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Why We Commented on the Form 5500 Proposed Changes

Most retirement savers probably would rather spend their time reviewing the fine print in their credit card agreements than think about a dry, technical form meant for government regulators. But the Form 5500 from the U.S. Department of Labor tracks the most important sector of the financial industry for ordinary investors.

About 75% of individual investors in the U.S. exclusively invest in a retirement account. And the Form 5500 provides data on more than 685,000 retirement plans, including more than 132 million participating Americans. The Form 5500 also helps track more than $8 trillion in assets held for these savers to help support their retirement.

Yet, as currently written, the Form 5500 is hopelessly dated and offers only glimmers of information where it could shine an important spotlight. Fortunately, the Labor Department proposed updating the Form 5500 when it was still under the Obama administration at the end of last year. With a new administration, we hope that the Department of Labor will turn the proposal into a reality. This would vastly improve the ability of data aggregators to evaluate and compare retirement plans, which will ultimately benefit ordinary savers.

We are hopeful the department will keep up the momentum on the Form 5500 proposed changes, which is why we wrote a comment letter to the agency in December.

What are the proposed changes to the Form 5500?

If the Labor Department moves ahead with its proposal, investors would see two key benefits:

  1. It would be much easier to compare plans’ investment lineups to each other to see the variety of investment options available to plan participants.
  2. It would be much easier to see how much of a saver’s hard-earned money goes into investments, how much goes for investment management (picking which individual stocks and bonds to buy and sell), and how much goes to third parties for related services.

The Labor Department’s proposal would take 401(k) data out of the dark ages and make it easy to compare plans. Workers could demand that their employers replace an inferior plan with a better one and even point to better plans that their competitors offer.

Advisors could assess whether an IRA rollover would be in their clients’ best interests using third-party evaluation software instead of poring over the statements of their clients’ 401(k) plans—if they could even find them. It would dramatically improve the retirement savings experience in the United States.

What’s the status of the proposed changes to the Form 5500?

As is standard, the Trump administration has frozen new rulemaking and regulations while it figures out what it wants to do. But I am hopeful that the Form 5500 proposed changes will be seen through, bringing the disclosures contained in it out of the their 1970s-era framework.

Many in the retirement industry will oppose these changes. But many others in and out of government support efforts to increase transparency and competition. If the Labor Department moves forward with its proposal, then we will quickly wonder how we ever thought about retirement planning and advice without such a clear picture a plan’s strengths and weaknesses relative to other plans and other options.

This blog post is adapted from an article that originally appeared in the April/May 2017 issue of Morningstar magazine. Read the full article.

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