Compliance September 14, 2021

DOL, IRS and PBGC Call for Comments on Form 5500 Revisions

In addition to asking for input on the SECURE Act’s requirements and the current Form 5500, the DOL has published a notice of proposed changes to its implementation of regulations under Title I of ERISA.

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The U.S. Department of Labor (DOL), via the Employee Benefits Security Administration (EBSA), has joined the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) in requesting public comments on proposed revisions to the Form 5500 Annual Return/Report. At the same time, EBSA is publishing a notice of proposed changes to its implementing regulations under Title I of the Employee Retirement Income Security Act (ERISA).

The Form 5500 is one of the key annual filings made by private-sector employee benefit plans, and the EBSA says it now needs changes, primarily to implement provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

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The proposed changes also include a limited number of other improvements to the annual return/report forms and instructions, says Acting Assistant Secretary for Employee Benefits Security Ali Khawar.

“The proposed form changes and related regulatory amendments address Setting Every Community Up for Retirement Enhancement Act changes, especially for multiple employer plans [MEPs], and improve this critical enforcement, research and public disclosure tool,” Khawar says. “The proposed changes would support the agencies’ oversight of employee benefit plans, provide better public access to Form 5500 data and allow interested private sector and other governmental stakeholders to expand their use of Form 5500 data in ways that help plan sponsors, fiduciaries and participants and beneficiaries understand their plans and plan investments better.”

The key proposed revisions and the proposed changes to the department’s implementing regulations would do the following:

  • Modify the Form 5500 Annual Return/Report and the department’s regulations to implement the SECURE Act requirement for the DOL and the Department of the Treasury to develop a consolidated annual report for groups of defined contribution (DC) retirement plans. Specifically, the proposal would establish a new type of direct filing entity called a Defined Contribution Group (DCG) Reporting Arrangement and add a new Schedule DCG (Individual Plan Information) that such reporting groups must file, in addition to meeting more generally applicable Form 5500 requirements for large pension plans.
  • Modify the Form 5500 Annual Return/Report to reflect pooled employer plans (PEPs) as a new type of retirement plan and implement SECURE Act changes to MEP reporting of participating employer information by establishing a new Schedule MEP (Multiple Employer Retirement Plan Information). Additionally, for multiple employer welfare plans that provide medical benefits, the proposal would move the questions regarding participating employers that are currently part of the Form 5500 Annual Return/Report to the Form M-1 and apply that reporting requirement to non-plan entities that file the Form M-1.
  • Improve financial reporting for retirement plans in general, including PEPs, other MEPs and the new DCG reporting arrangements. The proposed improvements would add new fee and expense reporting requirements and enhance the format and content of the existing schedules of assets held for investment.
  • Expand the number of DC pension plans that would be eligible for small plan simplified reporting options, including the conditional waiver of the independent qualified public accountant annual audit.
  • Add questions to improve financial and funding reporting by PBGC-covered defined benefit (DB) pension plans and to improve oversight and compliance of tax-qualified retirement plans.

According to the EBSA, the Form 5500 Annual Return/Report serves as the principal source of information and data available to the agencies concerning the operations, funding and investments of more than 800,000 pension and welfare benefit plans that file the annual return/report.

The publication of the proposals starts a 45-day comment period. The DOL says it will treat public comments submitted in response to this Notice of Proposed Forms Revisions as public comments on the Notice of Proposed Rulemaking—and vice versa.

Information about filing comments is available here.

The Markets September 14, 2021

TDF Usage Increases as Younger Participants Invest

Fifty-one percent of 401(k) plan assets owned by participants in their 20s were invested in TDFs, versus 23% for those in their 60s. 

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The Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) have found that participants are increasingly using target-date funds (TDFs) to save for retirement—especially younger participants.

A new report by the two organizations found more 401(k) plan participants are using the funds than in the past. EBRI and ICI examined year-end 2018 data from the EBRI/ICI 401(k) database—which follows millions of 401(k) plan participants as a means to examine how these participants manage their plan accounts—and found that 56% of participants in the database held target-date (or lifecycle) funds. That’s up almost 200% in 12 years. TDFs also held 27% of total 401(k) plan assets in the database.

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Younger 401(k) participants were more likely to hold TDFs than older participants. According to the report, at year-end 2018, 62% of plan participants in their 20s and 61% of those in their 30s owned TDFs, compared with 50% of participants in their 60s.

Additionally, 51% of 401(k) plan assets owned by participants in their 20s were invested in TDFs, versus 23% for those in their 60s. Almost half (41%) of participants in their 30s held plan assets in TDFs, with the number lowering significantly for participants in their 40s—to 28%.

Perhaps unsurprisingly, younger plan participants who held assets in target-date funds had higher allocations to equities than older groups. Among participants in their 20s, those holding TDFs invested 87% of their plan assets in equities.

Plan participants in their 20s also had a higher concentration of their accounts in target-date funds than older TDF investors. Eighty-eight percent of younger plan participants with TDFs held more than 90% of their accounts in these funds, with only two-thirds of TDF investors in their 50s and 60s holding such a high concentration.

The EBRI and ICI report studied how 401(k) participants are investing their TDFs, finding that most follow investing approaches that are appropriate for their age group. For example, among 401(k) plan participants with one TDF, 91% of those in their 20s held a TDF that had asset allocations in conjunction with their age. Overall, the vast majority (88%) of participants with TDFs held one age-appropriate TDF.

Additionally, participants tend to be using a TDF in accordance with their retirement date. For example, 83% of 401(k) plan participants holding a 2040 TDF were in line with reaching age 65 in 2040, and 96% of investors in the 2035 funds were also appropriately aged.

The firms said the heightened usage of TDFs can be attributed to the funds’ increased accessibility over time. For example, in 2006, 57% of plans offered TDFs to their participants. In 2018, that number rose to 79%. And now, 56% of participants use the funds, compared with just 19% in 2006.

But that growth has also led to scrutiny. In May, the chairwoman of the Senate Health, Education, Labor and Pensions (HELP) Committee and the chairman of the House Education and Labor Committee asked the Government Accountability Office (GAO) to conduct a review of TDFs.

They say that while TDFs are billed as offering participants retirement security by placing their assets in an age-appropriate glide path that grows more conservative as they approach retirement, the funds might actually be placing some participants at risk. Specifically, they say expenses and risk allocations vary considerably among funds.

An academic paper released in May also took aim at TDFs, saying they can take advantage of investors who aren’t paying attention to their accounts.

Past research has also shown that some investors aren’t using the vehicles as they are intended to be used. A combination of investor overconfidence and a desire for greater diversification can drive misuse.

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