Advisory Council Report of the Working Group on Electronic Reporting

November 8, 2002

Introduction

The Council investigated electronic reporting of ERISA plan filings in order to determine if it could be improved. Due to the abbreviated schedule of the Council this year, the Council limited the scope of its investigation to electronic reporting of Form 5500s to the Department of Labor, specifically through the Department of Labor’s ERISA Filing Acceptance System (EFAST). The Form 5500 can include a series of 12 schedules, accountant’s report and actuarial opinion.

What is the Current Status of Electronic Reporting?

The Council first looked into what is currently required with respect to electronic reporting and what is being done with regard to electronic reporting at the Department of Labor (“DOL”).

What is Required Now?

There are no statutory or regulatory mandates with respect to electronic reporting of Form 5500s, however, there appears to be significant energy in the direction of increasing electronic reporting for many reasons including the President’s memorandum to agencies encouraging the implementation of an agenda for E-Government. From a practical perspective, the Internal Revenue Service, Pension Benefit Guaranty Corporation and Social Security Administration, in addition to the DOL, use the data from the Form 5500s in connection with their regulatory programs and any electronic system for filing Form 5500s must be accessible and usable by those agencies.

What is Being Offered?

The DOL, IRS and the PBGC adopted a computerized system known as the ERISA Filing Acceptance System or EFAST. In 1999, the Department’s Pension and Welfare Benefits Administration (EBSA) assumed the administrative responsibility for accepting all filings, electronic and otherwise, of the Form 5500s, which had previously been filed with the IRS. The DOL embraced EFAST with the hope to achieve certain advantages provided by an electronic system including: better dissemination of information to the public, better access to data for the regulatory agencies and availability of more current data for participants and beneficiaries.

EFAST allows transmitters to electronically file Form 5500s using EFAST-approved vendors and software. The software allows the transmitter three options in filing the Form 5500. Under the first method, the Form 5500 is printed and contains a “1-D” barcode stating it is a Form 5500. This paper Form 5500 is then sent to the DOL by the submitter and the DOL scans the form into its database and retrieves necessary data from the Form through Optical Character Recognition (OCR). The second method creates a paper Form 5500 with the software similar to the first method, but it also contains a second barcode containing the salient data on the Form. The Form is sent into the DOL and the data is retrieved from the second barcode and not by OCR. The third method for the electronic filing of the Form 5500s uses DOL approved software to create the Form with the two barcodes and the barcode data is then sent to the DOL via direct modem connection. Alternatively under the third method, the submitter can burn the data onto a CD or magnetic tape and then send it to the DOL.

Who Participates in the EFAST System?

The direct participants of the current electronic filing system are few, basically including the Federal Government and the transmitter of the Form. The indirect participants are the plan sponsor and the accountants and actuaries submitting reports in support of the Form 5500. Also indirectly participating in the system are the plan participants, ERISA organizations, data providers (such as freeerisa.com) and the public.

All of these participants have some need or use for electronic filing of the Form 5500s. For example, the government wants valid data in a cost effective and efficient manner. Also, plan sponsors want to be able to file their Form 5500s through an easy system with the least cost possible. Likewise, plan participants, the public and ERISA organizations want up-to-date data about plans and data providers want quick access to the information.

The importance of electronic filing to some of these participants is underscored by the testimony of Judy Diamond of freeerisa.com which has about 15-17,000 users per day accessing the Form 5500 data available on its website. Those accessing the site include participants (seeking data about their plan or desiring to lodge complaints about their plan), plan sponsors (that check the actual Form 5500 as filed or look at competitors filings), financial professionals (e.g. accountants, brokers and plan administrators), and attorneys (who often use it in divorce cases and to obtain necessary documentation in representing participant clients who are too fearful to ask for the information directly from the plan sponsor due to possible retribution).

However, not all stakeholders look favorably upon some of the results of electronic reporting of Form 5500s. For example, some plan sponsors, notwithstanding that the Form 5500 is a public document, complain about their Form 5500 being available on public Websites such as freeerisa.com.

What are the Strengths of the EFAST System?

The EFAST system provides methods, superior in many ways to the prior paper system, for filing and extracting relevant data from the Form 5500s. The EFAST system requires less storage space than does paper filings, saves on mailing costs, provides confirmation when the Form 5500 is received and notifies the submitter within 48 hours of a transmission (but not a filing) error. Also, the Council received testimony that those using the current electronic filing system were more attentive to deadlines mainly because transmitters were more likely to urge submitters to be proactive in order to meet the electronic filing deadlines.

What are the Weaknesses of the EFAST System?

Although no system is perfect, the stakeholders in the current system testified that the EFAST system has many shortcomings. The significance of these impediments is supported by the fact that of the 1.2 million Form 5500 filings, only 1% of the reports were filed electronically for 1999 and only 3% were filed electronically for 2000. No more recent data beyond the year 2000 is available, but witnesses testified that it is anticipated that even these meager percentages will decrease in the coming year(s).⁽¹⁾

The reasons preventing greater use of the system were reported to be:

Signature Requirements: The submitter must file a paper application with the DOL to get a code to file with the electronic Form. This application process can take from 3-4 weeks. The code represents the filer’s signature and the filer either has to give that code to the transmitter of the Form 5500, which raises security issues, or go to the transmitter’s office in order to submit it with the electronic Form 5500. Various transmitters have stated that the cumbersome signature requirement has contributed to a low participation rate for electronic filing. Fidelity testified that only 7% of the plans for which electronic filing were available in their system actually took advantage of electronic filing in part because of the difficulty in implementing the electronic signature. In fact, they stated that this year, 2,000 Fidelity clients were removed from the electronic filing service because there was not enough time to obtain the electronic signature. Although the SEC has seemingly avoided this issue by accepting an electronically generated unique password to be used as a filer’s signature, the EFAST staff has taken the position that the Government Paperwork Elimination Act does not eliminate paper signatures required by individual legislation.

No economic benefit: The cost of filing electronically is higher than filing by paper. One large filer estimated that they spend approximately $200,000 per year to maintain the system necessary to complete electronic filings with no offsetting benefits. Paychex, which supported the EFAST system for filing fringe benefit plan Form 5500s for its clients, indicated that due to the complexity of the Form 5500 for 401k plans, the cost of filing electronically for 401(k) plans for its small plan clients would be greater than filing by paper. Some plan sponsors echo this sentiment as they do not see the benefit of filing electronically since “there is no refund coming back to the client faster through electronic filing as there is with individuals filing their taxes electronically.”

Required Software: Submitters must purchase DOL-approved software in order to generate the Form 5500s for electronic filing. Software vendors have not experienced customer demand for the software and therefore it is not widely available and sometimes expensive.

Timing Requirements: The Council received testimony that “there is not enough time to implement annual revisions to the 5500, prepare the forms, allow time for clients to request PIN’s and electronic signatures, and still meet the normal filing deadline.” When the DOL issues changes to the filing requirements, it can take even large submitters approximately three months to update their computer systems and obtain approval from the EFAST office. This reduces the number of forms electronically filed because there is simply not enough time to file with the DOL-required changes.

Results: Due to OCR scanning and barcode translations, there are sometimes significant errors in the data reported. In addition, the data available electronically is several years old, so filers do not get access to Form 5500 data any quicker by filing electronically than they do by filing by paper. Also, filers sometimes have to wait up to 10 days just to get confirmation that the electronically filed Form 5500 has been received. Also, concern was expressed that there are no digital image backups of electronically filed data.

Added Responsibility: Today, many plan service providers create the Form 5500 and provide it to the plan sponsor for the plan sponsor to file. It was reported that service providers are hesitant to take on the added liability of managing the electronic filing of the plan sponsors Form 5500.

Lack of Awareness: The availability of electronic filing and associated benefits are not widely known.

Inconsistency: Inefficiencies exist due to the differences between the electronic filing software and print specifications.

Too many middlemen: Witness testimony suggests that there is a channel management problem, i.e. there are a lot of people who stand between the plan and the government in the current system, such as software developers, plan administrators, preparers and transmitters.

Customer Expectations: Submitters expect the same ease of use and functionality as they find in other electronic systems, e.g. E-bay, and are disappointed and hesitant to use the system when they learn that it is more difficult to use than other commonly available systems.

Paper Corrections: Some of the procedures designed to ensure valid filings can cause it to be returned and then the error must still be corrected by paper mailing.

What are the Future Plans for the EFAST System?

Although the current system has its downsides, the DOL appears to be moving forward and addressing most of the current weaknesses in a phased plan for the future. The EFAST team indicated that they would be moving at some point in the future to a web based system. In the interim the EFAST team will be endeavoring to create incentives for submitters to file electronically, and they will be marketing these benefits to submitters.

Issues

Is There a Need for Electronic Reporting?

In light of the extremely low usage of the current electronic reporting system, it seems fair to ask whether electronic reporting is even needed. The Council set about answering this question by taking a look at the benefits that can be provided by an electronic reporting system and gathering testimony as to whether those benefits are valued by the stakeholders.

What are the benefits of EFAST?

Cost Savings. Electronic reporting could, depending upon the structure implemented, provide tremendous time and resource savings for all stakeholders. Filers can save money by reducing the personnel required to submit paper filings. For example, in some cases after adoption of the SEC’s Web Central Registration Depository (Web CRD), the number of paralegals required by filers decreased to a single person. Users of the information such as ERISA organizations and the public are able to access the data at lower costs due to efficiencies provided by electronic filing. Also, the Government saves on personnel and storage costs. The cost savings can increase to such an extent that electronic filing can become a profit center. Robert Plaze of the SEC testified that for their web-based reporting system “we have paid off all debts in a year and a half to build the system, and we are running at a healthy surplus right now.”

Data is More Current. Data filed electronically can be processed faster than paper filings. This is due in part because it can reduce the number of rejected filings due to, for example data entry errors or logically inconsistent answers to questions. Also, this speed can increase the integrity of the data by addressing errors in a more expeditious manner. Finally, the more current the data the more useful it is to the users of the data.

Transparency. Data filed electronically can be sorted and manipulated more readily and because it is received and processed faster, it can give users greater insight into the current status of those matters reported. Also, electronic reporting enables wider dissemination of data to the public and other plan sponsors and helps to fulfill one of the underlying purposes of ERISA to facilitate the dissemination of plan data to participants. Finally, this greater insight can promote competition with resulting decrease in costs.

Are the Benefits Valued by the Stakeholders?

Currently there is limited perception of the benefits of the EFAST system among the Stakeholders. However, similar electronic filing systems such as the SEC’s Web IARD and CRD systems show that filers value systems such as these. Further, disclosure sites such as freeerisa.com show that the public desires and values access to the data available through electronic reporting.

However, there is resistance to change the method in which some submitters file and testimony suggests that some and possibly many filers will not move to electronic reporting regardless of the benefits. Currently, it appears that cost is the predominant factor in the decision whether to use electronic filing.

Downsides and Costs

It is difficult to argue that there is a need for electronic reporting if the costs and downsides outweigh the benefits.

The Council was unable to obtain data on the actual costs of creating, implementing and maintaining the DOL’s current electronic reporting process. However, we were able to piece together some cost figures from similar systems. The SEC reported that their system cost about $12 million over approximately 10 years, and only required an outlay of $3 million from the SEC. All costs of the system are covered by filing fees. Freeerisa.com, which provides Form 5500’s over the web free of charge, shed further light on costs by stating that their operating site runs about $4,000 to $5,000 per month.

There can be many downsides to implementing an electronic filing system, but most of the downsides experienced to date in the EFAST system (and as detailed above) are a function of how the system is structured and/or how filers learn the new process and transition to the new system.

Can These Benefits be Provided by the Current System?

Due to the structure of the current EFAST system, which allows for multiple forms of submission, it is unclear whether it can provide the cost savings enjoyed by other electronic reporting systems. The only cost savings of the current system appear to be those obtained by the government, which no longer needs to store paper filings. There are also some small cost savings to submitters since they no longer have to print and send paper filings. The testimony presented revealed that costs currently outweigh the savings in participating in EFAST. Without significant structural change it is therefore unclear whether the current EFAST system can provide the desired efficiencies and cost savings promised by an electronic filing system.

The current EFAST system is able to provide greater transparency to the data filed, but due to delays in processing this data, caused in part by the high rejection rate of filings and paper-based correction process, the data is fairly old before it is made available to end-users including the Government. Again, it appears that without significant structural change, the current EFAST program will never live up to its full potential. Also, the limited participation in the current EFAST program compounds the difficulties described above.

Notwithstanding the foregoing, witnesses offered testimony regarding what should be done to correct some of the current deficiencies in the EFAST system. For the electronic signature problem, the suggestions included providing immediate access to PIN numbers on-line and authorizing PIN’s to be sent directly to the transmitter. These fixes should avoid lengthy delays in obtaining electronic signature codes and minimize the difficulties in coordinating the submission of the electronic signature with the transmitter. Witnesses further testified that the deadline for filing electronic 5500’s should be extended to allow for the increased time it takes to coordinate the electronic filing and complying with the ever-changing DOL filing requirements. Witnesses also suggested that the EFAST system revise the error check procedure, so that errors can be reported and corrected in real-time to avoid rejected filings and delayed notification of missed deadlines.

However, even if the above corrections are implemented, there are still significant out-of-pocket costs to participating in the EFAST program. Principal Financial Group, which offers electronic filing to 25,000 small plan sponsors (although only 4,500 filed electronically) reported that it costs approximately $200,000 per year to maintain the system interface that enables it to offer Form 5500 electronic filing through EFAST. With these numbers it seems clear that for smaller plan sponsors and service providers electronic filing is out of reach. Even larger transmitters who are in a position to achieve economies of scale and can file electronically for smaller submitters, testify that the costs and liabilities of an electronic filing system make it unattractive. Unfortunately, the actual Government cost for maintaining the current electronic filing system makes the economic imperative for such a system even less clear.

If the Benefits of the Current Electronic Filing System Cannot be Efficiently and Effectively Delivered - What are the Alternatives?

The Council received testimony from the SEC and NASD regarding electronic filing systems that they have implemented for data gathering forms similar to the Form 5500. The systems, called Web Investment Advisor Registration Depository (Web IARD) and Web CRD, handle 36,000 and 1.2 million filings a year, respectively. These systems have two functions, gathering data filed by the submitters and providing that data to regulators and the public through a public disclosure system. The systems are web based which allow any filer with access to a web browser to submit filings. Even filers who do not own computers are able to make their filings electronically by accessing the computers in their local libraries.

These systems are low cost to the user (filing fees range from $50 to $500) and reduce filing errors by checking the filing for completeness before the filing is accepted.

Also, these systems provide up-to-date information on filers and the industry. Due to the timeliness of the data and its public availability, the public and competitor companies have access to this information and can report any irregularities in a timely manner. In addition the regulators have the information they need to react quickly and efficiently to industry changes.

Moreover the systems allow for more proactive communication among the various stakeholders. They are also proactive in that they provide tickler notifications to filers regarding important filing dates and information. In the future, the SEC plans to enhance the system by using the filed data to assist investors in analyzing and selecting an advisor or broker.

Of particular relevance to the EFAST system is the fact that the SEC converted its CRD system from a mainframe to a web-based system. The transition occurred over a period of just three months. Its success was attributed to the use of beta test groups that looked for bugs and gave user feedback. In addition, the SEC consistently and persistently communicated the impending changes as well as provided training on how to use the new system to its filers through several different media. This voluminous communications drive was a key factor in the success of the new program.

Some of the impediments in the current EFAST system were addressed in the new SEC/NASD systems. Specifically, the SEC only requires a web-issued code for signature. Also, the system was tailored to gather different data for different regulators. Since the system is web based, the SEC did not have to choose a particular software format or force the filer to incur the cost of purchasing special software. Notwithstanding the benefits and success of the system, the SEC does admit that the fact that the new electronic system was mandated and had a trusted self-regulatory organization (“SRO”) to implement it, contributed greatly to its acceptance and success.

Recommendations

To enhance electronic reporting of Form 5500s, the ERISA Advisory Council recommends that the Secretary of Labor initiate the following:

Expedite work to implement a next generation electronic filing system that maximizes the benefits and cost savings achieved by other best-in-class government electronic filing systems.

• Base the system structure on real-time data from Stakeholders who will be participating and who benefit from use of the system
• Survey the Stakeholders for their desires with regard to the specifics of electronic filing system. Use this feedback to develop a rough framework for the system.
• Form an Advisory Group consisting of Stakeholders and include other agencies and vendors with previous experience in moving from a paper to an electronic solution, e.g. SEC, NASD. Also include in the Advisory Group other agencies (i.e. PBGC and IRS) that will use the data collected to ensure successful migration from the DOL’s system into those agencies’ legacy systems. The Advisory Group should exist through the life cycle of the implementation process from creation of workflow specifications to commenting on architecture mock-ups to reviewing screenshots to assisting in testing beta versions of the system.
• Beta Test versions of the system. Make available beta versions of the electronic reporting system to users spanning size and usage volume to get critical feedback before launching. If possible, include members of the Advisory Group in the beta tests.
• Quality Assurance. Before launch do quality assurance testing to ensure that the new system works as advertised. This will enhance industry acceptance and increase participation in the event that using the electronic system is not mandatory.

Incorporate the following elements into the next generation electronic filing system.

• Use the Web: This will expand the reach to any preparer who has access to the Internet either in their office or at their local library. It will also decrease the cost and complexity since filers will not be required to use approved software or rely on third party transmitters. This will also provide flexibility for system changes and preclude being restrained to specific software formats. In addition, the system recommendations listed below can be easily achieved through a web-based system. The system could be either web enabled or web based, although it appears that web based is more efficient and more widely accepted. Web enabled would entail downloading free or low cost software from the Internet that would reside on the filer’s server and be used to transmit filings over the net. Web-based would allow the direct input of a filing via the Internet.
• Security measures. Security can be provided by encryption or possibly using a Virtual Private Network (VPN).
• Allow multiple service providers to work on the same form. The current system forces a service provider to coordinate the various parts of the filing, which is time consuming and increases liability exposure. The need for input from multiple disciplines on the Form 5500 can be addressed by allowing access to the pending filing by the service provider, accountant, actuary and plan sponsor, all of whom would submit their portion of the filing. When the filing is complete, the plan sponsor can enter its electronic signature and submit the Form as final.
• Scalability: Allow the system to grow exponentially without sacrificing the usefulness or integrity of the system.
• User-Friendliness: When it comes to technology system solutions “less is often more”. The key to acceptance is ease of use. Consider beginning with a basic format and making it more robust as industry acceptance grows. The SEC used this approach in implementing its system (i.e. initially foregoing many bells and whistles) to ensure that what was offered worked and worked well.
• Design easy to understand and accessible training using multiple media. Many are resistant to change, especially when submitting something as important as regulatory filings in a new and different manner. The DOL should conduct training sessions around the country, using web casting, and widely advertise the training sessions. Also, the DOL could conduct special early train-the-trainers sessions for those organizations and people who as part of their business conduct continuing education services for those in the industry. In this way, the DOL will be able to leverage its training efforts and minimize its cost.
• Maximize usability and transparency of data. If data is transparent participants can more easily police their own plans and ERISA organizations can recognize trends and comment in a more timely fashion, which will assist the DOL in its oversight efforts and ultimately reduce costs.
• In implementing a new electronic filing system, remain cognizant of the conventional wisdom in the technology industry that states, “Cheap, Fast and Good – Pick Two of the Three.” In developing electronic systems it is difficult to have it all. Decide which benefits are most important to the DOL and the Stakeholders and then develop a system to accomplish these targets. Based upon the testimony, stakeholders in electronic reporting, including the DOL, value an efficient, cost-effective system. Leaning on the industry adage would imply that it is impractical to expect it to occur very fast. However, speed can be increased by leveraging what other agencies have already done, but this should not be at the expense of quality or cost. Therefore, the ERISA Advisory Council recommends that the DOL take the time necessary to do it right.

Pursue the following regulatory changes to assist in the success of the next generation system:

• Make electronic filing Form 5500s mandatory. The easiest way to have paper filers transition to the more cost-effective electronic reporting and thereby maximum economies of scale is by mandating it. The Council believes that with the exception of forms stated in 109(b) of ERISA, (i.e. financial statement, accountant statement, actuarial statement, and the SPD) there is sufficient current regulatory authority to require electronic reporting.⁽²⁾
• Charging flexible filing fees sufficient to support the maintenance of the system and add requested benefits and upgrades.
• If the DOL maintains its position that existing law does not allow a computer generated code to suffice for a signature on an electronically filed Form 5500, then the Council recommends that the DOL work for regulatory change eliminating the need for original paper signature on the Form 5500.

In the event that implementing the above recommendations would be a lengthy process, the Advisory Council suggests improving the current system in the interim. We suggest that the following changes to the current EFAST system be implemented to increase participation but only so long as these recommendations do not significantly delay the next generation of the electronic filing system.

• Provide a completeness check so that submission errors are corrected before filing and provide immediate confirmation to the submitter when the system receives a filing.
• Provide required software for free or at a deep discount. Also, allow for the software to be downloaded via the Internet.
• Increase the integrity of collected data and the efficiency of the system by reducing the number of ways to file under the EFAST system.
• Have consistent specifications for both the print and electronic forms.
• Increase awareness of electronic filing and its benefits to plan sponsors through a marketing campaign and follow-up training sessions.
• Until the next generation system is launched, the DOL should extend filing deadlines for those choosing to file the Form 5500 electronically in order to allow time to comply with filing requirements and to provide incentive for electronic filers. Alternatively, changes to the Form 5500’s could be made earlier so that the electronic fliers are not delayed.

Finally, the Council uncovered a tangential issue in connection with its investigation of electronic reporting. This issue is whether investment advisors to ERISA qualified plans are still required to file paper Form ADVs with the DOL in light of the SEC’s implementation of the WebIARD. In 1998, the DOL said that all state registered investment advisors must file a paper copy of their Form ADV with the DOL in order to qualify under 3(38) of Title I to ERISA. (See release reprinted below). In other words, to render investment advice to pension and other plans covered by ERISA the state registered advisor had to file its Form ADV and all subsequent amendments with the DOL. This requirement is limited to advisors registered with states, i.e. not investment advisors covered under Federal law pursuant to the National Securities Markets Improvement Act (NSMIA). At the time, the DOL expected that all investment advisors would soon be able to file their Form ADVs electronically through a centralized database. Therefore, this was just an interim requirement until the centralized database was implemented. The SEC and the States in conjunction with the NASD have created the WebIARD. This system now allows federally covered as well as state registered investment advisors to file their Form ADVs and amendments electronically. Even though not all states mandate that investment advisors file their Form ADV with the states through the WebIARD, all states accept electronic filing of the Form ADV. Now that the WebIARD, i.e. a centralized database for filing the ADV Forms has been implemented and accepted by the states, investment advisors want to know whether they need to keep filing the paper copies of the Form ADV with the DOL. The ERISA Advisory Council recommends that the DOL recognize the SEC’s Web IARD as a centralized registration system for investment advisors so that investment advisors advising ERISA Qualified Plans no longer have to file their Form ADV with the DOL (as the DOL now has the ability to access to the Form ADV data through the Web IARD).

Summary of Testimony Received

July 20, 2002

Testimony of Stephen Holden and Ronald Allen

The ERISA Filing Acceptance System (EFAST) is the current reporting system used by the Department of Labor for filing Form 5500s with respect to ERISA qualified plans. The Form 5500 can include a series of 12 schedules and accountant’s report and actuarial opinion.

The three methods in which filers can file the Form 5500 using EFAST are: 1) Form 5500 containing a “1-D” barcode stating it is a Form 5500 is filled out by hand by the submitter and then sent to the DOL and scanned in which is then converted by OCR into usable data. This method contains the highest error rate.; 2) Submitter uses DOL approved software to create a paper Form 5500 containing the 1-D barcode and also a second barcode containing the salient data on the Form. The Form is sent into the DOL and the data is retrieved off of the second barcode and not by OCR; and 3) The submitter uses DOL approved software to create the Form with the second barcodes, which barcodes are sent to the DOL via a CD or tape or directly by modem.

Of the approximately 1.2 million Form 5500 filings, 1% were filed through the EFAST system in 1999 and 3% filed in 2000. It is anticipated that these percentages will decline dramatically in the future due to the fact that pure fringe benefit plans are no longer required to file a Form 5500.

In order to submit filings electronically, a submitter must use software, which complies with DOL-issued specifications, and have the software approved by the DOL. There are over 500 approved transmitters, but only 32 actually submit Form 5500s electronically and one, Paychex, accounts for 68% of the filings.

Possible impediments to greater usage of EFAST are:

• Procedures designed to ensure valid filings can cause a valid filing to be returned.
• Errors in data still are corrected by mail even if the filing was submitted electronically
• Submitter must get a code to file with the Form representing their filer’s signature and either give that code to the transmitter of the Form 5500 or go to the transmitter’s office in order to submit it with the electronic Form 5500. The DOL believes that the Government Paperwork Elimination Act doesn’t eliminate paper signatures required by individual legislation.
• Submitters must purchase DOL-approved software. An impediment to offering free or low cost software or a free system through the net is that would compete with the current transmitters, and right now the DOL views transmitters as a distribution channel for its electronic reporting system, however it may be possible to do a barebones system that doesn’t compete with transmitters.
• There is a channel management problem, i.e. there are a lot of people who stand between the plan and the government in the current system, i.e. software developer, plan administrator, preparer and transmitter.
• Submitters expect same ease of use functionality as they find in other electronic systems, e.g. E-bay.

In order to help electronic filers, the DOL maintains a costly help desk, which handles about 30,000 calls.

Although the DOL maintains no data to determine the benefits or costs of electronic reporting, it has determined that it is a good goal to pursue. President Bush has sent out a memo to executive heads of agencies extolling the virtues of electronic government, encouraging agencies to work across both program and agency boundaries to enable electronic filing opportunities.

Some of the DOL goals with respect to the future of EFAST are:

• Move to Internet filing for cost and convenience purposes, however, the DOL would much rather deal with transmitters because they are more sophisticated “they get it” and we have trusted relationships with them.
• Revise the error check procedure, so that errors can be reported real time and corrected real time.
• Address user issues of privacy and security.
• Market the system to users.
• Create incentives for submitters to use the system.
• Ensure that other agencies, such as PBGC and IRS can use data obtained from any future system.

Testimony of Robert Plaze and Don Evans

SEC created two systems, the CRD and the IARD. The IARD is a web-based electronic filing and data retrieval system for investment advisor Form ADV filings handling 36,000 filings a year and the CRD is a filing system for the brokerage industry, which has just transistioned to be a web-based system. The systems are data “check the box” gathering systems as opposed to narrative or text filing systems.

The IARD allows an investment advisor sitting in his office anywhere in the country or, in fact, the world to electronically complete the form called Form ADV through essentially the touch of a keystroke, as well as to pay filing fees associated with the filing.

The system also has a public disclosure component to it, which is available to the public 24 hours a day and which provides almost complete transparency to the filed data.

There has been widespread industry support for the electronic filing system. A few reasons are:

• Cost savings. Where once numerous paralegals did filings, now just one person can do it.
• Reduced rejected filings. Prior to the system, approximately 66% of filings were sent back due to mistakes. The system does a completeness check on filings prior to submission so that errors are corrected prior to filing. The system also has logic checks so that answers to questions are consistent.
• The system automatically calculates required fees and deducts them from an assigned account.
• Has tickler system so that filers get advance notice of filing requirements and deadlines and late filers are tracked.

The system provides the SEC with good current data about the industry. Also since the industry and the public have insight into the data, the SEC’s policing of the industry has been aided. Also, it has helped the regulatory process because the SEC can run queries to see what effect certain changes will have on advisors.

The SEC makes available for purchase the data on the system, which purchasers can manipulate. The fees help to support the system.

The SEC has also had significant success transitioning 7500 filers on its CRD mainframe system to the web based CRD system in 3 months. Critical to the success was using a beta test group of 100 filers on a pilot system to debug and clarify the form. Also critical was the support communication through the 24-hour a day hotline and email system. The SEC sometimes had almost 1000 calls/contacts a day. SEC also notified users ahead of time about the upcoming new system through a variety of methods, including linking to industry web sites, news articles, etc… Finally, the SEC used an advisory group of stakeholders which viewed limited demos and gave feedback on proposals.

Helpful to the success of the systems was that it was mandatory for the filings to be filed through the system. The SEC believes that if it wasn’t mandated, a large number of firms would not have bothered to use it, likely due to inertia to change.

The SEC overcame several impediments in its web based systems including: 1) Signature: The SEC just issues a unique password to the filer to act as its signature; 2) Different Agencies Requiring Different Data: The SEC just created different screens to handle depending upon the filer; 3) Software: The SEC does not have to pick certain software or choose a format since it made the system web based, which has minimal requirements to us, in fact some filers just go to their local library to do their filing; and 4) Service Provider: The SEC chose the NASD an SRO under its jurisdiction to operate the system. They were chosen in light of several factors including: 1) conflicts of interest, 2) financial stability, amd 3) ability to handle sensitive information on a secure basis.

The overall system cost of the IARD is approximately $12.5 million to build over the years, but the SEC only had to pay $3 million of that cost. The rest of the cost was borne by the NASD, which is repaid through the filing fees. Filing fees range between $100 each year for the smallest advisors, to $550 for the largest advisors in the system. The system is running a little over a year and a half, all debts are paid and it is running at a healthy surplus (basically $1.4 million in operating expenses versus a little over $2 million in revenues).

Testimony of Martin P. Colburn and Derek W. Linden

The CRD system handles a total of 1.2 million filings a year from 8,000 securities firms and about 680,000 registered representatives.

Some key benefits from the system is: 1) eliminates duplicative filing with multiple regulators (e.g. states, SEC and SROs); 2) reduced downtime for brokers awaiting approval of their registrations; 3) eliminates data entry by the regulator and errors associated with data entry; 4) completeness check promotes accuracy of the data; 5) helps efficiency of the regulatory enforcement program. Can do comprehensive or tailored reviews and can track filing history of filers (i.e. easier to spot inconsistencies or potential problems). Overall this reduces the cost of compliance; 5) enables much more of the public to have access to the data without a concomitant increase in support personnel; 6) filer doesn’t have to recreate data on the form each time but can use data from a prior filing; 7) reduces costs of printing and mailing as users can download and print their own copies of filings or forms; and 8) increase speed of receipt of the information and transparency into current state of industry.

CRD was operated as a central electronic system with paper filings until 1999 when it transformed to a complete web based electronic filing system.

Challenges to creating a successful system: 1) Managing the requirements process: Need to obtain consensus from regulators and the industry on a uniform form; 2) Keep it simple by identifying the critical mass of functionality needed and not creating multiple variations; 3) create benefits from the use of the system, e.g. cost savings and ability to use information actually reported; and 4) picking a vendor (must have technology experts and business experts who understand the system in order to manage the vendor).

Service providers that used to provide the service enabled by the web-based system just transition to providing higher value services to clients. For example, they no longer send in the filing but instead charge for the advice on how to answer the questions in the Form.

September 20, 2002

Testimony of Judy Diamond

Ms. Diamond operates the website freeerisa.com, which provides Internet access to copies of the 1.2 million Form 5500 filings. She also sells software that enables purchasers to do various sorting and manipulation of the data provided on the Form 5500 filings. She indicated that the cost she incurs in providing these 5500s through the web is currently about $4-5,000 per month. Judy indicated a willingness to work with the Department of Labor if they want to provide Form 5500s via the Internet.

Freeerisa.com has about 15-17,000 users per day. The types of persons accessing the site are participants (many of whom lodge complaints about their plans with her), plan sponsors (to check their actual filing or look at competitors filings), financial professionals (e.g. accountants, brokers and TPAs), attorneys (for divorce cases and to obtain necessary documentation in representing participant clients who are too fearful to ask for the information directly from the plan sponsor due to possible retribution).

Judy indicated she was surprised by the number of plan participants contacting her for help concerning their plan. Also, she was surprised when plan sponsors contact her upset that their plan data is available over the Internet. In fact, one plan sponsor demanded that it be removed from her site under threat of litigation. Judy took the plan document off of her site.

The major complaints freeerisa.com receives from end-users as mentioned above, are:

The data is stale. Even though she gets quarterly reports of 5500 filings representing the most recent data available from the Department of Labor it is still old information. For example, the most recent Form 5500s available are from 1999 and even then only 50% of the Form 5500s from that year are available. The data contains errors. The text produced by the OCR scanning contains errors.

Judy indicated that web based reporting would be a preferable solution as it would produce more accurate results. She also indicated that she would like automatic data feeds of Form 5500 information available for download to her site.

Testimony of Pat Imhoff

Principal Financial Group is a member of the Fortune 500, serves 619,000 individual policyholders, 75,000 group employer clients and 40,000 employer pension clients. The Company’s Retirement and Investor Services Division offers bundled and unbundled services to retirement plan customers. ERISA services include the preparation of compliance tests, and the preparation of various forms including the Application for Determination, premium payment forms for the PBGC, and a signature-ready Form 5500 annual report. The testimony focuses on the Form 5500.

Principal provides Form 5500 and audit support services to 30,000 retirement benefit plans, including 1,500 defined benefit plans, and 28,500 defined contribution plans. Principal prepares 25,000 small plan filings (plans with less than 100 participants), and 5,000 large plan filings (plans with more than 100 participants which also require a plan audit).

Principal offers electronic filing to the 25,000 small plans. This service began in 1987, when the electronic filings were submitted to the IRS. During 1997, Principal accounted for 10,000 of the total of 13,000 electronic filings submitted. This year, Principal has submitted 4,500 annual returns electronically. The number of electronic filings has dropped from 10,000 to 4,500 due to: 1 - a one year suspension of electronic filing because the DOL issues the guidelines too late that year, and 2 - the signature and Personal Identification Number (PIN) requirements are burdensome to plan administrators.

Advantages to electronic filing are not always apparent. There is no refund coming back to the client faster through electronic filing as there is with individuals filing their taxes electronically. Advantages include confirmation that the 5500 was received by the EBSA, savings in mailing and copying the Form 5500, and the attractiveness from a marketing angle of offering the service to the clients.

The IRS electronic filing system offered an edit check, which reported errors to the transmitter, who could then resolved and re-filed. The EBSA EFAST system includes an edit check, which then sends paper deficiency letters to the client, who then forwards these letters to the Principal for processing. It would be beneficial for the edit checks to be sent to the transmitter or sent to the preparer, so that the problem can be resolved and the filing resubmitted electronically.

The electronic signature process is not simple, easy or immediate. The clients must request a PIN/Signer ID from EFAST, a process which takes three to four weeks. Then this information has to be turned over to the Principal for processing. Plans sponsors do not want to handle the From 5500 twice. Principal has had a 50% response rate in obtaining electronic signatures. The IRS system was easier. Suggestions for improvement include providing PIN numbers on-line immediately, and authorizing PIN’s to be sent directly to the transmitter.

Supporting the electronic filing system costs about $200,000 per year, with no real benefit to the transmitter. A suggestion is for the DOL to provide a financial incentive to service providers to submit 5500’s electronically.

Another challenge is timing. There is not enough time to implement annual revisions to the 5500, prepare the forms, allow time for clients to request PIN’s and Electronic signatures, and still meet the normal filing deadline. It takes about three months to update the computer systems and obtain approval from the EFAST office. This year, 2,000 clients were removed from the electronic filing service because there was not enough time to obtain the electronic signature. It was suggested that the deadline for filing electronic 5500’s be extended to allow for these issues.

Education and marketing to the industry on the benefits of electronic filing is key. Actuaries, auditors and plan sponsors have to be brought on board in this process.

Testimony of Janice M. Wegesin

Ms. Wegesin is a Certified Pension Consultant, an Enrolled Agent and a member of the American Society of Pension Actuaries (and a member of the ASPA board from 1995-1998). Her firm specializes in employee benefit plan compliance, emphasizing Form 5500 reporting and serves both public companies and small businesses. Ms. Wegesin is also the author of The Form 5500 Preparer’s Manual (Panel Publishers).

Ms. Wegesin reported that when ASPA conducted informal survey of its members, asking whether they currently use electronic reporting to file Form 5500s, the answer was overwhelming “No”. She cited two important reasons for this lack of interest in electronic reporting.

Problems with the transition to EFAST processing.

• Problems with barcode translations
• Lack of “digital image” back-ups to electronically filed data
• Cited a filing on freeERISA.com with an error reporting a $76 million prohibited transaction liability
• Many practitioners are not willing to take on the extra work of electronic filing
• Most prepare the form for a timely filing and forward the package to the plan sponsor for filing but do not monitor whether this is done or not.
• Some did the filing as well, in order to avoid having to deal with late filing issues, etc.

Ms. Wegesin asserted that one impediment to the expansion of electronic filing is the fact that a submission filed electronically is not made available to the public (i.e. on freeERISA.com) any more quickly than a paper filing. Many practitioners who do work for sponsors of small plans and so ought to be interested in the idea, are just beginning to learn that electronic filing is an option.

ASPA members that have moved to electronic filing tend to be the instigators of this change rather than responding to the demands of their clients. Ms. Wegesin cited one firm based in Virginia which has been filing most of its 5500s electronically since it first became a possibility. In their second year of electronic filing, they cite the following positives:

• Plan sponsors are more attentive to deadlines, because the firm sets the due dates well in advance of the date by which it must submit the forms.
• Changes and corrections can be faxed to the plan sponsor, which cannot be done for paper filings because faxes do not meet the requirements for paper filings.
• Production and mailing costs are reduced.
• Transmission errors are communicated within 48 hours of submission.
• Transmitters receive an electronic acknowledgement of receipt.
• Those clients that prefer to continue with paper filings are said to be suspicious of the electronic process.

Ms. Wegesin has targeted sponsors with multiple filings for the electronic process. However, she cited resistance from service providers that supply other information (e.g. institutional reports of investment transactions) to be attached to the filings. However, accounting firms are making increased use of PDF formats.

Other problems:

• Lack of support for electronic filing from major software vendors…lack of demand from their customers.
• A burdensome process, citing maintenance of EFINs, transmitter codes and passwords.
• Database development requirements and security concerns.

Suggestions:

• Why not use Form 1040 principals for electronic filing?
• Allow transmitter to confirm signature of plan sponsor.
• Asserts that law does not require burdensome electronic signature process, instead the agency rule has mandated these requirements.
• No incentive exists for practitioners or plan sponsors to migrate to electronic filing – including any reduction in time or effort.
• Paper process itself has problems and thus does not promote a change to electronics.
• Filings without attachments – smaller plans – could provide significant improvements for a large number of plans.

Testimony of Susan Goetzinger

Fidelity piloted a program for approximately 1,000 plans, offering them an opportunity to file Form 5500s electronically. During the last two years only 7% of those plans have chosen electronic filing. Approximately 250 of the plans indicated interest in electronic filing, but they choose not to use that method because of confusion in how to complete the EFAST 1 form and the time period involved in getting a personal identification number.

Fidelity identified the following challenges it faces in electronic filing:

• Difficulties in scanning the attachments required for larger plans to file electronically.
• Concerns with the security of modem usage. There also are inefficiencies due to the differences between the electronic filing software and print specifications.
• Waiting periods of up to 10 days to receive confirmation of receipt from DOL of electronic 5500 filings.

Fidelity made the following suggestions to increase the use of electronic filing:

• Automatically extend the period for electronic filings or offer an electronic extension process.
• Enable accountants to send accountant’s reports directly to DOL and have DOL match up the reports with the 5500 filing.
• Permit immediate access to a personal identification number from the DOL website.
• Provide very quick confirmations of receipt of electronic 5500 filings.
• Provide online access at the DOL’s website so plan sponsors and service providers can access 5500 data.
• After making the foregoing changes, institute a DOL marketing campaign to highlight the benefits of electronic filing.

Testimony of Robert Campbell, John Taylor, Joe Cronin and Jean Blake

The only electronic filing Paychex has done for benefit plans has been for 125 plans and, even then, only for clients who have provided Paychex with a power of attorney. Paychex has not offered e-filing for any other DOL forms. They do not have power of attorney for any of the 401(k) plans they administer and clients file those 5500s.

When asked about their experience with 125 filings, they reported that the process was relatively smooth. There was some confusion about how to get approved to file electronically but there were no problems in actually sending the filings and getting acknowledgments. They said they did not have suggestions for improvement because their use was so limited.

They did indicate concern with mandated electronic filing because some clients may not have access to the Web. They also noted concerns with filing 5500s for 401(k) plans electronically because more parties are involved in completing those forms than in 125 plans.

They may be interested in the future in electronic preparation of 5500 forms because of efficiency. But, many clients are very small, 11-15 employees or less, and currently Paychex views electronic filing as more expensive than paper filing.

They have approximately 23000 clients who file forms 5500. Approximately 2/3 of those clients have not voluntarily provided them with an e-mail address and that is one source of their concern about client computer access.

1099Rs are the only other e-filing that Paychex does that they are aware of.

Additional Information Sources

2002 Index for the Working Group on Electronic Reporting

Advisory Council on Employee Benefit and Pension Plans

Actual Transcripts/Executive Summaries for the Council's full meetings and Council sessions are available - at a cost - through the Department of Labor's contracted court reporting service, which is Executive Court Reporters at (301) 565-0064/Fax (301) 589-4280.

July 19, 2002: Working Group on Electronic Reporting

1. Agenda
2. Official Transcript
3. Questions Posed by Vice Chair Timothy Mahota.
4. E-Government Materials on “Bucketing of 24 Presidential Priorities by PMC on June 25, 2002 as well as E-Government Strategy.
5. Slide presentation by Ronald Allen, E-FAST Program Manager, and Stephen Holden, Consultant for the Pension and Welfare Benefit Administration’s EFAST Electronic Reporting Program.
6. Materials on The Investment Adviser Registration Depository by Robert E. Plaze, Associate Director, Division of Investment Management, U.S. Securities and Exchange Commission (SEC)
7. Registration and Disclosure Overview Background Material Prepared by the National Association of Securities Dealers (NASD)

September 20, 2002: Working Group on Electronic Reporting

1. Agenda
2. Official Transcript
3. Form 5500 Electronic Filing Testimony by Susan Goetzinger, Vice President of Reporting & Risk, Fidelity Investments.
4. Written testimony by Janice M. Wegesin, President of JMW Consulting in Palatine, Illinois, representing the views of the American Society of Pension Actuaries (ASPA).
5. Written testimony by Patricia Imhoff, Compliance Business Coordinator of the Principal Life Insurance Company.

October 16, 2002: Working Group on Electronic Reporting

1. Agenda
2. Official Transcript
3. Rough Draft of the Council’s Final Report
4. Statistical information provided by EBSA about the EFAST program.

Advisory Council Members

1. Timothy J. Mahota, Acting Chair of the Working Group
2. Evelyn F. Adams
3. Carl T. Camden
4. Dana M. Muir
5. Robert P. Patrician
6. James S. Ray
7. John J. Szczur
8. Ronnie S. Thierman
9. Judy Weiss
10. Michele M. Weldon
11. David Wray

Footnotes

1. Ron Allen testified that the future decrease is anticipated due to the fact that Form 5500s are no longer required to be filed for pure fringe benefit plans.
2. ERISA Section 109(a) provides that "Except as provided in subsection (b) of this section, the Secretary may require that any information required under this title be submitted to [her], including but not limited to the information required to be filed by the administrator pursuant to section 103(b)(3) and (c), must be submitted on such forms as he may prescribe."
   ERISA Section 109(c) grants authority to the Secretary to "prescribe the format and content" of the SPD, SAR, and "any other report, statements or documents," other than bargaining agreements, trust agreements, and contracts, that the plan must make available to participants.
   ERISA Section 110 authorizes the Secretary to prescribe, by regulation or otherwise, "alternative methods" for compliance with reporting and disclosure requirements for pension plans if the Secretary determines that to do so would satisfy three criteria set forth in the section.
   ERISA Section 505 authorizes the Secretary, subject to Section 109, to prescribe regulations that she deems necessary or appropriate to carry out the provisions of ERISA. This authority includes prescribing forms. The Department has previously defined "necessary or appropriate" as meaning "helpful."