Compliance February 24, 2023

DOL Updates Form 5500 for 2023

This year’s changes include reporting modifications for PEPs and small plans.

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The Department of Labor announced its annual revisions to Form 5500 Thursday.

The DOL updates Form 5500 annually to keep it up-to-date with various regulatory changes. All employee benefit plan sponsors are required to file a 5500 to the IRS and DOL annually. The form discloses information about a plan’s finances and operation. The forms are required under Title I and IV of the Employee Retirement Income Security Act of 1974 and are used both to ensure compliance by and to gather data on pension plans.

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The changes for 2023 included a consolidated Form 5500 option for certain defined contribution plans; improved reporting for pooled employer plans and multiple employer plans; a change in methodology for identifying small plans for reporting purposes; improvements in reporting by PBGC-covered defined benefit plans on Schedules R and SB; the addition of Internal Revenue Code compliance questions to improve tax compliance; and technical adjustments that address changes made by the SECURE 2.0 Act of 2022.

For determining which plans are under the 100-participant threshold and considered small plans, plans now count only participants that have account balances at the start of the plan year. Previously, plans had to count all employees eligible to participate in the plan.

The changes to Form 5500 for 2023 also implement changes included in the SECURE Act of 2019 that take effect this year. Specifically, the DOL and IRS were required to modify Form 5500 so that members of group DC plans may file a single, aggregated report which satisfies both ERISA and the IRC.

Form 5500 was also modified to implement SECURE Act changes which created PEPs. To do this, a new schedule, Schedule MEP will be added. According to the DOL, many PEP-specific questions have been streamlined based on input from public commenters.

The DOL projects that the simplifications made to reporting for 2023 will save the retirement industry about $95 million this year.

 “Mock-ups of the forms and instructions will be available on www.reginfo.gov as part of the Paperwork Reduction Act clearance process,” the DOL announcement stated. “The normal release of ‘for information-only’ copies of the forms and instructions will happen later in 2023.”
Compliance February 24, 2023

Embattled DOL ESG Rule Receives Democratic Congressional Support

A DOL rule permitting ESG considerations in retirement plan investing has been challenged by two separate lawsuits. House Democrats are now trying to legislate it.

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New legislation, the Freedom to Invest in a Sustainable Future Act, was introduced Thursday by Representative Suzan DelBene, D-Washington, would codify the key elements of the controversial Department of Labor rule permitting environmental, social and governance considerations in retirement plan investing, which went into effect on January 30. The legislation is co-sponsored the co-founders of the Sustainable Investment Caucus, Representatives Sean Casten, D-Illinois, and Juan Vargas, D-California.

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The bill would amend the Employee Retirement Income Security Act of 1974 to permit the consideration of ESG factors in retirement plan investing. It would also amend ERISA to include the updated “tiebreaker” rule: If a sponsor is deciding between multiple investment options, they could use “collateral” ESG factors if competing options would otherwise serve equally “the plan’s economic interests.”

This tiebreaker phraseology of “serve equally” is understood as a lower legal barrier than the phrasing of Trump-era the DOL rule from 2020, under the administration of President Donald Trump, which said that in order to consider collateral factors as a tiebreaker, competing investments must be otherwise indistinguishable.

Again in keeping with the new rule, and in contrast to the Trump-era rule, the bill explicitly does not require additional documentation. The bill reads: “A fiduciary shall not be required to maintain any greater documentation, substantiation, or other justification of the fiduciary’s actions relating to such fiduciary act than is otherwise required.”

This point on documenting requirements was a key element of a lawsuit brought in Wisconsin on Tuesday which challenges the legality of the DOL’s ESG rule. That lawsuit alleges that by not requiring documentation of collateral considerations, fiduciaries can avoid leaving a paper trail which could then be used against them later in litigation.

Since the two open complaints—including one brought in North Texas by 25 states—against the DOL rule challenge its consistency with ERISA, the proposed bill would obviate that objection by amending ERISA to effectively incorporate the DOL rule.

The representatives who back the bill have put forward two reasons to support it: ESG is a sound financial methodology, and ESG principles can make investing more environmentally and socially responsible.

DelBene emphasized both components in a statement, saying that, “Americans deserve a secure retirement and ESG investments can be a key component in accomplishing that goal. This bill would help provide workers and retirees a pathway to reach that secure retirement and invest in a sustainable world for future generations.”

In the same statement, Casten emphasized the intersection of financial returns and ESG and said, “Climate risk is financial risk. Retirement plan fiduciaries should be free to consider climate change and other ESG factors without regulatory barriers or the threat of litigation. I’m proud to support this legislation that gives workers the option to invest in the best plans for their future.”

Democrat supporters of ESG in Congress often take what might be called the “happy coincidence” thesis, which says that considering ESG factors is good for investing and risk management, as required by ERISA, and that it also makes the investment sector more environmentally and socially conscious.

The bill would have to pass the Republican-controlled House of Representatives before being taken up by the Democrat-majority Senate. The bill has not been assigned to a Congressional committee yet, but it is likely to be referred to the House Financial Services Committee.

 

 

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