Language Barriers of 401(k) Disclosure

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I would like to address disclosure versus communication. They are two very different things, but they shouldn’t be. Have you ever tried to read ERISA or DOL regulations? The average person doesn’t read this stuff. Lawyers read it because it is in their language. Lawyers are the ones who write this stuff.

Imagine a Company with 100 employees that has a 401(k) plan. If I walked into that Company and asked every employee if they have read the Company’s 401(k) plan document, how many employees would say yes? I am willing to bet 10 or less and part of that 10 would be the employees responsible for managing the plan. Is that bad? Not necessarily, because there are things called Summary Plan Descriptions (SPD’s). A SPD is supposed to be written as a high level summary of the plan that is not flooded with legal language that confuses participants. If I asked how many employees have read the Summary Plan Description (SPD) I am willing to bet that the answer would be closer to 50 out of 100 employees (assuming all 100 employees are participants). But out of those 50 employees, how many actually understood everything and read the full document? 30? 15? 10? That’s the problem. SPD’s are typically written by lawyers with the primary goal to protect plan sponsors instead of inform plan participants in easy to understand language. This is an example of the disconnect between disclosure and communication.

Over the past five years, the DOL has done impressive things to help advance the protection of plan participants. One of those impressive things was paying more attention to and increasing the regulation on disclosures involving participant fees. However, in my opinion, the DOL could have done a better job in executing this initiative to enhance the transparency and disclosure of participant fees. Did you know the current regulatory regime regarding participant fee disclosure allows for documents in excess of 15 or 20 pages and formulas that require a calculator to figure out? These disclosures are designed with the hope that the average participant will not pay any attention because it will take too much time to figure out. That’s not communication. Even worse, disclosure of participant fees are typically in basis points or rates, which makes it more difficult for the average participant to figure out.

My question – Why does the DOL not require a one page year-end itemized fee summary highlighting the actual cost of the plan in dollars? Why is there not a required uniform disclosure amongst all service providers related to fee disclosure? There are Fiduciary Service companies that gather fee information for clients and create a report that provides a uniform comparison of all provider fees that allow plan sponsors to perform fee benchmarking analyses. So it would make sense if the DOL created a template that all providers must use when quoting and disclosing fees, right? Leading plan administrators have already taken it upon themselves to provide this one page summary to participants.

I believe that the DOL has done and will continue to do great things to protect and inform plan participants. However, I think the DOL needs to realize their downfalls in communicating to the average 401(k) participants. In my opinion, I think the DOL is missing the connection between disclosure and communication on certain issues such as disclosure of plan participant fees. Confusing disclosure language is not likely to be read by the average 401(k) participant, but direct communication in plain English is likely to be read.

By Josh Mitchell, CPA