How DOL Could Improve Form 5500 for Pension Plans

December 1, 2016 Randall Ronsberg

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On July 21, 2016, the Department of Labor (DOL) Employee Benefit Security Administration (EBSA), Internal Revenue Service (IRS), and Pension Benefit Guaranty Corporation (PBGC) proposed a rule that would change how employee benefit plans share information with the government. This proposal, which revises the existing Form 5500, is intended to make data more useful and protect employees. DOL has encouraged stakeholders to submit public comments on these changes. Read our other posts about the proposed rule here.

Summit recently submitted comments to the proposed rule that would revise Form 5500. In this post, we explore some of our own suggestions DOL could use to strengthen the form.

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Add a field to collect Central Registration Depository number on the Schedule C

The Central Registration Depository (CRD) number is assigned by the Financial Industry Regulatory Authority, Inc. (FINRA) to identify firms (and each representative) in the CRD, a database containing information on registered securities and broker firms. The CRD database can be used to conduct background checks on brokers showing any complaints that may have been filed against them. The Securities Exchange Commission (SEC) asks for CRD numbers on their own data collection forms, such as the Form ADV.

Including the CRD number on the Schedule C would allow researchers to connect data about Schedule C service providers that give investment advisory and asset management services to plans to external data sources. The combined data can provide new insights that were previously not possible. For example, Schedule C data could be connected to the SEC Form ADV to see if there have been any regulatory, civil, or criminal actions against personnel working for the investment advisor firm (note: the criminal action disclosures needn’t be related to the investment advisory business, and therefore should be treated with care when making determinations about the investment advisory firm). As Form 5500 is modernized, we believe that it is important to take a forward-looking approach and proactively facilitate the ability to connect data sources across agencies.

Collect information regarding participant and employer contribution frequency and timing on the Schedule H

The Schedule H provides the retirement plan’s financial information such as assets, liabilities, income and expenses. The Schedule H also includes line items for the amount of employee and employer contributions to the retirement plan for the year. Gathering information regarding participant and employer contribution frequencies (e.g. bi-weekly, monthly, and yearly) is important for accurately calculating investment. Knowing the timing of the contributions allows for accurate investment returns comparisons between plans. Plans with more frequent and/or earlier contributions have more time to accumulate investment returns across a plan year than those with contributions that come in at the end of a plan year. As an example, consider plan ABC that receives all employer contributions at the end of the year and plan XYZ that receives employer contributions monthly. Without knowing the timing of contributions, we are likely to find that plan XYZ has better returns than plan ABC. Considering only one plan year, this is true in an absolute sense. However, it may be attributable to contribution timing rather than inferior investment options

Summit believes it is important to identify the timing of participant and employer contributions separately. Participant contributions should be deposited according to the employer’s pay period schedule, but employer contributions can be transmitted at the employer’s discretion (in accordance with plan documents). This additional information is key to appropriately determine the plan’s returns on investment.

Increasing the available data to calculate accurate investment returns will increase the transparency of the retirement investment market. Summit believes that more transparency in the marketplace will allow plans to see how they stack up to their peers. We think marketplace competition will increase as retirement plans seek the best available options for their participants with the new insights from previously unavailable data. As competition increases, fund fees will be subject to downward pressure and better performing funds will outshine their inferior competition. We believe this in turn will improve the overall retirement picture for the American workforce.  

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