Barry’s Pickings: Software Eats ERISA Disclosure

Art by Joe Ciardiello

On October 22, the Department of Labor (DOL) published its proposal for a “Default Electronic Disclosure by Employee Pension Benefit Plans under ERISA.”

The proposal adopts a “notice and access” approach to disclosure under Title I of the Employee Retirement Income Security Act (ERISA). Basically, all participant communications may be posted to a website, with a notice to the participant’s (email or smartphone) “electronic address,” unless the participant asks for a paper copy or opts for paper “globally.”

Why did this take so long?

To call this proposal much anticipated is a vast understatement. In the preamble to the proposal, the DOL traces the history of calls by sponsors and providers to eliminate or at least reduce the paper required to comply with the agency’s ERISA disclosure rules. That history began (more or less) 17 years ago (in 2002), with the publication of DOL’s original “Electronic Disclosure Safe Harbor,” about which providers and sponsors have been complaining for 17 years.

The DOL estimates the total cost savings of the new proposed rule to be $2.4 billion over 10 years, although it acknowledges that this figure understates the potential savings somewhat.

The reason given for not making this change sooner has, for some time, been a concern that “some of America’s workers and retirees do not have reasonable access to the internet.” With a smartphone now in nearly everyone’s pocket, this concern has certainly become less acute. Moreover, what has always been at issue is whether an individual can be sent a required disclosure, in effect (and as the title of the proposal indicates), “by default.” No one has suggested that individuals would not be given an opportunity to opt for paper.

The last significant action the DOL itself took on this issue was a 2011 Request for Information. As they say, classic.

Imagine if the agency had adopted this proposal, say, 10 years ago. We would all be $2.4 billion richer. Why didn’t that happen? My assumption—and I’m very open to being proved wrong—is that the bureaucratic incentives in play during that period—right after the Global Financial Crisis—lined up better with “regulating fees” than with “making communications more efficient.”

To give partisans of the fee regulation project their due, maybe the rules the DOL rolled out over this period, regulating provider-to-sponsor and sponsor-to-participant fee disclosure, and even the ultimately vacated Fiduciary Regulation, did more good than making communications cheaper and more efficient would have. I would simply say, why couldn’t it have done both?

New opportunities …

Enough of complaints. This proposal is an excellent first step into the 21st century for ERISA participant communications. Assuming there are no delays in the process, we could have a functioning, internet-based retirement plan communication system up by early 2020.

Now, I think the most interesting question is—for providers, sponsors, and policymakers—just how far can this new, internet-based approach to ERISA-required retirement plan communications be developed to, e.g., improve employee outcomes?

For starters, as the DOL observes, “Online access enables a layered approach to disclosure that can be designed not only to reduce the time and expense of disclosure, but to more effectively communicate information.” Amen.

Think about this: the regulator and policymakers are stuck on the issue of defined contribution (DC) plan “lifetime income disclosure.” The SECURE Act would require DC plan administrators to include a description of the “income stream” a participant’s account balance would produce in the annual statement. There has been a lot of controversy over this—sponsors are particularly concerned that any one-size-fits-all approach to calculating this income stream that the DOL develops won’t be the best for their participants.

Couldn’t an interactive calculator—integrated with the annual statement, say, one hypertext layer down—help here?

Can we do ERISA disclosure better?

The beautiful thing about transforming a process from analog to digital—that is, when a process (like ERISA disclosure) is, channeling Mark Andreesen, eaten by software—is that you can thereafter do things, change things, add things, and improve things, at zero (or close to zero) marginal cost.

The DOL’s proposal closes with an RFI soliciting “ideas on additional measures … the Department could take in the future … to improve the effectiveness of ERISA disclosures,” focusing on some basic—and important—questions:

• What is the best way to measure the effectiveness of a disclosure?
• Should DOL consider factors other than design, delivery, and content?
• Can/should disclosure be personalized more? Focus on life events?
• And, obviously (and to return to complaining, why can’t we get this done?)—what are the obsolete, duplicative, or simply not-very-useful disclosures currently being required?

Hopefully—in whatever new spirit has moved the DOL, after 17 years, to finally allow providers and sponsors to adopt practices that are widespread in commerce and at other agencies, including the Social Security Administration—the responses to these questions will lead to even more improvements in our current system. One can hope.

Michael Barry is president of O3 Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.