coordinate all disclosure requirements in comprehensive legislation in a manner that best reflects congressional goals for retirement literacy and security.
ERISA imposes numerous reporting and disclosure requirements, many dictated by statute. Participants may not read or understand the notices they receive, and the notices are often not designed to enhance retirement literacy and security. In addition, compliance with ERISA's notice requirements can be quite costly. New disclosure requirements related to plan fees and other matters may soon be imposed, resulting in even greater challenges, confusion, and costs. The Council wished to study the efficacy of ERISA's current and proposed reporting and disclosure scheme as well as problems and costs related to such disclosures.
The objective of the study was to identify what actions the Secretary of Labor should take to make ERISA's pension plan(1) disclosure requirements more useful in promoting retirement literacy and security for participants and beneficiaries while not imposing a costly burden on employers and other plan sponsors. The Council wished to study the form, content, timing, and required medium of disclosures. The Council intended to focus its recommendations on the types of guidance or regulations that the Secretary should consider to improve the utility of ERISA's retirement plan notice and disclosure requirements.
The Council excluded substantive disclosures related to plan fees and investments from the scope of the study. These issues are being addressed elsewhere, through proposed legislation, proposed regulations, or otherwise. Accordingly, nothing in this report should be construed to address the Council's views on substantive disclosures related to plan fees or investments. The Council believes, however, that the non-substantive issues addressed herein, such as the appropriate media for electronic disclosures and the ability of participants and beneficiaries to understand disclosed information, can be applied to fees and investments.
- Do current notice regimes make for better-informed participants?
- Do current notices and disclosures align with how adults learn and process information?
- What specific kinds of information would be most useful for DC participants in planning for their retirement? For example, how should investment performance information be presented? And, should participants receive statements of the estimated monthly annuity payment associated with their account balance? What assumptions should underlie such estimates?
- Should DB participants receive a statement of estimated benefits at various retirement ages like the ones coming from the Social Security Administration?
- Does ERISA's notice regime provide adequate information to participants' spouses, beneficiaries, and prospective alternate payees?
- How can ERISA's notice and disclosure scheme be improved to provide more or better information to participants and beneficiaries and to reduce complexity, costs and potential liabilities?
- Can multiple notices be combined?
- Can electronic or alternative delivery of notices improve security and literacy while reducing administrative costs? Do changes in the way that the public utilizes technology warrant a re-examination of the requirements regarding how all disclosures are delivered (for example, SPDs)?
- Is there a need to consolidate Treasury and DOL requirements?
The scope of the inquiry for the Council and the attendant questions were given to all witnesses in advance of testimony. The witnesses were told that the questions were merely a starting point to generate thought and discussion of the scope of the Council. The questions were not intended to limit the parameters of testimony.
The Council solicited testimony of witnesses from a broad cross-section of the retirement community including representatives of plan sponsors, benefit consultants, participant advocates, academic researchers, and the financial services industry. The witnesses did not answer every question and, in many instances, there was not enough information presented to form a consensus as to every inquiry by the Council.
The witnesses and the dates of their testimony were as follows:
July 23, 2009:
Lisa Alexander, EBSA
Jan Jacobson, American Benefits Council
Mike McAllister, Mercer
Annamaria Lusardi, Dartmouth College
Kim Gandy, National Organization for Women
Robert Richter, Sungard
Mark Warshawsky, Watson Wyatt Worldwide
David Wray, Profit Sharing/401k Council of America
September 15, 2009:
William Cowper, Prudential Financial
Dan Fontaine, Prudential Financial
Michelle Morey, Prudential Financial
Michael Taricani, Prudential Financial
Judy Mazo, The Segal Company
Rebecca Davis, Pension Rights Center
Jane Smith, Pension Rights Center
Douglas Kant, Fidelity
Lisa Hund Lattan, American Century Investments
Brigitte Madrian, Harvard University
Congress considered disclosure to be a critical aspect of ERISA. Indeed, before Congress adopted ERISA, it passed the Welfare and Pension Plans Disclosure Act of 1959 ("WPPDA"). The purpose of the WPPDA was to provide employees with the opportunity to obtain information regarding plans so that they could monitor their plans to prevent mismanagement and abuse of plan funds. The goal of Title I of ERISA was much broader and focused on protecting the interests of participants and their beneficiaries in employee benefit plans as well as providing financial information about plans to participants and beneficiaries, the Department of Labor, and other agencies. Among other things, ERISA requires that plan administrators provide participants and beneficiaries with adequate information regarding their plans.
Throughout their consideration of ERISA, the House and the Senate each recognized the shortcomings of the WPPDA and the importance of providing information to plan participants:
- Disclosure has been seen as a device to impart to employees sufficient information and data to enable them to know whether the plan was financially sound and being administered as intended. It was expected that the information disclosed would enable employees to police their plans. But experience has shown that the limited data available under the present Act is insufficient. Changes are therefore required to increase the information and data required in the reports both in scope and detail. Experience has also demonstrated a need for a more particularized form of reporting so that the individual participant knows exactly where he stands with respect to the plan-what benefits he may be entitled to, what circumstances may preclude him from obtaining benefits, what procedures he must follow to obtain benefits, and who are the persons to whom the management and investment of his plan funds have been entrusted.(2)
ERISA's initial disclosure provisions included the summary plan description, the summary of material modifications, and the summary annual report (SAR). The SPD was intended to inform participants about their benefits, rights, and obligations in an easy-to-understand manner and be updated through any required summary of material modifications. The SAR provided a simple overview of the plan's financial condition. More detailed information was available upon request: plan documents, a statement of accrued benefits, and the complete annual financial report (Form 5500).
In the thirty-five years since ERISA was passed, the required disclosures have multiplied, in many instances reflecting the growth of individual account plans with participant-directed investments and the decline of the single employer defined benefit plan. For example, ERISA's required disclosures now include advance notices about blackout periods, qualified default investment alternatives, automatic contribution arrangements, the right to sell company stock, and disclosures required if the plan intends to satisfy ERISA § 404(c). The precipitous rise in the number of required disclosures has overwhelmed both participants and administrators.
Another significant change over the years has been the additional disclosures required by the Internal Revenue Code for qualified plans. Those disclosures may, in some instances, overlap or duplicate what is required under Title I of ERISA. While the Council recognizes that the DOL does not have jurisdiction over these requirements, the additional disclosures cannot be ignored when considering the burdens placed on plan administrators, when considering possible improvements, and when eliminating complexity.
The DOL has published an excellent manual on ERISA disclosures titled "Overview of ERISA Title I Basic Disclosure Requirements." The DOL has made this manual electronically available on its website at www.dol.gov/ebsa/pdf/rdguide.pdf. The Council commends the DOL for publishing this manual and making it readily available to the public. The Council strongly encourages all plan administrators to review this manually carefully and refer to it often as an aid to ERISA's disclosure requirements.
The DOL has also assisted many participants with benefit disclosures. Benefits Advisors in EBSA's Office of Participant Assistance ("OPA")[*] assist participants in obtaining documents that are required by ERISA to be furnished to participants and beneficiaries. The following table provides a summary of inquiries received by OPA and the number of inquiries where the Benefits Advisors were able to recover the documents in response to the inquiries.
Volume of Inquiries with Issues Related to Reporting & Disclosure Requirements
Pension Inquiries With Reporting & Disclosure Issues
Welfare Inquiries With Reporting & Disclosure Issues
Number of Inquiries with Document Recoveries*
*Documents obtained for participants include: COBRA Notices, SPDs, Full Plan Docs, HIPAA Certificates, Insurance Contracts, Latest SARs, SMMs, Fee Schedules, Trust Agreements, Benefit Statements & Blackout Notices
This chart suggests that the number of inquiries may be growing each year.
The Council's recommendations generally involve (1) electronic disclosure, (2) model notices, (3) inter-agency coordination, and (4) "quick-start" guides. Each is discussed below.
1. Overview. Electronic communications have enormously improved the retirement system for both plans covered by ERISA and their participants. They have improved participant education, retirement planning, and plan participation. Electronic communications have allowed plans to furnish more information to participants and beneficiaries for less cost. They have simplified plan administration and improved plan recordkeeping. All of these benefits of electronic communication have improved retirement security, which was and remains an underlying goal of ERISA. The Council believes that this goal of retirement security would be better served if the DOL would expand the array of electronic media that plan administrators may use to satisfy ERISA's disclosure requirements.
2. Historical and Legal Development of Permissible Electronic Disclosures. The DOL has carefully reviewed electronic disclosures since 1997. Section 1510(a) of the Taxpayer Relief Act of 1997, Pub. L. 105-34, enacted August 5, 1997 ("TRA '97"), directed the Secretary of Labor and the Secretary of the Treasury to issue guidance designed to interpret the notice, election, consent, disclosure, time requirements, and related recordkeeping requirements of ERISA and the Internal Revenue Code, respectively, as applied to the use of new technologies by sponsors and administrators of retirement plans. Pursuant to TRA '97, the DOL issued proposed regulations on electronic disclosures. See 64 Fed. Reg. 4,506 (January 28, 1999). On June 30, 2000, before those regulations were finalized, Congress enacted the Electronic Signatures in Global and National Commerce Act ("E-SIGN"), Pub. L. No. 106-229, 114 Stat. 464 (2000) (codified at 15 U.S.C. § 7001 et seq.).
Under E-SIGN, "[n]otwithstanding any statute, regulation, or other rule of law (other than [subchapters I and II of Chapter 96 of Title 15 of the U.S. Code]), with respect to any transaction in or affecting interstate or foreign commerce[,] a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form." 15 U.S.C. § 7001(a). The term "transaction" under E-SIGN is defined broadly to include "an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons." 15 U.S.C. § 7006(13). The provisions of E-SIGN do not apply to any notice of the cancellation or termination of health insurance or benefits or life insurance benefits (excluding annuities). See 15 U.S.C. § 7003(b)(2)(C).(3)
E-SIGN does not limit, alter, or otherwise affect any requirement imposed by a statute, regulation, or rule of law relating to the rights and obligations of persons under such statute, regulation, or rule of law other than a requirement that contracts or other records be written, signed, or in nonelectronic form. 15 U.S.C. § 7001(b). Moreover, E-SIGN does not require any person to agree to use or accept electronic records or electronic signatures, other than a governmental agency with respect to a record other than a contract to which it is a party. Id.
E-SIGN provides further that if a statute, regulation, or other rule of law requires that information relating to a transaction be provided or made available to a consumer in writing, the use of an electronic record to provide or make available (whichever is required) such information satisfies the requirement that such information be in writing if certain requirements related to the consumer's consent are satisfied. See 15 U.S.C. § 7001(c). Under this rule, before the required information can be provided or made available electronically, a consumer must first affirmatively consent to receive the information electronically and the consent must be made in a manner that reasonably demonstrates the consumer's ability to access the information in electronic form (or, if the consent is not provided in such a manner, confirmation of the consent must be made electronically in a manner that reasonably demonstrates the consumer's ability to access the information in electronic form). See id. Prior to consent, the consumer must receive certain specified disclosures. The disclosures must include, among other items, the hardware or software requirements for access to, and retention of, the electronic records, the consumer's right to withdraw his or her consent to receive the information electronically (and the consequences that follow the withdrawal of consent), the procedures for requesting a paper copy of the electronic record, and the cost, if any, of obtaining a paper copy. See id. E-SIGN generally provides that, for purposes of these consumer consent rules, an oral communication or a recording of an oral communication does not qualify as an electronic record.
E-SIGN generally provides federal regulatory agencies that are responsible for rulemaking under any other statute with interpretative authority to issue guidance interpreting E-SIGN with respect to that other statute. See 15 U.S.C. § 7004(b)(2). However, as a limitation on that authority, E-SIGN prohibits the issuance of any guidance that is not consistent with 15 U.S.C. § 7001 or that adds to the requirements of that section. E-SIGN also requires that any agency issuing guidance interpreting E-SIGN find that there is a substantial justification for the guidance and that the methods selected to carry out the purpose of the guidance are substantially equivalent to the requirements imposed on records that are not electronic, do not impose unreasonable costs on the acceptance and use of electronic records, and do not require or accord greater legal status to a specific technology. See 15 U.S.C. § 7004(b)(2).
A federal regulatory agency is authorized to exempt, without condition, a specified category or type of record from the consumer consent requirements of § 7001(c). See 15 U.S.C. § 7004(d)(1). The exemption may be issued only if the exemption is necessary to eliminate a substantial burden on electronic commerce and will not increase the material risk of harm to consumers. Id.
Effective October 9, 2002, the DOL finalized the proposed regulations on electronic disclosures. See 67 Fed. Reg. 17,264 (April 9, 2002) (hereafter, "DOL Regulations"). The DOL took into account the goals of E-SIGN when it adopted the DOL Regulations, See 67 Fed. Reg. at 17,265 - 17,269. The DOL Regulations generally apply to disclosures required by Parts 1 and 4 of Title I of ERISA, such as the summary plan description, a summary of material modifications, the summary annual report, blackout notices, disclosures required under ERISA § 404(c) and the regulations thereunder, and qualified default investment alternative notices.
Effective October 5, 2006, the Internal Revenue Service ("IRS") issued final regulations that set forth standards for electronic systems that make use of an electronic medium to provide a notice to a recipient, or to make a participant election or consent, with respect to a retirement plan. 71 Fed. Reg. 61,877 (October 20, 2006) (hereafter, "IRS Regulations"). Those regulations, promulgated at Treas. Reg. § 1.401(a)-21, reflect the provisions of E-SIGN. Id. The IRS Regulations generally apply to disclosures that apply to qualified plans under the Internal Revenue Code, including the special tax notice required by I.R.C. § 402(f), qualified joint and survivor and qualified pre-retirement survivor annuity notices under I.R.C. § 417, and ADP/ACP safe harbor notices required under I.R.C. § 401(k).
In the preamble to the qualified default investment alternative regulations, the DOL stated that "plans that wish to use electronic means by which to satisfy their notice requirements may rely on either guidance issued by the Department of Labor at 29 C.F.R. § 2520.104b-1(c) or the guidance issued by the Department of Treasury and Internal Revenue Service at 26 C.F.R. § 1.401(a)-21 relating to use of electronic media." 72 Fed. Reg. 60,452, 60,458 (October 24, 2007). The DOL confirmed this guidance in Field Assistance Bulletin No. 2008-3 (April 29, 2008), Q&A-7. The DOL stated that it is currently reviewing its rules relating to the use of electronic media for disclosures under Title I of ERISA. See id.
3. Certain Differences Between DOL and IRS Regulations. The DOL Regulations and the IRS Regulations differ in many respects. One substantial difference relates to circumstances under which notices may be furnished electronically without the consent of a participant or beneficiary. Under the DOL regulations, a plan administrator may furnish a notice electronically without the participant's consent (the DOL Regulations do not permit electronic disclosure to beneficiaries) only if the participant has the ability to effectively access documents furnished in electronic form at any location where the participant is reasonably expected to perform his or her duties as an employee and the participant's access to the employer's or plan sponsor's electronic information system is an integral part of those duties. See 29 C.F.R. § 2520.104b-1(c). If these conditions are not satisfied, then, in addition to other requirements, the participant must consent to electronic delivery of the notice. See id. In all cases, a plan beneficiary must consent to electronic delivery (and other requirements for electronic delivery must be also be satisfied). See id.
In contrast, under the IRS Regulations, the participant's ability to access electronic documents at work as an integral part of his or her duties is not a prerequisite to electronic disclosure without the participant's consent. Rather, the participant's consent is not required if (1) the electronic medium used to provide the notice is a medium that the recipient has the effective ability to access and (2) at the time the notice is provided, the recipient is advised that he or she may request and receive the notice in writing on paper at no charge, and, upon request, the notice must be provided to the recipient at no charge. See Treas. Reg. § 1.401(a)-21(a)(1)(ii)(B) and § 1.401(a)-21(c). The IRS concluded that these requirements satisfied the prerequisites for an exemption from the consumer consent requirements of E-SIGN pursuant to the authority granted in 15 U.S.C. § 7004(d)(1). In reaching this conclusion, the IRS found that, if the consumer consent method were the only method available to satisfy the requirements for providing disclosure through the use of an electronic medium, it would impose a substantial burden on electronic commerce with respect to retirement plans, and that the requirements and safeguards in the IRS Regulations provide a less burdensome method without increasing the material risk of harm to recipients. The Council agrees with the IRS and recommends that the DOL Regulations be amended to include an exemption from the consumer consent requirements that reflects the requirements of Treas. Reg. § 1.401(a)-21(c).
The different regimes have caused substantial confusion among plan administrators. Many administrators find it difficult to determine whether a particular disclosure is required by the Internal Revenue Code or ERISA. As a result, many plan administrators who have only the best intentions can inadvertently violate the law because they believed a notice required by ERISA was covered by the IRS Regulations. This problem would be eliminated if the Department of Labor were to permit administrators to rely on the IRS Regulations for ERISA disclosures.
4. More Required Disclosures are Overwhelming Plan Administrators and Plan Participants. The rising number of required disclosures is creating a substantial burden on electronic commerce with respect to retirement plans. According to Ms. Alexander of the Department of Labor, "With an increasing number of disclosures being required to be furnished to employee benefit plan participants and beneficiaries, the information and communication challenges facing both plan sponsors and participants are significant." The PPA alone created at least ten participant notice requirements.
The Council heard that the significant number of required disclosures is both creating a heavy burden on plan sponsors and overwhelming participants with the disclosures they receive. According to one witness, overwhelming participants "can cause confusion and paralysis instead of enrollment and active engagement."
5. Electronic Disclosure Mitigates the Burdens Created by ERISA's Increasingly Complex Disclosure Scheme. Witnesses who testified before the Council indicated that electronic disclosure would permit participants to access only the information they want and thereby lessen information overload. This is consistent with the testimony of other witnesses who testified that participants learn best through "progressive access." In a progressive access scheme, participants are first furnished with simple, yet fundamental, plan information. Participants are also given access to more detailed plan information. In this way the participants can learn the basic information first and later progressively learn more as they are exposed to more information. The Council was informed that, with a progressive access scheme, participants are able to learn, understand, and retain information better than they can when the same information is disclosed all at once. Moreover, the Council was informed that the "[e]lectronic delivery of notices is a perfect application of progressive access…." The use of modern technology to assist with progressive access disclosure may thus increase retirement literacy for participants who have an effective ability to access that technology.
Witnesses also testified that electronic disclosure substantially reduces the cost of complying with ERISA's disclosure requirements. One witness stated directly that "electronic disclosure is much more cost-effective" than paper disclosure. Even those witnesses, discussed below, who oppose electronic disclosure of summary plan descriptions and benefits statements absent the participant's consent agreed that electronic delivery reduces plan costs.
The Council also learned that technology has changed since the DOL issued the DOL Regulations. According to one witness, "[W]hen electronic disclosure regulations were first considered in the late 1990s, many employees were not exposed to the Internet unless it was an integral part of their job. … [Now, m]ore participants have access at home." Another witness furnished the Council with empirical data that, according to the witness, "demonstrates a substantial increase in [Internet] usage over all age groups…."
6. The DOL Should Adopt the IRS Rules Governing Electronic Disclosure. The Council recommends that the Department of Labor permit plan administrators to rely on the IRS Regulations in order to comply with ERISA's disclosure requirements. The Council believes that the IRS Regulations will adequately protect the rights of those participants who are actively employed because it will generally be very simple for administrators to determine whether active employees have reasonable access to the electronic medium used to furnish the disclosure. The Council believes that administrators will not furnish those individuals who are not working actively -- such as retirees or beneficiaries -- with electronic disclosure unless the administrator has a working electronic mail address for such individuals. In that way, participants who are not actively employed and plan beneficiaries will be protected.
Two witnesses expressly disagreed with the proposition that the DOL adopt the IRS rules governing electronic disclosure. Those witnesses, both representing one organization, felt that the IRS Regulations do not adequately protect participants. Further, they recommended that the DOL Regulations be modified to require the participant's affirmative consent to furnish the summary plan description and benefit statement electronically, even where the participant's access to the electronic technology is an integral part of the participant's duties with the employer.
If the DOL adopts the Council's recommendations regarding electronic disclosures, then the DOL should explain how a plan administrator might determine whether a recipient has the "effective ability to access" the information. One witness suggested that specific examples would be helpful in this regard. For example, would an assembly line worker be considered to have the effective ability to access the information if that worker were required to travel fifteen miles from a factory to the company's headquarters in order to print the disclosure from a secretary's computer? In furnishing such guidance, the Secretary should ensure that the rights of participants and beneficiaries are adequately protected.
In testimony, the Council heard repeatedly that model notices both increase participant understanding and reduce the cost of disclosure. The Council recommends that the DOL review all ERISA disclosure requirements and determine if it would be efficacious to issue a model notice that plan administrators could rely upon to satisfy that disclosure requirement.
The DOL has already issued many model notices. On February 10, 2009, the DOL issued Field Assistance Bulletin 2009-01 (Feb. 10, 2009) which provides model language that can be used for the annual funding notices required under ERISA § 101(f). The DOL issued a model blackout notice pursuant to ERISA § 101(i)(6). See 68 Fed. Reg. 3,716, 3,722 - 23 (January 24, 2003). It has also issued a model notice for a multiemployer plan in critical status, 73 Fed. Reg. 15,688 (Mar. 25, 2008), a model notice of pending election of multiemployer plan status, 71 Fed. Reg. 69,594 (Dec. 1, 2006), a model ERISA rights statement, a model summary annual report, as well as other model notices. Accordingly, the DOL already has valuable experience in issuing model notices.
Model notices serve a variety of purposes. They can assist plan administrators in ensuring that they are in legal compliance with their disclosure requirements under ERISA with respect to that disclosure. The Council heard from more than one witness that some plan administrators furnish notices for the mere purpose of legal compliance. But the Council also heard that most administrators are genuinely interested in ensuring that participants receive the information they need. According to one witness, a model "notice is … something that would give the information that the participants need in a way that they can understand it." Another witness recommended that the use of model notices be required.
Model notices should be accompanied with guidance on their usage. One witness testified that plan administrators fear sending out notices that deviate from the model notice. Thus, it is important for the DOL to make it clear that there is no negative inference that model notices must be used without any modification. Rather, the DOL should continue to allow administrators to tailor model notices to their particular circumstances and needs.
The Council also heard repeatedly that participants have difficulty assimilating the large amount of information that they receive with respect to their retirement plan. The evidence showed that participants often ignore the information they receive, do not understand it, or just throw it away without ever reading it. In doing so, many participants disregard important, fundamental information regarding their plan. For this reason, the Council believes that it would be useful for the DOL to test model notices before they are first issued. To do this, the DOL could form focus groups consisting of administrators, participants, and plan service providers who would review and comment on the proposed model notices. The DOL could then use those comments to revise the model notices as it deems necessary or desirable.
Other required disclosures in addition to the SPD can take into account how adults learn and process information. Several witnesses stressed the importance of telling participants the significance of any disclosures furnished to them. This view echoes the recommendation of the 2005 ERISA Advisory Council Report on Communications to Retirement Plan Participants:
Recommendation: Require an introductory statement for each type of mandatory disclosure and provide suggested language for these statements.
Because each mandatory disclosure provided to a plan participant contains distinct important information about the retirement plan, the Working Group recommends that each mandatory disclosure should be required to "introduce itself" to plan participants through an introductory statement. The introductory statement should:
- Briefly summarize why the participant is receiving the disclosure;
- Provide a general description of the plan information included in the disclosure; and
- Emphasize that the participant should read the disclosure carefully and retain it for future reference.
The DOL should develop suggested language for each of these introductory statements, but not require plan administrators to use the suggested language.
Finally, the Council heard testimony that many individuals within traditionally vulnerable demographic groups - particularly women, minorities, and those of low educational attainment - have trouble understanding the information furnished. One study found that blacks and Hispanics have participation and saving rates that are lower than those for whites and Asians, even after adjusting for economic factors that would predict higher participation rates for whites such as salary, job tenure, and age. Kim Gandy of the National Organization for Women indicated that spouses and former spouses of participants often have considerable difficulty in obtaining information about their rights under the ERISA, though she recognized that many administrators do offer the information voluntarily. One witness testified that ERISA does not require any disclosures to spouses who are contingent beneficiaries, e.g., prospective alternate payees. Witnesses who testified on the matter and all members of the Council but one were of the opinion that spouses who are plan beneficiaries are not entitled to any information until they are actively receiving benefits from the plan.
By issuing additional model notices, the DOL would improve retirement security. Model notices help participants and beneficiaries understand their rights under ERISA. They reduce the disclosure burdens imposed on plan administrators. And they help ensure that the information Congress intends for participants and beneficiaries is properly furnished in a legally compliant manner.
Based on the foregoing, the Council believes that the DOL should review all pension plan disclosures required under Title I of ERISA and determine whether there are opportunities for streamlining such requirements. In connection therewith, the DOL should determine whether it could issue a model notice that plan administrators could use as a safe harbor for complying with each disclosure requirement. For existing model notices, the DOL should strive to simplify and shorten such models. Also in connection with such review, to the extent possible or practical, the DOL should combine different notice requirements into a more cohesive participant notice system, and revisit the timing requirements to correlate with certain teachable events or opportunities more closely.
The testimony of many of the witnesses highlighted the multiplicity of notices. The Council recommends that the Department of Labor serve as a catalyst to the formation of an inter-agency working group that would streamline participant disclosures. EBSA has in the past taken efforts to coordinate overlapping disclosure requirements:
- 29 C.F.R. §2550.404c-5(d) - The Department noted that complying with the notice requirement of the qualified default investment alternative (QDIA) regulation under ERISA Section 404(c)(5) will satisfy the notice requirement for preemption under ERISA Section 514(e)(3). The Department also coordinated with the Department of Treasury with regard to a sample notice that may be used to satisfy the Department's QDIA notice and the IRS's safe harbor notice requirements under IRC Sections 401(k)(13) and 414(w).
- Field Assistance Bulletin 2006-03 - The Department provided guidance regarding when compliance with the periodic benefit statement requirements under ERISA section 105(a)(1)(A)(i) may be deemed to satisfy the notice requirements under ERISA Section 101(m).
- Field Assistance Bulletin 2009-01 - The Department issued guidance stating that it will not take enforcement actions for a plan administrator's failure to furnish an annual funding notice to the Pension Benefit Guaranty Corporation (PBGC) as required under ERISA Section 101(f) for certain single-employer plans provided that the administrator furnishes the latest available annual funding notice to PBGC within 30 days of receiving a written request from the PBGC.
Nonetheless, the Council believes that further action could be taken. For example, a witness for the American Society for Pension Professionals and Actuaries ("ASPPA") recommended that administrators should be able to reference the summary plan description when furnishing certain IRS notices related to automatic contribution arrangements and safe harbor arrangements under I.R.C. § 401(k). According to ASPPA, the IRS presently does not permit such notices to refer to the provisions of the summary plan description.
Any comprehensive regulatory change in this area of law can only come from inter-agency coordination. Both the Internal Revenue Code and ERISA, as well as other laws, impose disclosure requirements on plan administrators. Because different agencies have jurisdiction over these requirements, their coordination is essential to any meaningful change.
One suggested solution to the problem participants and beneficiaries face when they receive too many notices is to furnish participants with a "quick-start" guide to their retirement plan. Such a quick-start guide would be analogous to the quick start guides that consumers often receive when they purchase electronic devices. It is common for consumers to receive an operator's manual that can be over 100 pages, but also receive a 2 to 5 page summary that shows the consumer the basics on how to start using the device without going into complex details.
A quick-start guide for an individual account plan could include:
Who controls the plan?
What does the plan offer generally and what is its purpose?
Why is the participant receiving the guide; what should the participant do with it?
Who is eligible for the plan?
How do participants enroll?
What contributions are made and when?
How are contributions allocated?
How do contributions vest?
How can contributions be forfeited?
How are contributions invested, including a list of then-current investment options?
When will or can a distribution be taken?
What forms of distribution are available?
Where can the participant get more information?
For a defined benefit plan, the a quick-start guide could include:
Who controls the plan?
Why is the participant receiving the guide; what should the participant do with it?
Who is eligible for the plan?
How do participants enroll?
What do participants have to do to earn a benefit?
What is the benefit formula and how does it work?
How do benefits vest?
How can benefits be suspended or forfeited?
When may benefit payments begin?
What forms of distribution are available?
Where can the participant get more information?
Plan sponsors should also consider providing information about financial literacy and retirement security in their quick-start guides. Testimony from Dr. Annamaria Lusardi emphasized that adults absorb and process new information best during "teachable moments," times at which the information is particularly salient. Examples might include at marriage or the birth of a child, or at a person's 40th, 50th or 60th birthday when they are more likely than usual to reflect on their future. In the context of retirement planning, such a teachable moment may naturally occur soon after employees' hire or promotion. To the extent that this timing coincides with when employees become newly eligible for retirement plans, quick-start guides could contribute to promoting financial literacy and retirement security.
Quick-start guides are good examples of progressive access. They provide participants with fundamental information and let them know how to obtain more information as and when they need it. The Council believes that such quick-start guides could substantially improve retirement literacy. The Council does not, however, think that quick-start guides should be made mandatory. Some members of the Council were also opposed to using a quick-start, progressive access regime in lieu of ERISA's current disclosure regime. Those members felt that such a change would improperly shift the burden to participants and beneficiaries to acquire plan information rather than requiring administrators to furnish the information, which ERISA now requires.
The Council strongly recommends that plan administrators use quick-start guides. The quick start guide could be called "Benefits at a Glance," "Brief Overview," or given any other appropriate name. Whatever name is used, such a guide would help participants and beneficiaries understand their plan rights in an easy-to-read format. The Council accordingly recommends that the DOL encourage plan administrators to use such guides.
Lisa Alexander, EBSA
Ms. Alexander is the Chief of the Division of Coverage, Reporting, and Disclosure in the Office of Regulations and Interpretations for the Employee Benefits Security Administration of the U.S. Department of Labor. Ms. Alexander has worked on a number of regulatory projects, including the regulation on default investment alternatives, under participant-directed individual account plans, the automatic rollover-safe harbor regulation, and the health care continuation coverage ("COBRA") notice regulations. Ms. Alexander received her J.D. from Boston University School of Law and a B.A. from Penn State University.
Ms. Alexander testified that with an increasing number of disclosures being required to be furnished to plan participants and beneficiaries, the information and communication challenges facing both plan sponsors and participants are significant. Plan sponsors and fiduciaries struggle with understandability, administrative costs, and litigation liability issues, while plan participants and beneficiaries struggle with what they must or should read.
Ms. Alexander focused on the disclosure requirements within the jurisdiction of the Department of Labor, particularly the disclosure requirements under Part 1 of Title I of ERISA. She stated that disclosures under Title I of ERISA generally take four forms:
- Pension plan administrators must furnish certain materials automatically to all participants and beneficiaries receiving benefits at specific times;
- Administrators must furnish certain materials to individual participants and beneficiaries upon the occurrence of certain events;
- Administrators must furnish certain materials to individual participants and beneficiaries upon request; and
- Administrators must make certain materials available to participants and beneficiaries for inspection at reasonable times and places.
Some notices must be furnished automatically. The automatic required disclosures include the summary plan description, the summary of material modifications, the periodic pension benefit statement, the summary annual report and the annual funding notice.
Upon the request of a participant, plan administrators must furnish a copy of the latest updated SPD, the latest annual report, Form 5500, any terminal report, bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated. These documents must be furnished no later than 30 days after a written request. The plan administrator may also make a reasonable charge to cover the cost of furnishing these materials. Another disclosure made upon request in the defined benefit context deals with multiemployer pension plan information. The administrator of a multiemployer plan must furnish copies of periodic actuarial reports, quarterly, semi-annual, or annual financial reports, and amortization applications to participants, beneficiaries receiving benefits, as well as each labor organization representing participants under the plan and each employer that has an obligation to contribute to the plan. This information also must be provided within 30 days of a written request.
Some disclosures are required to be furnished only upon the occurrence of a certain event. These include QDRO notices, blackout notices, a notice of failure to meet the minimum funding standards, suspension of benefits notice, disclosures required under ERISA § 404(c), and QDIA notices.
Ms. Alexander testified that ERISA's disclosure provisions generally focus on three major objectives. The first objective is that disclosures are designed to provide people with information about their rights and obligations under their plan and the law. Second, disclosures are designed to provide information about the financial condition of the plan and the value of people's benefits. Third, disclosures are designed to ensure that a plan is being administered in accordance with ERISA. All of ERISA's disclosures tend to meet one of these objectives. Disclosures also focus on individual plans and individual requirements applicable to those plans.
Ms. Alexander noted that the DOL has published a summary of ERISA's disclosure and reporting requirements for both pension and welfare benefits plan: "Reporting and Disclosure Guide for Employee Benefit Plans." This summary was revised last October to incorporate the Pension Protection Act of 2006.
With regard to electronic disclosures, Ms. Alexander noted that the DOL issued a regulation that specifically deals with electronic disclosure to participants and beneficiaries under ERISA. Use of electronic communication technologies is permitted subject to conditions in the regulation designed to ensure that participants' and beneficiaries' rights to required disclosures under ERISA are protected. With regard specifically to two specific documents - the periodic pension benefit statement and the QDIA notice - the DOL has stated that plans may rely upon electronic disclosure guidance issued by the Department of the Treasury and the Internal Revenue Service relating to the use of electronic media. Those are the only two disclosures through which the DOL has said that the IRS Treasury regulation could be used as well, with, or instead of the regulation that the Department of Labor issued.
Jan Jacobson, American Benefits Council
Ms. Jacobson is Senior Counsel, Retirement Policy for the American Benefits Council ("ABC"). ABC is a public policy organization representing principally Fortune 500 companies and other organizations that assist employers of all sizes in providing benefits to employees. Collectively, ABC's members either sponsor directly or provide services to retirement and health plans that cover more than 100 million Americans.
Ms. Jacobson opened by stating that ABC believes that the disclosure issue is very important - and even more so in the current economic environment. ABC believes it important that any reforms protect and promote the employer-sponsored system. Ms. Jacobson indicated that while account balances have gone down, members indicate that participants still like their 401(k) plans and continue to participate at significant rates. She also testified that studies show that participants save very little for retirement outside of employer-sponsored plans - so it's important that any changes in disclosure requirements do not discourage employer sponsorship of plans.
Ms. Jacobson remarked that it is essential that the disclosure regime both (a) provide information to participants in a manner they are likely to use/understand and (b) not unduly burden employers by increasing costs or potential litigation risk. Her testimony focused on four areas: (1) the DOL's disclosure regulatory efforts, (2) the current notice regime, (3) the need for streamlining notices and electronic delivery, and (4) promoting protecting financial literacy. On the DOL's disclosure regulatory efforts, Ms. Jacobson noted the progress the DOL has made in light of the changing methods of communication (i.e., electronic communications). She would like to see that progress continued.
With respect to the current notice regime, ABC believes there is room for improvement because plan participants are often overwhelmed and confused with the "onslaught" of information. Ms. Jacobson noted that there were at least ten new participant notices under the PPA. She pointed out how the annual funding notice caused so much fervor that the PBGC had to add on its website that the notice did not mean a DB plan was terminating. She found it meaningful that an agency of PBGC's stature would have to post a message to calm participants.
With respect to streamlining notices and electronic delivery, Ms. Jacobson testified that the disclosure regime should reflect the reality of how participants review and understand information. She cannot identify one participant who sits down, reads a notice cover to cover, and analyzes the situation at hand. She noted that when current electronic disclosure regulations were first considered, many employees were not exposed to the Internet. She believes the times have changed. She felt the DOL should couple an electronic disclosure regime with the ability of participants to request paper notices if needed. She also remarked that employers are worried about having to provide the same information electronically and on paper - because you would need reams of paper to equal one good website. She believes the "push and post" system seems promising - where disclosures are posted on the Internet and notice of its availability is pushed to participants.
With regard to promoting financial literacy, she noted that ABC testified before the ERISA Advisory Council in 2007 on financial literacy. She testified that this topic remains important to ABC and its members. ABC believes the process of learning should start earlier than in the workplace and encourages policymakers to consider making financial literacy a secondary educational requirement. She acknowledged that this may be outside the purview/authority of the ERISA Advisory Council.
Mike McAllister, Mercer
Mr. McAllister testified that current approaches to reporting and disclosure are not working. Current notices are not being read and simply confuse and mystify the few plan participants who try to follow them. He suggests that the different governmental agencies, including DOL and Treasury, consolidate current efforts to develop model templates that plan sponsors can use to disclose important plan information in a user-friendly way.
Two key questions need to be answered: 1) What information MUST participants have in order to be literate; and 2) What information do participants WANT to have?
Mr. McAllister suggests the DOL consider undertaking a project to speak to plan sponsors and participants to answer these questions. Current research indicates that many participants lack even a basic understanding of whether they are participants in a particular plan. To help the DOL create a template for employers, a union or other group that needs to communicate with participants and others, he suggests the following list of questions to answer for plan participants:
- Do I participate in the plan currently and, if not, what do I have to do to participate?
- What do I have to do to earn a benefit under the plan? What will it cost me?
- If I have a benefit, what happens if I leave it? Get disabled? Die?
- When can I get a benefit? How will/can it be paid to me?
- If I have an account balance, what is it currently? What is expected to be at various points in time in the future (given certain clearly defined assumptions)?
- If there are ways I direct investments, what are they? What are their objectives? How have they performed in the past? What should I think about with regard to how I'm invested?
- What happens to my benefit if the company folds or is acquired or if the plan is frozen or terminated? How are my benefits protected, if at all?
- How do I apply for benefits when the time comes?
- Where do I go with any questions?
As suggested by Mr. McAllister, such a template would provide a safe harbor for compliance with the flexibility to add additional information as appropriate. This approach would help the DOL to fulfill its promise to provide necessary information to Americans; it would help employers by doing part of their work for them in a cost effective, standardized format; and most importantly, it would help plan participants get information that they really need to have in a way that they can understand and use.
He also suggests that the method of distribution reflect the different ways adults of all ages process information. While adults generally ask the question: "What's in it for me and how can I use this information right away?", older workers seem to prefer to receive information in printed form, while younger workers are more comfortable navigating on-line to obtain information. The quantity and detail of information that can be absorbed by participants varies, so Mr. McAllister suggests providing basic information with options to "drill down" to get greater details as needed by the participant, either in the form of "links" online or additional information that can be requested in paper form.
Mr. McAllister notes that many Americans have abdicated responsibility for their retirement to others, and stresses that participants are the ones most responsible for their own financial health, but they need to the tools to do so. Adults need information that they can use right way, and benefit most from a "hands on" approach to problem solving with real-life examples that are clear and easily understood by the average person. They need to be told what they want and need to know, and strongly encouraged to take an active role in managing their own financial information, similar to the concept of encouraging personal health and wellness programs. McCallister supports using the idea of "teachable moments" to promote retirement literacy, perhaps revolving around certain milestone birthdays (e.g. 40th, 50th) to reach out to employees to respond and learn more about their current and future status.
Annamaria Lusardi, Dartmouth
Ms. Lusardi testified that for several years she has done surveys trying to measure how much the average worker knows about basic economics and finance. She reported that her findings are really discouraging. In every data set she has looked at - older workers, young workers, and all ages -she has found a very low level of financial literacy. Individuals do not know about interest compounding, do not know what inflation is, and do not know risk diversification, which she believe are at the bases of saving and financial decisions. She has also found that people, even older workers when they are close to retirement, don't plan for retirement, which is a very important determinant of retirement wealth. In her studies she, and other peers who have worked with her, have traced back the lack of retirement planning to a lack of financial literacy.
Ms. Lusardi also found that workers do not have the basic knowledge that they should have with respect to their retirement plans. In one study she found that as many as 50 percent of workers do not know in which type of pension plan they participate. According to her, "workers seem to be awfully uninformed about their pension."
According to Ms. Lusardi, for twenty-five years workers in Chile were in charge of their pension accounts. Studies showed that there workers understood very little about their pensions and were particularly uninformed about fees. She said that in the U.S. and in other countries, we don't find information that shows that workers are well informed, and there is a lot of evidence that workers are not taking steps to plan for retirement.
Kim Gandy, National Organization for Women
Ms. Gandy is the former president of the National Organization for Women ("NOW"). She recently completed her second term as president. She has served as a national officer of NOW since 1987 and in state, local and regional leadership positions since 1973. Since 2001, Ms. Gandy has led NOW's campaigns on issues ranging from Supreme Court nominations to the rights of mothers and caregivers, from Social Security reform to ending the war in Iraq. She graduated from Louisiana Tech University in 1973 with a BS and she received her law degree in 1978 from Loyola University School of Law. She was formerly a family law attorney.
Ms. Gandy first discussed her background. At the time of her testimony she had been out of the position as the president of NOW for two days. She noted that she is an attorney and was a domestic relations practitioner for many years in Louisiana. She made it clear that she is not an expert in ERISA, but that she is an advocate for women, particularly for the fair treatment of women in the family court system.
Ms. Gandy focused on testimony on the need for more easily obtainable plan information for "alternate beneficiaries." She said her constituents have tended to be those who have been struggling to get information about plans rather than those who have been the direct beneficiaries of the plans.
Ms. Gandy stated that a former spouse or alternate payee starts out at the very beginning at a considerable disadvantage in seeking her fair share of pension retirement plan and related benefits and even in getting the information that she needs in order to seek that fair share of those assets. She observed that the Department of Labor currently recommends that plan administrators provide this information, but does not clearly require that they do that or provide any sanction for failure to do it. She stated that many plan administrators do willingly provide this information, but unfortunately some do not, which creates a significant number of problems.
Ms. Gandy also pointed out problems that arise when an administrator may have a conflict of interest. She stated that, when trying to obtain information, a spouse may run up against the fact that the insurer or the company or the administrator may be unduly loyal to the participant. For example, the participant may be an executive of the company and may encouraging administrators not to disclose the requested information. Ms. Gandy testified that she has seen this happen in actual practice "with some frequency."
Ms. Gandy testified further that if there are not strict obligations required by law that are backed up by potential penalties, then administrators are unlikely to, and many in fact do not, providing plan information that the spouse needs to move forward with a QDRO. Lower income spouses are at an even greater disadvantage because they lack the resources needed to access courts to compel the disclosure. If the participant has influence over the administrator and if there's no clear legal obligation for the plan to provide the information, then the spouse must use her financial resources to force administrators to do what they should to be doing anyway.
Ms. Gandy next addressed whether it would be reasonable for plans to require the spouse to compel disclosure through the family court discovery process. First, she said, there may not be a lawsuit pending and the spouse cannot file a discovery motion if there is no lawsuit. In that case the spouse would have to file a lawsuit - against the participant or the plan - just to get plan information. Second, many small domestic relations cases may have no discovery process. Third, even if there is a discovery process, the discovery practice itself can increase costs enormously. Fourth, even if the spouse gets an order compelling discovery, there is often little recourse if the participant delays. According to Ms. Gandy, a potential for an order of contempt is an insufficient deterrent because courts rarely impose penalties or sanctions and, when they do, they are rarely high enough to have a serious deterrent effect. Ms. Gandy stated that she "represented a lot of … people who couldn't afford to pay [her] to do these very kinds of things, and it's just one of those things that shouldn't have to happen in a situation like this anyway. There are a lot of things that [the DOL] can't do anything about, but at least information about an ERISA plan is something that the Department of Labor could do something about."
Ms. Gandy testified that the ERISA regulations should make it clear that administrators are required to furnish plan information to spouses who can establish an interest or potential interest in the plan. She stated that plan information should be provided as a matter of course. The plan administrator should be obligated to provide the plan information without a waiver from a participant or a subpoena.
Ms. Gandy stated that there should be "specified and substantial" sanctions for the administrator's failure to provide the requested information. She said that, without sanctions, NOW has seen situations where "the husband can say, 'Oh, it's not my fault, the company is just dragging its feet.' Well, he's a vice president of the company and he has something do with whether they're dragging their feet or not. So that can't be permitted as a safe harbor for a party who is trying to obstruct the process. So if there is a requirement that plan administrators provide the information, that's the most direct and fair way to do it, rather than having the alternate payee have to go through the primary participant in order to get the information, and I think a fine or other monetary sanction would be appropriate to do that."
During the Q&A, Ms. Gandy remarked:
- Women are in jeopardy of not having retirement savings. That is a serious problem. She said that the three-legged stool of savings, social security, and pensions applies a lot more to men than women. During their working lives, women have lower earnings, which results in less Social Security benefits, and lower savings. And because they often work less to care for the family, they often have lower pensions. So women are more dependent on having benefits from a QDRO through a spouse or former spouse's pension plan. She said that one helpful solution could be pay equity for women. Another is to make sure that survivor benefits are available.
- Having a survivor benefit in a defined contribution plan is important for women because they often outlive their spouses.
- Plans should pay for the cost of processing a DRO and not pass the cost on to the spouse.
- Spouses should have access to participant information when they are trying to obtain a QDRO.
Robert Richter, Sungard
Mr. Richter testified on behalf of the ASPPA. He applauds the DOL in taking up the issue of streamlining required notices to improve participant communications. He states the system is not broken but has room for significant improvements. The problems with disclosures vary dramatically by type of plan - from those plans that are not participant directed to those that are.
As other witnesses have pointed out, much information is being provided but is not necessarily educating participants. In some case the volume and content of information provided causes participants to freeze, which is one reason automatic enrollment is provided for in the law. People often just do not read the material or do not understand it. The notices are going right into the recycling bin.
One issue is overlapping requirements from both the Internal Revenue Service (IRS), security laws and the Department of Labor (DOL). Different agencies have different disclosure requirements amounting to reams of paper being provided to participants. An example is that the Treasury will not allow you to reference a Summary Plan Description, so the information must be repeated.
Liability is a huge issue for employers in trying to communicate in simple language to participants. The end result is long notices. ASPPA has proposed a "plan operating manual" that has all the rules in the plan in one document and would like the DOL to draft model language. Notices would then be distributed based on life cycle events, which is hopefully when the participant will be engaged in the process. If people want more detailed information, they can drill down.
ASPPA would like to see a system based on electronic delivery versus paper and allow participants to opt out and receive paper if desired. Clearly there is still a need to have paper available.
The notices themselves could be short with only two or three key messages on it - digestible bites. More detailed information can be available electronically (and in paper upon request or election). The DOL is in a great position to act as a catalyst and work with the Treasury and the SEC to attempt to have a uniform, cohesive communication plan for participants versus the current fractured system. An analysis should be made of all the regulations in regard to participant disclosures and summary plan descriptions in regard to the content, the timing and the distribution method. Some of these will require legislative fixes.
Financial literacy is one of the DOL's main concerns, and perhaps employers could direct participants to the DOL website (which probably needs enhancing). Mr. Richter does think projections of benefits on statements are helpful provided there are sufficient disclosures on assumptions. He stated that ERISA does not require disclosure of plan or participant information to spouses. He also stated he thinks the current disclosure requirements for alternate payees are sufficient.
Mark Warshawsky, Watson Wyatt Worldwide
Mark Warshawsky, is Director of Retirement Research at Watson Wyatt Worldwide. He is a member of the Social Security Advisory Board and he also served as Assistant Secretary for Economic Policy at the Treasury Department from 2004 to 2006.
Mr. Warshawsky's remarks drew heavily from the recently published report of the Social Security Advisory Board, entitled "The Social Security Statement: How It Can Be Improved." He said the statement is intended to serve several purposes: (1) to encourage workers to validate their earnings history, (2) to educate workers on how Social Security works, and (3) to provide personalized projections. Also, retirement benefits are illustrated at three different retirement ages, which can serve as an important input into insurance, financial and retirement planning.
Mr. Warshawsky said experts in communication found that the most effective statements were simple and compact. Information that is highly programmatic, technical or complex would be better conveyed separately through pamphlets or other sources. The experts also confirmed that it's particularly effective to customize the message further; again, delineate groups and to assist them in likely, practical decision-making, such as, for those approaching retirement, retirement, younger workers work, insurance purchases, and, again, for older works, the timing of claims.
Looking at the statement in terms of the accuracy of the benefit projections, Social Security found that, historically, the actual retirement benefits were pretty accurate but did hide some problems. In particular, the accuracy was lower for women than for men, for younger workers than older workers, and for lower wage workers than higher wage workers, and, generally, there was an underestimate of the projection. So he recommended that there be more realistic assumptions and methods used in the projections of the benefits.
Mr. Warshawsky said statements should be easy to read, compact, colorful, and they should use graphics. Their design should also be changed periodically. Static communications with dense bureaucratic language are not useful.
David Wray, Profit Sharing/401k Council of America
David Wray is the president of the Profit Sharing/401k Council of America, which is a national nonprofit association of 1,200 companies that run profit-sharing and 401(k) plans for over five million employees.
Mr. Wray testified that participants will not appreciate 401(k) plans if they are not fully informed. So there's clearly an alignment of interest in making that happen.
He said that ERISA disclosures are extremely legalistic. Companies want to communicate effectively but have problems with legal requirements. He said as a result that the notices being sent "are just not usable," though he did exclude the SPD from this statement and recognized the value of SPDs.
Mr. Wray said we need an "SPD that is a living document, … is useable and available to people all of the time, 24/7."
Mr. Wray said the Profit Sharing Council is concerned about showing estimated future benefit payments. He said, "We clearly want to give some people some thoughts about where they could be, but we don't want people to get information in a way that they could actually rely on that information in some way in the future, because we just don't know."
Mr. Wray said a single government website should include information about all required notices, including those required by the DOL and the IRS. The current DOL website is useful, but it should be expanded to cover all other notice requirements.
William Cowper, Dan Fontaine, Michelle Morey, and Michael Taricani, Prudential Financial
Witnesses from Prudential testified that streamlining participant communications can improve retirement literacy and security. Prudential estimates that there are a possible forty-four notices currently required for DB and DC plans. These notices all share the same three challenges: timing, cost, and content. The regulatory framework makes for a "notice season" overwhelming participants with notices at not the best time for the participant at an estimated average cost of at least $2 per notice.
Their testimony underscores the need for substantial improvement to plan disclosures. Prudential recommended:
- Government reform of pension plan regulations to guarantee participants disclosures that are relevant, timely and succinct and suggested the Department of Labor, the U.S. Treasury and the Securities and Exchange Commission need to better coordinate retirement plan notice and disclosure requirements.
- Sensitivity to differences between actively-engaged and passive participants: Simplify required notices to help less engaged participants -- the very target audience for the notices -- understand them better. While easy access to fundamental plan information is important, write the notices to respect the way the target audience processes and uses information. In addition, while improved communication can be achieved through regulatory modifications, retirement literacy cannot be created by regulation.
- Progressive Access: Give plan sponsors the ability to communicate plan information in a simple format that ensures all participants will read it and that provides easy access for more engaged participants to get more in-depth levels of information. Prudential recommends this model for required notices, along with expanding regulators` acceptance of continuous electronic access to plan information as an effective means of communication to this audience and a cost-reducing way for plan sponsors to fulfill their notice obligations. Requiring all details be included in a notice makes the notice longer and dilutes the notice's key message, which often leads to participant confusion.
- Freedom from Arbitrary Requirements: Provide disclosure notices at a time when they are most relevant or when participants are more likely to read them. Certain annual disclosures to participants should be allowed at any time of the year, instead of within narrow window time frames, typically at year-end. Required notices should contain a core message. Notices need to be relevant, brief and delivered in a timely, effective manner which will encourage participants to read them and in turn, become more knowledgeable.
- Coordination between Regulatory Agencies: All appropriate regulatory agencies, including the Department of Labor, the Treasury Department and the Securities Exchange Commission should coordinate all notice and disclosure requirements wherever possible and however necessary-even if legislative changes are needed.
Judy Mazo, The Segal Company
Judy Mazo is Senior Vice President and Director of Research for The Segal Company, with responsibility for directing research and providing guidance on public policy, legislative and regulatory issues and other matters of interest to clients of this national actuarial, benefits and compensation consulting firm. Ms. Mazo has served on both the Advisory Committee of the PBGC and the ERISA Advisory Council.
Ms. Mazo first noted that there are differences between disclosures required for defined benefit plans and disclosures required for defined contribution plans. Notices for DB plans are about telling people what they are entitled to and how to use the plan. Notices for DC plans are about telling participants what they can do, what their options are, and how they can use the plan. She said that DB plans explain DB rights, which are very complicated because DB plans are complicated. "It is just impossible to describe them in a really participant friendly way as well as being comprehensive."
She said that "Congress has thrown notice requirements into the law haphazardly when they are not sure what else to do and they feel like they have to respond to something." She used as an example the Women's Health Care and Cancer Rights Act of 1998, which requires an annual notice regarding a participant's right to reconstructive surgery if the participant has a mastectomy. She explains that administrators will send out a packet of notices - including QDIA notices and others, and in the middle is a notice that says "if you have a mastectomy, you can get reconstructive surgery."
With regard to congressional action to streamline disclosures, she noted that congressional staffers rarely, if ever, have time to discuss specific notice requirements. Also, notice issues are often boring and involve little money. These things make it difficult for Congress to pay attention to disclosure requirements. "The last thing you're going to talk about [on the Hill] because you just don't have time are these administrative problems."
She said that most participants are not very interested in details about multiemployer or single employer defined benefit plan investment allocations. She believes this is a problem with the annual funding notices.
There is a further problem for multi-employer plans when it comes to electronic communication. Few vendors, she said, see the multi-employer universe as a big enough market to develop enough strong expertise to be adapted to their needs. Also, as plans, multi-employer plans don't have the same motivation that an employer does to communicate beyond the legal requirements and beyond the need to tell the participants what they want to be sure they understand that an employer does. A multi-employer pension plan has no interest in giving its participants a comprehensive compensation statement that reminds them that by the way you are getting so and so but we are also paying so and so for your health insurance. The union is interested in that, individual employers may be interested, but the plans themselves have only tangential interest.
Ms. Mazo testified further very few administrators would use a different notice if a model notice were available. Nobody is willing to depart very hard from the model. She said models could be more carefully done than they sometimes are, and Department of Labor should work with communications professionals.
She said it is not clear when the individual benefit statement has to be given. We are coming up on the third year. It is also unclear because the law that requires the defined benefit plans to give these notices, benefit statements, has different effective dates for people who work under collective bargaining units than people who don't.
Rebecca Davis and Jane Smith, Pension Rights Center
Rebecca Davis is a Staff Attorney and Jane Smith the Policy Associate for the Pension Rights Center. The Pension Rights Center (the "Center") is the only consumer organization solely dedicated to protecting and promoting the retirement security of U.S. workers and their families. For over 33 years, the staff members at the Center have worked directly with pension plan participants on the issues that arise when those participants feel they were not properly or accurately informed regarding their benefits. Mses. Davis and Smith focused their testimony on what the Employee Benefits Security Administration ("EBSA") could do to make disclosures more useful to participants while at the same time avoiding burdening plan sponsors with additional administrative costs. Ms. Davis focused on the importance of model notices; specifically noting that standard language and model notices are a great help to employers and at the same time aid participant understanding of those disclosures. Ms. Davis also remarked that model notices are vitally important because notices generated by plans are often confusing to plan participants. She clarified that this confusion can be traced to the complexity of retirement plans and that fact that different people absorb information differently. The Center recommends that for each required notice or disclosure, EBSA include an introductory paragraph that addresses the following questions:
- What is it?
- Why am I receiving it?
- What do I do with it?
- Will this affect my current or future benefits?
- Whom do I contact at the plan and at EBSA with a question?
The Center believes that addressing these questions will reduce inquiries and therefore reduce plan administrative costs. The Center also believes it would likely reduce cost to the PBGC and EBSA as well. The Center recommends that plans be required to use the model notices. The Center further encourages the DOL to not only draft more model notices but to revisit notices already written to determine if they are delivering useful information to participants. Ms. Davis indicated that the Center further recommends:
- SPDs be structured according to participant life events and include an index or summary for quick reference;
- SPDs should highlight any provisions that could reduce benefits and should not be allowed to include disclaimer statements;
- EBSA help plan administrators and participants by issuing guidance on drafting SPDs that participants can understand;
- DOL establish a listserve that provides plan sponsors and participants with general information and helpful periodic reminders of upcoming due dates;
- EBSA require that plan sponsors submit their SPD to the DOL or post it on the plan's public website; and
- EBSA issue guidance with specific parameters that must be met for any plan sponsor that wants to provide individual benefits statements with projected benefits.
Ms. Smith focused on the form and delivery of disclosure. She recommends against combining multiple notices but instead that each required disclosure be written and delivered separately as a standalone document. The SPD especially should not be combined with other disclosures and the Center is concerned that providing combined disclosures will result in these important notices being ignored by participants. As for notice delivery, the Center believes that the SPD and Periodic Pension Benefit Statement be delivered electronically only after the participant has affirmatively consented to electronic delivery. For all other disclosures, the Center believes that electronic delivery is appropriate for those who use the computer as part of their job. The Center also recommends that the DOL make their electronic disclosure rules mandatory rather than a safe harbor. Further, the Center finds the DOL's indication that sponsors can rely on the Internal Revenue Services' (IRS) rules concerning because the DOL is moving away from its own rules. They suggest that they DOL's rules be the standard for both DOL and IRS disclosure and elections. The Center recommends that EBSA both (i) publish on its website all model notices for participants, including IRS model notices in one easy-to-find location and (ii) include on its website a list and description of all required participant disclosures, including IRS notices. Finally, the Center believes that EBSA advisors be specifically tasked with providing immediate assistance to plan participants who have requested written copies of notices and disclosures and have not received them.
During the Q&A, Mses. Davis and Smith remarked:
- Participants and beneficiaries often have difficulty getting written copies of SPDs, even when requested. They don't believe it's deliberate on the part of plan sponsors, but that it's often extremely difficult to get information out of plans.
- They believe the basic rule should be more conservative and more protective by providing paper copies and they understand that doing so is more costly to plan sponsors.
- The DOL needs to come out with good model notices so that the information is useful because it is better than the "hit and miss" communications that each individual employer produces when the regulations are complicated.
- They're not against projected benefit statements but concerned with the assumptions used in producing them and don't address the realities of plan terminations - EBSA needs to provide guidance.
- Reconfirmed their position that, assuming the information is useful and necessary, notices should not be combined because participants won't focus on them.
Douglas Kant, Fidelity
Douglas Kant testified on behalf of Fidelity Investments and the Fidelity affiliates that provide record keeping, investment management and range of other services to retirement plans. Mr. Kant testified that Fidelity believes that internet usage provides a critical means for streamlining and improving participant communications. According to Mr. Kant, participants need current information and often paper disclosure distribution by mail may contain stale information. Internet access provides participants with the opportunity to go on-line at a convenient time and get up to the minute information.
Mr. Kant made several recommendations to streamline and make disclosure more efficient and effective. With regard to the required quarterly account statements, Mr. Kant urged that mailings should not be required, unless requested. Effective access to a secure website would assure that participants review the status of their account investments on-line in "real time" so that participants can have more current information when determining whether some change in account investments are necessary or desirable. As well, participants should be notified how to get access or if they can't or don't want to review electronic disclosures they can get paper copies through the mail. Mr. Kant indicated that among older workers, internet usage has continued to gain acceptance and reinforces Fidelity's view that this as a "very important" recommendation as it both reduces delivery costs while providing participants with the most relevant information.
Mr. Kant also recommended that the Department reaffirm its FAB authorizing the delivery of required information in multiple statements - especially because it is not uncommon for plans to have multiple investment or service providers.
Mr. Kant also recommended that in formulating its fee disclosure regulations, the Department not require fees or prices to be unbundled. This is particularly true in cases where bundled fees represent the manner in which fees are charged. Unbundling will only serve to detract from the most critical assessment - to determine the ultimate charge to participants.
With regard to access to account information by spouses and beneficiaries, Mr. Kant expressed the view that the participant is the only one who should be given and be able to grant access to spouses and beneficiaries.
He also expressed support for model notices but urged that they be issued for educational purposes only. Differences among providers suggest that the Department require no specific format as such notices should be exemplary or offered for guidance.
Lisa Hund Lattan, American Century Investments
Lisa Hund Lattan is Vice President and Associate General Counsel at American Century Investments. She is also incoming Chair of the Investment Company Institute ("ICI"). She spoke on behalf of the ICI.
Ms. Lattan said that the ICI has long advocated and supported efforts to make disclosures to participants more understandable. She said ICI is in favor of anything that will help participants better understand their plans and the investments available to them under their plans.
On behalf of the ICI, Ms. Lattan made four key recommendations. First, the ICI believes the Department of Labor and the IRS should work together as they undertake this project to consolidate and streamline information in a way that will focus participants on the information they need at the time they need it. Second, the ICI feels that the Department of Labor should consolidate as much information as possible in the summary plan description so that it returns to the purpose it was intended - as an owners manual or a reference manual for a retirement plan. Third, the ICI hopes that the department will encourage the use of something that the ICI refers to as a quick start guide. Finally, the ICI hopes that the DOL will be able to further modernize its electronic delivery rules.
ICI believes that disclosures should focus on the information that participants need at the decision point times in their life as a plan participant. The first decision point comes at enrollment. The second point in time is when they are called upon periodically to monitor their accounts, to keep track of what is happening with their investments. Were those initial investment decisions that they made appropriate? Do they continue to be appropriate? Do they need to reallocate monies among the investment options that their employer has made available to them? The quarterly benefit statements are helpful with this. A third decision point is upon a distribution. At that point in time, participants are faced with the decision about whether to leave their monies in their retirement plan, whether to take a distribution, in what form to take a distribution. So the information that they receive at that decision point in time again should be focused on what they are doing and what they need to decide then. Others apply to special situations, such as when a participant takes a loan or is going through a divorce.
Redundancy should be eliminated. Thus, investment information and distribution information should be combined.
Third, SPD information should be streamlined into a "quick start" guide. Most people don't read the owner's manual to their TV set cover to cover; the retirement industry should borrow a concept that consumer products use such as a quick start guide.
One example of streamlining information into a quick start guide has been the summary prospectus approved by the SEC. The prospectus in the mutual fund world has suffered over the years from some of the same problems that we have seen in the plan world. Overload of information, too many facts being pushed out to participants such that they can't discern the information they really need. So the SEC worked closely with the mutual fund industry to develop the summary prospectus, which is sort of a quick start guide to the mutual fund. It includes the key information that potential shareholders would need when they are thinking about investing in a mutual fund.
Mutual funds which elect to use the summary prospectus can post both their summary and their statutory full prospectuses on line. They can use hyper links to allow investors to move back and forth and those investors who are interested can link to the full information in the statutory prospectus. A useful lesson that the investment industry took away from that process and which the ICI suggests to the DOL is that it is very important to have a dialogue between the regulators and the industry when you are adding something new or when you are attempting to streamline things.
Finally, ICI would like the DOL to update its electronic delivery rules. ICI said the Department of Labor and the IRS should work together to develop comparable electronic delivery rules.
In Q&A, Ms. Lattan suggested that perhaps the DOL may wish to consider reopening the SPD regulations.
Brigitte Madrian, Harvard University
Brigitte Madrian is the Aetna Professor of Public Policy and Corporate Management at the Harvard University John F. Kennedy School of Government and a Research Associate at the National Bureau of Economic Research. For the past ten years, her academic research has focused on how individuals make savings and investment choices in savings plans. She discussed two recent research papers.
In the first paper, "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," research participants were divided into four groups and asked to allocate a hypothetical sum of money across four different S&P 500 index funds with different fees. Each group was given different information: The first group was given the fund's prospectus. The second group received the prospectus and a one-page cheat sheet which outlined the fund's fees. The third group received the prospectus and a performance returns sheet that highlighted returns. The fourth group in one experiment received the prospectus and a FAQ sheet which explained what an index fund is.
She found that (i) very few participants in the prospectus-only group chose the lowest fee fund, (ii) average fees dropped by 50% for the group that also received the fee cheat sheet but a majority of participants in that group did not choose the lowest fee fund, and (iii) participants in the third group chose funds with historical higher returns, which should be irrelevant since these are all index funds tracking the same index.
In the second paper, "How Does Simplified Disclosure Affect Individuals' Mutual Fund Choices?," research participants were either given (i) a statutory prospectus, (ii) a summary prospectus, or (iii) a summary prospectus and told they could request a statutory prospectus. They were asked to choose between four actively managed equity mutual funds and four actively managed bond mutual funds. Ms. Madrian didn't find any statistical difference between the prospectus-only group and the group with the summary prospectus and that few participants in the third group requested the statutory prospectus. She also found that participants do not minimize sales loads even when they should do so because of their short investment horizons.
Ms. Madrian concluded that the summary prospectus does not improve investment choices, investors don't understand what information is most relevant to their investment choices, and that investors underestimate the importance of mutual fund loads and other fees. She also concluded that a single form of disclosure may not be best when there are multiple objectives and that it is important to identify the objective or purpose that is the goal of disclosure.
In response to questions from the Council, Ms. Madrian responded:
- She thinks that plan participants should still have investment choice under DC plans.
- She doesn't support a mandatory deferral rate because employers may have other retirement plans and doesn't think that auto-enrollment works for all employers.
- She doesn't think progressive disclosure (i.e., when an investor drills down to other information) is the solution as those who drill down would find information in other ways.
- She can't tell from her experiments whether disclosure works at all but does think simplified disclosures will help after time.
- She doesn't think that disclosure of fees to the plan sponsor is enough and noted the importance of fees to IRAs and other retirement savings outside of employer-sponsored plans.
- Investors will respond if fees are disclosed simply and in a way that makes it personal (e.g., on quarterly statement).
- She doesn't know if mandatory disclosure leads to inaction.
- The Council excluded welfare benefit plan disclosures from the scope of the study.
- Legislative History of the Employee Retirement Income Security Act of 1974, Volume 1 at p. 613 (Senate Report 93-127). Similar statements are made throughout other committee reports. Volume II at 2357, 3294 and 3307.
- The Council has found no direct guidance on the issue, but assumes that the term “benefits” set forth in 15 U.S.C. § 7003(b)(2)(C) means health benefits, not retirement benefits. Because the scope of this report excludes health benefits, the exception in § 7003(b)(2)(C) is not directly relevant to this report. The exception does, however, imply that Congress intended to include benefit notices within the scope of E-SIGN. Otherwise, Congress would not have excluded notices related to health and life insurance.