No one likes the Form 5500, right? But there's plenty of hidden value locked away for retirement advisors in the form, and with changes recently proposed by the Government Accountability Office, it could deliver even more.
That's the upshot from Eric Ryles, who was recently called into service by the government for his expertise on the 5500, though whether the government will actually heed his advice is an altogether different matter.
In the interest of full disclosure, Ryles is the managing director of Judy Diamond Associates, the retirement plan data publisher behind FreeERISA.com. JDA is a division of Summit Professional Networks, the parent of BenefitsPro.
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In Ryles' view (and mine, for that matter), there's no doubt the 5500 fails to provide a clear picture of certain key points. That said, it's still the only game in town.
Taking the time to go through any company's 5500 reveals quite a lot – including a plan's rate of return, whether the number of participants in the plan is growing or shrinking, and whether the plan is in compliance with all sorts of rules and regulations.
The data become even more interesting when it's aggregated, something JDA does nowadays to very interesting effect.
One of its latest findings? Nearly 60,000 401(k) plans failed their most recent nondiscrimination tests.
As BenefitsPro reporter Nick Thornton explained in an article last month, the IRS requires highly compensated plan participants and rank-and-file employees to contribute similar rates to their retirement plans. If the IRS finds an imbalance that favors wealthier employees, plans are required to return contributions to employees, after which the money is taxed as regular income.
The process, as any seasoned advisor can tell you, is known as a corrective distribution. And as any HR exec will attest, it's a huge pain in the neck, one that will regularly spur employers to put out an RFP to replace the idiot advisor who let it happen.
Of course, if you're hungry for business, there's no reason to wait for your targets to get into hot water with the authorities. You can mine FreeERISA and look for any number of administrative issues and other pain points revealed by a review of a company's 5500.
Ryles says the world won't end if none of the problems with the 5500 is fixed. "People will make due," he says.
On the other hand, the world does get a lot better with the changes recommended by Ryles and others on the panel of industry stakeholders that the GAO surveyed for its report.
One of the more important fixes, Ryles says, would standardize what are now inconsistent naming conventions, which makes it difficult to collect and accurately match records.
In other words, there's no uniformity in how providers are identified. Great-West Financial could be listed in the 5500s as Great-West, GreatWest, GWS or some other variation.
Advisors would benefit from a standard convention because it would allow them to more accurately see who's working with whom.
The GAO also recommended changes in the 5500 that would lead to greater fee transparency, an obviously critical area that would, among other things, help address some of the trust issues that plague the financial services industry.
Making these fixes isn't simply a matter of making life easier for advisors sifting for new prospects.
As the GAO said in its report, the "inherent risks of incomplete, inconsistent and incomparable data warrant immediate action and, as the only nationally-representative data on over $6 trillion in employee benefits, it is critical that these data be of the highest quality."
So, yes, the 5500 offers a lot in its current form and no serious advisor would consider walking into a potential client's office without first having reviewed that company's 5500. But it could and should be made better.
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