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Most 401(k) plans – except certain one person plans – must file a Form 5500 annually to satisfy their annual reporting requirements under ERISA and the Internal Revenue Code. The goal of the Form 5500 is to help the government and other stakeholders perform data-based 401(k) plan research.
For decades, the Form 5500 has done a poor job at meeting this goal for three key reasons:
- Depending upon the nature of service provider compensation, plan fees may not be reported on a Form 5500 at all.
- The reporting requirements for plan fees and investment types can vary substantially plan-by-plan, making apples-to-apples 401(k) benchmarking impossible.
- “Small Plan” (defined as plans with under 100 participants) 5500 filers are not required to report plan investments at all, while Large Plan filers report investments on paper attachments that are difficult to data mine.
To make matters worse, the Form 5500’s current fee disclosures do not align with other fee disclosure regulations, requiring 401(k) providers to keep an additional set of fee records – which can increase their fees.
These 5500 shortcomings harm 401(k) fiduciaries and participants. When 401(k) market data is not readily accessible, it’s more difficult for 401(k) fiduciaries to evaluate the reasonableness of plan fees, making excessive fees – and fiduciary liability - more likely. Further, any additional fees necessary to maintain a second set of 401(k) fee records do not offer value to 401(k) participants, they just lower returns.
Fortunately, the government agencies responsible for the Form 5500 – DOL, IRS and PBGC – know the Form 5500 is a problem and want to do something about it. Effective for the 2019 plan year, they are proposing a substantially revised Form 5500. For the most part, I like their proposed changes – I think they’ll vastly improve the usefulness of the Form 5500 to retirement plan stakeholders. That said, holy smokes…it’s a lot of change!!
5500 reform objectives
The 2019 Form 5500 proposal was designed to meet four broad objectives:
- Modernize financial reporting to “improve the reliability and transparency” of 401(k) plan investments and other financial transactions.
- Enhance data mineability by converting “more elements of the Form 5500 into data or information that is organized in a structured manner to make them computer-processable and identifiable for data-mining and analytic purposes.”
- Improve service provider fee information by harmonizing the Form 5500’s Schedule C information with the DOL’s 408b-2 fee disclosure rules.
- Enhance ERISA and tax compliance by adding “new questions regarding plan operations, service provider relationships, and financial management of plans.”
2019 Form 5500 highlights
- Small plan Form 5500-SF filers must provide additional financial information.
- Form 5500 preparer information to be required.
- Form 5500 (main body) changes:
- Plan feature “codes” to be replaced with questions to improve response accuracy.
- New questions related to participant accounts, contributions, distributions, default investments, Rollovers used for Business Start-ups (ROBS), leased employees, and pre-approved plans.
- Participant-directed plans must attach a copy of the plan’s 404a-5 “comparative chart” to the Form 5500.
- Schedule H changes:
- Small plans not eligible to file a Form 5500-SF must now use Schedule H. The shorter Schedule I eliminated.
- Balance sheet – new asset categories to break out derivatives, limited partnerships, hedge funds, private equity, real estate and other alternative investments.
- Income statement - new administrative expense subcategories to break out salaries, audit, trustee, recordkeeping, actuarial, legal and valuation fees.
- More detailed Self-Directed Brokerage Account (SDBA) information to be required.
- Schedule of Assets to be reportable in a new data-mineable format
- New questions related to fee disclosures, annual fair market valuations, designated investment alternatives, investment managers, plan terminations, asset transfers, administrative expenses and uncashed participant checks.
- Schedule C changes:
- Disclosure rules to harmonize with 408b-2 rules.
- Small plans not eligible to file a Form 5500-SF must now file (when applicable).
- A separate Schedule C to be required for each reportable service provider.
- “Eligible indirect compensation” must now be reported.
- Schedule E to be reinstated for ESOP reporting.
- Schedule G to include new loan and prohibited transaction questions
- Schedule R to include new questions about participation rates, matching contributions, and nondiscrimination.
- Other changes:
Great news for 401(k) stakeholders! Not so much for 401(k) providers…
The 2019 Form 5500 is a major overhaul of the Form 5500 series – and, in my view, a long overdue one. While it adds a lot of new questions, small business 401(k) fiduciaries should not worry about additional work – experienced 401(k) providers will do the heavy lifting to meet the new requirements.
I believe sunlight is the best disinfectant and the new 5500 disclosures should help 401(k) stakeholders make better-informed decisions – not to mention, make the 401(k) market more competitive.