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November 8, 2002
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What is Electronic Reporting?
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On
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The Council investigated electronic reporting of ERISA plan filings in order
to determine if it could be improved. Due to the abbreviated schedule of the
Council this year, the Council limited the scope of its investigation to
electronic reporting of Form 5500s to the Department of Labor, specifically
through the Department of Labor’s ERISA Filing Acceptance System (EFAST).
The Form 5500 can include a series of 12 schedules, accountant’s report
and actuarial opinion.
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What is the Current Status of Electronic Reporting?
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The Council first looked into what is currently required with respect to
electronic reporting and what is being done with regard to electronic
reporting at the Department of Labor (“DOL”).
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What is Required Now?
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There are no statutory or regulatory mandates with respect to electronic
reporting of Form 5500s, however, there appears to be significant energy in
the direction of increasing electronic reporting for many reasons including
the President’s memorandum to agencies encouraging the implementation of
an agenda for E-Government. From a practical perspective, the Internal
Revenue Service, Pension Benefit Guaranty Corporation and Social Security
Administration, in addition to the DOL, use the data from the Form 5500s in
connection with their regulatory programs and any electronic system for
filing Form 5500s must be accessible and usable by those agencies.
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What is Being Offered?
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The DOL, IRS and the PBGC adopted a computerized system known as the
ERISA Filing Acceptance System or EFAST. In 1999, the Department’s Pension
and Welfare Benefits Administration (EBSA) assumed the administrative
responsibility for accepting all filings, electronic and otherwise, of the
Form 5500s, which had previously been filed with the IRS. The DOL embraced
EFAST with the hope to achieve certain advantages provided by an electronic
system including: better dissemination of information to the public, better
access to data for the regulatory agencies and availability of more current
data for participants and beneficiaries.
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EFAST allows transmitters to electronically file Form
5500s using EFAST-approved vendors and software. The software allows the
transmitter three options in filing the Form 5500. Under the first method,
the Form 5500 is printed and contains a “1-D” barcode stating it is a
Form 5500. This paper Form 5500 is then sent to the DOL by the submitter and
the DOL scans the form into its database and retrieves necessary data from
the Form through Optical Character Recognition (OCR). The second method
creates a paper Form 5500 with the software similar to the first method, but
it also contains a second barcode containing the salient data on the Form.
The Form is sent into the DOL and the data is retrieved from the second
barcode and not by OCR. The third method for the electronic filing of the
Form 5500s uses DOL approved software to create the Form with the two
barcodes and the barcode data is then sent to the DOL via direct modem
connection. Alternatively under the third method, the submitter can burn the
data onto a CD or magnetic tape and then send it to the DOL.
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Who Participates in the EFAST System?
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The direct participants of the current electronic filing system are few,
basically including the Federal Government and the transmitter of the Form.
The indirect participants are the plan sponsor and the accountants and
actuaries submitting reports in support of the Form 5500. Also indirectly
participating in the system are the plan participants, ERISA organizations,
data providers (such as freeerisa.com) and the public.
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All of these participants have some need or use for
electronic filing of the Form 5500s. For example, the government wants valid
data in a cost effective and efficient manner. Also, plan sponsors want to
be able to file their Form 5500s through an easy system with the least cost
possible. Likewise, plan participants, the public and ERISA organizations
want up-to-date data about plans and data providers want quick access to the
information.
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The importance of electronic filing to some of these
participants is underscored by the testimony of Judy Diamond of
freeerisa.com which has about 15-17,000 users per day accessing the Form
5500 data available on its web site. Those accessing the site include
participants (seeking data about their plan or desiring to lodge complaints
about their plan), plan sponsors (that check the actual Form 5500 as filed
or look at competitors filings), financial professionals (e.g. accountants,
brokers and plan administrators), and attorneys (who often use it in divorce
cases and to obtain necessary documentation in representing participant
clients who are too fearful to ask for the information directly from the
plan sponsor due to possible retribution).
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However, not all stakeholders look favorably upon some of
the results of electronic reporting of Form 5500s. For example, some plan
sponsors, notwithstanding that the Form 5500 is a public document, complain
about their Form 5500 being available on public Web sites such as
www.freeerisa.com.
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What are the Strengths of the EFAST System?
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The EFAST system provides methods, superior in many ways to the prior
paper system, for filing and extracting relevant data from the Form 5500s.
The EFAST system requires less storage space than does paper filings, saves
on mailing costs, provides confirmation when the Form 5500 is received and
notifies the submitter within 48 hours of a transmission (but not a filing)
error. Also, the Council received testimony that those using the current
electronic filing system were more attentive to deadlines mainly because
transmitters were more likely to urge submitters to be proactive in order to
meet the electronic filing deadlines.
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What are the Weaknesses of the EFAST System?
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Although no system is perfect, the stakeholders in the current system
testified that the EFAST system has many shortcomings. The significance of
these impediments is supported by the fact that of the 1.2 million Form 5500
filings, only 1% of the reports were filed electronically for 1999 and only
3% were filed electronically for 2000. No more recent data beyond the year
2000 is available, but witnesses testified that it is anticipated that even
these meager percentages will decrease in the coming year(s).(1)
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The reasons preventing greater use of the system were
reported to be:
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Signature Requirements: The submitter
must file a paper application with the DOL to get a code to file with
the electronic Form. This application process can take from 3-4 weeks.
The code represents the filer’s signature and the filer either has to
give that code to the transmitter of the Form 5500, which raises
security issues, or go to the transmitter’s office in order to submit
it with the electronic Form 5500. Various transmitters have stated that
the cumbersome signature requirement has contributed to a low
participation rate for electronic filing. Fidelity testified that only
7% of the plans for which electronic filing were available in their
system actually took advantage of electronic filing in part because of
the difficulty in implementing the electronic signature. In fact, they
stated that this year, 2,000 Fidelity clients were removed from the
electronic filing service because there was not enough time to obtain
the electronic signature. Although the SEC has seemingly avoided this
issue by accepting an electronically generated unique password to be
used as a filer’s signature, the EFAST staff has taken the position
that the Government Paperwork Elimination Act does not eliminate paper
signatures required by individual legislation.
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No economic benefit: The cost of
filing electronically is higher than filing by paper. One large filer
estimated that they spend approximately $200,000 per year to maintain
the system necessary to complete electronic filings with no offsetting
benefits. Paychex, which supported the EFAST system for filing fringe
benefit plan Form 5500s for its clients, indicated that due to the
complexity of the Form 5500 for 401k plans, the cost of filing
electronically for 401(k) plans for its small plan clients would be
greater than filing by paper. Some plan sponsors echo this sentiment as
they do not see the benefit of filing electronically since “there is
no refund coming back to the client faster through electronic filing as
there is with individuals filing their taxes electronically.”
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Required Software: Submitters must
purchase DOL-approved software in order to generate the Form 5500s for
electronic filing. Software vendors have not experienced customer demand
for the software and therefore it is not widely available and sometimes
expensive.
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Timing Requirements: The Council
received testimony that “there is not enough time to implement annual
revisions to the 5500, prepare the forms, allow time for clients to
request PIN’s and electronic signatures, and still meet the normal
filing deadline.” When the DOL issues changes to the filing
requirements, it can take even large submitters approximately three
months to update their computer systems and obtain approval from the
EFAST office. This reduces the number of forms electronically filed
because there is simply not enough time to file with the DOL-required
changes.
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Results: Due to OCR scanning and
barcode translations, there are sometimes significant errors in the data
reported. In addition, the data available electronically is several
years old, so filers do not get access to Form 5500 data any quicker by
filing electronically than they do by filing by paper. Also, filers
sometimes have to wait up to 10 days just to get confirmation that the
electronically filed Form 5500 has been received. Also, concern was
expressed that there are no digital image backups of electronically
filed data.
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Added Responsibility: Today, many plan
service providers create the Form 5500 and provide it to the plan
sponsor for the plan sponsor to file. It was reported that service
providers are hesitant to take on the added liability of managing the
electronic filing of the plan sponsors Form 5500.
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Lack of Awareness: The availability of
electronic filing and associated benefits are not widely known.
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Inconsistency: Inefficiencies exist
due to the differences between the electronic filing software and print
specifications.
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Too many middlemen: Witness testimony
suggests that there is a channel management problem, i.e. there are a
lot of people who stand between the plan and the government in the
current system, such as software developers, plan administrators,
preparers and transmitters.
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Customer Expectations: Submitters
expect the same ease of use and functionality as they find in other
electronic systems, e.g. E-bay, and are disappointed and hesitant to use
the system when they learn that it is more difficult to use than other
commonly available systems.
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Paper Corrections: Some of the
procedures designed to ensure valid filings can cause it to be returned
and then the error must still be corrected by paper mailing.
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What are the Future Plans for the EFAST System?
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Although the current system has its downsides, the DOL appears to be
moving forward and addressing most of the current weaknesses in a phased
plan for the future. The EFAST team indicated that they would be moving at
some point in the future to a web based system. In the interim the EFAST
team will be endeavoring to create incentives for submitters to file
electronically, and they will be marketing these benefits to submitters.
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Is There a Need for Electronic Reporting?
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In light of the extremely low usage of the current electronic reporting
system, it seems fair to ask whether electronic reporting is even needed.
The Council set about answering this question by taking a look at the
benefits that can be provided by an electronic reporting system and
gathering testimony as to whether those benefits are valued by the
stakeholders.
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What are the benefits of EFAST?
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Cost Savings. Electronic reporting could, depending upon the structure
implemented, provide tremendous time and resource savings for all
stakeholders. Filers can save money by reducing the personnel required to
submit paper filings. For example, in some cases after adoption of the SEC’s
Web Central Registration Depository (Web CRD), the number of paralegals
required by filers decreased to a single person. Users of the information
such as ERISA organizations and the public are able to access the data at
lower costs due to efficiencies provided by electronic filing. Also, the
Government saves on personnel and storage costs. The cost savings can
increase to such an extent that electronic filing can become a profit
center. Robert Plaze of the SEC testified that for their web-based reporting
system “we have paid off all debts in a year and a half to build the
system, and we are running at a healthy surplus right now.”
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Data is More Current. Data filed electronically can be processed faster than
paper filings. This is due in part because it can reduce the number of
rejected filings due to, for example data entry errors or logically
inconsistent answers to questions. Also, this speed can increase the
integrity of the data by addressing errors in a more expeditious manner.
Finally, the more current the data the more useful it is to the users of the
data.
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Transparency. Data filed electronically can be sorted and manipulated more
readily and because it is received and processed faster, it can give users
greater insight into the current status of those matters reported. Also,
electronic reporting enables wider dissemination of data to the public and
other plan sponsors and helps to fulfill one of the underlying purposes of
ERISA to facilitate the dissemination of plan data to participants. Finally,
this greater insight can promote competition with resulting decrease in
costs.
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Are the Benefits Valued by the Stakeholders?
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Currently there is limited perception of the benefits of the EFAST
system among the Stakeholders. However, similar electronic filing systems
such as the SEC’s Web IARD and CRD systems show that filers value systems
such as these. Further, disclosure sites such as freeerisa.com show that the
public desires and values access to the data available through electronic
reporting.
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However, there is resistance to change the method in which some submitters
file and testimony suggests that some and possibly many filers will not move
to electronic reporting regardless of the benefits. Currently, it appears
that cost is the predominant factor in the decision whether to use
electronic filing.
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Downsides and Costs
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It is difficult to argue that there is a need for electronic reporting
if the costs and downsides outweigh the benefits.
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The Council was unable to obtain data on the actual costs of creating,
implementing and maintaining the DOL’s current electronic reporting
process. However, we were able to piece together some cost figures from
similar systems. The SEC reported that their system cost about $12 million
over approximately 10 years, and only required an outlay of $3 million from
the SEC. All costs of the system are covered by filing fees. Freeerisa.com,
which provides Form 5500’s over the web free of charge, shed further light
on costs by stating that their operating site runs about $4,000 to $5,000
per month.
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There can be many downsides to implementing an electronic filing system, but
most of the downsides experienced to date in the EFAST system (and as
detailed above) are a function of how the system is structured and/or how
filers learn the new process and transition to the new system.
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Can These Benefits be Provided by the Current System?
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Due to the structure of the current EFAST system, which allows for
multiple forms of submission, it is unclear whether it can provide the cost
savings enjoyed by other electronic reporting systems. The only cost savings
of the current system appear to be those obtained by the government, which
no longer needs to store paper filings. There are also some small cost
savings to submitters since they no longer have to print and send paper
filings. The testimony presented revealed that costs currently outweigh the
savings in participating in EFAST. Without significant structural change it
is therefore unclear whether the current EFAST system can provide the
desired efficiencies and cost savings promised by an electronic filing
system.
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The current EFAST system is able to provide greater transparency to the data
filed, but due to delays in processing this data, caused in part by the high
rejection rate of filings and paper-based correction process, the data is
fairly old before it is made available to end-users including the
Government. Again, it appears that without significant structural change,
the current EFAST program will never live up to its full potential. Also,
the limited participation in the current EFAST program compounds the
difficulties described above.
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Notwithstanding the foregoing, witnesses offered testimony regarding what
should be done to correct some of the current deficiencies in the EFAST
system. For the electronic signature problem, the suggestions included
providing immediate access to PIN numbers on-line and authorizing PIN’s to
be sent directly to the transmitter. These fixes should avoid lengthy delays
in obtaining electronic signature codes and minimize the difficulties in
coordinating the submission of the electronic signature with the
transmitter. Witnesses further testified that the deadline for filing
electronic 5500’s should be extended to allow for the increased time it
takes to coordinate the electronic filing and complying with the
ever-changing DOL filing requirements. Witnesses also suggested that the
EFAST system revise the error check procedure, so that errors can be
reported and corrected in real-time to avoid rejected filings and delayed
notification of missed deadlines.
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However, even if the above corrections are implemented, there are still
significant out-of-pocket costs to participating in the EFAST program.
Principal Financial Group, which offers electronic filing to 25,000 small
plan sponsors (although only 4,500 filed electronically) reported that it
costs approximately $200,000 per year to maintain the system interface that
enables it to offer Form 5500 electronic filing through EFAST. With these
numbers it seems clear that for smaller plan sponsors and service providers
electronic filing is out of reach. Even larger transmitters who are in a
position to achieve economies of scale and can file electronically for
smaller submitters, testify that the costs and liabilities of an electronic
filing system make it unattractive. Unfortunately, the actual Government
cost for maintaining the current electronic filing system makes the economic
imperative for such a system even less clear.
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If the Benefits of the Current Electronic Filing System Cannot be
Efficiently and Effectively Delivered - What are the Alternatives?
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The Council received testimony from the SEC and NASD regarding
electronic filing systems that they have implemented for data gathering
forms similar to the Form 5500. The systems, called Web Investment Advisor
Registration Depository (Web IARD) and Web CRD, handle 36,000 and 1.2
million filings a year, respectively. These systems have two functions,
gathering data filed by the submitters and providing that data to regulators
and the public through a public disclosure system. The systems are web based
which allow any filer with access to a web browser to submit filings. Even
filers who do not own computers are able to make their filings
electronically by accessing the computers in their local libraries.
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These systems are low cost to the user (filing fees range from $50 to $500)
and reduce filing errors by checking the filing for completeness before the
filing is accepted.
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Also, these systems provide up-to-date information on filers and the
industry. Due to the timeliness of the data and its public availability, the
public and competitor companies have access to this information and can
report any irregularities in a timely manner. In addition the regulators
have the information they need to react quickly and efficiently to industry
changes.
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Moreover the systems allow for more proactive communication among the
various stakeholders. They are also proactive in that they provide tickler
notifications to filers regarding important filing dates and information. In
the future, the SEC plans to enhance the system by using the filed data to
assist investors in analyzing and selecting an advisor or broker.
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Of particular relevance to the EFAST system is the fact that the SEC
converted its CRD system from a mainframe to a web-based system. The
transition occurred over a period of just three months. Its success was
attributed to the use of beta test groups that looked for bugs and gave user
feedback. In addition, the SEC consistently and persistently communicated
the impending changes as well as provided training on how to use the new
system to its filers through several different media. This voluminous
communications drive was a key factor in the success of the new program.
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Some of the impediments in the current EFAST system were addressed in the
new SEC/NASD systems. Specifically, the SEC only requires a web-issued code
for signature. Also, the system was tailored to gather different data for
different regulators. Since the system is web based, the SEC did not have to
choose a particular software format or force the filer to incur the cost of
purchasing special software. Notwithstanding the benefits and success of the
system, the SEC does admit that the fact that the new electronic system was
mandated and had a trusted self-regulatory organization (“SRO”) to
implement it, contributed greatly to its acceptance and success.
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To enhance electronic reporting of Form 5500s, the ERISA Advisory Council
recommends that the Secretary of Labor initiate the following:
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Expedite work to implement a next generation
electronic filing system that maximizes the benefits and cost savings
achieved by other best-in-class government electronic filing systems.
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Base the system structure on real-time data from
Stakeholders who will be participating and who benefit from use of
the system
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Survey the Stakeholders for their desires with
regard to the specifics of electronic filing system. Use this
feedback to develop a rough framework for the system.
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Form an Advisory Group consisting of Stakeholders
and include other agencies and vendors with previous experience in
moving from a paper to an electronic solution, e.g. SEC, NASD.
Also include in the Advisory Group other agencies (i.e. PBGC and
IRS) that will use the data collected to ensure successful
migration from the DOL’s system into those agencies’ legacy
systems. The Advisory Group should exist through the life cycle of
the implementation process from creation of workflow
specifications to commenting on architecture mock-ups to reviewing
screenshots to assisting in testing beta versions of the system.
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Beta Test versions of the system. Make available
beta versions of the electronic reporting system to users spanning
size and usage volume to get critical feedback before launching.
If possible, include members of the Advisory Group in the beta
tests.
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Quality Assurance. Before launch do quality
assurance testing to ensure that the new system works as
advertised. This will enhance industry acceptance and increase
participation in the event that using the electronic system is not
mandatory.
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Incorporate the following elements into the next
generation electronic filing system.
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Use the Web: This will expand the reach to any
preparer who has access to the Internet either in their office or
at their local library. It will also decrease the cost and
complexity since filers will not be required to use approved
software or rely on third party transmitters. This will also
provide flexibility for system changes and preclude being
restrained to specific software formats. In addition, the system
recommendations listed below can be easily achieved through a
web-based system. The system could be either web enabled or web
based, although it appears that web based is more efficient and
more widely accepted. Web enabled would entail downloading free or
low cost software from the Internet that would reside on the filer’s
server and be used to transmit filings over the net. Web-based
would allow the direct input of a filing via the Internet.
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Security measures. Security can be provided by
encryption or possibly using a Virtual Private Network (VPN).
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Allow multiple service providers to work on the
same form. The current system forces a service provider to
coordinate the various parts of the filing, which is time
consuming and increases liability exposure. The need for input
from multiple disciplines on the Form 5500 can be addressed by
allowing access to the pending filing by the service provider,
accountant, actuary and plan sponsor, all of whom would submit
their portion of the filing. When the filing is complete, the plan
sponsor can enter its electronic signature and submit the Form as
final.
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Scalability: Allow the system to grow
exponentially without sacrificing the usefulness or integrity of
the system.
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User-Friendliness: When it comes to technology
system solutions “less is often more”. The key to acceptance
is ease of use. Consider beginning with a basic format and making
it more robust as industry acceptance grows. The SEC used this
approach in implementing its system (i.e. initially foregoing many
bells and whistles) to ensure that what was offered worked and
worked well.
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Design easy to understand and accessible training
using multiple media. Many are resistant to change, especially
when submitting something as important as regulatory filings in a
new and different manner. The DOL should conduct training sessions
around the country, using web casting, and widely advertise the
training sessions. Also, the DOL could conduct special early
train-the-trainers sessions for those organizations and people who
as part of their business conduct continuing education services
for those in the industry. In this way, the DOL will be able to
leverage its training efforts and minimize its cost.
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Maximize usability and transparency of data. If
data is transparent participants can more easily police their own
plans and ERISA organizations can recognize trends and comment in
a more timely fashion, which will assist the DOL in its oversight
efforts and ultimately reduce costs.
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In implementing a new electronic filing system,
remain cognizant of the conventional wisdom in the technology
industry that states, “Cheap, Fast and Good – Pick Two of the
Three.” In developing electronic systems it is difficult to have
it all. Decide which benefits are most important to the DOL and
the Stakeholders and then develop a system to accomplish these
targets. Based upon the testimony, stakeholders in electronic
reporting, including the DOL, value an efficient, cost-effective
system. Leaning on the industry adage would imply that it is
impractical to expect it to occur very fast. However, speed can be
increased by leveraging what other agencies have already done, but
this should not be at the expense of quality or cost. Therefore,
the ERISA Advisory Council recommends that the DOL take the time
necessary to do it right.
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Pursue the following regulatory changes to assist in
the success of the next generation system:
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Make electronic filing Form 5500s mandatory. The
easiest way to have paper filers transition to the more
cost-effective electronic reporting and thereby maximum economies
of scale is by mandating it. The Council believes that with the
exception of forms stated in Section 109(b) of ERISA, (i.e.
financial statement, accountant statement, actuarial statement,
and the SPD) there is sufficient current regulatory authority to
require electronic reporting.(2)
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Charging flexible filing fees sufficient to
support the maintenance of the system and add requested benefits
and upgrades.
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If the DOL maintains its position that existing
law does not allow a computer generated code to suffice for a
signature on an electronically filed Form 5500, then the Council
recommends that the DOL work for regulatory change eliminating the
need for original paper signature on the Form 5500.
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In the event that implementing the above
recommendations would be a lengthy process, the Advisory Council
suggests improving the current system in the interim. We suggest that
the following changes to the current EFAST system be implemented to
increase participation but only so long as these recommendations do
not significantly delay the next generation of the electronic filing
system.
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Provide a completeness check so that submission
errors are corrected before filing and provide immediate
confirmation to the submitter when the system receives a filing.
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Provide required software for free or at a deep
discount. Also, allow for the software to be downloaded via the
Internet.
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Increase the integrity of collected data and the
efficiency of the system by reducing the number of ways to file
under the EFAST system.
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Have consistent specifications for both the print
and electronic forms.
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Increase awareness of electronic filing and its
benefits to plan sponsors through a marketing campaign and
follow-up training sessions.
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Until the next generation system is launched, the
DOL should extend filing deadlines for those choosing to file the
Form 5500 electronically in order to allow time to comply with
filing requirements and to provide incentive for electronic
filers. Alternatively, changes to the Form 5500’s could be made
earlier so that the electronic fliers are not delayed.
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Finally, the Council uncovered a tangential issue in
connection with its investigation of electronic reporting. This issue
is whether investment advisors to ERISA qualified plans are still
required to file paper Form ADVs with the DOL in light of the SEC’s
implementation of the WebIARD. In 1998, the DOL said that all state
registered investment advisors must file a paper copy of their Form
ADV with the DOL in order to qualify under Section 3(38) of Title I to
ERISA. (See release reprinted below). In other words, to render
investment advice to pension and other plans covered by ERISA the
state registered advisor had to file its Form ADV and all subsequent
amendments with the DOL. This requirement is limited to advisors
registered with states, i.e. not investment advisors covered under
Federal law pursuant to the National Securities Markets Improvement
Act (NSMIA). At the time, the DOL expected that all investment
advisors would soon be able to file their Form ADVs electronically
through a centralized database. Therefore, this was just an interim
requirement until the centralized database was implemented. The SEC
and the States in conjunction with the NASD have created the WebIARD.
This system now allows federally covered as well as state registered
investment advisors to file their Form ADVs and amendments
electronically. Even though not all states mandate that investment
advisors file their Form ADV with the states through the WebIARD, all
states accept electronic filing of the Form ADV. Now that the WebIARD,
i.e. a centralized database for filing the ADV Forms has been
implemented and accepted by the states, investment advisors want to
know whether they need to keep filing the paper copies of the Form ADV
with the DOL. The ERISA Advisory Council recommends that the DOL
recognize the SEC’s Web IARD as a centralized registration system
for investment advisors so that investment advisors advising ERISA
Qualified Plans no longer have to file their Form ADV with the DOL (as
the DOL now has the ability to access to the Form ADV data through the
Web IARD).
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Testimony of Stephen Holden and Ronald Allen on July 20, 2002
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The ERISA Filing Acceptance System (EFAST) is the current reporting system
used by the Department of Labor for filing Form 5500s with respect to ERISA
qualified plans. The Form 5500 can include a series of 12 schedules and
accountant’s report and actuarial opinion.
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The three methods in which filers can file the Form 5500 using EFAST are: 1)
Form 5500 containing a “1-D” barcode stating it is a Form 5500 is filled out
by hand by the submitter and then sent to the DOL and scanned in which is then
converted by OCR into usable data. This method contains the highest error rate.;
2) Submitter uses DOL approved software to create a paper Form 5500 containing
the 1-D barcode and also a second barcode containing the salient data on the
Form. The Form is sent into the DOL and the data is retrieved off of the second
barcode and not by OCR; and 3) The submitter uses DOL approved software to
create the Form with the second barcodes, which barcodes are sent to the DOL via
a CD or tape or directly by modem.
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Of the approximately 1.2 million Form 5500 filings, 1% were filed through the
EFAST system in 1999 and 3% filed in 2000. It is anticipated that these
percentages will decline dramatically in the future due to the fact that pure
fringe benefit plans are no longer required to file a Form 5500.
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In order to submit filings electronically, a submitter must use software,
which complies with DOL-issued specifications, and have the software approved by
the DOL. There are over 500 approved transmitters, but only 32 actually submit
Form 5500s electronically and one, Paychex, accounts for 68% of the filings.
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Possible impediments to greater usage of EFAST are:
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Procedures designed to ensure valid filings can cause a valid filing to be
returned.
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Errors in data still are corrected by mail even if the filing was
submitted electronically
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Submitter must get a code to file with the Form representing their filer’s
signature and either give that code to the transmitter of the Form 5500 or go to
the transmitter’s office in order to submit it with the electronic Form 5500.
The DOL believes that the Government Paperwork Elimination Act doesn’t
eliminate paper signatures required by individual legislation.
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Submitters must purchase DOL-approved software. An impediment to offering
free or low cost software or a free system through the net is that would compete
with the current transmitters, and right now the DOL views transmitters as a
distribution channel for its electronic reporting system, however it may be
possible to do a barebones system that doesn’t compete with transmitters.
-
There is a channel management problem, i.e. there are a lot of people who
stand between the plan and the government in the current system, i.e. software
developer, plan administrator, preparer and transmitter.
-
Submitters expect same ease of use functionality as they find in other
electronic systems, e.g. E-bay.
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In order to help electronic filers, the DOL maintains a costly help desk,
which handles about 30,000 calls.
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Although the DOL maintains no data to determine the benefits or costs of
electronic reporting, it has determined that it is a good goal to pursue.
President Bush has sent out a memo to executive heads of agencies extolling the
virtues of electronic government, encouraging agencies to work across both
program and agency boundaries to enable electronic filing opportunities.
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Some of the DOL goals with respect to the future of EFAST are:
-
Move to Internet filing for cost and convenience purposes, however, the
DOL would much rather deal with transmitters because they are more sophisticated
“they get it” and we have trusted relationships with them.
-
Revise the error check procedure, so that errors can be reported real time
and corrected real time.
-
Address user issues of privacy and security.
-
Market the system to users.
-
Create incentives for submitters to use the system.
-
Ensure that other agencies, such as PBGC and IRS can use data obtained
from any future system.
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Testimony of Robert Plaze and Don Evans on July 20,
2002
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SEC created two systems, the CRD and the IARD. The IARD is a web-based
electronic filing and data retrieval system for investment advisor Form ADV
filings handling 36,000 filings a year and the CRD is a filing system for the
brokerage industry, which has just transistioned to be a web-based system. The
systems are data “check the box” gathering systems as opposed to narrative
or text filing systems.
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The IARD allows an investment advisor sitting in his office anywhere in the
country or, in fact, the world to electronically complete the form called Form
ADV through essentially the touch of a keystroke, as well as to pay filing fees
associated with the filing.
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The system also has a public disclosure component to it, which is available
to the public 24 hours a day and which provides almost complete transparency to
the filed data.
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There has been widespread industry support for the electronic filing system.
A few reasons are:
-
Cost savings. Where once numerous paralegals did filings, now just one
person can do it.
-
Reduced rejected filings. Prior to the system, approximately 66% of
filings were sent back due to mistakes. The system does a completeness check on
filings prior to submission so that errors are corrected prior to filing. The
system also has logic checks so that answers to questions are consistent.
-
The system automatically calculates required fees and deducts them from an
assigned account.
-
Has tickler system so that filers get advance notice of filing
requirements and deadlines and late filers are tracked.
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The system provides the SEC with good current data about the industry. Also
since the industry and the public have insight into the data, the SEC’s
policing of the industry has been aided. Also, it has helped the regulatory
process because the SEC can run queries to see what effect certain changes will
have on advisors.
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The SEC makes available for purchase the data on the system, which purchasers
can manipulate. The fees help to support the system.
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The SEC has also had significant success transitioning 7500 filers on its CRD
mainframe system to the web based CRD system in 3 months. Critical to the
success was using a beta test group of 100 filers on a pilot system to debug and
clarify the form. Also critical was the support communication through the
24-hour a day hotline and email system. The SEC sometimes had almost 1000
calls/contacts a day. SEC also notified users ahead of time about the upcoming
new system through a variety of methods, including linking to industry web
sites,
news articles, etc… Finally, the SEC used an advisory group of stakeholders
which viewed limited demos and gave feedback on proposals.
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Helpful to the success of the systems was that it was mandatory for the
filings to be filed through the system. The SEC believes that if it wasn’t
mandated, a large number of firms would not have bothered to use it, likely due
to inertia to change.
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The SEC overcame several impediments in its web based systems including: 1)
Signature: The SEC just issues a unique password to the filer to act as its
signature; 2) Different Agencies Requiring Different Data: The SEC just created
different screens to handle depending upon the filer; 3) Software: The SEC does
not have to pick certain software or choose a format since it made the system
web based, which has minimal requirements to us, in fact some filers just go to
their local library to do their filing; and 4) Service Provider: The SEC chose
the NASD an SRO under its jurisdiction to operate the system. They were chosen
in light of several factors including: 1) conflicts of interest, 2) financial
stability, amd 3) ability to handle sensitive information on a secure basis.
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The overall system cost of the IARD is approximately $12.5 million to build
over the years, but the SEC only had to pay $3 million of that cost. The rest of
the cost was borne by the NASD, which is repaid through the filing fees. Filing
fees range between $100 each year for the smallest advisors, to $550 for the
largest advisors in the system. The system is running a little over a year and a
half, all debts are paid and it is running at a healthy surplus (basically $1.4
million in operating expenses versus a little over $2 million in revenues).
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Testimony of Martin P. Colburn and Derek W. Linden on
July 20, 2002
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The CRD system handles a total of 1.2 million filings a year from 8,000
securities firms and about 680,000 registered representatives.
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Some key benefits from the system is: 1) eliminates duplicative filing with
multiple regulators (e.g. states, SEC and SROs); 2) reduced downtime for brokers
awaiting approval of their registrations; 3) eliminates data entry by the
regulator and errors associated with data entry; 4) completeness check promotes
accuracy of the data; 5) helps efficiency of the regulatory enforcement program.
Can do comprehensive or tailored reviews and can track filing history of filers
(i.e. easier to spot inconsistencies or potential problems). Overall this
reduces the cost of compliance; 5) enables much more of the public to have
access to the data without a concomitant increase in support personnel; 6) filer
doesn’t have to recreate data on the form each time but can use data from a
prior filing; 7) reduces costs of printing and mailing as users can download and
print their own copies of filings or forms; and 8) increase speed of receipt of
the information and transparency into current state of industry.
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CRD was operated as a central electronic system with paper filings until 1999
when it transformed to a complete web based electronic filing system.
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Challenges to creating a successful system: 1) Managing the requirements
process: Need to obtain consensus from regulators and the industry on a uniform
form; 2) Keep it simple by identifying the critical mass of functionality needed
and not creating multiple variations; 3) create benefits from the use of the
system, e.g. cost savings and ability to use information actually reported; and
4) picking a vendor (must have technology experts and business experts who
understand the system in order to manage the vendor).
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Service providers that used to provide the service enabled by the web-based
system just transition to providing higher value services to clients. For
example, they no longer send in the filing but instead charge for the advice on
how to answer the questions in the Form.
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Testimony of Judy Diamond on September 20, 2002
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Ms. Diamond operates the web site freeerisa.com, which provides Internet
access to copies of the 1.2 million Form 5500 filings. She also sells software
that enables purchasers to do various sorting and manipulation of the data
provided on the Form 5500 filings. She indicated that the cost she incurs in
providing these 5500s through the web is currently about $4-5,000 per month.
Judy indicated a willingness to work with the Department of Labor if they want
to provide Form 5500s via the Internet.
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Freeerisa.com has about 15-17,000 users per day. The types of persons
accessing the site are participants (many of whom lodge complaints about their
plans with her), plan sponsors (to check their actual filing or look at
competitors filings), financial professionals (e.g. accountants, brokers and
TPAs), attorneys (for divorce cases and to obtain necessary documentation in
representing participant clients who are too fearful to ask for the information
directly from the plan sponsor due to possible retribution).
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Judy indicated she was surprised by the number of plan participants
contacting her for help concerning their plan. Also, she was surprised when plan
sponsors contact her upset that their plan data is available over the Internet.
In fact, one plan sponsor demanded that it be removed from her site under threat
of litigation. Judy took the plan document off of her site.
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The major complaints freeerisa.com receives from end-users as mentioned
above, are:
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The data is stale. Even though she gets quarterly reports of 5500 filings
representing the most recent data available from the Department of Labor it is
still old information. For example, the most recent Form 5500s available are
from 1999 and even then only 50% of the Form 5500s from that year are available.
The data contains errors. The text produced by the OCR scanning contains errors.
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Judy indicated that web based reporting would be a preferable solution as it
would produce more accurate results. She also indicated that she would like
automatic data feeds of Form 5500 information available for download to her
site.
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Testimony of Pat Imhoff on September 20, 2002
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Principal Financial Group is a member of the Fortune 500, serves 619,000
individual policyholders, 75,000 group employer clients and 40,000 employer
pension clients. The Company’s Retirement and Investor Services Division
offers bundled and unbundled services to retirement plan customers. ERISA
services include the preparation of compliance tests, and the preparation of
various forms including the Application for Determination, premium payment forms
for the PBGC, and a signature-ready Form 5500 annual report. The testimony
focuses on the Form 5500.
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Principal provides Form 5500 and audit support services to 30,000 retirement
benefit plans, including 1,500 defined benefit plans, and 28,500 defined
contribution plans. Principal prepares 25,000 small plan filings (plans with
less than 100 participants), and 5,000 large plan filings (plans with more than
100 participants which also require a plan audit).
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Principal offers electronic filing to the 25,000 small plans. This service
began in 1987, when the electronic filings were submitted to the IRS. During
1997, Principal accounted for 10,000 of the total of 13,000 electronic filings
submitted. This year, Principal has submitted 4,500 annual returns
electronically. The number of electronic filings has dropped from 10,000 to
4,500 due to: 1 - a one year suspension of electronic filing because the DOL
issues the guidelines too late that year, and 2 - the signature and Personal
Identification Number (PIN) requirements are burdensome to plan administrators.
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Advantages to electronic filing are not always apparent. There is no refund
coming back to the client faster through electronic filing as there is with
individuals filing their taxes electronically. Advantages include confirmation
that the 5500 was received by the EBSA, savings in mailing and copying the Form
5500, and the attractiveness from a marketing angle of offering the service to
the clients.
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The IRS electronic filing system offered an edit check, which reported errors
to the transmitter, who could then resolved and re-filed. The EBSA EFAST system
includes an edit check, which then sends paper deficiency letters to the client,
who then forwards these letters to the Principal for processing. It would be
beneficial for the edit checks to be sent to the transmitter or sent to the
preparer, so that the problem can be resolved and the filing resubmitted
electronically.
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The electronic signature process is not simple, easy or immediate. The
clients must request a PIN/Signer ID from EFAST, a process which takes three to
four weeks. Then this information has to be turned over to the Principal for
processing. Plans sponsors do not want to handle the From 5500 twice. Principal
has had a 50% response rate in obtaining electronic signatures. The IRS system
was easier. Suggestions for improvement include providing PIN numbers on-line
immediately, and authorizing PIN’s to be sent directly to the transmitter.
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Supporting the electronic filing system costs about $200,000 per year, with
no real benefit to the transmitter. A suggestion is for the DOL to provide a
financial incentive to service providers to submit 5500’s electronically.
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Another challenge is timing. There is not enough time to implement annual
revisions to the 5500, prepare the forms, allow time for clients to request PIN’s
and Electronic signatures, and still meet the normal filing deadline. It takes
about three months to update the computer systems and obtain approval from the
EFAST office. This year, 2,000 clients were removed from the electronic filing
service because there was not enough time to obtain the electronic signature. It
was suggested that the deadline for filing electronic 5500’s be extended to
allow for these issues.
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Education and marketing to the industry on the benefits of electronic filing
is key. Actuaries, auditors and plan sponsors have to be brought on board in
this process.
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Testimony of Janice M. Wegesin on September 20, 2002
|
Ms. Wegesin is a Certified Pension Consultant, an Enrolled Agent and a member
of the American Society of Pension Actuaries (and a member of the ASPA board
from 1995-1998). Her firm specializes in employee benefit plan compliance,
emphasizing Form 5500 reporting and serves both public companies and small
businesses. Ms. Wegesin is also the author of The Form 5500 Preparer’s Manual
(Panel Publishers).
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Ms. Wegesin reported that when ASPA conducted informal survey of its members,
asking whether they currently use electronic reporting to file Form 5500s, the
answer was overwhelming “No”. She cited two important reasons for this lack
of interest in electronic reporting.
|
Problems with the transition to EFAST processing.
-
Problems with barcode translations
-
Lack of “digital image” back-ups to electronically filed data
-
Cited a filing on freeERISA.com with an error reporting a $76 million
prohibited transaction liability
-
Many practitioners are not willing to take on the extra work of electronic
filing
-
Most prepare the form for a timely filing and forward the package to the
plan sponsor for filing but do not monitor whether this is done or not.
-
Some did the filing as well, in order to avoid having to deal with late
filing issues, etc.
|
Ms. Wegesin asserted that one impediment to the expansion of electronic
filing is the fact that a submission filed electronically is not made available
to the public (i.e. on freeERISA.com) any more quickly than a paper filing. Many
practitioners who do work for sponsors of small plans and so ought to be
interested in the idea, are just beginning to learn that electronic filing is an
option.
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ASPA members that have moved to electronic filing tend to be the instigators
of this change rather than responding to the demands of their clients. Ms.
Wegesin cited one firm based in Virginia which has been filing most of its 5500s
electronically since it first became a possibility. In their second year of
electronic filing, they cite the following positives:
-
Plan sponsors are more attentive to deadlines, because the firm sets the due
dates well in advance of the date by which it must submit the forms.
-
Changes and corrections can be faxed to the plan sponsor, which cannot be
done for paper filings because faxes do not meet the requirements for paper
filings.
-
Production and mailing costs are reduced.
-
Transmission errors are communicated within 48 hours of submission.
-
Transmitters receive an electronic acknowledgement of receipt.
-
Those clients that prefer to continue with paper filings are said to be
suspicious of the electronic process.
|
Ms. Wegesin has targeted sponsors with multiple filings for the electronic
process. However, she cited resistance from service providers that supply other
information (e.g. institutional reports of investment transactions) to be
attached to the filings. However, accounting firms are making increased use of
PDF formats.
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Other problems:
-
Lack of support for electronic filing from major software vendors…lack
of demand from their customers.
-
A burdensome process, citing maintenance of
EFINs, transmitter codes and
passwords.
-
Database development requirements and security concerns.
|
Suggestions:
-
Why not use Form 1040 principals for electronic filing?
-
Allow transmitter to confirm signature of plan sponsor.
-
Asserts that law does not require burdensome electronic signature process,
instead the agency rule has mandated these requirements.
-
No incentive exists for practitioners or plan sponsors to migrate to
electronic filing – including any reduction in time or effort.
-
Paper process itself has problems and thus does not promote a change to
electronics.
-
Filings without attachments – smaller plans – could provide
significant improvements for a large number of plans.
|
Testimony of Susan Goetzinger on September 20, 2002
|
Fidelity piloted a program for approximately 1,000 plans, offering them an
opportunity to file Form 5500s electronically. During the last two years only 7%
of those plans have chosen electronic filing. Approximately 250 of the plans
indicated interest in electronic filing, but they choose not to use that method
because of confusion in how to complete the EFAST 1 form and the time period
involved in getting a personal identification number.
|
Fidelity identified the following challenges it faces in electronic filing:
-
Difficulties in scanning the attachments required for larger plans to file
electronically.
-
Concerns with the security of modem usage. There also are inefficiencies
due to the differences between the electronic filing software and print
specifications.
-
Waiting periods of up to 10 days to receive confirmation of receipt from
DOL of electronic 5500 filings.
|
Fidelity made the following suggestions to increase the use of electronic
filing:
-
Automatically extend the period for electronic filings or offer an
electronic extension process.
-
Enable accountants to send accountant’s reports directly to DOL and have
DOL match up the reports with the 5500 filing.
-
Permit immediate access to a personal identification number from the DOL
web site.
-
Provide very quick confirmations of receipt of electronic 5500 filings.
-
Provide online access at the DOL’s
web site so plan sponsors and service
providers can access 5500 data.
-
After making the foregoing changes, institute a DOL marketing campaign to
highlight the benefits of electronic filing.
|
Testimony of Robert Campbell, John Taylor, Joe Cronin
and Jean Blake on September 20, 2002
|
The only electronic filing Paychex has done for benefit plans has been for
section 125 plans and, even then, only for clients who have provided Paychex
with a power of attorney. Paychex has not offered e-filing for any other DOL
forms. They do not have power of attorney for any of the 401(k) plans they
administer and clients file those 5500s.
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When asked about their experience with section 125 filings, they reported
that the process was relatively smooth. There was some confusion about how to
get approved to file electronically but there were no problems in actually
sending the filings and getting acknowledgments. They said they did not have
suggestions for improvement because their use was so limited.
|
They did indicate concern with mandated electronic filing because some
clients may not have access to the Web. They also noted concerns with filing
5500s for 401(k) plans electronically because more parties are involved in
completing those forms than in section 125 plans.
|
They may be interested in the future in electronic preparation of 5500 forms
because of efficiency. But, many clients are very small, 11-15 employees or
less, and currently Paychex views electronic filing as more expensive than paper
filing.
|
They have approximately 23000 clients who file forms 5500. Approximately 2/3
of those clients have not voluntarily provided them with an e-mail address and
that is one source of their concern about client computer access.
|
1099Rs are the only other e-filing that Paychex does that they are aware of.
|
|
|
2002 Index for the Working Group on Electronic
Reporting
|
Advisory Council on Employee Benefit and Pension Plans
|
Actual Transcripts/Executive Summaries for the Council's full meetings and
Council sessions are available - at a cost - through the Department of Labor's
contracted court reporting service, which is Executive Court Reporters at
301.565.0064/Fax 301.589.4280.
|
July 19, 2002: Working Group on Electronic Reporting
-
Agenda
-
Official Transcript
-
Questions Posed by Vice Chair Timothy
Mahota.
-
E-Government Materials on “Bucketing of 24 Presidential Priorities by PMC
on June 25, 2002 as well as E-Government Strategy.
-
Slide presentation by Ronald Allen, E-FAST Program Manager, and Stephen
Holden, Consultant for the Pension and Welfare Benefit Administration’s EFAST
Electronic Reporting Program.
-
Materials on The Investment Adviser Registration Depository by Robert E.
Plaze, Associate Director, Division of Investment Management, U.S. Securities
and Exchange Commission (SEC)
-
Registration and Disclosure Overview Background Material Prepared by the
National Association of Securities Dealers (NASD)
|
September 20, 2002: Working Group on Electronic Reporting
-
Agenda
-
Official Transcript
-
Form 5500 Electronic Filing Testimony by Susan
Goetzinger, Vice President of
Reporting & Risk, Fidelity Investments.
-
Written testimony by Janice M. Wegesin, President of JMW Consulting in
Palatine, Illinois, representing the views of the American Society of Pension
Actuaries (ASPA).
-
Written testimony by Patricia Imhoff, Compliance Business Coordinator of the
Principal Life Insurance Company.
|
October 16, 2002: Working Group on Electronic Reporting
|
|
|
- Timothy J. Mahota, Acting Chair of the Working Group
- Evelyn F. Adams
- Carl T. Camden
- Dana M. Muir
- Robert P. Patrician
- James S. Ray
- John J. Szczur
- Ronnie S. Thierman
- Judy Weiss
- Michele M. Weldon
- David Wray
- Sharon Morrissey
|
|
|
-
Ron Allen testified that the future
decrease is anticipated due to the fact that Form 5500s are no longer
required to be filed for pure fringe benefit plans.
-
ERISA Section 109(a) provides that
"Except as provided in subsection (b) of this section, the
Secretary may require that any information required under this title
be submitted to [her], including but not limited to the information
required to be filed by the administrator pursuant to section
103(b)(3) and (c), must be submitted on such forms as he may
prescribe."
ERISA Section 109(c) grants authority to the Secretary to
"prescribe the format and content" of the SPD, SAR, and
"any other report, statements or documents, " other than
bargaining agreements, trust agreements, and contracts, that the plan
must make available to participants.
ERISA Section 110 authorizes the Secretary to prescribe, by regulation
or otherwise, "alternative methods" for compliance with
reporting and disclosure requirements for pension plans if the
Secretary determines that to do so would satisfy three criteria set
forth in the section.
ERISA Section 505 authorizes the Secretary, subject to Section 109, to
prescribe regulations that she deems necessary or appropriate to carry
out the provisions of ERISA. This authority includes prescribing
forms. The Department has previously defined "necessary or
appropriate" as meaning "helpful."
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