The Department of Labor, on July 11, proposed changes to Form 5500, the annual report of private-sector em-ployee benefits plans that is required of corporations and other plan sponsors regulated under the Employee Retirement Income Security Act.
An overhaul is long overdue. The proposal seeks to modernize reporting to enhance the usefulness of the form not only for users, but also for DOL and other officials.
Form 5500 now is inaccessible to many would-be information seekers, despite its availability on the DOL website, which is a challenge to navigate. Some of it is incomprehensible to users because of undefined wording. In general, the data it provides is of limited use.
The overhaul proposal is 777 pages long, along with a 123-page implementing proposal. The total length hardy encourages confidence the outcome will promote a streamlined form. It should promote better transparency, compliance and accountability for plan participants, investors and other users; it should also provide a principal tool for enforcement efforts, as well as for policymakers to identify trends for improving retirement-income security.
The proposal must bring the 5500 up to current interactive data standards, much as the Securities and Exchange Commission began with its forms.
As a joint effort of the Labor Department's Employee Benefits Security Administration, the Department of the Treasury's Internal Revenue Service and the Pension Benefit Guaranty Corp., form 5500 is an important, critical source of financial and investment information about 806,000 pension and welfare benefit plans, which have total assets of $8.7 trillion and cover 143 million employees, retirees and beneficiaries, according to numbers in the proposal. For defined benefit plans, the 5500 data includes pension plan liabilities.
Besides overhauling the form, the agencies must improve filing timeliness to make the form and its data more relevant to users. Now, plan sponsors must file the report by the last day of the seventh month after the end of the plan's fiscal year. That's an unacceptable timeframe. Corporations must file their 10-K annual corporate financial report within 60 days of the closing of the corporate fiscal year.
The new form has to become more useful for data mining and analytics, something the current form does not embrace but the proposal undertakes to accomplish. The new form has to provide flexibility for updating data fields to keep up with dynamics in the marketplace on investing and other content, rather than have to propose changes through a formal process, which in the current procedure takes years to complete.
In its current state, much of the 5500 form is useless. In aggregate, 44% of assets of large pension plans is classed as pooled investments rather placed under specific asset classes, the proposal notes, pointing out the new form will correct that shortcoming. To its credit, new form will include “hard-to-value and other alternative investments, such as derivatives, limited partnerships, hedge funds, private equity, and real estate,” all heightened as oversight risks, the proposal states.
The new form must replace incomprehensible sections to promote clarity in content. For instance, the current form states, “If a person received only eligible indirect compensation for which the plan received the required disclosures, you are required to answer line 1 but are not required to include that person when completing the remainder of this part.” Does any form user understand what that section means?
The DOL is holding out the proposal for a 75-day public comment period that runs to early October. The DOL hopes to have the form become effective for plan years beginning Jan. 1, 2019, and posted online in 2020.
The 5500 is supposed to promote compliance with ERISA but the current form has fallen short in achieving confidence because of the inaccessibility and lack of user ease. That is a primary hurdle the new form must overcome. Plan sponsors, institutional investors, and others in the retirement community should step up to express their recommendations for revising the proposal to make sure it accomplishes the objectives of usefulness. n