Electronic Disclosure Rules Are So Last Century, SPARK Says

Employers that offer defined contribution (DC) retirement plans are required to distribute a host of statements and disclosures quarterly as well as annually, a process many plans would prefer to do electronically. But current rules stand in the way, according to “Improving Outcomes with Electronic Delivery of Retirement Plan Documents,” a new SPARK report.

Extensive guidance from the Department of Labor (DOL) and the Internal Revenue Service (IRS) governs the manner in which plans can distribute retirement plan information electronically. But depending on the nature of the information, any one of four different IRS or DOL standards can apply. In some contexts, plans can default participants into electronic delivery; for other types of information, the plan sponsor must sign up each participant for electronic delivery—which can mean a formidable battle against inertia. This lack of consistency causes considerable confusion for retirement plan administrators as well as their participants, the report says.

The framework that guides electronic delivery, which the report calls highly restrictive, is trapped in the 20^th century. Neither the emerging information trends and technologies of recent years nor their many benefits are reflected in the current guidelines, the report contends, pointing out that both retirement plan participants and administrators benefit from these newer technologies.

SPARK cites research that finds plan participants benefit from electronic delivery, as well as the savings a plan can realize when eliminating printing and its associated costs. The paper examines the reasons for allowing plan sponsors to make electronic delivery the default method for communicating with retirement plan participants.

Recent surveys indicate that virtually all Americans have access to online services, in the workplace or at home, or both. Access cuts across age group, race, household income and region. As growth in computer and Internet use has skyrocketed, so has Americans’ reliance on electronic technology for financial communication and transactions, with growth in areas of critical importance to everyday life, such as banking and financial transactions.

SPARK cites the rise of online and mobile phone banking as the preferred banking method across all age groups to support its thesis that plan participants want and even prefer electronic communication. Nearly all Social Security recipients (99% in 2014) receive their benefits through electronic payment, the paper observes. The trend to file individual tax returns electronically continues to experience steady growth: 85% of the 137 million returns filed as of May 16, 2014, were filed electronically.

Since conducting day-to-day financial transactions online serves as a proxy for a retirement plan participant’s interest in electronically distributed plan-related notices, disclosures and statements, that behavior is a strong indicator that participants would prefer and benefit from electronic delivery of plan information, according to SPARK.

One of the paper’s findings is that relying on paper communication is both inefficient and costly. Even the federal government has recognized in its DC plan for federal employees that electronic delivery of plan information is the appropriate default. It allows participants to respond quickly to plan information, ensures information remains up to date and is accessed by participants in real time, and it provides more accessible information.

Information delivered electronically can be more easily customized, the paper notes, and it can provide a better guarantee of actual receipt of information.

Compared with distributing plan documents by mail, electronic delivery has significantly lower costs, with savings from printing, processing and mailing, SPARK says, lowering costs by much as 36%. Plan participants, too, could see some savings: Allowing retirement plan administrators to make electronic delivery a default would reduce the costs associated with their plans.

The paper maintains these cost savings would ultimately be passed back to participants, translating to lower expenses—and higher net investment returns. SPARK estimates switching to an electronic delivery default would produce $200 to $500 million in aggregate savings annually, and that would accrue directly to individual retirement plan participants.

Despite the changing attitudes toward electronic mediums in all aspects of daily life, the current rules have inhibited plans from adopting opt-out electronic delivery practice for plan documents. Yet, in a poll of retirement plan participants by Greenwald & Associates, which fielded SPARK’s report, 84% find it acceptable to make electronic delivery the default option, with the ability to opt out without cost.  

A side benefit of electronic communication, SPARK observes, is that directing participants to electronic mediums can also promote the use of electronic tools—such as retirement readiness calculators—that ultimately play an important role in promoting superior retirement outcomes. In fact, as provider data demonstrate, mere exposure to online tools has been shown to encourage participants to increase deferrals or modify their investment strategy to achieve a secure retirement. Consequently, participants who receive plan communications electronically have better retirement outcomes.

SPARK polled 1,000 randomly selected plan participants nationwide, employed either full- or part-time and participating in an employer retirement plan, in a 10-minute telephone survey. Data was collected between December 3, 2014, and January 2, 2015, by Greenwald & Associates and its affiliate National Research.

“Improving Outcomes with Electronic Delivery of Retirement Plan Documents” is available for download here. SPARK—the Society of Professional Asset-Managers and Record Keepers—is an inter-industry organization that serves retirement plan professionals.