Disclosure Gone Wild

W ho can blame the average retirement plan participant for losing confidence in the financial future? Not only is it hard to save for retirement amid the mounting expenses of daily life, but it’s hard to even calculate how much money a comfortable retirement will require. Confronted with retirement plan descriptions that seem overloaded with mandated fine-print disclosures and all the user-friendliness of a tax-law textbook, participants often roll their eyes and hope––against hope––for the best.

    There’s no question that the sea of disclosure is a well-meaning byproduct of years of ERISA regulation, litigation and ongoing pension reform policy. But employers need to do more than comply and deliver technical––often too technical––information. They need to fashion effective communication strategies that will educate and engage participants to make more informed retirement choices.

    That’s easy to say, of course. Amid all the legal disclaimers, there are the multiple required notices stemming from the new Pension Protection Act, the looming prospect of new fee disclosures for defined-contribution plans, notices required for automatic 401(k) enrollment, company stock-diversification notices, new notice and consent requirements for distributions, and so on. So much fine print can only lead to information overload at a time when context and clarity are what plan participants need most.

    And let’s not overlook those new right-to-defer notices in defined-benefit plans. Sure, they tell employees about the consequences of electing (or delaying) a distribution, but that information is provided only after the participant has left employment. There are no required disclosures that help participants decide when it’s appropriate to retire. Isn’t the purpose of all this disclosure to help participants make better decisions?

    Most employers and plan sponsors realize that well-focused change communication is the key to providing clarity. For example, are participants simply being told about the mechanics of new retirement options such as Roth 401(k)s, or we engaging them in straightforward language to help them understand how these options can translate into securing their personal goals for retirement?

    Adding to the disclosure-gone-wild scenario is the likelihood that new fee disclosure requirements for DC plans will be implemented in the near future. With 401(k) lawsuits over the adequacy of investment-fee disclosure making headlines, the U.S. Department of Labor is ready to mandate greater disclosure, but are plan sponsors ready for the consequences? At Mercer, we recently hosted a series of forums with DC plan sponsors in cities all over the U.S.—as well as client conversations––and noted some trends.

    For one thing, there’s very little communication or education about DC plan fees taking place, while few plan sponsors disclose fee information beyond what they interpret as being required under ERISA 404(c). That often translates into fee information being buried in fund prospectuses, which most participants don’t read anyway. Indeed, plan sponsors are concerned that mandated fee disclosure might deter their employees from participating, or cause them to place too much emphasis on fees in making their investment decisions (rather than considering fees in the proper context of fund objectives and expected net return).

    Then there are the potential adverse reactions from participants. “Why are you providing this information now?” they may ask, while even the most reasonable fee levels may seem excessive to participants who lack any real context for evaluating this information. And employers themselves often don’t grasp the big picture when it comes to fees––a complicated issue that can be difficult to explain no matter how hard one tries to avoid legalese or numbing disclosures.

    Companies should make it a priority to review their fee disclosure practices in light of ERISA requirements and recent lawsuits. They can then consider whether additional fee disclosure is warranted––in advance of any mandated disclosures––to address liability concerns. Obviously, now’s the time to incorporate education regarding DC-plan fee structures into participants’ communications, to provide some much-needed background for assimilating any new disclosures, and to fit in with other retirement messages.

    The simple fact is, many current disclosure practices are inadequate. While the best practices are still evolving, they certainly must transcend the sea of mandated disclosure. For example, as IBM prepares to replace its longstanding DB plan with a 401(k) DC plan, it has announced far-reaching intentions to provide comprehensive financial advice to all participants.

    Ultimately, plan sponsors have latitude when it comes to participant communications. They can deconstruct the complexities of retirement issues, bringing clarity and a big-picture context to the discussion, rather than rely on the eye-glazing boilerplate of descriptions and disclosures that may satisfy the law but don’t really answer participants’ larger needs. Employees are looking for savvy guidance and straight talk, and they deserve it––it’s their future that’s at stake.