401(k) Disclosure Rules Are Out of Date; It’s Time for Common Sense Reform

It probably won’t surprise you to learn that government 401(k) regulations are often inefficient or ineffective. That’s too bad because superfluous regulation generally increases the cost of a 401k plan, which in turn, lowers participant returns.

The posterchild for bad 401(k) regulation is the ERISA participant disclosure rules. That’s unfortunate given their important job - to give 401(k) participants the information they need to make educated decisions about their account. Today’s rules fall short for two key reasons:

• The number of required disclosures has grown dramatically during the past 15 years. Much of this information is redundant, making new information more difficult to discern and act upon.
• Plans need to jump through too many hoops to use cheap modern technology for distributing disclosures, increasing 401(k) expenses unnecessarily.

Bottom line – to better educate 401(k) participants and lower plan expenses, disclosures need to be more streamlined and easier for 401(k) plans to deliver using modern technology. It’s time to reform the regulations that govern these disclosures.

Runaway 401(k) disclosure

401(k) plans are obligated to disclose a lot of information to a participant prior to their enrollment date and each year thereafter. The most common disclosures are listed in the table below.

Unfortunately, a lot of the information in these disclosures is redundant. Why? Because cross-referencing information is often not allowed. This redundancy results in lengthy disclosures that participants are less likely to read. I also think it de-emphasizes the importance of the SPD – which 401(k) participants should be conditioned to use for plan information.

Confusing electronic delivery rules

Today, paper delivery is the default method for distributing participant disclosures. This is unfortunate for two reasons. Paper delivery is costly and increasingly at odds with the way most people intake information. I mean, when was the last time you read a paper book, magazine or newspaper? It’s probably been a while. In 2016, most people get their information electronically.

Why is paper the default distribution method? An outdated patchwork of DOL and IRS electronic media rules with complex affirmative consent requirements for electronic delivery. Many of these rules were written over 15 years ago!

It’s time to change the default to electronic. In 2015, The SPARK Institute published a white paper outlining a case for this change. In it, they cited the following advantages of electronic delivery:

• Allows participants to respond quickly to plan information received electronically;
• Ensures information remains up-to-date and is accessed by participants in “real time;”
• Provides information that is more accessible – and digestible;
• Provides information that can be more readily customized; and
• Provides a better guarantee of actual receipt of information.

Come on already!

Small business 401(k) sponsors are obligated by 401(k) regulations to only pay reasonable plan expenses. Why? Because participant returns suffer when a 401(k) plan pays unnecessary expenses – and lower returns make it more difficult for participants to grow a proper nest egg for retirement.

When this is understood, it seems ironic that some 401(k) regulations actually increase 401(k) expenses unnecessarily. The posterchild for counterproductive 401(k) regulations is ERISA’s participant disclosure rules. It’s time for them to change.