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How Fixing the Form 5500 Could Help Illuminate 401(k) Plans’ Quality

Form 5500 requirements need revamping to help shed more light on retirement lineups

Retirement savers, regulators, advisors, and plan sponsors all want to know the same thing: Is a given 401(k) plan meeting participants’ needs? Which participants does the plan serve the best? Further, workers (and their advisors, if they have one) need to know whether leaving money in their 401(k) is the best option after a job change or retirement?

These are critically important questions—and fixing the main disclosure that retirement plans file with the Department of Labor, known as the Form 5500, would help.

Updating the Form 5500 requirements could help answer these critical questions. That would, in turn, more easily help retirement savers and advisors determine whether a rollover makes sense. It could also help regulators assess the retirement system holistically and better understand how it’s working and where it can be improved. And plan sponsors could use such answers to help ensure that they’re offering the best investment lineup they can—and might keep them out of trouble if a plaintiff asserts they breached their fiduciary duties.

So, why don’t we know if a 401(k) plan is good?

The reason it’s so hard to answer this simple question is also simple: The disclosures filed with the Labor Department are terrible and haven’t been overhauled since the good old days of traditional pensions.

If you work for an employer who is still offering a 1970s-era pension plan, congratulations. The public disclosures for your plan are pretty illuminating. Also, you probably don’t care what’s in them—you’re going to get a nice benefit at retirement either way, unless your company seeks Chapter 11 bankruptcy protection.

For the rest of us, there is a lot missing. Here are three areas where the Form 5500 requirements are lacking key information:

  1. Investment lineup information on the retirement plan disclosures are often incompatible with SEC filings, making it impossible to match information on the investments available within 401(k) plans to other data that the SEC collects. Without such links, retirement plan filings only give glimmers of information, rather than connecting to the robust investment data that the government already captures in other forms.
  2. The Form 5500 also fails to require key data on popular investment types, such as collective investment trusts. These investments already include more than $2.1 trillion in assets, so it’s important to know more about them than the minimal data the federal government collects today.
  3. Information on the administrative and investment fees participants pay is inaccurate and limited. These constraints undermine the entire purpose of public financial reporting, as the data is not actionable.

How could fixing the Form 5500 requirements help?

Given the limitations of retirement plan disclosures, it’s impossible for financial professionals and regulators—let alone investors—to compare retirement plans’ investment lineups to each other or to fully understand the state of defined-contribution plan lineups.

Improving the Form 5500 disclosures would:

  • Make it much easier to see how much of a retirement saver’s hard-earned money pays for investment management (the selection of individual stocks and bonds to buy and sell), and how much goes to third parties for services or for administering the retirement plan itself. Such transparency could also put pressure on high-cost providers to reduce fees.
  • Allow federal regulators who collect the data, such as the Labor Department, to more easily identify retirement plan sponsors with questionable investments and see who might not be living up to their fiduciary duties.
  • Better inform investors (and the advisors who serve them) as weigh whether rolling over money from one 401(k) to another, or from a 401(k) to an IRA, is a good idea. Right now, there’s no central repository of information from which to gather key data.

In general, the disclosure tool that the government wields works best when it’s aimed at helping third parties unpack information for people. Making a few small changes to the Form 5500 requirements would make a huge difference. You can see more details about our recommendations in our new white paper.

Read our new paper "Retirement Plan Transparency" for our recommendations to fix the Form 5500 requirements.
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