Advisory Council Report of the Working Group on Communications to Retirement Plan Participants

This report was produced by the Advisory Council on Employee Welfare and Pension Benefit Plans, which was created by ERISA to provide advice to the Secretary of Labor. The contents of this report do not necessarily represent the position of the Department of Labor.

Executive Summary

The 2005 ERISA Advisory Council formed a Working Group on Communications to Retirement Plan Participants to assess whether plan participants understand their rights and benefits under retirement plans and if existing ERISA-required communication tools are accomplishing the goal of full disclosure.

The following issues were addressed:

• Do SPDs and SMMs for retirement plans provide participants with adequate and meaningful information on their benefits?
• Do SARs provide financial and other plan information that is understandable and useful to participants and beneficiaries?
• Can any of the required disclosures be combined to ease the administrative burden on plans without causing confusion for participants or beneficiaries?
• Are the electronic disclosure requirements appropriate for the disclosures being made and should the availability of electronic disclosure be expanded?
• Do participants generally understand their rights and their benefits under retirement plans?

Testimony to the Working Group was provided on July 6, 2005 and September 23, 2005 by six consultants or service providers, one labor union, three membership organizations, and one nonprofit consumer organization. Of these witnesses, five presented the viewpoint of plan participants, five presented the viewpoint of plan administrators, and one presented the viewpoint of an independent fiduciary. (The names and affiliations of the witnesses and summaries of their testimony are provided at the end of this report.)

After thoughtful debate and analysis of the issues and testimony, this Working Group submits the following recommendations to the Secretary of Labor for consideration:

Summary Plan Descriptions

Short-Term Recommendation 1: Provide regulatory or advisory guidance to help plan administrators prepare understandable and user-friendly SPDs.

Short-Term Recommendation 2: Enhance or create mechanisms to enforce the regulatory requirement that SPDs be understandable by the average plan participant.

Long-Term Recommendation: Review court decisions granting legal superiority to SPDs and, if necessary, propose legislation to amend ERISA to reestablish the original purpose and status of SPDs that satisfy regulatory requirements.

Summaries of Material Modifications

Propose legislation amending ERISA to shorten the deadline for distributing SMMs.

Summary Annual Reports

Revise the regulatory requirements for SAR contents and format.

Importance of Disclosures to Participants

Require an introductory statement for each type of mandatory disclosure and provide suggested language for these statements.

The Working Group believes these recommendations will support the DOL’s goal of providing plan participants with understandable and useful information about their employer-provided retirement plan benefits.

Respectfully submitted

Advisory Council Working Group Members

• Antoinette M. Pilzner (Working Group Chair), Butzel Long, P.C
• Lynn L. Franzoi (Working Group Vice Chair), Fox Entertainment Group, Inc.
• R. Todd Gardenhire (Advisory Council Chair), Smith Barney
• Sherrie Grabot (Advisory Council Vice Chair), GuidedChoice, Inc.
• C. Mark Bongard, Ashland Inc.
• Neil S. Gladstein, International Association of Machinists & Aerospace Workers
• Timothy W. Knopp, Central Oregon Builders Association
• Richard D. Landsberg, Nationwide Financial Services
• Mary B. Maguire, Davis Consulting
• James D. McCool, Schwab Corporate Services
• Thomas C. Nyhan, Central States Funds
• Willow J. Prall, DeCarlo & Connor
• Christopher Rouse, Windham Brannon PC

Introduction

ERISA protects the interests of plan participants and beneficiaries by requiring disclosure of specific documents and information, reporting of financial and other plan information to the DOL, and providing access to Federal courts. The DOL has regulatory authority over ERISA’s reporting and disclosure requirements and is therefore in a position to provide guidance to plan administrators as to the type of reporting and disclosure that should be meaningful to plan participants.

The following information is required to be automatically provided to all retirement plan participants:

• summary plan description (SPD)
• summary of material modifications to the plan (SMM)
• summary annual report (SAR)

The following information is required to be provided when requested by a participant:

• plan documents
• most recent Form 5500
• annual statement of benefits

The following information is required to be provided to a participant after a specific event with respect to that participant occurs:

• notice of benefit claim determination and determination on review
• notice of suspension of benefits
• notice of receipt of domestic relations order and determination of QDRO status

The following information is required to be provided to all participants after a specific event with respect to the plan occurs:

• notice of transfer of excess pension assets to retiree health benefit account
• notice of significant reduction in future benefit accruals
• notice of plan sponsor’s failure to make required contributions to defined benefit plan
• notice of blackout period
• investment and related information under ERISA Section 404(c)
• notice of intent to terminate a defined benefit plan
• notice of defined benefit plan benefits upon plan termination
• notice of defined benefit plan’s underfunded status

More information on retirement plan disclosure requirements is available at dol.gov/ebsa/pdf/rdguide.pdf.

Plan administrators are generally required to provide all of the above information directly to each participant in paper format. However, a plan administrator who complies with specific regulatory requirements can provide most of the above information to participants in electronic format.

The 2005 ERISA Advisory Council formed a Working Group on Communications to Retirement Plan Participants to evaluate how well the materials distributed by retirement plan administrators to plan participants under ERISA’s disclosure requirements, and the manner in which those materials are distributed, achieve the goals of:

• Legal compliance
• Full disclosure to plan participants regarding participants’ rights, including benefit appeals, legal rights and PBGC information
• Providing information in a timely manner
• Meaningful and understandable information
• Easy accessibility and the appropriate mix of paper and electronic formats

Definitions

• SAR: A Summary Annual Report as defined in ERISA §104(b)(3).
• SMM: A Summary of Material Modifications as defined in ERISA §104(b)(1).
• SPD: A Summary Plan Description as defined in ERISA §102.

Witness Questions

The Working Group asked witnesses to consider the following questions when preparing their testimony:

1. What information should be required in a retirement plan SPD so that participants and beneficiaries understand the terms of the plan, their rights under the plan, the plan’s level of benefits, the conditions under which benefits can be reduced, and the PBGC’s role with respect to the plan? Is there information currently required in the SPD that isn’t necessary?
2. Presuming that the Form 5500 would be modified as necessary, is there a better format for the SAR that would provide participants and beneficiaries adequate and appropriate information regarding the financial status of the plan? Should other plan information be required on Form 5500 and the SAR?
3. If we had a blank slate with respect to required disclosures to retirement plan participants, what would you suggest?
4. Can the average participant or beneficiary in your retirement plan describe the major features of the plan?
5. Is it feasible to combine any of the required disclosures?
6. Does electronic disclosure really work? Are there limitations that can be alleviated without burdening participants or beneficiaries?
7. Is there plan information that participants and beneficiaries routinely request that isn’t already required to be disclosed?

Overall Observations about Participant Communications

Several witnesses testified that, in general, plan administrators of defined contribution plans do a better job of communicating with their participants than defined benefit plans.

Mr. Wray testified that the required disclosures are not effective participant communications and should be limited to as few as possible. Complying with the disclosure requirements is a significant administrative burden on small employers and discourages plan adoption.

Mr. Szymanski testified that participants in multiemployer plans generally are better informed about their plans because retirement benefits are discussed in detail whenever a new collective bargaining agreement is negotiated. Smaller union locals hold meetings to discuss retirement benefits and larger union locals send out written surveys and periodic updates on how retirement benefits would be affected by a pending contract. Consequently, union members generally feel they have input into the design of their retirement benefits. Multiemployer plan participants also have the union as an intermediary with respect to retirement plan questions or problems.

Mr. Hotz and Ms. Signorille testified that participants who receive documents by electronic disclosure should be encouraged to keep a paper copy for future reference when the participant no longer has access to the electronic document (e.g., after terminating employment). Ms. Hennessy cautioned that any rules with respect to electronic disclosure should not be designed based solely on today’s technology, but should be flexible enough to adapt to emerging technologies.

Ms. Hogg testified that, particularly for employers sponsoring Code Section 401(k) plans, communicating with plan participants has become more active and less passive. Communications to plan participants should be divided into informational disclosures and directional advice. She also testified that it is critical for disclosures to take into account the diversity of plan participants’ education and sophistication.

Mr. Gilbert’s testimony directed the Working Group to remember that “size matters” and disclosure requirements impose relatively greater administrative costs on small employers than on large employers. Also, small employers tend to have less internal support for plan administration and rely more heavily on outside administrators and consultants, which also increases their administrative costs. Ms. Hennessy also advised the Working Group to understand how its recommendations would affect small employers, including how service providers for large employer plans can adapt their products to small employer plans.

Summary Plan Description Issues

The witnesses uniformly stated that SPDs in their traditional paper format are too complex for the average plan participant to understand and are not user-friendly. Mr. Hotz testified that most plan participants are confused, misinformed, or uninformed after looking at an SPD.

All of the witnesses stated that SPDs generally are not written in plain English but are written in “legalese.” Because courts have frequently held that the provisions of the SPD control any conflicts with the provisions of the formal plan document, SPDs are written to protect plan sponsors from legal action, not to provide plan participants with basic information about their benefits. Several witnesses, including Ms. Travis, testified that because courts have given SPDs a legal standing that was not intended under ERISA or the Labor Regulations, SPDs will continue to be written by plan sponsors’ attorneys for participants’ attorneys rather than by benefit communication specialists for participants until this legal standing is changed. Ms. Hennessy testified she expected the legalese trend in SPDs to not only continue, but to increase.

Several witnesses, including Mr. McAllister, Mr. Wray, and Ms. Travis, testified that participants do not read SPDs cover to cover when they first receive them. They use them as reference guides. Ms. Hogg compared the SPD to an owner’s manual for a car. Because participants use the SPD as a reference tool, different formats are more useful. Q&As, FAQs, a one-page “quick start guide” with more detailed cross-references, and SPDs arranged in life stage or sequential stages are more useful and understandable to participants. Mr. McAllister testified that participants expect to be able to easily find information in the SPD and to be able to understand what they find. He noted that both the organization (i.e., the “life stage” arrangement) and the presentation of the SPD are key to helping participants understand the SPD. Mr. Wray testified that SPDs generally need to be reorganized to be helpful to participants. Ms. Talbot testified that “language matters” in making an SPD understandable to participants, and also noted that question and answer formats tend to be easier for participants to use and understand.

Electronic disclosure is generally more helpful to participants because electronic formats can include pop-up boxes, links, and search functions. One concern with electronic disclosure, however, is that participants who lose access to the plan administrator’s computer network because of employment termination also lose access to these helpful electronic versions, and may not have kept paper copies of any prior versions of the electronic documents. Plan administrators are only required to provide a copy of the most current SPD upon request. Generally, a plan participant cannot obtain a paper copy of a prior version of an SPD unless the participant’s attorney requests it during discovery in the course of legal action. Ms. Hennessy also testified that alternative delivery systems are needed for times when the electronic delivery systems fail.

Mr. Hotz noted that SPDs often do not specify their effective dates or the dates when they are updated. A participant needs to know when the SPD was published in order to know if he or she should request or look for SMMs to update the SPD. Mr. Hotz and Ms. Hennessy both suggested that ERISA should require more frequent updating of SPDs based on the number of intervening SMMs, not the number of years since the last SPD was distributed. Mr. Hotz recommended that the SPD be required to state in large print that the SPD is important and should be retained in a safe place.

Several witnesses, including Ms. Signorille, Mr. Wray, and Ms. Hogg, stated that it would be helpful for the DOL to publish “model language” to be used to explain common retirement plan concepts, such as the difference between accruing benefits and vesting in benefits, what a plan sponsor’s reservation of a right to amend the plan means, and what the plan administrator’s discretionary authority to interpret the plan means. However, Ms. Hennessy testified that using model language in an SPD would be difficult because all plans are different and complex. Mr. McAllister also suggested that the DOL require an SPD to include a “Frequently Asked Questions” section with questions and answers provided by the DOL. Ms. Hennessy recommended that the DOL develop model, but not required, SPD language warning defined contribution plan participants about the risk of investing their plan accounts in employer stock.

Mr. Wray also testified that the DOL could encourage more understandable SPD formats by publicly recognizing innovative SPD formats that are easier for participants to read and use.

Summaries of Material Modification Issues

Several witnesses noted that the ERISA deadline for SMMs of 210 days after the end of the plan year in which the modification was adopted essentially made the SMM useless to the participant. Any opportunity the participant may have had to effectively respond to the modification may have been lost even if the SMM was timely provided. This ERISA requirement was adopted in must less volatile times and before the development of effective means of electronic communication. This deadline could likely be shortened to a period starting when the modification is adopted without adversely affecting plan administrators.

Ms. Signorille of AARP proposed shortening the deadline to 30 days after the amendment is adopted for electronic disclosures and 60 days for paper disclosures. Ms. Signorille also noted that the SMM should both describe the amendment and explain why the amendment was made.

Annual Statements of Benefits Issues

The annual statement of benefits is an important item of information for participants as well as an important communication tool for plan sponsors. Several witnesses stated that plan administrators should be required to automatically provide the annual statement of benefits each year, instead of only providing it when requested. Witnesses testified that many plan administrators already do this, including Mr. Gilbert, who testified that his organization already prepares annual statements for participants in small defined benefit plans. Others testified that plan administrators should be required to automatically provide a statement of benefits once every three years or once every five years.

Ms. Signorille testified that automatic distribution of benefit statements should be required at least quarterly, noting that the benefit statements can also function as an employee relations tools for the plan sponsor. She also testified that participants in multiemployer plans should also be entitled to receive statements of their individual benefits, noting that these participants are not currently entitled to receive these statements annually. Mr. Szymanski testified that some multiemployer plans already provide annual statements of benefits to their participants.

This is a more pressing issue for defined benefit plans than for defined contribution plans. Defined contribution plan participants generally receive plan account statements quarterly, or have constant on-line access to their plan account statements.

Witnesses testified that the annual statement of benefits for defined benefit plans should also include the plan’s benefit formula, the participant’s compensation, years of service, and other data used in the formula, and the actuarial assumptions used to compute plan benefits. If the participant is notified of his or her compensation, years of service, and other personal data used for computing benefits on a periodic basis, the participant has the opportunity to correct errors while supporting data and documentation are still available to both the participant and the plan administrator.

Summary Annual Reports Issues

Most witnesses testified that plan participants do not read the SAR, because it does not provide plan participants with any useful information. Also, the text format of the regulatory model SAR is an ineffective way to present financial data, which is the majority of the information disclosed in the model SAR. Further, several witnesses, including Mr. Szymanski, testified that the SAR is distributed too late for participants to take any action with respect to information in the SAR.

Mr. McAllister recommending eliminating the SAR for defined benefit plans, because the SAR information does not help a participant understand the long-term financial health of the plan. Ms. Hennessy testified that the funded status of a defined benefit plan disclosed on the Form 5500 and SAR is generally meaningless to a plan participant. She recommended against including the plan’s funded status in the SAR. Ms. Hennessy also testified that the current model SAR for defined contribution plans is “completely worthless” for plans where investments are participant directed. Ms. Talbot recommended eliminating the SAR for all plans if the SAR is not redesigned to be more informative and useful.

Other witnesses suggested that including in the SAR other information reported on the Form 5500 would help the SAR give a plan participant an accurate picture of the current status of the retirement plan such as:

• The date the last employer contribution to the plan was made
• If the plan was amended during the last plan year
• If the plan administrator disclosed that participant contributions were deposited late
• Whether any plan service providers were terminated, and why they were terminated
• Funded status (if defined benefit plan)

All of the above information can help a plan participant determine if there are any problems with the plan or if the plan participant should be worried about how the plan administrator is operating the plan. Mr. Hotz testified that the SAR should provide explanations of how a participant is to interpret the information disclosed in the SAR to assess the financial health of the plan.

In addition, the revised model SAR should provide clearer information on all of the plan documents and reports that the participant can review or obtain upon request, including the participant’s right to receive an annual statement of benefits. Several witnesses, including Mr. Wray, suggested that separate model SARs be provided for defined benefit and defined contribution plans. Mr. Gilbert testified that overall plan financial information in SARs for small defined contribution plans is irrelevant for most plan participants and should not be required. For defined contribution plans, the individual participant’s account balance and individual contributions, earnings, and expenses for the year.

Working Group Conclusions and Recommendations

Summary Plan Descriptions

Conclusion: Plan administrators need to be reminded that SPDs must be understandable by the average plan participant.

The Working Group determined that plan administrators need to be strongly reminded not only of the ERISA mandate that SPDs be understandable by average plan participants, but that understandability is not limited to the words or sentence structure used in the SPD. Understandability also includes the presentation of the information, such as formatting of text and the method of delivery used.

Short-Term Recommendation 1: Provide regulatory or advisory guidance to help plan administrators prepare understandable and user-friendly SPDs.

The Working Group recommends that the DOL assist plan administrators in preparing understandable SPDs by providing sample SPD formats, sample language, and encouraging the use of interactive delivery methods, including online access, CD-ROMs, and live presentations. The DOL should clearly indicate that any suggested language developed by the DOL is suggested only and not a safe harbor or otherwise mandated.

Guidance provided by the DOL could include:

• Samples of alternative SPD formats, such as question-and-answer or “Frequently Asked Questions” formats, and formats that arrange SPD information sequentially by life stages.
• Suggested sample understandable language, whether newly created by the Department or already existing in Department publications or other guidance, to explain common retirement plan concepts, such as “accrual of benefits v. vesting of benefits,” “discretionary authority of plan administrator,” and “reservation of right to amend or terminate.”
• Encouraging plan administrators to use electronic disclosures and other disclosure methods that are more interactive and provide more specific or individualized information to plan participants.
• Enhancing protection for participants who receive and use electronic disclosures and who lose access to those electronic disclosures when employment ends, by requiring plan administrators who use electronic disclosures to retain a printed copy of each version of the disclosures made available in electronic format and to provide the electronic disclosures both in print and on CD-ROM when requested by a participant.

Conclusion: Because the regulatory requirement that SPDs be understandable by the average plan participant is generally only enforced through legal actions by participants, plan administrators have no strong incentive to comply with this regulatory requirement.

The Working Group determined that there is no discernable enforcement of the regulatory requirement that SPDs be understandable to the average plan participant. This lack of enforcement, combined with plan sponsors’ desire to be protected from potential legal action, significantly contributes to the current trend of SPDs being written by attorneys for attorneys instead of by benefit communications specialists for plan participants. The Working Group concluded that the DOL could begin to reverse this trend by enforcing the existing regulatory requirements governing the manner in which SPDs are required to be written.

Short-Term Recommendation 2: Enhance or create mechanisms to enforce the regulatory requirement that SPDs be understandable by the average plan participant.

Because it is important that plan participants and beneficiaries understand their SPDs, the Working Group recommends that the DOL strongly encourage plan administrators to provide understandable SPDs by enforcing the regulatory requirement of understandability. These enforcement mechanisms could include:

• Random review of a specified number of SPDs each year from plans of various sizes; and
• Including SPD content and format reviews in other DOL audit procedures.

Conclusion: SPDs are not written in plain English because SPDs are written by attorneys for attorneys, not for plan participants, to protect the plan sponsor from legal action.

The Working Group concurs with all of the witnesses that court decisions have changed the nature of the SPD from an understandable summary of the plan provisions to a binding legal description of the plan’s benefits. Plan sponsors are reluctant to distribute an SPD that is written in plain English and understandable to the average plan participant because any ambiguity in the SPD may be interpreted by a court as providing a benefit the plan sponsor never intended to provide. Plan sponsors are willing to provide the benefits they intended to provide under the terms of the formal plan document. However, plan sponsors are not willing to provide additional benefits just because the understandable language or the summary nature of the SPD is interpreted by a court as conflicting with the formal plan document and creating new or additional benefits under the plan.

The Working Group sees the judicially-conferred legal status of SPDs as a primary obstacle facing plan sponsors who want to provide understandable and user-friendly SPDs to plan participants. Until SPDs are legally returned to their intended status as plan summaries that do not modify or supersede the actual terms of the formal plan document, plan sponsors can be expected to provide plan participants with SPDs written to protect the plan sponsor from potential liability, not to help the participant understand the terms of the plan.

Long-Term Recommendation: Review court decisions granting legal superiority to SPDs and, if necessary, propose legislation to amend ERISA to reestablish the original purpose and status of SPDs that satisfy regulatory requirements.

The Working Group recommends that the DOL survey the facts underlying court decisions giving legal superiority to SPDs over plan documents to ascertain whether these decisions were consistent with ERISA’s original intent. To the extent the underlying facts reveal that the SPDs were materially or intentionally misleading or not in compliance with the regulatory requirements for SPDs, or both, the courts may have reached the appropriate conclusion. However, to the extent the underlying facts reveal that the SPDs were in fact drafted as understandable summaries of the plan provisions that comply with the regulatory requirements, the courts may have incorrectly modified the intended statutory and regulatory purpose of the SPD.

If this review of the court decisions indicates that compliant SPDs have frequently been granted legal superiority over plan documents, the Working Group recommends that the DOL propose legislation to amend ERISA to clarify that SPDs that comply with the regulatory requirements, including the regulatory requirement that the SPD format not have the effect of misleading, misinforming, or failing to inform participants or beneficiaries, do not legally supersede the terms of the plan document.

Summaries of Material Modifications

Conclusion: The current deadline for distributing SMMs minimizes or eliminates the usefulness of the SMM.

The Working Group recognizes that ERISA already requires the plan administrator to notify plan participants in advance of any retirement plan amendment that reduces the rate of future benefit accruals. The Working Group also recognizes that most plan sponsors publicize enhancements to retirement plans soon after those enhancements are adopted, to benefit from the positive employee sentiment resulting from benefit enhancements. However, other plan revisions are still communicated through SMMs distributed just before the existing statutory deadline of 210 days after the end of the plan year in which the modification is adopted.

The Working Group determined that the current deadline can operate to prevent a plan participant from timely reacting to the modification and should be reduced. The Working Group understands that plan administrators who communicate with participants electronically would likely incur minimal inconvenience or hardship because of a shorter SMM deadline. However, plan administrators who communicate with participants through paper documents, usually small employers, would incur additional administrative expenses.

Recommendation: Propose legislation amending ERISA to shorten the deadline for distributing SMMs.

The Working Group recommends that the SMM distribution deadline be shortened to a specific number of days (e.g., 90 days) after the date the modification is adopted.

The Working Group also recommends that the DOL review the additional administrative burden imposed by this change on plan sponsors of various sizes using various communication techniques. If the additional administrative burden would be significant, the effective date of this change should be delayed or staggered, or both, as appropriate.

Summary Annual Reports

Conclusion: The current model SARs in the Labor Regulations do not provide useful information to retirement plan participants.

The Working Group concurs with witnesses who stated that the form of SAR provided in the Labor Regulations does not adequately disclose to a plan participant the most helpful information that is already being reported on the Form 5500.

Recommendation: Revise the regulatory requirements for SAR contents and format.

The Working Group recommends revising the model SAR so that the SAR becomes an informative and helpful disclosure for plan participants. The Working Group recommends creating separate model SARs for defined benefit plans and defined contribution plans, because different information on the Form 5500 is beneficial to defined benefit plan participants and to defined contribution plan participants. For example, the total assets, total income, and total expenses of a defined contribution plan generally is not helpful to a defined contribution plan participant, because the participant’s plan benefit depends solely on the participant’s individual account balance.

The revised model SARs should incorporate additional information from the Form 5500, including:

• if the plan’s financial statements were required to be audited, the type of audit opinion issued (unqualified, qualified, disclaimed, adverse) and the name of the auditing firm;
• existence of fidelity bond coverage;
• transfers of assets to or from other plans;
• adoption of amendment to terminate the plan and amount of employer reversion;
• adoption of amendment to increase or decrease plan benefits (for defined benefit plan);
• late deposit of contributions by employer (for a defined contribution plan);
• changes in plan service providers;
• funded percentage (for a defined benefit plan).

The revised model SAR for defined benefit plans should present financial data in a table format, rather than a text format, and should include more specific information on how the plan participant can obtain a copy of the participant’s annual statement of benefits.

Importance of Disclosures to Participants

Conclusion: Participants need to be told why each type of mandatory disclosure they receive about their retirement plan is important.

The Working Group concurs with the witnesses who testified that plan participants can feel overwhelmed by the amount of information they receive about their retirement plan. It would be helpful to plan participants if they were told why each mandatory disclosure they receive is important to the participants for getting the maximum benefit from their retirement plan.

Recommendation: Require an introductory statement for each type of mandatory disclosure and provide suggested language for these statements.

Because each mandatory disclosure provided to a plan participant contains distinct important information about the retirement plan, the Working Group recommends that each mandatory disclosure should be required to “introduce itself” to plan participants through an introductory statement. The introductory statement should:

• Briefly summarize why the participant is receiving the disclosure;
• Provide a general description of the plan information included in the disclosure; and
• Emphasize that the participant should read the disclosure carefully and retain it for future reference.

The DOL should develop suggested language for each of these introductory statements, but not require plan administrators to use the suggested language.

Summary

Retirement plan participants need to understand their benefits, rights, and obligations under their plans to maximize the retirement security those plans can provide. Plan administrators generally want to help participants understand and benefit from these plans, and the ERISA disclosure requirements create a framework for plan administrators to communicate this important information to plan participants. But increased plan complexity and a changing legal landscape have both trumped the regulatory call for required disclosures to be understandable by plan participants. The ERISA statutory and regulatory disclosure provisions need to be updated to address the increased complexity of plan information that needs to be communicated to participants and to limit the legal status of SPDs so these essential descriptive documents can once again be understandable and useful tools for plan participants.

Summaries of Witness Testimony

July 6, 2005

Summary of Testimony of Mary Ellen Signorille, AARP

Mary Ellen Signorille, a senior attorney with AARP Foundation Litigation, represented the participant perspective. Ms. Signorille suggested that separate Forms 5500 be created for defined benefit plans and defined contribution plans.

Ms. Signorille testified that SPDs need to be clear for all participants and beneficiaries in terms of eligibility rules, how to calculate the benefits and determine what the standard of review for claims denial is. She also believes that 210 days after the last plan year is too long for distributing SMMs, and recommends shortening this deadline to 30 days after adoption of a plan amendment if the plan administrator uses web based access or notice and 60 days if the plan administrator still uses paper. She also stated that the SMM should indicate both the changes made to the plan and why the changes have been made.

Ms. Signorille commented that SARs are not helpful. The purpose of the SAR is to inform plan participants about the financial health of the plan. For defined contribution plans, the SAR should include an attestation that the money that was deducted from the employees’ compensation was actually put into their plan accounts. The SAR should be looked at more globally, to figure out what information plan participants really need to know to understand the financial health of their plan. She also feels participants should be able to obtain historical copies of plan documents by written request. Under current law, participants are only able to receive the current documents. In response to a question, she indicated that historical documents should be retained as long as the plan administrator may deny a claim based on those documents.

Ms. Signorille also discussed annual statements of individual benefits. AARP’s view is that these statements should be furnished automatically on no less than a quarterly basis without the current requirement that a participant first request the statement. AARP and many other plan administrators currently do this, informing employees of their benefits and the contributions being made by their employer, which is also a good PR tool for the employer. Ms. Signorille commonly encounters a problem when an employee retires and wants to know how his or her benefit is calculated and the plan administrator won’t give the employee the information used in calculating the benefit. She feels this information should be provided when a person elects to retire. Further, Ms. Signorille noted that participants in multiemployer plans do not have the right to receive an annual statement of individual benefit. Although some multiemployer plans do send out yearly statements, AARP urges the DOL to require these plans to provide these statements.

Ms. Signorille suggested that additional disclosures be required. Upon written request, plan participants should receive information about the plan’s fiduciaries, which can be crucial in determining whether the proper fiduciary made a disputed claims decision. She also suggests that participants in multiemployer plans be able to receive, upon written request, a list of employers contributing to the plan. In addition, SPDs for multiemployer plans should specify how and to whom a participant must give notice when the participant is returning to work.

Ms. Signorille noted that it is very difficult to understand SPDs, which are usually written by attorneys. SPDs need to be easier to read and more easily accessible. Model language from the DOL, including explanations of the difference between vesting and benefit accrual, would help, as would answers to basic questions. In response to questions, Ms. Signorille stated that different courts interpret disclaimers between the SPD and the plan document differently. She also said SPDs are written in so complex a manner and language partly because of these differing court interpretations.

Summary of Testimony of Michael F. McAllister, Mercer Human Resource Consulting

Michael McAllister testified that few participants ever read Sponsor Plan Documents (SPD). When the SPD arrives, they give the SPD a brief look and might peruse a summary if one is provided. Then they put the SPD away for future reference. Plan participants will consult the SPD when and if they need information or have a question. And when they use the SPD in this fashion, they have two expectations, that they will be able to find the information quickly and easily. Also, that once they find the information, it will be presented in a way that’s easy to understand.

However, McAllister said he has found it’s not the amount of information required by ERISA that’s the problem, but often the way that information is presented to plan participants. The witness further testified that most SPDs today contain too much legal language, they are not well organized and text is not formatted in a way that promotes understanding.

First, McAllister recommended that the DOL consider prescribing an order in which retirement benefits are covered in an SPD—an order that corresponds more to how plan participants think about retirement benefits. We often like to use a “life event” approach that follows a chronological order:

• Becoming eligible for and joining the plan
• Earning your benefit
• Owning your benefit
• Receiving your benefit
• Retiring early and how it affects how much you receive
• Receiving full benefits
• Dealing with special circumstances (e.g., disability, death) and how they affect your benefits
• Understanding what other circumstances can affect your benefits (when benefits are denied)
• Applying for your benefits
• Knowing how your benefits are protected
• Understanding how the plan is administered.

Second, DOL might require that each SPD include a list of DOL-provided “frequently asked questions” and brief answers to those questions. The questions would be the same for all retirement plans.

For example, the questions might include the following, some of which are intended to alert participants that they cannot rely solely on a retirement plan for all of their income in retirement:

• Am I in this plan automatically?
• If not, what do I need to do to join?
• Is there a cost to participate? If so, what is it?
• How does the plan work?
• When will benefits be paid?
• How much will I get if I retire (at various ages)?
• What factors are used to determine my benefits?
• What payment options do I have? How do they work?
• What happens if I leave, die, or become disabled?
• What factors could affect my benefit? (e.g., QDROs, termination before vesting)
• Am I guaranteed to receive the full benefits the plan provides?
• Can the plan sponsor change or terminate the plan without permission from me and other plan participants and beneficiaries?
• What benefits am I entitled to if the plan sponsor changes or terminates the plan?
• What benefits am I entitled to if the plan sponsor files for bankruptcy or is acquired by another company?
• Where do I go with questions?

Third, employers could make plan documents more accessible (e.g., online) and use a format prescribed by the DOL for a shortened SPD, putting the remaining information (e.g., administrative information, claims procedures, ERISA rights) in the plan document in a prescribed format. That would make the SPD shorter but still provide participants with access to information on other subjects when they need it.

McAllister further testified that certain participant notices for DB plans could be consolidated, especially if the proposed Pension Protection Act (PPA) is enacted. Currently, participants in DB plans may receive two separate notices about the general financial health of their plan—the SAR after the Form 5500 is filed, and the PBGC's participant notice (the 4011 notice) if the plan pays a variable premium. If the Pension Protection Act were enacted, participants would receive a third general notice, the "annual funding notice," as well as a new notice for certain employers with 4010 filings. All general notices would have different measures of how well a DB plan is funded. This will be inherently confusing to participants.

The witness further testified there are strong arguments for eliminating the SAR altogether for DB plans. He went on to say that SARs include information about the amount of plan expenses, benefit distributions and asset gains, but present it in a way that is not really that useful to participants wanting to know about the long-term financial health of their plans. The statement of the plan's funding percentage contained in the PBGC's 4011 participant notice provides more useful information. The statement in the SAR that the employer did or did not make required contributions duplicates the requirement to notify participants of missed contributions. The timing of the SAR—two months after the filing of the 5500 for the previous year—is too late for participants to react to anything that may have happened to the plan.

McAllister testified he believes electronic disclosure does work, and will work even better in the future as Americans become more and more accustomed to receiving and viewing information electronically. Further, having SPDs online enables SPDs to be kept up to date, makes SPDs easily accessible, and makes it easy to provide additional resources (e.g., links to other disclosures) without overwhelming people. And you can certainly print an SPD from a website. McAllister had two recommendations to make electronic SPDs more user-friendly:

Online SPDs should be able to be printed so the text is suitable for reading—not simply pages and pages of web-page-formatted text. You may be familiar with a “printer-friendly” button on many web sites that converts web-formatted text into text that is easier to print and read. That kind of feature should be mandatory for online SPDs.

Also, Online SPDs should also have links to other sites that would provide more information to participants. For example, there could be links to sites for the DOL, PBGC, etc. And there could also be links so plan participants can simply “click” and see other plan information, such as financial or funding information currently contained in SARs and other notices.

McAllister did indicate however that there should still be a requirement that participants be able to get information in hard copy if they wish to do so.

Summary of Testimony of John Hotz, Pension Rights Center

John Hotz is the Deputy Director of the Pension Rights Center, a national non-profit and non-partisan consumer organization. The Center focuses exclusively on the protection of pension rights for workers, retirees and their families. The Center receives feedback from the constituency it serves, which includes feedback on the efficacy of retirement plan communications and disclosures.

Participants and beneficiaries need accurate and accessible information about their retirement plans. The ERISA reporting and disclosure requirements furnish participants and beneficiaries with the only information they have about their benefits. They have to be able to rely on that information. A well informed participant is also a useful enforcement tool.

The summary plan description is the primary disclosure document that participants use to find out about their plan. Mr. Hotz said that most participants are confused, misinformed or uniformed after looking at the SPD. He suggested that the SPD should be written on a 6th grade level. Nonetheless, it would still need to be comprehensive and complete to give participants accurate and reliable information about the plan.

He said that many SPDs fail to sufficiently identify the situations when participants can loose or fail to qualify for benefits. Such loss triggering events should be highlighted. He spoke highly of the recent IRS relative value regulations and suggested that similar disclosures are needed.

Mr. Hotz suggested a mandatory disclaimer for the beginning of an SPD indicating the discretionary nature of many plan benefits. He also suggested that this statement be tempered with another one indicating which benefits that once earned could not be reduced or eliminated. The SPD should also have the date as of which it is effective and refer participants to subsequent summaries of material modifications (SMMs). In this regard he also offered that SPDs should have to be updated more frequently. He further testified that the recent revised DOL model statement of ERISA rights should be a strict requirement.

The SPD should caution participants in extra large print that the SPD is important and should be retained in a safe place. He said that terminated vested participants often have trouble finding documentation regarding their pension benefits. There should be a way through the employer to readily get prior documents for such participants.

The annual report on the form 5500 needs more information. The plan amendments and dates of adoption should be on the 5500. The schedule B information needs to be more understandable to participants so that they can know which information is truly relevant to determining plan funding levels.

Mr. Hotz also testified that the summary annual report (SAR) is a valuable tool for participants, but that it also needs to be enhanced. It needs more explanation on how to interpret the information in the SAR for participants to know how to assess the financial health of the plan. The SAR should also be attached to the 5500 when it is filed.

Mr. Hotz testified that it can be difficult to get information from plan sponsors and administrators. They do not want to disclose information to a party other than the participant without a power of attorney executed by the participant. He said that this is not necessary, and the DOL should make it clear that disclosures can be made to third parties who are representing participants. He also testified that it can be difficult to find the correct person with whom to speak about a benefit claim. He is also concerned about a compliance gap regarding the reporting and disclosure requirements.

Mr. Hotz recognizes the popularity of electronic disclosures with many who are computer literate, but he cautioned against deleting the current protections in the present rules on electronic disclosures. He recommended at least one additional protection. He suggested adding a required statement that participants should strongly consider printing out all electronically delivered documents. He expressed particular concern for terminated employees who may not have an opportunity to print documents before they are escorted from the building.

Summary of Testimony of David Wray, President, Profit Sharing/401(k) Council of America

David Wray is President of the Profit Sharing / 401(k) Council of America (PSCA), a national non-profit association of companies that sponsor profit sharing and 401(k) plans covering over four million employees.

Mr. Wray described how it is critical for employees to understand their retirement plans, including benefit formulas and plan administration. This helps participants to utilize their plans, plan for retirement, and avoid mistakes. Plan sponsors also benefit when participants understand their plans since it helps to attract, retain, and motivate workers.

He also pointed that defined contribution plan providers have been improving the quality and quantity of information provided to employees, and that nearly all defined contribution plan participants receive more information than is required by law. Mr. Wray said that plan sponsors, especially small companies, have limited resources and that complying with regulations is expensive and discourages plan formation.

Mr. Wray recommended that required disclosures should be as few as possible since required disclosures are not effective employee communications. He argued that regulations should allow for flexibility of form and delivery. Areas employees need communications on their defined contribution plans include how the plan operates, individual account information, blackout periods, and meaningful changes in the plan's benefits.

Concerning the SPD, Mr. Wray stated that they are not useful communication pieces, but they are useful in a legal or claim proceeding. He feels that SPDs need to be reorganized, and that plan sponsors should have flexibility in how to reorganize them. Under current requirements, plan sponsors follow the safest method and are discouraged from being creative.

One problem Mr. Wray pointed to is definitions. He stated that in the front of most SPDs are legalistic definitions instead of a more useful description of benefits. Mr. Wray thinks that definitions should be simplified, understandable, in the back of the SPD. He also proposed that the DOL develop standard simple definitions that sponsors would know are safe to use since plan sponsors currently use legalistic definitions to protect themselves in proceedings instead of giving participants useful information.

Mr. Wray feels that although employees get their SPDs when they are hired, they do not look at the SPDs until something major happens in their life, such as getting married, terminating employment or nearing retirement.

Suggestions Mr. Wray made for SPDs included adding frequently asked questions, being organized by life event situations, having an index, and being integrated into electronic communications.

The Working Group and Mr. Wray discussed the conflicting nature of SPDs in that they are both communications and legal pieces, and that the legal concerns are undermining the ability to provide understandable communications. There was also discussion about other communications materials that are given to participants. Mr. Wray described how plan sponsors develop SPDs to protect themselves legally and then use other forms of communications to educate the participants.

Mr. Wray also suggested that if the DOL recognized innovative SPDs, the lawyers may be less worried since the plan sponsor could now say that the DOL said this type of innovation was a great idea.

Concerning the SARs and Form 5500s, Mr. Wray stated that PSCA supports the 2004 report of the ERISA Advisory Council on the fee disclosures.

Mr. Wray also discussed how the SAR was written for defined benefit plans. He suggested that it might be better to have a separate SAR for defined contribution plans. He also pointed out that defined contribution participants are typically getting quarterly statements showing their account balances.

The Working Group and Mr. Wray discussed the possibility of a separate SAR for defined contribution plans and what could be useful, such as are sponsors making timely contributions, were there recent amendments, and fee disclosures.

Another topic Mr. Wray brought up was the 404(c) requirement on prospectuses. He thinks prospectuses are not useful and that they are much harder to understand than SPDs. Mr. Wray argued that instead of a prospectus, participants need a very simple summary of what is in each of fund. He thinks profile sheets work well. Mr. Wray proposed eliminating the prospectus requirement for every investment option.

September 23, 2005

Summary of Testimony of Geri Travis, Aon Consulting

Geri Travis is a senior member of Aon’s Northeast Communications Practice. She has 23 years of experience in communications consulting. Ms. Travis testified about the effectiveness of the summary plan description (SPD), summary of material modifications (SMM) and the summary annual report (SAR) as communication tools for plan participants and beneficiaries.

Ms. Travis addressed her testimony to three areas:

1. The content and language of retirement plan communications;
2. The organization and usability of retirement plan communications; and
3. The accessibility of retirement plan communications.

Content and Language

The SPD has grown to include too much plan description and too little summary. Litigation has changed the original focus of the SPD from being a summary of the plan provisions to being an extensive and legalistic enumeration of the plan provisions. Sponsoring employers desire to limit their exposure to risk so lawyers necessarily review SPDs before distribution. This results in too much legalese. Participants are frustrated because they have difficulty understanding the document.

Participants consistently report that SPDs are not a good source of information. Participants use an SPD for specific information and they have trouble sorting through the legalistic language to find answers to their questions. Participants yearn for user-friendly plain-speak language that connects to the kind of information they will find to be useful.

Ms. Travis also said that communications tend to be in silos. The description of each plan is separate from the others. Participants would benefit from descriptions of the retirement program as a whole, showing how each piece complements the others.

Organization and Usability

Employees do not read SPDs cover to cover. The SPD is a reference document. Employees consult it when they have a specific need for information. It is critical for the format to serve the needs of the end user.

Ms. Travis testified that SPDs should be organized around life events, like employment, marriage, divorce, termination, disability, retirement and death. She also said it is important for the document to be easy to read. Pull quotes, side bars, bullet points, lists, magazine style, white space, and highlighting all help focus the eyes of the reader to important information. The attention span of employees today is short and the format has to accommodate this.

Accessibility

Ms. Travis testified that electronic delivery of SPDs has great promise to enhance the accessibility of the document. Electronic delivery can also enhance content and usability.

Electronic distribution facilitates quick updates and distribution. Electronic delivery serves the purpose that employees seek in the SPD – the ready access to answers to specific questions. Electronic documents can have a search function and links to other relevant information. This makes navigation of the document easy and efficient.

Employers can save costs through electronic delivery. Ms. Travis also said that the initial cost of implementing electronic delivery can be expensive, but cost savings should be realized over time.

In summary, Ms Travis identified key elements of effective SPDs as follows:

• The tone is personal and avoids legalese
• Technical terms are defined in a glossary
• An introduction places the benefit being described in context and states what can be expected of the sponsoring employer and what is expected from employees
• References to other relevant sources
• In the case of participant directed investments, rudimentary education on investing would be included
• Efficient navigation and cross references
• Flexibility in delivery methods.

Summary of Testimony of Patrick Szymanski, International Brotherhood of Teamsters

Patrick Szymanski, who is General Counsel for the International Brotherhood of Teamsters, began his testimony by indicating that he thinks it is very important that people who have retirement benefits and other benefits that are governed by ERISA have an ability to understand those benefits. He stated that he was going to be giving a union - and primarily multiemployer fund - perspective.

According to Mr. Szymanski, there are approximately 1,650 multiemployer plans in the United States, covering approximately 60,000 employers. Ninety percent of the employers that participate in these plans are small employers, with fewer than 100 employees. Ten million employees are covered by these plans.

Mr. Szymanski indicated that multiemployer plans serve an important purpose for two reasons. First, they allow small employers to provide meaningful retirement benefits that they probably would otherwise not be able to do. Second, they allow people to work for more than one employer and maintain their benefits.

In the multiemployer situation, Mr. Szymanski testified that employers and unions have a legitimate and critical need for information about the plans. This information is needed when it comes time for them to renegotiate the contract because that is the point at which contributions to the plan are fixed. He also indicated that they need information about the plan during the term of the contract because under ERISA there are serious things that can happen in the event a plan becomes underfunded. They need to have an opportunity to act, even during the term of the contract, in order to avoid those consequences.

Mr. Szymanski stated, in part, that “. . . a participant is not going to have any idea of what a funding standard account is, and what the SAR says about the health of the fund. . .” He also indicated that 5500s and SARs are not sufficient because, in a lot of situations, the information comes too late to be able to react.

Mr. Szymanski testified that his impression is that “multiemployer union plans have participants that generally are better informed about their benefits than other situations.” He indicated that part of this is due to participants focusing on the retirement benefits when the collective bargaining agreement is renegotiated and wanting to know what will happen to their benefits and whether their benefits are going to be changed or reduced.

When asked what mode of communication employees are using to get information when benefit issues come to the forefront, Mr. Szymanski indicated that in his union there is a proposal procedure prior to renegotiating the contract where employees covered by the contract either come to a meeting, if it is a smaller bargaining unit, or get something in writing, if it is a larger bargaining unit. In some situations involving large contracts, he indicated that written surveys are sent to members about what sort of things they want to see in the next contract. In larger contracts, there are periodic statements that go out in the course of negotiations to give people updates on what is going on and at the end there is a contract ratification meeting or procedure. In a smaller group, he indicated that it would be a meeting at which the bullet points of the contract are presented to everybody, people find out what the tentative agreement is, and they vote on it.

In response to an inquiry about whether members of the union feel like they have a say in the design of benefits, he indicated that such was the case and that there are also other reasons that members know more about their benefits. He stated that “part of it is the structure of our funds being jointly administered between the employer and the union.” He further stated that “[t]he union is also the principal point that the member comes to when they have a problem with their benefits, or they have an issue with their benefits.”

Mr. Szymanski indicated that to the extent there are questions, the union, which is participating 50/50 in the administration of the plan, has the ability to go to the fund and say you ought to have a 800 number, you ought to have an information system, your website needs to be updated, you need to put more information up there for members. He indicated that union representatives generally come up through the ranks just like the employees did. According to Mr. Szymanski, “[i]f they don’t understand it, they understand that their fellow members don’t understand it, so the impetus is right there.”

He testified that some plans issue individual benefit statements on an annual basis. An example that he provided was the Western Conference Plan that covers the Western United States for the Teamster’s organization. The Plan sends out an individual statement to each participant every year indicating what their benefit is and how it has changed from the year before. He indicated that this was a tremendous advantageous because an employee gets a statement that is tailored precisely to his or her situation. If they think that their benefit should have gone up because the statement doesn’t give them credit for whatever work they did, they can correct it then. He indicated that some people have told him that it is difficult to give individualized statements to everybody, but that he not so sure that it is.

Mr. Szymanski testified that “information seems to get out better to our members because of the contract negotiations, because of the contract, because of the ability to go someplace local and actually talk to an individual about the benefits.” He also indicated that funds of his union have put out periodic newsletters and magazines to members that are well-designed, informative and present the information in a way people can understand. He testified that, “[t]o some extent, the magazines are necessary because, as other people have described, the SPDs have become so laden with qualifications and all of the details for fear that a general statement is going to be misconstrued, that in a lot of situations, they’re too long, too turgid and it’s difficult to read or understand.”

Summary of Testimony of Diane Talbot, Merrill Lynch

Ms. Talbot does not believe more information is needed, but she stated that the relevance and understandability of the information that is given can be improved importantly. Ms. Talbot termed “informational” information (as opposed to motivational information) as being that information that is the foundation for understanding the plan. It should be (1) brief, (2) easy to understand and (3) accessible. She said the SPD is not useful from a “brevity” perspective, and that “language matters” in making the SPD easy to understand. She cited the examples of substituting “you” for “plan participant” and posing and answering questions rather than telling as ways to improve understandability. She said that “self-served” information would be better than packaged info, and that on-line was more accessible (and less costly in her view) than hard copy. She recommended that the Social Security statement be used as an excellent example of an informational document.

She recommended that a Participant Bill of Rights be created and communicated. She believes more disclosure is not required, only a redesign of existing disclosures. She recommends a re-evaluation of all disclosure requirements to eliminate unhelpful (not specified) info. She believes brevity is important.

She recommended the SAR be redesigned or eliminated.

She stated that she believes plan transparency is currently “good,” but recommended that plans be made public.

Summary of Testimony of Barbara Hogg, Hewitt Associates

Barbara Hogg, an actuary for Hewitt Associates and Practice Leader for Hewitt’s Defined Contribution business, covered four different areas during her presentation:

1. Trends that show that retirement plan designs are becoming more complex and therefore, plan sponsors are trying to make communications’ tools simpler for participants. For employers offering Code Section 401(k) plans, plan communication has become more action-based and less passive communication. This puts greater pressure on the participants to decide how much to save and how savings should be invested. The DOL should recognize that plan communication should be both informative and supportive. The challenge for this Working Group is deciding how to balance the need for complete information with the role that communication can play to help participants take greater action on their plans.
2. Communication should be directed to the specific audience target. In this regard, Ms. Hogg analogized the offering of a plan to a participant to a purchase of a car. Using this analogy, the SPD for the plan serves as the car’s owner manual. Certainly, participants do not read the SPD cover to cover upon initial participation, but instead rely on the document when they have specific questions. After the purchase of the car, various follow-up communications are made from the dealer to the purchasers. Plan communication efforts should focus similarly on providing education when the information is relevant (i.e., relevant events such as marriage, death, retirement).
3. Information should relate to directional needs: Communications to plan participants and beneficiaries should differentiate between informational disclosures versus directional advice. Disclosure information is certainly the safe thing for plan sponsors to provide; however participants need direction to make decisions – such action based information should also be provided.
4. The audience of plan participants and beneficiaries is diverse: The diversity of the audience poses several challenges for the plan sponsor in disclosing the terms of the plan – educational levels of the participants; difficulty in communicating quantitative topics; lack of understanding of retirement programs; default by participants to use short-cuts in making decisions; and the power of framing the interpretation of the material disclosed.

While the SPD is regarded as a reference material, it should be easy to understand and structured according to various “life events” that trigger questions about the plan. Communications should differentiate between informational versus action-required types of disclosure. Since most participants rely on electronic disclosure, continuance reliance on on-line disclosure should be encouraged.

For plans that provide quantitative options (e.g., relative values of optional forms of payment), participants and beneficiaries generally do not relate to the numbers provided to them. More is not always better; in fact, too much information may disable a participant and beneficiary in making a decision. People generally rely on taking “short cuts” in making major life decisions – for example, they rely on emotions instead of data; they prefer to defer to the advice of experts; they assume past experiences are indicative of future experiences. As a result, the most important information brought forth to participants and beneficiaries should use examples and rely on model language (that could be provided by the DOL).

In conclusion, participants and beneficiaries need more guidance and direction with respect to plan communications; however, such efforts must focus on simplification so that such recipients of benefits can understand the benefit decisions that must be made.

Summary of Testimony of Lynne Sport, Society for Human Resource Management

Lynne Sport spoke on behalf of the Society of Human Resource Management. Ms. Sport is the Director of Human Resources and Administration at the Carnegie Endowment for International Peace, a non-profit think-tank specializing in international affairs, where she's responsible for the full range of Human Resources management.

SHRM members include HR professionals of both public and private employers who are intimately involved in all aspects of pension plan management and administration. Based on the experience of its members, SHRM believes it is essential that plan participants understand the qualifications and benefits of their retirement plan, how to contact the plan administrator if they have questions, and how to access the tools necessary to make sound financial decisions regarding retirement. Pension plan participants need to have information, education, and professional advice to wisely exercise their investment responsibilities in preparing for retirement.

Most pension plan SPDs are very cumbersome and very difficult to read. The format of the SPD should be standardized in the same way that a mutual fund prospectus is standardized. It would be easier for a mobile workforce to understand plan information if it was presented in a standardized format across employers and plans. SPDs should also contain an FAQ or a Q&A section to address specific questions, such as plan fees.

Ms. Sport stated that most plan participants do not read the SPD in its entirety at any one time, but in relation to life events. They read part of it when they first become eligible, when they want to take out a loan, or when they're ready to think about retirement.

The SAR provides important financial information, but most plans have so much financial information that a participant rarely invests the time to read through the document and usually does not understand the information in the SAR. The SAR information should be accompanied by interpretive and illustrative information, such as what percentage the plan assets have grown during the current year and the amount of the funds that the employee has invested into the plan, presented in the same format as the participant's quarterly statement, including graphs and pie charts.

Further, the SAR was developed principally to disclose annual financial status information of a defined benefit plan, not a defined contribution plan. Because defined benefit plans operate quite differently from defined contribution plans in terms of funding mechanisms, plan structure, distributions, and other provisions, it would be useful to restructure the SAR to disclose different information for defined benefit and defined contribution plans.

SHRM believes a blank slate with respect to required disclosures to retirement plan participants should consider legal compliance and participant's rights, which in turn include benefits, appeals, legal rights, and PBGC information, as issues to be considered when communicating to plan participants. Also, comprehensible information needs to be provided to plan participants in a timely manner and accessible in multiple formats.

If plan administrators were allowed to develop, without fear of litigation, a set of documents that met all of the disclosure requirements, but were presented in layman's terms, participants would be able to more completely understand the plan. To provide complete protection from litigation, and to ensure that the plan language is the final authority on inconsistencies between the plan and the SPD, SHRM encourages Congress to amend ERISA to require an SPD to state clearly that in the event of discrepancies between the SPD and a plan document, the plan document prevails. This approach would enable participants to ask more questions regarding their retirement savings options and encourage more participants to become involved with the retirement program, because if the SPD does not explicitly refer to the plan document, most plan participants do not realize that there is a document other than the SPD controlling the operation of the plan.

In response to a question, Ms. Sport stated this change is needed because it's difficult for an employer, and particularly the smaller employer, to keep all the plan documents in check. Her experience is that major discrepancies between the plan document and the SPD don't often occur, but minor discrepancies do, which is why plan administrators need more complete protection to go to the plan document in the event of discrepancies.

Plan administrators should take more responsibility in effectively communicating retirement plan benefits to their work force. There are several models that an employer can implement which hinge primarily on the fact that most plan participants need another human being to explain the written plan explanations. One option is devoting a full-time staff member who is an expert on the retirement plan and who is able to explain the inner workings of the plan to the average employee who may have little comprehension of the retirement plan.

Another option is for the plan administrator to bring in an outside consultant from the investment group that sponsors the plan. This representative should be made available to all employees for educational purposes and to answer participants’ questions. This can cost the employer and the participants in time, but can often be provided without additional direct monetary cost to either the employer or the participants.

In response to a question, Ms. Sport stated that although HR professionals push a lot of information out to participants, the participants choose to listen when they want to and they choose not to listen at times. Therefore, it is important for plan administrators to get plan information out there, make sure it's always accessible to the participants, and remind participants in many different ways throughout the year that the information is available.

Electronic disclosure does work, and should be available and used by plan administrators and participants whenever possible. Access to the most current plan information is extremely helpful and a considerable improvement over hard copies. The Department of Labor should continue to encourage the growth of electronic disclosure. As has been demonstrated by Hurricane Katrina, it is valuable to have employee benefit information on-line and accessible from anywhere through internet access.

Summary of Testimony of Sam Gilbert, United Plan Administrators, Inc.

Sam Gilbert testified the theme of his presentation is “Size Matters." What makes sense for mid to large entities in benefit communications, where most legislators and regulators are focused, often costs more for smaller businesses to accomplish, and has unintended consequences with little real informative value.

Gilbert referenced data from the Small Business Administration (SBA) that there are 23 million small businesses in America. That means 99.7% of all employer firms are considered small. Small business employs 50% of all private sector employees and pays 44.3% of total private payroll.

Mr. Gilbert provided testimony on an additional SBA report about retirement plan administrative and disclosure costs entitled, "Cost of Employee Benefits in Large and Small Businesses." Using data from Form 5500 sheds light on the cost per participant sponsors pay for administrative expenses on employee benefit plans. In defined benefit plans with over 5,000 participants, it costs on average $159 per participant to produce the annual disclosure requirements. In defined benefit plans with 100 or less employees, it costs $530 per participant, on average – 330% more.

The witness went on to say that the larger the business entity, the more the likelihood that one or more full-time individuals are responsible for employee benefit communications in the human resource department. The human resource department serves as a place to go if a worker has questions or needs information about their benefits. The trained staff's only job is handling benefit issues. The smaller the business entity, the less likely there is a human resource staff or an individual dedicated to benefits. That function is usually handled by a CFO with varying degrees of benefit knowledge, or the small business owner or owners.

Mr. Gilbert testified that most small businesses employ outside advisors, both independent and financial service-related to design, install, operate, and communicate employee benefits to their workforce. There are a fair percentage of small business owners on both sides of the issue with the ease, comfortableness, or access to electronic benefit communications. Policies designed to encourage electronic delivery of benefit communications should be explored on a voluntary basis, mindful of the hesitant nature of some in a voluntary benefits world, and the benefit administration cost per participant differential that already exists between large and small entities.

With respect to SPDs Mr. Gilbert suggested that the SPD information be condensed within two pages, and add a third called "Feature Descriptions of Your Retirement Plan,” listing numerous one-page topic descriptions that can be requested at any time by the participant, with an obligation by the sponsor to provide topic descriptions within 30 days of the written request. The new participant would not be overwhelmed by information overload, and would gain knowledge of a subject when it is more useful to them at various points within their career. The SMMs given to participants should also refer the participant to an updated topic description as a result of the modification.

The witness stated that his organization prepares individual benefit statements yearly for defined benefit plan participants. However, his organization is always aware that few participants understand that benefit projections are estimates, not promises. Their actuary is concerned that the proposed disclosure rule for relative values will add an additional cost of $200 - $300 for each terminated employee.

Mr. Gilbert stated that size also matters with respect to the SAR. He has never been convinced that a participant needs to know the total value of plan assets in a small business defined contribution plan. This information does not need to be on the SAR. The total earnings of the plan are also irrelevant. What is important to the employee is the employee’s account value and individual contributions, earnings, expenses and vesting rights.

Mr. Gilbert urged the Working Group to request the DOL to convene a working group of small business employee benefit plan advisors who could recommend procedures that might establish more effective benefit communications for the small business workforce.

Summary of Testimony of Nell Hennessy, Fiduciary Counselors Inc.

Nell Hennessy, President and Chief Executive Officer of Fiduciary Counselors, Inc., first addressed the question of the funded status of a pension plan (and specifically the required participant communication for an under-funded pension plan) and commented that the funded status in the abstract is not terribly useful and every measure of the funded status that comes off the 5500 is meaningless if what you're trying to convey to a participant is how well funded is your plan if it's going to terminate. Ms. Hennessy commented also that her views were from the perspective of large pension plans and that the Working Group might consider whether a threshold could be developed so plans under a certain size would not have to deliver the notice of under-funding.

Ms. Hennessy remarked that the PBGC notice is not ideal, because it, too, uses the funded measure, the current liability calculation that's used for minimum funding. But its advantage is that it is intended as a stand-alone notice, rather than something added to the SAR because “no one read(s) the summary annual report.” The other benefit of the notice warning to participants is consequences to them if their plan terminates and the level of guaranteed versus non-PBGC guaranteed plan benefits, which Ms. Hennessy testified is a very useful description of what could happen if the under-funded plan terminated.

Ms. Hennessy added, in summary, that most defined benefit plan participants, with the possible exception of very small plans, already receives information about the funded status of their plan, and she would encourage the Working Group to not recommend moving that information into the SAR.

Ms. Hennessy then addressed SPDs. She commented that the SPD disclosure for defined benefit plans is “actually pretty good.” She noted that the separate annual notice for under-funded plans is more effective than longer boilerplate in the SPD.

With respect to SPDs for defined contribution plans, she suggested warning those participants about dangers that have already been seen. Specifically, she suggested that the required explanation of the non-guarantee of benefits from PBGC should be expanded to include a warning about the risk of employer stock. Ms. Hennessy suggested that the DOL develop model language, if not required language, for the SPD warning about company stock. Specifically, the model language should refer to company stock as non-diversified and that if the employer failed, in all likelihood the stock would be worthless. She noted that the SEC web page has an excellent description of what happens to stock for a company in bankruptcy that the Working Group might consider suggesting as model language.

In response to a question about the value of model language if plan participants do not tend to heed warnings about employer stock, Ms. Hennessy stated that she felt some people will heed the warning, and the ideal would be to have model language included in the description of the stock fund that the participants get as part of their investment materials. Currently, these statements are not typically in the SPD and therefore not subject to the Departments oversight. Ms. Hennessy felt that the same warning about the risk of employer stock is presented in an ESOP and while the suggested model language will be helpful to ESOP participants, nothing additional was needed.

Ms. Hennessy addressed SARs specifically for defined contribution plans, and stated that the SAR for a defined contribution plan is completely worthless, because the participant really doesn't care what's in the whole plan; rather, the participant only really cares about what’s in his or her own account. She suggested a more meaningful approach would be to give participants in plans with participant-directed accounts a comprehensive statement of their account in lieu of the SAR. However, the SAR would be useful in a non-participant directed account since the investments are handled at the plan level rather than by the participant.

With respect to participant notices in matters of change in ownership, such as a merger, acquisition for a pension plan, Ms. Hennessy remarked on the enormous complexities associated with mergers and acquisitions. Because the DOL, the PBGC, and the Internal Revenue Service have limited information by which to track transfers of pension assets and liabilities resulting from these transactions, those agencies cannot assist a person getting ready to retire with locating their pension.

In regard to the trend toward more legalese in SPDs, Ms. Hennessy stated that the trend would continue and even increase because the courts are looking at the SPD as part of the plan documents, and finding against the employer if the SPD says one thing and the plan says something different, even when the SPD clearly says that the plan trumps the SPD. She added that an SPD ideally should be shorter and more readable than large SEC-required prospectus, noting that even the SEC created a one-page or short prospectus. With respect to whether model language could be used in portions of the SPD, such as for topics that have been shown particularly confusing to participants, she remarked that because plans are all very different and very complex that creating and using model language in SPDs would be very difficult to do.

Ms. Hennessy also commented on electronic communication and the balancing act of trying to get things out to people electronically as well as to those who may not be electronically connected or when the electronic delivery system fails. Overall, her view is that an ideal mix is to have electronic availability to people who can access it and to have a mechanism to deliver paper to people who still want paper. However, Ms. Hennessy warned against creating rules that are designed for today's technology because it is unknown what improvements future technology will create in electronic communications. Rules should be made flexible enough to adapt to emerging technologies.

With respect to the timeliness or lack of timeliness for SMMs, Ms. Hennessy stated that the statutory rule for SMMs is not timely enough but confirmed the usefulness of an SMM in lieu of a completely new SPD. She added that the statutory requirement for republishing SPDs should not be based on a period of years but on the number of changes since the last SPD.

Ms. Hennessy closed her remarks with a view about the small business. She urged the Working Group to make sure that the big vendors, banks, mutual funds, insurance companies are on board with any changes recommended by the Working Group and that the Working Group understand how their mechanisms work for very small plans and the cost to the small plans.