Morningstar: Opaque Data Hinders Best-Interest Advice

A new white paper calls out the annual disclosures for defined contribution plans as “opaque” and in need of “major improvements.”

The focus of the paper by Morningstar Director of Policy Research Aron Szapiro (Data Content Researcher Lia Mitchell is also listed) is the Form 5500 – and, considering the source, it’s not surprising that its focus is decidedly investment-oriented. The paper specifically notes that the investment lineup information on the Form 5500 is “often incompatible” with Securities and Exchange Commission filings, “making it impossible to match information on the investments available inside of 401(k) plans to other data the SEC already collects.” Without those linkages, the authors maintain that the retirement plan filings only give “glimmers” of information, rather than connecting to the robust data on investments the government already collects in other forms.

They also cite the failure of the current Form 5500 to require key data on popular investment types, such as collective investment trusts, which have amassed more than $2.1 trillion in assets, “so it is important to know more about them than the minimal data the federal government collects today,” they write.

Moreover, the report says that the information on the administrative and investment fees participants pay is “inaccurate and limited,” which the authors say undermines “the entire purpose of public financial reporting, as the data is not actionable.”

More Public Plan Disclosures?

That is, of course, the (very) public dissemination of plan information – that which is filed with the government, and generally available to the public (albeit after the passage of time). However, the authors point out that the disclosures the Labor Department requires plans to provide directly to participants “provide much of the information necessary to help retirement investors evaluate their plans” via the 404a-5 disclosure. The authors note that these disclosures provide different information from the Form 5500 disclosures, but “they are not widely available to anyone or even required to be filed with the DOL.”

This lack of general public disclosure means that “employers cannot easily assess if the fees they pay in their retirement plans are appropriate, if their investment lineups are best-in-class, or how they can improve their retirement offerings,” they write. “For example, despite the popularity of CITs among many retirement plan sponsors, employers cannot easily find out if the fees they pay are too high because they cannot see what other similar plans pay. Similarly, plan sponsors cannot easily assess if the administrative fees they pay are reasonable because the publicly available data is incomplete and of questionable quality.”

The authors note that in their experience working with advisors, the “lack of transparency hamstrings advisors trying to act in their clients’ best interests,” noting that if a plan participant meets with an outside financial advisor, “the advisor cannot easily compare the plan to a rollover option or make recommendations about rebalancing in a plan without detailed plan lineup data” (they do say cannot “easily” compare), and that “even in cases in which a participant brings a hard copy of the plan’s 404a-5 disclosure, the advisor would need to manually enter the information and then set up a follow-up meeting to analyze the client’s options.” Instead, they claim that “allowing financial technology firms access to high-quality plan filings, in contrast, would help democratize access to advice on rolling over from or between defined contribution plans,” they write. Hmmm…


The authors offer several recommendations:

  • Require plan sponsors to include the most recent plan 404a-5 disclosure with the Form 5500 to give a more complete picture of the U.S. defined contribution retirement system and shed light on retirement investment fees.
  • Collect the SEC contract/class ID for the investment information plans report on the Schedule H of the Form 5500 (this would facilitate connecting retirement plan investment options to SEC data).
  • Improve the quality, depth and breadth of data collected on CITs, SMAs and other unregistered investments on the Form 5500 to provide a more complete picture of the U.S. retirement system.
  • Update the service provider reporting on the Form 5500 to require plans to report the formula used to determine compensation for plan service providers and the daily average assets or accounts upon which that formula was applied for the previous plan year.

What do you think? Comment below…

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Send this to a friend