Few powering up with electronic disclosure

When the Department of Labor finalized a rule in May that permitted default electronic delivery of retirement plan disclosures, record keepers and plan sponsors welcomed the move by saying it will increase participant engagement and cut mailing costs.

And while those points still hold, since the rule went into effect July 27 there hasn't been much movement to implement default electronic disclosure programs. Both plan sponsors, which need to OK the electronic shift, and record keepers, which need to figure out the logistics, have been busy lately.

"Most members are just starting to spec out the program," said Tim Rouse, executive director at the Simsbury, Conn.-based SPARK Institute, which represents retirement industry players such as record keepers, investment advisers, mutual fund companies and benefit consultants. "So much has been happening with regard to the SECURE Act and CARES Act and executive orders. This has been something that our members have been wanting for a long time but there's so much other activity going on that we're all just starting to implement the new rule now."

Will Hansen, executive director of the Arlington, Va.-based Plan Sponsor Council of America and chief government affairs officer at the American Retirement Association, has noticed something similar from plan sponsors. It's "not a negative toward the rule, it's just priorities," he said. "Right now from an HR perspective, priorities are still focused on the pandemic and the general end-of-year employee benefit activities, and once that goes away I think there can be a renewed focus to best implement the electronic disclosure rule."

The rule provides a safe harbor for employers that want to make retirement plan disclosures accessible on a website, rather than sending volumes of paper documents through the mail.

Retirement plan administrators have the option to use email to send disclosures directly to participants, but participants who prefer printed disclosures can opt out of electronic delivery. Moreover, a plan administrator may not default a participant into electronic delivery unless the participant has an email address and notifies the participant by paper that retirement documents will be furnished electronically.

Administrators also must notify participants by paper about the online disclosures, provide information on how to access the disclosures, and inform participants of their rights to request paper or opt out completely. The new rule includes additional protections for retirement savers, such as accessibility and readability standards for online disclosures and system checks for invalid electronic addresses.

But not all parties are happy with the rule. Groups like the AARP and Pension Rights Center have voiced concerns about it, saying participants without reliable internet access and those less technologically savvy will likely have problems.

"The participants have to do all the work of finding these disclosures and they also need the electronic devices that are capable of searching a complex financial website," said Jane Smith, policy analyst at the Pension Rights Center, a Washington-based non-profit.

Added Karen Friedman, the Pension Rights Center's executive vice president and policy director: "We think it's going to be hard enough for many people who already know how to navigate computers to do this but it's going to be a real nightmare for the millions of people who don't have broadband, who don't have printers. Plans are going to save money but they're putting all the burden back on individuals."

There's a "digital divide" in the country based on geography, education, income, race/ethnicity and age, Ms. Friedman said.

In unveiling the rule, the Labor Department referenced a 2019 Pew Research Center study that found that 90% of U.S. adults use the internet.

Mr. Hansen said the rule's opt-out measures are clear and sufficient for any participant who would like to continue receiving paper materials. Moreover, the rule will lead to more participant engagement, he said. "By moving in this direction it enables a plan sponsor to tailor the communications specially to the participants," Mr. Hansen said.

Sending disclosures via a web link will lead to more savings, Mr. Rouse said. "Our members have found that if you get something in the mail you put it aside and then think 'OK I'll log on and maybe do something with my account.' There's very little connectivity there," he said. "But if I get an email and I click on it, I am now in the system. I can increase my deferral rates, update my beneficiaries or adjust my allocations."

But Ms. Friedman is concerned that if participants miss the initial paper disclosure alerting them to the new electronic system, they will be defaulted in and suffer. "The Department of Labor has sort of a system of inertia that works against people's best interests," she said.

Jennifer Eller, a principal at Groom Law Group LLP and co-head of its fiduciary practice group in Washington, said it will likely take some time before record keepers roll out their default electronic disclosure initiatives. "Record keepers are working to get things in place to take advantage of the rule as much as possible, as soon as possible, but it's not happening in one fell swoop," she said.

Fidelity Investments, the nation's largest record keeper, is targeting sometime in the fourth quarter to have its electronic delivery offering widely available to plan sponsors, spokesman Eric Sandwen said. Roughly 77% of the 23.7 million participants in the Fidelity record-keeping system have an email address on file, Mr. Sandwen added.

"We have a team dedicated to developing our offering to ensure compliance with the regulation and that the change is easy for our participants to understand and doesn't come as a surprise," Mr. Sandwen said.

A spokesman for TIAA-CREF said in an email that the record keeper is still reviewing how it can support its plan sponsors with expanded electronic delivery options, but added that wider use of e-delivery will result in "decreased costs for plan sponsors, as well as improved retirement outcomes for individuals, both in the amount Americans save for retirement and the ways savers understand, monitor and manage their retirement plans."

The Labor Department estimates the rule will save $3.2 billion over the next decade for ERISA-covered retirement plans by cutting down on materials, printing and mailing costs.

Fidelity and fellow major money managers BlackRock Inc. and Charles Schwab Corp. have also urged the Securities and Exchange Commission to update its prior interpretive guidance and regulations to allow for the default electronic delivery of investor communications. The three firms wrote a letter to the SEC in September.

Later that month, financial industry associations like the Securities Industry and Financial Markets Association and Investment Adviser Association published a discussion paper with similar goals.

The default delivery change in investor communications by broker-dealers, mutual funds, investment advisers, public companies and business development companies should include prospectuses and other important investor communications, like customer account statements, customer confirmations of sale, and investment adviser brochures, the associations said in the discussion paper directed at the SEC.

SEC Chairman Jay Clayton, while testifying in June before the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, was asked about electronic delivery. He said his "view on this has been further shaped by the work we have done in this COVID environment. It is clear that we live in an electronic communication world. Let me say that I am of the view that anyone who wants paper should be able to get paper, but what this period has shown us is the importance of electronic delivery and the effectiveness of electronic delivery."