Last week my wife and I helped our daughter pack for her freshman year of college. As we sorted her belongings, I noticed Conrad, her beta fish, swimming around in his little bowl. Conrad has a pretty decent life: no predators (unless you count my younger children!), clean water, and a daily supply of food. But one thing Conrad does not have is privacy. His existence is totally transparent, and he has nowhere to hide in his fish bowl.
This kind of transparency, or a close approximation of it, is what the IRS, the Department of Labor (DOL), and the Pension Benefit Guaranty Corporation (PBGC) have in mind with many of the proposed revisions to the Form 5500 annual reporting package for retirement and health/welfare plans, announced on July 11, 2016.
I’m going to focus on changes affecting defined contribution (DC) plans. These changes would require plan sponsors to provide more detailed information on plan features, operations, and investments in order to, among other things, create more transparency. For example, key suggested revisions would:
- Increase transparency of fees and expenses by requiring a separate Schedule C (Service Provider Information) for each service provider to a plan. In addition, this schedule would be revised to more closely align with the service provider fees and expenses that must be disclosed to plan sponsors under ERISA section 408(b)(2).
- Enhance the ability to “mine” data from Form 5500 by, for example, requiring information previously accepted as an attachment to be entered directly into the form.
- Allow easier recognition of trends across DC plans by adding plan-level questions about, for example, Roth, education, advice, safe harbor, auto enrollment/auto escalation, and matching contribution features.
- Provide clearer understanding of daily operations of a plan by adding IRS and DOL compliance-related questions about issues including required minimum distributions, uncashed checks, hardship withdrawals, participant fee disclosure notices, and summary plan descriptions.
- Improve clarity around certain assets classes (e.g., alternative investments), plan expenses, and qualified accountant information, by revising Schedule H (Financial information).
Many of the proposed changes, and the increased transparency they bring, could be a good thing for plan sponsors. After all, the compilation of industrywide data can provide helpful information to plan sponsors looking to benchmark their plan design against others. Benchmarking often leads to plan design enhancements that improve participant retirement outcomes. Of course, transparency into any individual plan could also produce an entirely different outcome. For example, the proposal indicates that the IRS and DOL could use the Form 5500 data for targeted enforcement of plans with compliance issues noted on the form. It wouldn’t be surprising for these plans to be subject to future audits.
While proposed changes to the Form 5500 are significant, it’s important to remember that these are just proposals for now, and most of the changes would not go into effect until the 2019 plan year. There is much more to come, especially since industry comments are not even due until December 5, 2016. In the meantime, plan sponsors should continue to ensure that plan operations remain compliant and be prepared to face transparency closer to what Conrad experiences in his fish bowl. The difference for plan sponsors is, unlike for Conrad, there may be predators lurking, especially if the plan operations are not as “clean” as his fish bowl!
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