Given its age, you'd expect ERISA to be buying a sports car, trying on hipster clothes and generally just trying to recapture the vigor of its youth. While it's unlikely that the now 40-year-old Employee Retirement Income Security Act will be going bungee-jumping any time soon, ERISA is indeed suffering a bit of a mid-life crisis.
The primary method by which ERISA provides disclosure on 401(k) and other retirement plans is a form called the 5500. As a purveyor of 5500-based market intelligence, I can tell you that ERISA has recently experienced a loss of identity and purpose. Although one of the initial goals of ERISA was to provide plan participants with a window into how their money is being spent, the new "Short Form" 5500 has had the opposite effect.
The Short Form was introduced in 2009 with the intent of providing a simpler, less burdensome filing for small plans. At only three pages long, the Short Form is an incredibly condensed version of the longer "full" 5500. To go from 20 pages (or more) to three requires a lot of chopping, and one of the items that didn't make the cut was the disclosure section detailing the relationships between the plan and its various providers and vendors. As a result, it is often not possible to see how much of the participant's money is being routed to third-party administrators, brokers or consultants, nor for outside observers to get an idea of a plan's overall cost.
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This reduction in the scope and sophistication of the plan data available for public consumption has had something of an unintended consequence; it has created a barrier to competition. By limiting access to things like investment lineups, consulting and administration fees, the Short Form has effectively made it easier to "hide" a bad plan. At a time when increased disclosure and transparency are the buzzwords of the day, the overseers of ERISA have taken the opposite approach, obfuscating critical information on over 600,000 retirement plans.
Those of us in the business of turning 5500 data into competitive intelligence have had an especially frustrating few years. The tools with which we can analyze, manipulate and model data have grown immensely more sophisticated at the exact same time that the data itself has gotten less revealing. We are hamstrung in our ability to point advisors at bad plans and say, "Go get 'em!" It is, in a word, maddening.
But all is not lost. Adversity breeds innovation, and many firms (yes, including my own) have created new methods of examining a plan to help foster the kind of competition that drives bad plans and bad plan advisors from the market. Furthermore, a recent GAO panel submitted recommendations on making changes to the 5500 to provide more disclosure surrounding plan fees and expenses. While this report did not advocate for the repeal of the Short Form, it takes a big step in the right direction.
At 40 years old, ERISA has admirably fulfilled its role of ensuring the security of America's private retirement plans, but it can be a better advocate for participant rights. Perhaps it's time for a facelift after all.
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