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Last December, the ERISA Advisory Council has released a summary of its 2015 recommendations. One of the (two) issues the Department of Labor had asked the EAC to consider for 2015 was “lifetime plan participation.” Together with its summary, the EAC released a “Sponsor Tip Sheet and Sample Communications” which would, if adopted by DOL, provide detailed guidance on (i) plan design and policy and (ii) the style and tone of participant notifications encouraging lifetime plan participation.
In this article we discuss EAC’s lifetime plan participation recommendations and conclude with some remarks about their significance for plan sponsors. We begin with some background on the EAC.
The EAC consists of 15 members appointed by the Secretary of Labor, representing labor, employers and the general public and the fields of insurance, corporate trust, actuarial counseling, investment counseling, investment management, and accounting. Each year it considers and hears testimony on selected issues and then makes recommendations to DOL.
EAC recommendations have no particular legal status, but they often reflect an emerging consensus and may provide the basis for concrete DOL policy initiatives. This is especially the case with respect to the issues considered in 2015: the EAC only took up two issues, instead of the usual three; and, at DOL’s request, it developed specific proposals. With respect to lifetime plan participation, DOL “tasked the 2015 Council with developing sample participant communications and plan sponsor education materials encouraging lifetime participation.”
So, the EAC’s recommendations may well form the basis for future DOL guidance.
“Lifetime plan participation” is a label for a set of policy initiatives designed to encourage employer plan participants to leave their money in the employer plan system. The reasoning behind this initiative is:
To build up adequate retirement savings in a DC plan, a participant must begin saving relatively early and continue saving throughout her career.
Employees change jobs frequently (according to the EAC, citing the Employee Benefit Research Institute, “ten or more times during their lifetime”).
Because of, e.g., lower fees, better investment options and better tools (e.g., investment education), some participants who, in the current context, would on termination typically roll their retirement savings into, e.g., an IRA would “do better” leaving them in the employer plans system.
Based on this logic, much of the focus of the lifetime plan participation initiative is on getting terminating plan participants to either leave their plan assets in their old employer’s plan or transfer them to their new employer’s plan, rather than, e.g., rolling them into an IRA or cashing them out.
Thus, the questions before the EAC were: How can sponsors be encouraged to facilitate retaining the assets of a terminating employee in the employer plan system? And how can participants be encouraged to consider that alternative?
To encourage lifetime plan participation, the EAC focused on two areas: (1) Changes to plan design and policy that sponsors could implement in order to encourage participants to stay in the employer plan system. These generally involve changes that would make it easier for terminating participants to either leave their assets in their old employer’s plan or transfer them to their new employer’s plan. (2) Changes to participant communications – in effect, changes that would effectively steer participants towards staying in the employer plan system.
The EAC made five general recommendations to DOL: publish a range of sample communications; publish tips and FAQs to educate plan sponsors about plan design features that encourage lifetime plan participation; encourage the creation of plain language communications promoting lifetime plan participation; simplify the “IRA Rollover Notice;” and take action on the remaining recommendations from the EAC’s 2014 report on lifetime plan participation, including lifetime income options, lifetime income calculators, loan continuation post separation, uniform sample forms and technology standards, and automatic account consolidation.
Perhaps more significantly, however, EAC also produced a 24-page “Sponsor Tip Sheet and Sample Communications” for possible adoption by DOL. Just to be clear about what is going on here, the EAC has, at DOL’s request, produced a ‘tip sheet’ that DOL would adopt as its own and publish as guidance to sponsors.
The tip sheet focuses on the two key areas noted above: plan design and policy; and the style and tone of participant communications.
The EAC is proposing that DOL recommend (via a ‘tip sheet’) that plan sponsors:
Allow partial or periodic withdrawals for terminated participants. (“Participants who are permitted to access their retirement savings … are more inclined to hold the majority of their assets in their retirement plan over the long term.”)
Consider adding a lifetime income option.
Allow terminated participants to continue/initiate loans.
Allow participants to roll-in qualified plan assets, including DB lump sums, from prior employers.
Offer low cost, institutionally priced investment options.
Offer capital preservation investment options.
Make available investment guidance, advice and other services and tools and calculators.
Allow terminated participants access to educational information, webinars, etc.
Add a brokerage window to increase the range of investment options available under the plan. (“After separation from service … some participants feel they there are not enough investment options available in the defined contribution plan to meet their needs ….”)
Support initiatives to encourage low balance participants to leave assets in the system. (“There are a few things to consider. For one, communication and education can help reinforce the benefits of preserving retirement assets for these individuals. Second, plan sponsors can consider reducing the automatic force out limits as allowed by regulations. Finally, sponsors can work with their providers on ways to support simple, efficient and perhaps automatic plan-to-plan rollouts and roll-ins to encourage account aggregation and lifetime plan participation.”)
Make available information on Social Security, guidance on claiming strategies, links and calculators.
Provide participants with lifetime income projections.
In the EAC’s view, generally, sponsors should: provide simple and easy to understand communications at all stages of employment, promoting the protections and potential advantages of employer-sponsored qualified retirement plans governed under ERISA; promote the features of their plan to terminating participants; and promote the benefits of keeping money in the qualified plan environment.
The EAC also provided a set of “Communications principles for Plan Sponsors to encourage Lifetime Plan Participation” that some may consider fairly significant. These include suggestions that:
Plan sponsors are encouraged to develop a philosophy on lifetime plan participation.
The use of stories and communications that describe the consequences of actions can be considered.
Messages can be general and/or specific, but should be factual to the best knowledge of the plan sponsor and/or service provider responsible for the development of the communications.
The completeness and accuracy of communications should be based on the facts and circumstances prevailing at the time of development. However, plan sponsors have a duty to periodically review, revise, and/or replace communications which are deemed to be outdated, inaccurate, inapplicable, or inappropriate at the time of the subsequent review.
Communications may include accurate numerical values and other factual content which is subject to change so long as the date on which the values or other facts were collected is clearly disclosed.
Communications may include estimates/projections/forecasts so long as they are clearly identified as such and all material assumptions used in such estimates/projection/forecasts are clearly disclosed.
Communications may include text, tables, charts, and graphs depicting current factual values and estimates/projections/forecasts as well as comparisons of any of the forgoing so long as each is clearly delineated as such and material assumptions are clearly disclosed.
Communications may be in static, variable, and/or interactive formats so long as all disclosure requirements are met.
Language, illustrations, and images used in communications may be of a persuasive nature, but should fairly represent comparisons, avoid glaring omissions of pertinent information and avoid derogatory, defamatory, or exploitive content. (One of the sample employer communications the EAC published included the statement: “When you change jobs, you might be tempted to ‘cash out’ and withdraw all your savings from your 401(k) plan – don’t do it!”).
When various choices are presented to participants, sponsors should consider the order in which they are provided and the impact that may have on participant decision making.
Remember, this is the EAC’s recommendation for what should be included in a DOL-published tip sheet providing, in effect, guidance to plan sponsors.
As we said, the EAC is making, broadly, two sets of recommendations. First, the EAC is recommending that DOL take steps to encourage – largely through education (e.g., the ‘tip sheet’) – sponsors to adopt plan designs and policies that will either encourage terminating participants to leave their money with their old employer’s plan or roll it over to their new employer’s plan. It’s possible that some sponsors have not adopted these designs and policies out of ignorance, but many sponsors have considered and rejected them for practical reasons – cost, complexity and fiduciary risk. To take just a couple of examples: many sponsors remain uncomfortable about the fiduciary risk presented by in-the-plan annuity options and even with “lifetime income projections.” And some sponsors have concerns about the qualified status of incoming rollovers and believe that a thorough vetting process with respect to them is justified. It’s not clear that further education will change sponsors’ attitudes on these issues.
Second, the EAC is proposing a significant shift in the tone and style of sponsor communications with terminating participants, going so far as to suggest sponsors should try to ‘persuade’ participants to stay in the system. Is there a possibility that such a recommendation with respect to a distribution raises issues under DOL’s fiduciary ‘conflicted advice’ proposal? That proposal defines as fiduciary ‘advice’ as including a “recommendation to take a distribution.” Logically one would think that a recommendation not to take a distribution (“don’t do it!”) would also constitute advice.
While sponsors generally want to help participants make the right decision, they are also subject to complicated ERISA and Tax Code disclosure obligations and generally wish to avoid taking actions which may increase their fiduciary exposure. Thus, they will generally want more comfort (more comfort, that is, than what is provided by a ‘tip sheet’) on those issues – compliance with federal rules and fiduciary exposure – before changing their communications.
Finally, we note that, in 2014, the EAC did address (and make recommendations with respect to) the regulatory issues that can make achieving ‘lifetime plan participation’ difficult for both sponsors and participants and reiterated those recommendations in 2015.
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As we said at the beginning, these EAC recommendations may well form the basis for concrete DOL action, e.g., publication of a ‘tip sheet’ on encouraging lifetime plan participation.
We will continue to follow this issue.