Form 5500 Modernization Misses the Mark

Noting that the Obama administration’s proposal to “modernize” the Form 5500 “substantially underestimates the time and cost burden associated with complying with the new requirements,” the American Retirement Association’s Government Affairs Committee (GAC) has weighed in.

In July, the DOL’s Employee Benefits Security Administration, the IRS and the PBGC sought public comments on proposed revisions that the agencies say will “modernize and improve the Form 5500 Annual Return/Report.”

Well modernization may be the intent, but mincing no words, the ARA GAC Comment Letter says, “The time, financial, and technology burden which would result from the implementation of the Proposal is staggering.”

The ARA GAC goes on to comment that, “The conclusion that there is no additional recordkeeping burden is a wholly inaccurate assumption and reflects a fundamental misunderstanding of the current state of the industry and the way in which it continues to evolve.” Somewhat ironically, it is the modernization of the industry itself which would render the proposed changes so costly and burdensome to embrace. “Many service providers have transitioned to an electronic information request, where that data automatically feeds into the software that prepares the Form 5500 series; therefore, the addition of any item to the information request requires technology and programming resources,” the letter explains, going on to note that “although recordkeeping systems may maintain records about assets and liabilities in the normal course of business, the information is not readily available at the granular level required by the Proposal.”

Small Business Impact

The cost and time burdens the proposal would impose “will weigh heavily upon small businesses and the participants in plans impacted by this apparently intentional change in the definition of ‘eligible assets.’” The Comment Letter highlights the potential impact on small plan filers, particularly defined contribution plans with participant directed investments, noting that while the proposal does not anticipate that fewer small plan filers will be eligible to file the Form 5500-SF, but at the same time modifies the definition of “eligible assets” in a way that would result in a majority of participant-directed DC plans having to switch from filing Form 5500-SF to filing the full Form 5500, which the letter notes is “longer and more data intensive.” These changes could result in plans being terminated or small employers choosing not to sponsor a new plan, the letter cautions.

A Step Back

The ARA Comment Letter notes that the proposal includes a number of new data elements that the average service provider cannot answer without specific input from the plan sponsor, and that “these types of data elements are a step back from the modernization and technology investments (i.e., efficiencies) that many service providers have been able to make since the implementation of EFAST2.”

Also cited was that, as proposed, the Schedule C does not allow the usage of formulas to express indirect compensation in the same way that is permitted in the 408b-2 disclosures provided to plan sponsors. “This failure results in the need for the industry to invest and design the necessary technology infrastructure to express the information in dollar amounts, which creates a significant burden,” according to the Comment Letter.

“On the whole, it is clear that the Proposal will require large scale changes to investment platforms, trust accounting systems, recordkeeping systems, reporting systems, and the software that supports the preparation of the Form. The cost of these substantial changes would likely be passed to the plan and, ultimately, to plan participants and beneficiaries,” the ARA Comment Letter cautions.

Time Lines

Since it generally takes 6-12 months for the approval of the capital investment and personnel allocations necessary to implement the required system changes, the ARA Comment Letter notes that, “the extensive technology, communication, and procedure changes dictated by the Proposal will take, at a minimum, an additional 12 to 24 months for providers to develop and implement,” and that “given the lead time requirements, the earliest the Proposal should be effective is for the first plan year that begins no earlier than 24 to 36 months after publication of the final version of the forms and instructions.”

Failing to take those constraints into account, the ARA Comment Letter warns that “the “rush to publish” will unnecessarily increase the costs and burdens associated with providing the information solicited on the form and schedules. Even with this timeline, “transition relief with good faith compliance must be provided until systems and processes are adapted to ensure that accurate and useful data are being submitted.”

The ARA recommends that additional time be provided to transition into the significant technology changes the proposal will require and that the effective date should be deferred at least 24 to 36 months following the final release of both the forms and instructions.

Room for Improvements

The ARA notes the agencies did not use this modernization platform to promote other improvements, including:

  • A general lack of clarity in the instructions and ambiguity in the terms used, specifically cited was a need for clear definitions of fair value, contract value, and what constitutes “hard to value.”
  • A more user-friendly format by creating separate “compliance” schedules for (1) defined contribution retirement plans, (2) defined benefit retirement plans, and (3) welfare benefit plans.

Finally, the ARA Comment Letter notes that EFAST2 currently imposes a manual signature requirement on the plan administrator/plan sponsor when a service provider is signing on behalf of the plan administrator/sponsor and on the actuary of a defined benefit plan – and that, under the proposal, the manual signature requirement may be imposed on even more parties, “a burden which involves manual transmission of a document from the preparer to the signer and the manual return of the document from the signer to the preparer.”

In sum, the ARA recommends that the gencies hold a public hearing on the proposal, conduct testing, and allow additional public comment so that the information can be gathered in the least costly and burdensome manner.

The full text of the ARA GAC comment letter is available online here.

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