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November 2005 |
This report was produced by the Advisory Council on Employee Welfare
and Pension Benefit Plans, which was created by ERISA to provide advice to
the Secretary of Labor. The contents of this report do not necessarily
represent the position of the Department of Labor. |
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The 2005 ERISA Advisory Council formed a Working Group
on Communications to Retirement Plan Participants to assess whether plan
participants understand their rights and benefits under retirement plans
and if existing ERISA-required communication tools are accomplishing the
goal of full disclosure. |
The following issues were addressed: |
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Do SPDs and SMMs for retirement plans provide
participants with adequate and meaningful information on their benefits?
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Do SARs provide financial and other plan information
that is understandable and useful to participants and beneficiaries?
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Can any of the required disclosures be combined to
ease the administrative burden on plans without causing confusion for
participants or beneficiaries?
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Are the electronic disclosure requirements
appropriate for the disclosures being made and should the availability of
electronic disclosure be expanded?
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Do participants generally understand their rights
and their benefits under retirement plans?
Testimony to the Working Group was provided on July 6,
2005 and September 23, 2005 by six consultants or service providers, one
labor union, three membership organizations, and one nonprofit consumer
organization. Of these witnesses, five presented the viewpoint of plan
participants, five presented the viewpoint of plan administrators, and one
presented the viewpoint of an independent fiduciary. (The names and
affiliations of the witnesses and summaries of their testimony are
provided at the end of this report.)
After thoughtful debate and analysis of the issues and
testimony, this Working Group submits the following recommendations to the
Secretary of Labor for consideration:
Summary Plan Descriptions
Short-Term Recommendation 1: Provide regulatory or
advisory guidance to help plan administrators prepare understandable and
user-friendly SPDs.
Short-Term Recommendation 2: Enhance or create
mechanisms to enforce the regulatory requirement that SPDs be
understandable by the average plan participant.
Long-Term Recommendation: Review court decisions
granting legal superiority to SPDs and, if necessary, propose legislation
to amend ERISA to reestablish the original purpose and status of SPDs that
satisfy regulatory requirements.
Summaries of Material Modifications
Propose legislation amending ERISA to shorten the
deadline for distributing SMMs.
Summary Annual Reports
Revise the regulatory requirements for SAR contents and
format.
Importance of Disclosures to Participants
Require an introductory statement for each type of
mandatory disclosure and provide suggested language for these statements.
The Working Group believes these recommendations will
support the DOL’s goal of providing plan participants with
understandable and useful information about their employer-provided
retirement plan benefits.
Respectfully submitted
Advisory Council Working Group Members
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Antoinette M. Pilzner (Working Group Chair),
Butzel Long, P.C
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Lynn L. Franzoi (Working Group Vice Chair),
Fox Entertainment Group, Inc.
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R. Todd Gardenhire (Advisory Council Chair),
Smith Barney
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Sherrie Grabot (Advisory Council Vice Chair),
GuidedChoice, Inc.
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C. Mark Bongard,
Ashland Inc.
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Neil S. Gladstein,
International Association of Machinists & Aerospace
Workers
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Timothy W. Knopp,
Central Oregon Builders Association
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Richard D. Landsberg,
Nationwide Financial Services
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Mary B. Maguire,
Davis Consulting
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James D. McCool,
Schwab Corporate Services
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Thomas C. Nyhan,
Central States Funds
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Willow J. Prall,
DeCarlo & Connor
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Christopher Rouse,
Windham Brannon PC
ERISA protects the interests of plan participants and
beneficiaries by requiring disclosure of specific documents and
information, reporting of financial and other plan information to the DOL,
and providing access to Federal courts. The DOL has regulatory authority
over ERISA’s reporting and disclosure requirements and is therefore in a
position to provide guidance to plan administrators as to the type of
reporting and disclosure that should be meaningful to plan participants.
The following information is required to be
automatically provided to all retirement plan participants:
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summary plan description (SPD)
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summary of material modifications to the plan
(SMM)
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summary annual report (SAR)
The following information is required to be provided
when requested by a participant:
The following information is required to be provided to
a participant after a specific event with respect to that participant
occurs:
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notice of benefit claim determination and
determination on review
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notice of suspension of benefits
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notice of receipt of domestic relations order and
determination of QDRO status
The following information is required to be provided to
all participants after a specific event with respect to the plan occurs:
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notice of transfer of excess pension assets to
retiree health benefit account
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notice of significant reduction in future benefit
accruals
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notice of plan sponsor’s failure to make required
contributions to defined benefit plan
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notice of blackout period
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investment and related information under ERISA
Section 404(c)
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notice of intent to terminate a defined benefit plan
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notice of defined benefit plan benefits upon plan
termination
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notice of defined benefit plan’s underfunded
status
More information on retirement plan disclosure
requirements is available at www.dol.gov/ebsa/pdf/rdguide.pdf.
Plan administrators are generally required to provide
all of the above information directly to each participant in paper format.
However, a plan administrator who complies with specific regulatory
requirements can provide most of the above information to participants in
electronic format.
The 2005 ERISA Advisory Council formed a Working Group
on Communications to Retirement Plan Participants to evaluate how well the
materials distributed by retirement plan administrators to plan
participants under ERISA’s disclosure requirements, and the manner in
which those materials are distributed, achieve the goals of:
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Legal compliance
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Full disclosure to plan participants regarding
participants’ rights, including benefit appeals, legal rights and PBGC
information
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Providing information in a timely manner
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Meaningful and understandable information
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Easy accessibility and the appropriate mix of paper
and electronic formats
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SAR: A Summary Annual Report as defined in ERISA
§104(b)(3).
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SMM: A Summary of Material Modifications as defined
in ERISA §104(b)(1).
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SPD: A Summary Plan Description as defined in ERISA
§102.
The Working Group asked witnesses to consider the
following questions when preparing their testimony:
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What information should be required in a retirement
plan SPD so that participants and beneficiaries understand the terms of
the plan, their rights under the plan, the plan’s level of benefits, the
conditions under which benefits can be reduced, and the PBGC’s role with
respect to the plan? Is there information currently required in the SPD
that isn’t necessary?
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Presuming that the Form 5500 would be modified as
necessary, is there a better format for the SAR that would provide
participants and beneficiaries adequate and appropriate information
regarding the financial status of the plan? Should other plan information
be required on Form 5500 and the SAR?
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If we had a blank slate with respect to required
disclosures to retirement plan participants, what would you suggest?
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Can the average participant or beneficiary in your
retirement plan describe the major features of the plan?
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Is it feasible to combine any of the required
disclosures?
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Does electronic disclosure really work? Are there
limitations that can be alleviated without burdening participants or
beneficiaries?
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Is there plan information that participants and
beneficiaries routinely request that isn’t already required to be
disclosed?
Several witnesses testified that, in general, plan
administrators of defined contribution plans do a better job of
communicating with their participants than defined benefit plans.
Mr. Wray testified that the required disclosures are
not effective participant communications and should be limited to as few
as possible. Complying with the disclosure requirements is a significant
administrative burden on small employers and discourages plan adoption.
Mr. Szymanski testified that participants in
multiemployer plans generally are better informed about their plans
because retirement benefits are discussed in detail whenever a new
collective bargaining agreement is negotiated. Smaller union locals hold
meetings to discuss retirement benefits and larger union locals send out
written surveys and periodic updates on how retirement benefits would be
affected by a pending contract. Consequently, union members generally feel
they have input into the design of their retirement benefits.
Multiemployer plan participants also have the union as an intermediary
with respect to retirement plan questions or problems.
Mr. Hotz and Ms. Signorille testified that participants
who receive documents by electronic disclosure should be encouraged to
keep a paper copy for future reference when the participant no longer has
access to the electronic document (e.g., after terminating employment).
Ms. Hennessy cautioned that any rules with respect to electronic
disclosure should not be designed based solely on today’s technology,
but should be flexible enough to adapt to emerging technologies.
Ms. Hogg testified that, particularly for employers
sponsoring Code Section 401(k) plans, communicating with plan participants
has become more active and less passive. Communications to plan
participants should be divided into informational disclosures and
directional advice. She also testified that it is critical for disclosures
to take into account the diversity of plan participants’ education and
sophistication.
Mr. Gilbert’s testimony directed the Working Group to
remember that “size matters” and disclosure requirements impose
relatively greater administrative costs on small employers than on large
employers. Also, small employers tend to have less internal support for
plan administration and rely more heavily on outside administrators and
consultants, which also increases their administrative costs. Ms. Hennessy
also advised the Working Group to understand how its
recommendations would affect small employers, including how service
providers for large employer plans can adapt their products to small
employer plans.
Summary Plan Description Issues
The witnesses uniformly stated that SPDs in their
traditional paper format are too complex for the average plan participant
to understand and are not user-friendly. Mr. Hotz testified that most plan
participants are confused, misinformed, or uninformed after looking at an
SPD.
All of the witnesses stated that SPDs generally are not
written in plain English but are written in “legalese.” Because courts
have frequently held that the provisions of the SPD control any conflicts
with the provisions of the formal plan document, SPDs are written to
protect plan sponsors from legal action, not to provide plan participants
with basic information about their benefits. Several witnesses, including
Ms. Travis, testified that because courts have given SPDs a legal standing
that was not intended under ERISA or the Labor Regulations, SPDs will
continue to be written by plan sponsors’ attorneys for participants’
attorneys rather than by benefit communication specialists for
participants until this legal standing is changed. Ms. Hennessy testified
she expected the legalese trend in SPDs to not only continue, but to
increase.
Several witnesses, including Mr. McAllister, Mr. Wray,
and Ms. Travis, testified that participants do not read SPDs cover to
cover when they first receive them. They use them as reference guides. Ms.
Hogg compared the SPD to an owner’s manual for a car. Because
participants use the SPD as a reference tool, different formats are more
useful. Q&As, FAQs, a one-page “quick start guide” with more
detailed cross-references, and SPDs arranged in life stage or sequential
stages are more useful and understandable to participants. Mr. McAllister
testified that participants expect to be able to easily find information
in the SPD and to be able to understand what they find. He noted that both
the organization (i.e., the “life stage” arrangement) and the
presentation of the SPD are key to helping participants understand the SPD.
Mr. Wray testified that SPDs generally need to be reorganized to be
helpful to participants. Ms. Talbot testified that “language matters”
in making an SPD understandable to participants, and also noted that
question and answer formats tend to be easier for participants to use and
understand.
Electronic disclosure is generally more helpful to
participants because electronic formats can include pop-up boxes, links,
and search functions. One concern with electronic disclosure, however, is
that participants who lose access to the plan administrator’s computer
network because of employment termination also lose access to these
helpful electronic versions, and may not have kept paper copies of any
prior versions of the electronic documents. Plan administrators are only
required to provide a copy of the most current SPD upon request.
Generally, a plan participant cannot obtain a paper copy of a prior
version of an SPD unless the participant’s attorney requests it during
discovery in the course of legal action. Ms. Hennessy also testified that
alternative delivery systems are needed for times when the electronic
delivery systems fail.
Mr. Hotz noted that SPDs often do not specify their
effective dates or the dates when they are updated. A participant needs to
know when the SPD was published in order to know if he or she should
request or look for SMMs to update the SPD. Mr. Hotz and Ms. Hennessy both suggested that ERISA should require more frequent updating of SPDs
based on the number of intervening SMMs, not the number of years since the
last SPD was distributed. Mr. Hotz recommended that the SPD be required to
state in large print that the SPD is important and should be retained in a
safe place.
Several witnesses, including Ms. Signorille, Mr. Wray,
and Ms. Hogg, stated that it would be helpful for the DOL to publish “model
language” to be used to explain common retirement plan concepts, such as
the difference between accruing benefits and vesting in benefits, what a
plan sponsor’s reservation of a right to amend the plan means, and what
the plan administrator’s discretionary authority to interpret the plan
means. However, Ms. Hennessy testified that using model language in an
SPD would be difficult because all plans are different and complex. Mr.
McAllister also suggested that the DOL require an SPD to include a “Frequently
Asked Questions” section with questions and answers provided by the DOL.
Ms. Hennessy recommended that the DOL develop model, but not required,
SPD language warning defined contribution plan participants about the risk
of investing their plan accounts in employer stock.
Mr. Wray also testified that the DOL could encourage
more understandable SPD formats by publicly recognizing innovative SPD
formats that are easier for participants to read and use.
Summaries of Material Modification Issues
Several witnesses noted that the ERISA deadline for
SMMs of 210 days after the end of the plan year in which the modification
was adopted essentially made the SMM useless to the participant. Any
opportunity the participant may have had to effectively respond to the
modification may have been lost even if the SMM was timely provided. This
ERISA requirement was adopted in must less volatile times and before the
development of effective means of electronic communication. This deadline
could likely be shortened to a period starting when the modification is
adopted without adversely affecting plan administrators.
Ms. Signorille of AARP proposed shortening the deadline
to 30 days after the amendment is adopted for electronic disclosures and
60 days for paper disclosures. Ms. Signorille also noted that the SMM
should both describe the amendment and explain why the amendment was made.
Annual Statements of Benefits Issues
The annual statement of benefits is an important item
of information for participants as well as an important communication tool
for plan sponsors. Several witnesses stated that plan administrators
should be required to automatically provide the annual statement of
benefits each year, instead of only providing it when requested. Witnesses
testified that many plan administrators already do this, including Mr.
Gilbert, who testified that his organization already prepares annual
statements for participants in small defined benefit plans. Others
testified that plan administrators should be required to automatically
provide a statement of benefits once every three years or once every five
years.
Ms. Signorille testified that automatic distribution of
benefit statements should be required at least quarterly, noting that the
benefit statements can also function as an employee relations tools for
the plan sponsor. She also testified that participants in multiemployer
plans should also be entitled to receive statements of their individual
benefits, noting that these participants are not currently entitled to
receive these statements annually. Mr. Szymanski testified that some
multiemployer plans already provide annual statements of benefits to their
participants.
This is a more pressing issue for defined benefit plans
than for defined contribution plans. Defined contribution plan
participants generally receive plan account statements quarterly, or have
constant on-line access to their plan account statements.
Witnesses testified that the annual statement of
benefits for defined benefit plans should also include the plan’s
benefit formula, the participant’s compensation, years of service, and
other data used in the formula, and the actuarial assumptions used to
compute plan benefits. If the participant is notified of his or her
compensation, years of service, and other personal data used for computing
benefits on a periodic basis, the participant has the opportunity to
correct errors while supporting data and documentation are still available
to both the participant and the plan administrator.
Summary Annual Reports Issues
Most witnesses testified that plan participants do not
read the SAR, because it does not provide plan participants with any
useful information. Also, the text format of the regulatory model SAR is
an ineffective way to present financial data, which is the majority of the
information disclosed in the model SAR. Further, several witnesses,
including Mr. Szymanski, testified that the SAR is distributed too late
for participants to take any action with respect to information in the SAR.
Mr. McAllister recommending eliminating the SAR for
defined benefit plans, because the SAR information does not help a
participant understand the long-term financial health of the plan. Ms. Hennessy
testified that the funded status of a defined benefit plan
disclosed on the Form 5500 and SAR is generally meaningless to a plan
participant. She recommended against including the plan’s funded status
in the SAR. Ms. Hennessy also testified that the current model SAR for
defined contribution plans is “completely worthless” for plans where
investments are participant directed. Ms. Talbot recommended eliminating
the SAR for all plans if the SAR is not redesigned to be more informative
and useful.
Other witnesses suggested that including in the SAR
other information reported on the Form 5500 would help the SAR give a plan
participant an accurate picture of the current status of the retirement
plan such as:
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The date the last employer contribution to the plan
was made
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If the plan was amended during the last plan year
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If the plan administrator disclosed that participant
contributions were deposited late
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Whether any plan service providers were terminated,
and why they were terminated
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Funded status (if defined benefit plan)
All of the above information can help a plan
participant determine if there are any problems with the plan or if the
plan participant should be worried about how the plan administrator is
operating the plan. Mr. Hotz testified that the SAR should provide
explanations of how a participant is to interpret the information
disclosed in the SAR to assess the financial health of the plan.
In addition, the revised model SAR should provide
clearer information on all of the plan documents and reports that the
participant can review or obtain upon request, including the participant’s
right to receive an annual statement of benefits. Several witnesses,
including Mr. Wray, suggested that separate model SARs be provided for
defined benefit and defined contribution plans. Mr. Gilbert testified that
overall plan financial information in SARs for small defined contribution
plans is irrelevant for most plan participants and should not be required.
For defined contribution plans, the individual participant’s account
balance and individual contributions, earnings, and expenses for the year.
Summary Plan Descriptions
Conclusion: Plan administrators need to be reminded
that SPDs must be understandable by the average plan participant.
The Working Group determined that plan administrators
need to be strongly reminded not only of the ERISA mandate that SPDs be
understandable by average plan participants, but that understandability is
not limited to the words or sentence structure used in the SPD.
Understandability also includes the presentation of the information, such
as formatting of text and the method of delivery used.
Short-Term Recommendation 1: Provide regulatory or
advisory guidance to help plan administrators prepare understandable and
user-friendly SPDs.
The Working Group recommends that the DOL assist plan
administrators in preparing understandable SPDs by providing sample SPD
formats, sample language, and encouraging the use of interactive delivery
methods, including online access, CD-ROMs, and live presentations. The DOL
should clearly indicate that any suggested language developed by the DOL
is suggested only and not a safe harbor or otherwise mandated.
Guidance provided by the DOL could include:
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Samples of alternative SPD formats, such as
question-and-answer or “Frequently Asked Questions” formats, and
formats that arrange SPD information sequentially by life stages.
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Suggested sample understandable language, whether
newly created by the Department or already existing in Department
publications or other guidance, to explain common retirement plan
concepts, such as “accrual of benefits v. vesting of benefits,” “discretionary
authority of plan administrator,” and “reservation of right to amend
or terminate.”
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Encouraging plan administrators to use electronic
disclosures and other disclosure methods that are more interactive and
provide more specific or individualized information to plan participants.
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Enhancing protection for participants who receive
and use electronic disclosures and who lose access to those electronic
disclosures when employment ends, by requiring plan administrators who use
electronic disclosures to retain a printed copy of each version of the
disclosures made available in electronic format and to provide the
electronic disclosures both in print and on CD-ROM when requested by a
participant.
Conclusion: Because the regulatory requirement that
SPDs be understandable by the average plan participant is generally only
enforced through legal actions by participants, plan administrators have
no strong incentive to comply with this regulatory requirement.
The Working Group determined that there is no
discernable enforcement of the regulatory requirement that SPDs be
understandable to the average plan participant. This lack of enforcement,
combined with plan sponsors’ desire to be protected from potential legal
action, significantly contributes to the current trend of SPDs being
written by attorneys for attorneys instead of by benefit communications
specialists for plan participants. The Working Group concluded that the
DOL could begin to reverse this trend by enforcing the existing regulatory
requirements governing the manner in which SPDs are required to be
written.
Short-Term Recommendation 2: Enhance or create
mechanisms to enforce the regulatory requirement that SPDs be
understandable by the average plan participant.
Because it is important that plan participants and
beneficiaries understand their SPDs, the Working Group recommends that the
DOL strongly encourage plan administrators to provide understandable SPDs
by enforcing the regulatory requirement of understandability. These
enforcement mechanisms could include:
Conclusion: SPDs are not written in plain English
because SPDs are written by attorneys for attorneys, not for plan
participants, to protect the plan sponsor from legal action.
The Working Group concurs with all of the witnesses
that court decisions have changed the nature of the SPD from an
understandable summary of the plan provisions to a binding legal
description of the plan’s benefits. Plan sponsors are reluctant to
distribute an SPD that is written in plain English and understandable to
the average plan participant because any ambiguity in the SPD may be
interpreted by a court as providing a benefit the plan sponsor never
intended to provide. Plan sponsors are willing to provide the benefits
they intended to provide under the terms of the formal plan document.
However, plan sponsors are not willing to provide additional benefits just
because the understandable language or the summary nature of the SPD is
interpreted by a court as conflicting with the formal plan document and
creating new or additional benefits under the plan.
The Working Group sees the judicially-conferred legal
status of SPDs as a primary obstacle facing plan sponsors who want to
provide understandable and user-friendly SPDs to plan participants. Until
SPDs are legally returned to their intended status as plan summaries that
do not modify or supersede the actual terms of the formal plan document,
plan sponsors can be expected to provide plan participants with SPDs
written to protect the plan sponsor from potential liability, not to help
the participant understand the terms of the plan.
Long-Term Recommendation: Review court decisions
granting legal superiority to SPDs and, if necessary, propose legislation
to amend ERISA to reestablish the original purpose and status of SPDs that
satisfy regulatory requirements.
The Working Group recommends that the DOL survey the
facts underlying court decisions giving legal superiority to SPDs over
plan documents to ascertain whether these decisions were consistent with
ERISA’s original intent. To the extent the underlying facts reveal that
the SPDs were materially or intentionally misleading or not in compliance
with the regulatory requirements for SPDs, or both, the courts may have
reached the appropriate conclusion. However, to the extent the underlying
facts reveal that the SPDs were in fact drafted as understandable
summaries of the plan provisions that comply with the regulatory
requirements, the courts may have incorrectly modified the intended
statutory and regulatory purpose of the SPD.
If this review of the court decisions indicates that
compliant SPDs have frequently been granted legal superiority over plan
documents, the Working Group recommends that the DOL propose legislation
to amend ERISA to clarify that SPDs that comply with the regulatory
requirements, including the regulatory requirement that the SPD format not
have the effect of misleading, misinforming, or failing to inform
participants or beneficiaries, do not legally supersede the terms of the
plan document.
Summaries of Material Modifications
Conclusion: The current deadline for distributing SMMs
minimizes or eliminates the usefulness of the SMM.
The Working Group recognizes that ERISA already
requires the plan administrator to notify plan participants in advance of
any retirement plan amendment that reduces the rate of future benefit
accruals. The Working Group also recognizes that most plan sponsors
publicize enhancements to retirement plans soon after those enhancements
are adopted, to benefit from the positive employee sentiment resulting
from benefit enhancements. However, other plan revisions are still
communicated through SMMs distributed just before the existing statutory
deadline of 210 days after the end of the plan year in which the
modification is adopted.
The Working Group determined that the current deadline
can operate to prevent a plan participant from timely reacting to the
modification and should be reduced. The Working Group understands that
plan administrators who communicate with participants electronically would
likely incur minimal inconvenience or hardship because of a shorter SMM
deadline. However, plan administrators who communicate with participants
through paper documents, usually small employers, would incur additional
administrative expenses.
Recommendation: Propose legislation amending ERISA to
shorten the deadline for distributing SMMs.
The Working Group recommends that the SMM distribution
deadline be shortened to a specific number of days (e.g., 90 days) after
the date the modification is adopted.
The Working Group also recommends that the DOL review
the additional administrative burden imposed by this change on plan
sponsors of various sizes using various communication techniques. If the
additional administrative burden would be significant, the effective date
of this change should be delayed or staggered, or both, as appropriate.
Summary Annual Reports
Conclusion: The current model SARs in the Labor
Regulations do not provide useful information to retirement plan
participants.
The Working Group concurs with witnesses who stated
that the form of SAR provided in the Labor Regulations does not adequately
disclose to a plan participant the most helpful information that is
already being reported on the Form 5500.
Recommendation: Revise the regulatory requirements for
SAR contents and format.
The Working Group recommends revising the model SAR so
that the SAR becomes an informative and helpful disclosure for plan
participants. The Working Group recommends creating separate model SARs
for defined benefit plans and defined contribution plans, because
different information on the Form 5500 is beneficial to defined benefit
plan participants and to defined contribution plan participants. For
example, the total assets, total income, and total expenses of a defined
contribution plan generally is not helpful to a defined contribution plan
participant, because the participant’s plan benefit depends solely on
the participant’s individual account balance.
The revised model SARs should incorporate additional
information from the Form 5500, including:
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if the plan’s financial statements were required
to be audited, the type of audit opinion issued (unqualified, qualified,
disclaimed, adverse) and the name of the auditing firm;
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existence of fidelity bond coverage;
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transfers of assets to or from other plans;
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adoption of amendment to terminate the plan and
amount of employer reversion;
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adoption of amendment to increase or decrease plan
benefits (for defined benefit plan);
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late deposit of contributions by employer (for a
defined contribution plan);
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changes in plan service providers;
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funded percentage (for a defined benefit plan).
The revised model SAR for defined benefit plans should
present financial data in a table format, rather than a text format, and
should include more specific information on how the plan participant can
obtain a copy of the participant’s annual statement of benefits.
Importance of Disclosures to Participants
Conclusion: Participants need to be told why each type
of mandatory disclosure they receive about their retirement plan is
important.
The Working Group concurs with the witnesses who
testified that plan participants can feel overwhelmed by the amount of
information they receive about their retirement plan. It would be helpful
to plan participants if they were told why each mandatory disclosure they
receive is important to the participants for getting the maximum benefit
from their retirement plan.
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:
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Briefly summarize why the participant is receiving
the disclosure;
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Provide a general description of the plan
information included in the disclosure; and
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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.
Retirement plan participants need to understand their
benefits, rights, and obligations under their plans to maximize the
retirement security those plans can provide. Plan administrators generally
want to help participants understand and benefit from these plans, and the
ERISA disclosure requirements create a framework for plan administrators
to communicate this important information to plan participants. But
increased plan complexity and a changing legal landscape have both trumped
the regulatory call for required disclosures to be understandable by plan
participants. The ERISA statutory and regulatory disclosure provisions
need to be updated to address the increased complexity of plan information
that needs to be communicated to participants and to limit the legal
status of SPDs so these essential descriptive documents can once again be
understandable and useful tools for plan participants.
Summary of Testimony of Mary Ellen Signorille, AARP,
July 6, 2005
Mary Ellen Signorille, a senior attorney with AARP
Foundation Litigation, represented the participant perspective. Ms.
Signorille suggested that separate Forms 5500 be created for defined
benefit plans and defined contribution plans.
Ms. Signorille testified that SPDs need to be clear for
all participants and beneficiaries in terms of eligibility rules, how to
calculate the benefits and determine what the standard of review for
claims denial is. She also believes that 210 days after the last plan year
is too long for distributing SMMs, and recommends shortening this deadline
to 30 days after adoption of a plan amendment if the plan administrator
uses web based access or notice and 60 days if the plan administrator
still uses paper. She also stated that the SMM should indicate both the
changes made to the plan and why the changes have been made.
Ms. Signorille commented that SARs are not helpful. The
purpose of the SAR is to inform plan participants about the financial
health of the plan. For defined contribution plans, the SAR should include
an attestation that the money that was deducted from the employees’
compensation was actually put into their plan accounts. The SAR should be
looked at more globally, to figure out what information plan participants
really need to know to understand the financial health of their plan. She
also feels participants should be able to obtain historical copies of plan
documents by written request. Under current law, participants are only
able to receive the current documents. In response to a question, she
indicated that historical documents should be retained as long as the plan
administrator may deny a claim based on those documents.
Ms. Signorille also discussed annual statements of
individual benefits. AARP’s view is that these statements should be
furnished automatically on no less than a quarterly basis without the
current requirement that a participant first request the statement. AARP
and many other plan administrators currently do this, informing employees
of their benefits and the contributions being made by their employer,
which is also a good PR tool for the employer. Ms. Signorille commonly
encounters a problem when an employee retires and wants to know how his or
her benefit is calculated and the plan administrator won’t give the
employee the information used in calculating the benefit. She feels this
information should be provided when a person elects to retire. Further,
Ms. Signorille noted that participants in multiemployer plans do not have
the right to receive an annual statement of individual benefit. Although
some multiemployer plans do send out yearly statements, AARP urges the DOL
to require these plans to provide these statements.
Ms. Signorille suggested that additional disclosures be
required. Upon written request, plan participants should receive
information about the plan’s fiduciaries, which can be crucial in
determining whether the proper fiduciary made a disputed claims decision.
She also suggests that participants in multiemployer plans be able to
receive, upon written request, a list of employers contributing to the
plan. In addition, SPDs for multiemployer plans should specify how and to
whom a participant must give notice when the participant is returning to
work.
Ms. Signorille noted that it is very difficult to
understand SPDs, which are usually written by attorneys. SPDs need to be
easier to read and more easily accessible. Model language from the DOL,
including explanations of the difference between vesting and benefit
accrual, would help, as would answers to basic questions. In response to
questions, Ms. Signorille stated that different courts interpret
disclaimers between the SPD and the plan document differently. She also
said SPDs are written in so complex a manner and language partly because
of these differing court interpretations.
Summary of Testimony of Michael F. McAllister, Mercer
Human Resource Consulting, July 6, 2005
Michael McAllister testified that few participants ever
read Sponsor Plan Documents (SPD). When the SPD arrives, they give the SPD
a brief look and might peruse a summary if one is provided. Then they put
the SPD away for future reference. Plan participants will consult the SPD
when and if they need information or have a question. And when they use
the SPD in this fashion, they have two expectations, that they will be
able to find the information quickly and easily. Also, that once they find
the information, it will be presented in a way that’s easy to
understand.
However, McAllister said he has found it’s not the
amount of information required by ERISA that’s the problem, but often
the way that information is presented to plan participants. The witness
further testified that most SPDs today contain too much legal language,
they are not well organized and text is not formatted in a way that
promotes understanding.
First, McAllister recommended that the DOL consider
prescribing an order in which retirement benefits are covered in an SPD—an
order that corresponds more to how plan participants think about
retirement benefits. We often like to use a “life event” approach that
follows a chronological order:
-
Becoming eligible for and joining the plan
-
Earning your benefit
-
Owning your benefit
-
Receiving your benefit
-
Retiring early and how it affects how much you receive
-
Receiving full benefits
-
Dealing with special circumstances (e.g., disability,
death) and how they affect your benefits
-
Understanding what other circumstances can affect your
benefits (when benefits are denied)
-
Applying for your benefits
-
Knowing how your benefits are protected
-
Understanding how the plan is administered.
Second, DOL might require that each SPD include a list
of DOL-provided “frequently asked questions” and brief answers to
those questions. The questions would be the same for all retirement plans.
For example, the questions might include the following,
some of which are intended to alert participants that they cannot rely
solely on a retirement plan for all of their income in retirement:
-
Am I in this plan automatically?
-
If not, what do I need to do to join?
-
Is there a cost to participate? If so, what is it?
-
How does the plan work?
-
When will benefits be paid?
-
How much will I get if I retire (at various ages)?
-
What factors are used to determine my benefits?
-
What payment options do I have? How do they work?
-
What happens if I leave, die, or become disabled?
-
What factors could affect my benefit?
(e.g., QDROs,
termination before vesting)
-
Am I guaranteed to receive the full benefits the
plan provides?
-
Can the plan sponsor change or terminate the plan
without permission from me and other plan participants and beneficiaries?
-
What benefits am I entitled to if the plan sponsor
changes or terminates the plan?
-
What benefits am I entitled to if the plan sponsor
files for bankruptcy or is acquired by another company?
-
Where do I go with questions?
Third, employers could make plan documents more
accessible (e.g., online) and use a format prescribed by the DOL for a
shortened SPD, putting the remaining information (e.g., administrative
information, claims procedures, ERISA rights) in the plan document in a
prescribed format. That would make the SPD shorter but still provide
participants with access to information on other subjects when they need
it.
McAllister further testified that certain participant
notices for DB plans could be consolidated, especially if the proposed
Pension Protection Act (PPA) is enacted. Currently, participants in DB
plans may receive two separate notices about the general financial health
of their plan—the SAR after the Form 5500 is filed, and the PBGC's
participant notice (the 4011 notice) if the plan pays a variable premium.
If the Pension Protection Act were enacted, participants would receive a
third general notice, the "annual funding notice," as well as a
new notice for certain employers with 4010 filings. All general notices
would have different measures of how well a DB plan is funded. This will
be inherently confusing to participants.
The witness further testified there are strong
arguments for eliminating the SAR altogether for DB plans. He went on to
say that SARs include information about the amount of plan expenses,
benefit distributions and asset gains, but present it in a way that is not
really that useful to participants wanting to know about the long-term
financial health of their plans. The statement of the plan's funding
percentage contained in the PBGC's 4011 participant notice provides more
useful information. The statement in the SAR that the employer did or did
not make required contributions duplicates the requirement to notify
participants of missed contributions. The timing of the SAR—two months
after the filing of the 5500 for the previous year—is too late for
participants to react to anything that may have happened to the plan.
McAllister testified he believes electronic disclosure
does work, and will work even better in the future as Americans become
more and more accustomed to receiving and viewing information
electronically. Further, having SPDs online enables SPDs to be kept up to
date, makes SPDs easily accessible, and makes it easy to provide
additional resources (e.g., links to other disclosures) without
overwhelming people. And you can certainly print an SPD from a web site.
McAllister had two recommendations to make electronic SPDs more
user-friendly:
Online SPDs should be able to be printed so the text is
suitable for reading—not simply pages and pages of web-page-formatted
text. You may be familiar with a “printer-friendly” button on many web
sites that converts web-formatted text into text that is easier to
print and read. That kind of feature should be mandatory for online SPDs.
Also, Online SPDs should also have links to other sites
that would provide more information to participants. For example, there
could be links to sites for the DOL, PBGC, etc. And there could also be
links so plan participants can simply “click” and see other plan
information, such as financial or funding information currently contained
in SARs and other notices.
McAllister did indicate however that there should still
be a requirement that participants be able to get information in hard copy
if they wish to do so.
Summary of Testimony of John Hotz, Pension Rights
Center, July 6, 2005
John Hotz is the Deputy Director of the Pension Rights
Center, a national non-profit and non-partisan consumer organization. The
Center focuses exclusively on the protection of pension rights for
workers, retirees and their families. The Center receives feedback from
the constituency it serves, which includes feedback on the efficacy of
retirement plan communications and disclosures.
Participants and beneficiaries need accurate and
accessible information about their retirement plans. The ERISA reporting
and disclosure requirements furnish participants and beneficiaries with
the only information they have about their benefits. They have to be able
to rely on that information. A well informed participant is also a useful
enforcement tool.
The summary plan description is the primary disclosure
document that participants use to find out about their plan. Mr. Hotz said
that most participants are confused, misinformed or uniformed after
looking at the SPD. He suggested that the SPD should be written on a 6th
grade level. Nonetheless, it would still need to be comprehensive and
complete to give participants accurate and reliable information about the
plan.
He said that many SPDs fail to sufficiently identify
the situations when participants can loose or fail to qualify for
benefits. Such loss triggering events should be highlighted. He spoke
highly of the recent IRS relative value regulations and suggested that
similar disclosures are needed.
Mr. Hotz suggested a mandatory disclaimer for the
beginning of an SPD indicating the discretionary nature of many plan
benefits. He also suggested that this statement be tempered with another
one indicating which benefits that once earned could not be reduced or
eliminated. The SPD should also have the date as of which it is effective
and refer participants to subsequent summaries of material modifications (SMMs).
In this regard he also offered that SPDs should have to be updated more
frequently. He further testified that the recent revised DOL model
statement of ERISA rights should be a strict requirement.
The SPD should caution participants in extra large
print that the SPD is important and should be retained in a safe place. He
said that terminated vested participants often have trouble finding
documentation regarding their pension benefits. There should be a way
through the employer to readily get prior documents for such participants.
The annual report on the form 5500 needs more
information. The plan amendments and dates of adoption should be on the
5500. The schedule B information needs to be more understandable to
participants so that they can know which information is truly relevant to
determining plan funding levels.
Mr. Hotz also testified that the summary annual report
(SAR) is a valuable tool for participants, but that it also needs to be
enhanced. It needs more explanation on how to interpret the information in
the SAR for participants to know how to assess the financial health of the
plan. The SAR should also be attached to the 5500 when it is filed.
Mr. Hotz testified that it can be difficult to get
information from plan sponsors and administrators. They do not want to
disclose information to a party other than the participant without a power
of attorney executed by the participant. He said that this is not
necessary, and the DOL should make it clear that disclosures can be made
to third parties who are representing participants. He also testified that
it can be difficult to find the correct person with whom to speak about a
benefit claim. He is also concerned about a compliance gap regarding the
reporting and disclosure requirements.
Mr. Hotz recognizes the popularity of electronic
disclosures with many who are computer literate, but he cautioned against
deleting the current protections in the present rules on electronic
disclosures. He recommended at least one additional protection. He
suggested adding a required statement that participants should strongly
consider printing out all electronically delivered documents. He expressed
particular concern for terminated employees who may not have an
opportunity to print documents before they are escorted from the building.
Summary of Testimony of David Wray, President, Profit
Sharing/401(k) Council of America, July 6, 2005
David Wray is President of the Profit Sharing / 401(k)
Council of America (PSCA), a national non-profit association of companies
that sponsor profit sharing and 401(k) plans covering over four million
employees.
Mr. Wray described how it is critical for employees to
understand their retirement plans, including benefit formulas and plan
administration. This helps participants to utilize their plans, plan for
retirement, and avoid mistakes. Plan sponsors also benefit when
participants understand their plans since it helps to attract, retain, and
motivate workers.
He also pointed that defined contribution plan
providers have been improving the quality and quantity of information
provided to employees, and that nearly all defined contribution plan
participants receive more information than is required by law. Mr. Wray
said that plan sponsors, especially small companies, have limited
resources and that complying with regulations is expensive and discourages
plan formation.
Mr. Wray recommended that required disclosures should
be as few as possible since required disclosures are not effective
employee communications. He argued that regulations should allow for
flexibility of form and delivery. Areas employees need communications on
their defined contribution plans include how the plan operates, individual
account information, blackout periods, and meaningful changes in the
plan's benefits.
Concerning the SPD, Mr. Wray stated that they are not
useful communication pieces, but they are useful in a legal or claim
proceeding. He feels that SPDs need to be reorganized, and that plan
sponsors should have flexibility in how to reorganize them. Under current
requirements, plan sponsors follow the safest method and are discouraged
from being creative.
One problem Mr. Wray pointed to is definitions. He
stated that in the front of most SPDs are legalistic definitions instead
of a more useful description of benefits. Mr. Wray thinks that definitions
should be simplified, understandable, in the back of the SPD. He also
proposed that the DOL develop standard simple definitions that sponsors
would know are safe to use since plan sponsors currently use legalistic
definitions to protect themselves in proceedings instead of giving
participants useful information.
Mr. Wray feels that although employees get their SPDs
when they are hired, they do not look at the SPDs until something major
happens in their life, such as getting married, terminating employment or
nearing retirement.
Suggestions Mr. Wray made for SPDs included adding
frequently asked questions, being organized by life event situations,
having an index, and being integrated into electronic communications.
The Working Group and Mr. Wray discussed the
conflicting nature of SPDs in that they are both communications and legal
pieces, and that the legal concerns are undermining the ability to provide
understandable communications. There was also discussion about other
communications materials that are given to participants. Mr. Wray
described how plan sponsors develop SPDs to protect themselves legally and
then use other forms of communications to educate the participants.
Mr. Wray also suggested that if the DOL recognized
innovative SPDs, the lawyers may be less worried since the plan sponsor
could now say that the DOL said this type of innovation was a great idea.
Concerning the SARs and Form 5500s, Mr. Wray stated
that PSCA supports the 2004 report of the ERISA Advisory Council on the
fee disclosures.
Mr. Wray also discussed how the SAR was written for
defined benefit plans. He suggested that it might be better to have a
separate SAR for defined contribution plans. He also pointed out that
defined contribution participants are typically getting quarterly
statements showing their account balances.
The Working Group and Mr. Wray discussed the
possibility of a separate SAR for defined contribution plans and what
could be useful, such as are sponsors making timely contributions, were
there recent amendments, and fee disclosures.
Another topic Mr. Wray brought up was the 404(c)
requirement on prospectuses. He thinks prospectuses are not useful and
that they are much harder to understand than SPDs. Mr. Wray argued that
instead of a prospectus, participants need a very simple summary of what
is in each of fund. He thinks profile sheets work well. Mr. Wray proposed
eliminating the prospectus requirement for every investment option.
Summary of Testimony of Geri Travis, Aon Consulting,
September 23, 2005
Geri Travis is a senior member of Aon’s Northeast
Communications Practice. She has 23 years of experience in communications
consulting. Ms. Travis testified about the effectiveness of the summary
plan description (SPD), summary of material modifications (SMM) and the
summary annual report (SAR) as communication tools for plan participants
and beneficiaries.
Ms. Travis addressed her testimony to three areas:
-
The content and language of retirement plan
communications;
-
The organization and usability of retirement plan
communications; and
-
The accessibility of retirement plan communications.
Content and Language
The SPD has grown to include too much plan description
and too little summary. Litigation has changed the original focus of the
SPD from being a summary of the plan provisions to being an extensive and
legalistic enumeration of the plan provisions. Sponsoring employers desire
to limit their exposure to risk so lawyers necessarily review SPDs before
distribution. This results in too much legalese. Participants are
frustrated because they have difficulty understanding the document.
Participants consistently report that SPDs are not a
good source of information. Participants use an SPD for specific
information and they have trouble sorting through the legalistic language
to find answers to their questions. Participants yearn for user-friendly
plain-speak language that connects to the kind of information they will
find to be useful.
Ms. Travis also said that communications tend to be in
silos. The description of each plan is separate from the others.
Participants would benefit from descriptions of the retirement program as
a whole, showing how each piece complements the others.
Organization and Usability
Employees do not read SPDs cover to cover. The SPD is a
reference document. Employees consult it when they have a specific need
for information. It is critical for the format to serve the needs of the
end user.
Ms. Travis testified that SPDs should be organized
around life events, like employment, marriage, divorce, termination,
disability, retirement and death. She also said it is important for the
document to be easy to read. Pull quotes, side bars, bullet points, lists,
magazine style, white space, and highlighting all help focus the eyes of
the reader to important information. The attention span of employees today
is short and the format has to accommodate this.
Accessibility
Ms. Travis testified that electronic delivery of SPDs
has great promise to enhance the accessibility of the document. Electronic
delivery can also enhance content and usability.
Electronic distribution facilitates quick updates and
distribution. Electronic delivery serves the purpose that employees seek
in the SPD – the ready access to answers to specific questions.
Electronic documents can have a search function and links to other
relevant information. This makes navigation of the document easy and
efficient.
Employers can save costs through electronic delivery.
Ms. Travis also said that the initial cost of implementing electronic
delivery can be expensive, but cost savings should be realized over time.
In summary, Ms Travis identified key elements of
effective SPDs as follows:
-
The tone is personal and avoids legalese
-
Technical terms are defined in a glossary
-
An introduction places the benefit being described
in context and states what can be expected of the sponsoring employer and
what is expected from employees
-
References to other relevant sources
-
In the case of participant directed investments,
rudimentary education on investing would be included
-
Efficient navigation and cross references
-
Flexibility in delivery methods.
Summary of Testimony of Patrick Szymanski,
International Brotherhood of Teamsters, September 23, 2005
Patrick Szymanski, who is General Counsel for the
International Brotherhood of Teamsters, began his testimony by indicating
that he thinks it is very important that people who have retirement
benefits and other benefits that are governed by ERISA have an ability to
understand those benefits. He stated that he was going to be giving a
union - and primarily multiemployer fund - perspective.
According to Mr. Szymanski, there are approximately
1,650 multiemployer plans in the United States, covering approximately
60,000 employers. Ninety percent of the employers that participate in
these plans are small employers, with fewer than 100 employees. Ten
million employees are covered by these plans.
Mr. Szymanski indicated that multiemployer plans serve
an important purpose for two reasons. First, they allow small employers to
provide meaningful retirement benefits that they probably would otherwise
not be able to do. Second, they allow people to work for more than one
employer and maintain their benefits.
In the multiemployer situation, Mr. Szymanski testified
that employers and unions have a legitimate and critical need for
information about the plans. This information is needed when it comes time
for them to renegotiate the contract because that is the point at which
contributions to the plan are fixed. He also indicated that they need
information about the plan during the term of the contract because under
ERISA there are serious things that can happen in the event a plan becomes
underfunded. They need to have an opportunity to act, even during the term
of the contract, in order to avoid those consequences.
Mr. Szymanski stated, in part, that “. . . a
participant is not going to have any idea of what a funding standard
account is, and what the SAR says about the health of the fund. . .” He
also indicated that 5500s and SARs are not sufficient because, in a lot of
situations, the information comes too late to be able to react.
Mr. Szymanski testified that his impression is that “multiemployer
union plans have participants that generally are better informed about
their benefits than other situations.” He indicated that part of this is
due to participants focusing on the retirement benefits when the
collective bargaining agreement is renegotiated and wanting to know what
will happen to their benefits and whether their benefits are going to be
changed or reduced.
When asked what mode of communication employees are
using to get information when benefit issues come to the forefront, Mr.
Szymanski indicated that in his union there is a proposal procedure prior
to renegotiating the contract where employees covered by the contract
either come to a meeting, if it is a smaller bargaining unit, or get
something in writing, if it is a larger bargaining unit. In some
situations involving large contracts, he indicated that written surveys
are sent to members about what sort of things they want to see in the next
contract. In larger contracts, there are periodic statements that go out
in the course of negotiations to give people updates on what is going on
and at the end there is a contract ratification meeting or procedure. In a
smaller group, he indicated that it would be a meeting at which the bullet
points of the contract are presented to everybody, people find out what
the tentative agreement is, and they vote on it.
In response to an inquiry about whether members of the
union feel like they have a say in the design of benefits, he indicated
that such was the case and that there are also other reasons that members
know more about their benefits. He stated that “part of it is the
structure of our funds being jointly administered between the employer and
the union.” He further stated that “[t]he union is also the principal
point that the member comes to when they have a problem with their
benefits, or they have an issue with their benefits.”
Mr. Szymanski indicated that to the extent there are
questions, the union, which is participating 50/50 in the administration
of the plan, has the ability to go to the fund and say you ought to have a
800 number, you ought to have an information system, your web site needs to
be updated, you need to put more information up there for members. He
indicated that union representatives generally come up through the ranks
just like the employees did. According to Mr. Szymanski, “[i]f they don’t
understand it, they understand that their fellow members don’t
understand it, so the impetus is right there.”
He testified that some plans issue individual benefit
statements on an annual basis. An example that he provided was the Western
Conference Plan that covers the Western United States for the Teamster’s
organization. The Plan sends out an individual statement to each
participant every year indicating what their benefit is and how it has
changed from the year before. He indicated that this was a tremendous
advantageous because an employee gets a statement that is tailored
precisely to his or her situation. If they think that their benefit should
have gone up because the statement doesn’t give them credit for whatever
work they did, they can correct it then. He indicated that some people
have told him that it is difficult to give individualized statements to
everybody, but that he not so sure that it is.
Mr. Szymanski testified that “information seems to
get out better to our members because of the contract negotiations,
because of the contract, because of the ability to go someplace local and
actually talk to an individual about the benefits.” He also indicated
that funds of his union have put out periodic newsletters and magazines to
members that are well-designed, informative and present the information in
a way people can understand. He testified that, “[t]o some extent, the
magazines are necessary because, as other people have described, the SPDs
have become so laden with qualifications and all of the details for fear
that a general statement is going to be misconstrued, that in a lot of
situations, they’re too long, too turgid and it’s difficult to read or
understand.”
Summary of Testimony of Diane Talbot, Merrill Lynch,
September 23, 2005
Ms. Talbot does not believe more information is needed,
but she stated that the relevance and understandability of the information
that is given can be improved importantly. Ms. Talbot termed “informational”
information (as opposed to motivational information) as being that
information that is the foundation for understanding the plan. It should
be (1) brief, (2) easy to understand and (3) accessible. She said the SPD
is not useful from a “brevity” perspective, and that “language
matters” in making the SPD easy to understand. She cited the examples of
substituting “you” for “plan participant” and posing and answering
questions rather than telling as ways to improve understandability. She
said that “self-served” information would be better than packaged
info, and that on-line was more accessible (and less costly in her view)
than hard copy. She recommended that the Social Security statement be used
as an excellent example of an informational document.
She recommended that a Participant Bill of Rights be
created and communicated. She believes more disclosure is not required,
only a redesign of existing disclosures. She recommends a re-evaluation of
all disclosure requirements to eliminate unhelpful (not specified) info.
She believes brevity is important.
She recommended the SAR be redesigned or eliminated.
She stated that she believes plan transparency is
currently “good,” but recommended that plans be made public.
Summary of Testimony of Barbara Hogg, Hewitt Associates,
September 23, 2005
Barbara Hogg, an actuary for Hewitt Associates and
Practice Leader for Hewitt’s Defined Contribution business, covered four
different areas during her presentation:
-
Trends that show that retirement plan designs are
becoming more complex and therefore, plan sponsors are trying to make
communications’ tools simpler for participants. For employers offering
Code Section 401(k) plans, plan communication has become more action-based
and less passive communication. This puts greater pressure on the
participants to decide how much to save and how savings should be
invested. The DOL should recognize that plan communication should be both
informative and supportive. The challenge for this Working Group is
deciding how to balance the need for complete information with the role
that communication can play to help participants take greater action on
their plans.
-
Communication should be directed to the
specific
audience target. In this regard, Ms. Hogg analogized the offering of a
plan to a participant to a purchase of a car. Using this analogy, the SPD
for the plan serves as the car’s owner manual. Certainly, participants
do not read the SPD cover to cover upon initial participation, but instead
rely on the document when they have specific questions. After the purchase
of the car, various follow-up communications are made from the dealer to
the purchasers. Plan communication efforts should focus similarly on
providing education when the information is relevant (i.e., relevant
events such as marriage, death, retirement).
-
Information should relate to directional needs:
Communications to plan participants and beneficiaries should differentiate
between informational disclosures versus directional advice. Disclosure
information is certainly the safe thing for plan sponsors to provide;
however participants need direction to make decisions – such action
based information should also be provided.
-
The audience of plan participants and beneficiaries
is diverse: The diversity of the audience poses several challenges for the
plan sponsor in disclosing the terms of the plan – educational levels of
the participants; difficulty in communicating quantitative topics; lack of
understanding of retirement programs; default by participants to use
short-cuts in making decisions; and the power of framing the
interpretation of the material disclosed.
While the SPD is regarded as a reference material, it
should be easy to understand and structured according to various “life
events” that trigger questions about the plan. Communications should
differentiate between informational versus action-required types of
disclosure. Since most participants rely on electronic disclosure,
continuance reliance on on-line disclosure should be encouraged.
For plans that provide quantitative options (e.g.,
relative values of optional forms of payment), participants and
beneficiaries generally do not relate to the numbers provided to them.
More is not always better; in fact, too much information may disable a
participant and beneficiary in making a decision. People generally rely on
taking “short cuts” in making major life decisions – for example,
they rely on emotions instead of data; they prefer to defer to the advice
of experts; they assume past experiences are indicative of future
experiences. As a result, the most important information brought forth to
participants and beneficiaries should use examples and rely on model
language (that could be provided by the DOL).
In conclusion, participants and beneficiaries need more
guidance and direction with respect to plan communications; however, such
efforts must focus on simplification so that such recipients of benefits
can understand the benefit decisions that must be made.
Summary of Testimony of Lynne Sport, Society for Human
Resource Management, September 23, 2005
Lynne Sport spoke on behalf of the Society of Human
Resource Management. Ms. Sport is the Director of Human Resources and
Administration at the Carnegie Endowment for International Peace, a
non-profit think-tank specializing in international affairs, where she's
responsible for the full range of Human Resources management.
SHRM members include HR professionals of both public
and private employers who are intimately involved in all aspects of
pension plan management and administration. Based on the experience of its
members, SHRM believes it is essential that plan participants understand
the qualifications and benefits of their retirement plan, how to contact
the plan administrator if they have questions, and how to access the tools
necessary to make sound financial decisions regarding retirement. Pension
plan participants need to have information, education, and professional
advice to wisely exercise their investment responsibilities in preparing
for retirement.
Most pension plan SPDs are very cumbersome and very
difficult to read. The format of the SPD should be standardized in the
same way that a mutual fund prospectus is standardized. It would be easier
for a mobile workforce to understand plan information if it was presented
in a standardized format across employers and plans. SPDs should also
contain an FAQ or a Q&A section to address specific questions, such as
plan fees.
Ms. Sport stated that most plan participants do not
read the SPD in its entirety at any one time, but in relation to life
events. They read part of it when they first become eligible, when they
want to take out a loan, or when they're ready to think about retirement.
The SAR provides important financial information, but
most plans have so much financial information that a participant rarely
invests the time to read through the document and usually does not
understand the information in the SAR. The SAR information should be
accompanied by interpretive and illustrative information, such as what
percentage the plan assets have grown during the current year and the
amount of the funds that the employee has invested into the plan,
presented in the same format as the participant's quarterly statement,
including graphs and pie charts.
Further, the SAR was developed principally to disclose
annual financial status information of a defined benefit plan, not a
defined contribution plan. Because defined benefit plans operate quite
differently from defined contribution plans in terms of funding
mechanisms, plan structure, distributions, and other provisions, it would
be useful to restructure the SAR to disclose different information for
defined benefit and defined contribution plans.
SHRM believes a blank slate with respect to required
disclosures to retirement plan participants should consider legal
compliance and participant's rights, which in turn include benefits,
appeals, legal rights, and PBGC information, as issues to be considered
when communicating to plan participants. Also, comprehensible information
needs to be provided to plan participants in a timely manner and
accessible in multiple formats.
If plan administrators were allowed to develop, without
fear of litigation, a set of documents that met all of the disclosure
requirements, but were presented in layman's terms, participants would be
able to more completely understand the plan. To provide complete
protection from litigation, and to ensure that the plan language is the
final authority on inconsistencies between the plan and the SPD, SHRM
encourages Congress to amend ERISA to require an SPD to state clearly that
in the event of discrepancies between the SPD and a plan document, the
plan document prevails. This approach would enable participants to ask
more questions regarding their retirement savings options and encourage
more participants to become involved with the retirement program, because
if the SPD does not explicitly refer to the plan document, most plan
participants do not realize that there is a document other than the SPD
controlling the operation of the plan.
In response to a question, Ms. Sport stated this change
is needed because it's difficult for an employer, and particularly the
smaller employer, to keep all the plan documents in check. Her experience
is that major discrepancies between the plan document and the SPD don't
often occur, but minor discrepancies do, which is why plan administrators
need more complete protection to go to the plan document in the event of
discrepancies.
Plan administrators should take more responsibility in
effectively communicating retirement plan benefits to their work force.
There are several models that an employer can implement which hinge
primarily on the fact that most plan participants need another human being
to explain the written plan explanations. One option is devoting a
full-time staff member who is an expert on the retirement plan and who is
able to explain the inner workings of the plan to the average employee who
may have little comprehension of the retirement plan.
Another option is for the plan administrator to bring
in an outside consultant from the investment group that sponsors the plan.
This representative should be made available to all employees for
educational purposes and to answer participants’ questions. This can
cost the employer and the participants in time, but can often be provided
without additional direct monetary cost to either the employer or the
participants.
In response to a question, Ms. Sport stated that
although HR professionals push a lot of information out to participants,
the participants choose to listen when they want to and they choose not to
listen at times. Therefore, it is important for plan administrators to get
plan information out there, make sure it's always accessible to the
participants, and remind participants in many different ways throughout
the year that the information is available.
Electronic disclosure does work, and should be
available and used by plan administrators and participants whenever
possible. Access to the most current plan information is extremely helpful
and a considerable improvement over hard copies. The Department of Labor
should continue to encourage the growth of electronic disclosure. As has
been demonstrated by Hurricane Katrina, it is valuable to have employee
benefit information on-line and accessible from anywhere through internet
access.
Summary of Testimony of Sam Gilbert, United Plan
Administrators, Inc., September 23, 2005
Sam Gilbert testified the theme of his presentation is
“Size Matters." What makes sense for mid to large entities in
benefit communications, where most legislators and regulators are focused,
often costs more for smaller businesses to accomplish, and has unintended
consequences with little real informative value.
Gilbert referenced data from the Small Business
Administration (SBA) that there are 23 million small businesses in
America. That means 99.7% of all employer firms are considered small.
Small business employs 50% of all private sector employees and pays 44.3%
of total private payroll.
Mr. Gilbert provided testimony on an additional SBA
report about retirement plan administrative and disclosure costs entitled,
"Cost of Employee Benefits in Large and Small Businesses." Using
data from Form 5500 sheds light on the cost per participant sponsors pay
for administrative expenses on employee benefit plans. In defined benefit
plans with over 5,000 participants, it costs on average $159 per
participant to produce the annual disclosure requirements. In defined
benefit plans with 100 or less employees, it costs $530 per participant,
on average – 330% more.
The witness went on to say that the larger the business
entity, the more the likelihood that one or more full-time individuals are
responsible for employee benefit communications in the human resource
department. The human resource department serves as a place to go if a
worker has questions or needs information about their benefits. The
trained staff's only job is handling benefit issues. The smaller the
business entity, the less likely there is a human resource staff or an
individual dedicated to benefits. That function is usually handled by a
CFO with varying degrees of benefit knowledge, or the small business owner
or owners.
Mr. Gilbert testified that most small businesses employ
outside advisors, both independent and financial service-related to
design, install, operate, and communicate employee benefits to their
workforce. There are a fair percentage of small business owners on both
sides of the issue with the ease, comfortableness, or access to electronic
benefit communications. Policies designed to encourage electronic delivery
of benefit communications should be explored on a voluntary basis, mindful
of the hesitant nature of some in a voluntary benefits world, and the
benefit administration cost per participant differential that already
exists between large and small entities.
With respect to SPDs Mr. Gilbert suggested that the SPD
information be condensed within two pages, and add a third called
"Feature Descriptions of Your Retirement Plan,” listing numerous
one-page topic descriptions that can be requested at any time by the
participant, with an obligation by the sponsor to provide topic
descriptions within 30 days of the written request. The new participant
would not be overwhelmed by information overload, and would gain knowledge
of a subject when it is more useful to them at various points within their
career. The SMMs given to participants should also refer the participant
to an updated topic description as a result of the modification.
The witness stated that his organization prepares
individual benefit statements yearly for defined benefit plan
participants. However, his organization is always aware that few
participants understand that benefit projections are estimates, not
promises. Their actuary is concerned that the proposed disclosure rule for
relative values will add an additional cost of $200 - $300 for each
terminated employee.
Mr. Gilbert stated that size also matters with respect
to the SAR. He has never been convinced that a participant needs to know
the total value of plan assets in a small business defined contribution
plan. This information does not need to be on the SAR. The total earnings
of the plan are also irrelevant. What is important to the employee is the
employee’s account value and individual contributions, earnings,
expenses and vesting rights.
Mr. Gilbert urged the Working Group to request the DOL
to convene a working group of small business employee benefit plan
advisors who could recommend procedures that might establish more
effective benefit communications for the small business workforce.
Summary of Testimony of Nell Hennessy, Fiduciary
Counselors Inc., September 23, 2005
Nell Hennessy, President and Chief Executive Officer
of Fiduciary Counselors, Inc., first addressed the question of the funded
status of a pension plan (and specifically the required participant
communication for an under-funded pension plan) and commented that the
funded status in the abstract is not terribly useful and every measure of
the funded status that comes off the 5500 is meaningless if what you're
trying to convey to a participant is how well funded is your plan if it's
going to terminate. Ms. Hennessy commented also that her views were from
the perspective of large pension plans and that the Working Group might
consider whether a threshold could be developed so plans under a certain
size would not have to deliver the notice of under-funding.
Ms. Hennessy remarked that the PBGC notice is not
ideal, because it, too, uses the funded measure, the current liability
calculation that's used for minimum funding. But its advantage is that it
is intended as a stand-alone notice, rather than something added to the
SAR because “no one read(s) the summary annual report.” The other
benefit of the notice warning to participants is consequences to them if
their plan terminates and the level of guaranteed versus non-PBGC
guaranteed plan benefits, which Ms. Hennessy testified is a very useful
description of what could happen if the under-funded plan terminated.
Ms. Hennessy added, in summary, that most defined
benefit plan participants, with the possible exception of very small
plans, already receives information about the funded status of their plan,
and she would encourage the Working Group to not recommend moving that
information into the SAR.
Ms. Hennessy then addressed SPDs. She commented that
the SPD disclosure for defined benefit plans is “actually pretty good.”
She noted that the separate annual notice for under-funded plans is more
effective than longer boilerplate in the SPD.
With respect to SPDs for defined contribution plans,
she suggested warning those participants about dangers that have already
been seen. Specifically, she suggested that the required explanation of
the non-guarantee of benefits from PBGC should be expanded to include a
warning about the risk of employer stock. Ms. Hennessy suggested that the
DOL develop model language, if not required language, for the SPD warning
about company stock. Specifically, the model language should refer to
company stock as non-diversified and that if the employer failed, in all
likelihood the stock would be worthless. She noted that the SEC web page
has an excellent description of what happens to stock for a company in
bankruptcy that the Working Group might consider suggesting as model
language.
In response to a question about the value of model
language if plan participants do not tend to heed warnings about employer
stock, Ms. Hennessy stated that she felt some people will heed the
warning, and the ideal would be to have model language included in the
description of the stock fund that the participants get as part of their
investment materials. Currently, these statements are not typically in the
SPD and therefore not subject to the Departments oversight. Ms. Hennessy felt that the same warning about the risk of employer stock is presented
in an ESOP and while the suggested model language will be helpful to ESOP
participants, nothing additional was needed.
Ms. Hennessy addressed SARs specifically for defined
contribution plans, and stated that the SAR for a defined contribution
plan is completely worthless, because the participant really doesn't care
what's in the whole plan; rather, the participant only really cares about
what’s in his or her own account. She suggested a more meaningful
approach would be to give participants in plans with participant-directed
accounts a comprehensive statement of their account in lieu of the SAR.
However, the SAR would be useful in a non-participant directed account
since the investments are handled at the plan level rather than by the
participant.
With respect to participant notices in matters of
change in ownership, such as a merger, acquisition for a pension plan, Ms.
Hennessy remarked on the enormous complexities associated with mergers
and acquisitions. Because the DOL, the PBGC, and the Internal Revenue
Service have limited information by which to track transfers of pension
assets and liabilities resulting from these transactions, those agencies
cannot assist a person getting ready to retire with locating their
pension.
In regard to the trend toward more legalese in SPDs,
Ms. Hennessy stated that the trend would continue and even increase
because the courts are looking at the SPD as part of the plan documents,
and finding against the employer if the SPD says one thing and the plan
says something different, even when the SPD clearly says that the plan
trumps the SPD. She added that an SPD ideally should be shorter and more
readable than large SEC-required prospectus, noting that even the SEC
created a one-page or short prospectus. With respect to whether model
language could be used in portions of the SPD, such as for topics that
have been shown particularly confusing to participants, she remarked that
because plans are all very different and very complex that creating and
using model language in SPDs would be very difficult to do.
Ms. Hennessy also commented on electronic
communication and the balancing act of trying to get things out to people
electronically as well as to those who may not be electronically connected
or when the electronic delivery system fails. Overall, her view is that an
ideal mix is to have electronic availability to people who can access it
and to have a mechanism to deliver paper to people who still want paper.
However, Ms. Hennessy warned against creating rules that are designed for
today's technology because it is unknown what improvements future
technology will create in electronic communications. Rules should be made
flexible enough to adapt to emerging technologies.
With respect to the timeliness or lack of timeliness
for SMMs, Ms. Hennessy stated that the statutory rule for SMMs is not
timely enough but confirmed the usefulness of an SMM in lieu of a
completely new SPD. She added that the statutory requirement for
republishing SPDs should not be based on a period of years but on the
number of changes since the last SPD.
Ms. Hennessy closed her remarks with a view about the
small business. She urged the Working Group to make sure that the big
vendors, banks, mutual funds, insurance companies are on board with any
changes recommended by the Working Group and that the Working Group
understand how their mechanisms work for very small plans and the cost to
the small plans.
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