Love ’em or hate ’em, retirement plan disclosures are a reality – but could they be “better,” and could they be just as effective (and perhaps more so) if they weren’t paper? NAPA Net readers weigh in.
It’s a topic of interest – retirement plans are a complicated business – and a process that adds a lot of cost to the process. At the same time, it’s not altogether clear that the current process is effective, at least in terms of getting participants to read, and perhaps more importantly, understand these disclosures.
It was a topic of discussion at the ERISA Advisory Council last fall, as documented in a recently released report from those discussions.
Personal Perspectives
Starting on a personal note, we asked readers what they did with the disclosures they received with their accounts. A solid plurality (42%) said they “throw them away,” though another 18% went with “read them, then throw them away.” Just over a quarter (28%) said that it depended on the disclosure, while 8% went right into their files (without being read), and the rest – well, they said that, “without realizing what they were, threw them away.”
We then asked readers what they thought about the number of retirement plan-related disclosures, and found that while about a quarter (24%) thought there were too many, even more (36%) thought there were “way too many,” and roughly 1 out of 10 thought it was “about right.” Another quarter (26%) said it isn’t a matter of how many, it’s “how much is in those disclosures (and it should be less).”
“There are too many, they are not easy to understand and many of them do not provide useful information,” noted one reader. “They need to be less wordy and simple to understand,” commented another – a theme that would emerge later and throughout the responses this week.
Participant ‘Accounts’
So, what do readers think that “regular” participants do with the disclosures? Well, let’s just say it’s a lot less ambiguous. Nearly three-quarters (73%) say they throw them away, and another quarter say that “not knowing what they are, they throw them away.” The rest – and bear in mind, we’re only talking about 2% – said they throw them away without reading them.
Turning to the perspectives of their plan sponsor clients, more than half (59%) said that those clients and the recordkeepers they work with comment on the disclosure requirements “all the time.” Another quarter (23.5%) said the subject came up “only occasionally,” and about 7% said it hasn’t come up. The rest were in what amounts to an “other” category, with comments like the following:
- “It is tough for them to keep up with what disclosures are required, when they are required, and to whom they should be delivered.”
- “They hate sending them out.”
- “Clients comment to me, only every time they come out, usually something along the lines of, ‘Do I have to do anything with this?’ or ‘Didn’t I just do this?’”
- “Many sponsors ask if they can email disclosures. It comes up most often when there’s a fund replacement.”
- “I don't know that I would say ‘all the time’ but it is frequent.”
Apparently it’s come up often enough that one reader’s firm has crafted a solution: “We've built a proprietary system that collects the notices from the providers and combines them. We’ll send the notices out that meet the wired-at-work standards for clients that qualify. Removing the need for paper disclosures for most clients.”
Default Defined?
While participants can opt to receive many of the currently mandated disclosures in electronic form, the default is paper – and so, we asked readers if they thought the default should be changed.
Here again – and doubtless reflecting their sense of how those disclosures are treated now – nearly 77% of this week’s respondents said the default should be changed, though 1 in 10 said it depended on the disclosure, and about 6% thought that a paper default was appropriate. “I was going to answer ‘depends on the disclosure,’” but I do believe the answer is, ‘no, a paper default is appropriate for relevant disclosures,’” commented one reader. “The answer for the rest of the disclosures, like the SAR, is to discontinue this disclosure entirely. Other disclosures also need significant revisions to make them easy to read and understandable.” Another opined that “the employer should be able to choose the default on a plan level. As long as all employees have regular access to company email, electronic should be fine. But employees who do not have regular access to company email will still need paper delivery.”
Other Comments
As we generally do, we did get a number of interesting comments. Here’s a sampling:
“Disclosures should be allowed to just be posted to the recordkeepers’ websites. People don’t read them anyway, they tend to be too long, and when they are read no one understands them.”
“The disclosures should follow a standard template. Depending on the recordkeeper, the information varies and, at best, is incomplete.”
“Still trying to figure out the purpose of the Summary Annual Report. That one wins craziest disclosure of all.”
“I don't think PS or participants look at the disclosures. What it has done is put fees front and center, making plan sponsors aware that their plan is not ‘free.’ This has led to more productive discussions on costs, reduced fees, and improved participant outcomes.”
“Disclosures need to be pared down and streamlined to ease administrative burden associated with these often unread notifications.”
“While the intention of the disclosures is admirable, they are far too lengthy to be useful. The supposedly participant friendly language has been hijacked by legalese.”
“I think they need to be simplified. If they were electronic, they could have hotlinks in them so that if the person reading didn’t understand a term/etc. they could be linked to more info.”
“Even though disclosures are important, they seem to be more important to everyone except the participant. Until these disclosures can be written in the ‘King's English’ and ‘bulletized’ for easy reading and understanding, this is a tremendous waste of time, money and resources designed to CYA instead of fostering clarity and learning.”
“I have several issues with the disclosures; two with content and a third with the timing requirement. I think the timing should be once per plan year. Under the current requirement, fiduciary decisions concerning the plan’s investment menu are negatively impacted by the timing requirement. With respect to content, the disclosure overemphasizes fees and returns. As we know, these are only two components of mutual fund analysis. And the focus on those items detracts from the need for proper asset allocation, which is vastly more important. The other problem is the requirement to show ‘total annual operating expense,’ which can be significantly higher than the actual expense ratio. I had a conversation with a member of the DOL committee that developed the disclosure and she confessed that the committee thought total annual operating expense was the expense ratio. Wow!”
“Electronic makes a lot more sense. An e-mail address is far easier to track than a physical address. Better yet, each participant should be part of a social media group where documents and notices can be shared.”
“It would be great if the requirements for electronic disclosures were all identical instead of minute differences between them. It would make it easier for providers. In today’s day and age, there’s no reason the ‘default’ can’t be electronic with, of course, the participant having the option of paper.”
“Disclosures are supposed to user friendly. There are some disclosure people in the profession have a hard time reading, how do you suppose the person not in the profession thinks about them?”
“I think employees should get a link to disclosures upon hire, be allowed to request paper and be reminded if the link annually.”
There were some humorous responses as well…
“They are great for lighting fires.”
“YouTube has some great videos on how to make fire logs out of paper.”
But my favorite – and it’s funny, but not so funny at the same time – came from a reader who noted, “The running joke I have about the SPD is that it is written in a manner calculated to be thrown away by the average plan participant.”
Thanks to everyone who participated in this (and every) week’s NAPA Net reader poll!
