Harsh Comments About Proposed Form 5500 Revisions

Three agencies call for 'significant revisions'

The revisions were supposed to make things easier.The revisions were supposed to make things easier.

The American Retirement Association got in just under the wire.

ARA’s Government Affairs Committee filed a comment letter with the Department of Labor on Dec. 1, right before the Dec. 5 deadline.

The letter addresses proposals that the DOL, IRS and Pension Benefit Guaranty Corporation made to modernize and improve the Form 5500. As expected, the 401k plan advocacy organization isn’t happy with what it sees.

The three agencies called for significant revisions to the Form 5500 in July, and decided to extend the public comment period from the original Oct. 4 deadline to the new Dec. 5, 2016, deadline.

In the letter, the ARA expresses concern that the proposal significantly underestimates the cost and burden to comply with the reporting requirements. The proposal also does not provide sufficient time to make the technology and procedural updates required for the proposed 2019 plan year effective date.

The letter notes that the agencies conclude that the proposal will not result in an additional recordkeeping burden, which they premise on their belief that most businesses or financial entities maintain detailed accounts of assets and liabilities, as well as of income and expenses as part of the ordinary course of business.

Because of that, letter says, the agencies did not include these activities in the calculation of recordkeeping burdens required by the Paperwork Reduction Act of 1995.

The ARA takes exception, saying that the proposal “substantially underestimates the time and cost burden associated with complying with the new requirements” and says “The conclusion that there is no additional recordkeeping burden is a wholly inaccurate assumption and reflects a fundamental misunderstanding of the current state of the industry and the way in which it continues to evolve.”

It adds that “The time, financial, and technology burden which would result from the implementation of the Proposal is staggering.”

And, the letter warns, the proposal “will require large scale changes to investment platforms, trust accounting systems, recordkeeping systems, reporting systems, and the software that supports the preparation of the Form,” and that those changes would impose costs that “would likely be passed to the plan and, ultimately, to plan participants and beneficiaries.”

The ARA recommends that the agencies review the impact of the proposal on the recordkeeping and reporting infrastructure when they quantify the cost increases attendant to the proposal and that the agencies “reconsider the extent of the changes in light of these cost considerations.”

Impact on Small Plan Filers

The letter notes that the proposal creates a substantial burden for small plan filers, particularly defined contribution plans with participant directed investments. The letter notes that the proposal does not anticipate that fewer small plan filers will be eligible to file the Form 5500-SF, but at the same time modifies the definition of “eligible assets” in a way that would result in a majority of participant-directed DC plans would have to switch from filing Form 5500-SF to filing the full 401k Form 5500, which the letter notes is longer and more data intensive.”

The letter says that the cost and time burdens the proposal would impose “will weigh heavily upon small businesses and the participants in plans impacted by this apparently intentional change in the definition of ‘eligible assets.’”

The ARA warns that these changes could have the unintended result of plans being terminated or small employers choosing not to sponsor a new plan, and recommends that the agencies consider the proposal’s substantial impact on small plan filers.

Cost-Benefit and Risk Analysis and Compliance with Executive Order 13563

The letter argues that a cost-benefit and risk analysis should be undertaken regarding the costs that will be borne by plan participants and beneficiaries due to the proposal in accordance with Executive Order 13563. The order directs that regulatory systems must identify and use the best, most innovative and least burdensome tools, must take into account quantitative and qualitative benefits and costs, and provides criteria when the primary concern is the effect of regulations on businesses, especially small businesses.

The ARA recommends that the agencies “take a considered review” regarding whether the benefits the proposal would achieve as opposed to the cost to comply with the increased reporting requirements, and that the agencies “evaluate the modest risk of continuing with the existing reporting structure or some structure much less burdensome than has been proposed.”

Proposal Implementation Timeline

The letter notes that the proposal calls for the form revisions to begin with the plan year 2019 Form 5500 and to would generally be coordinated with the procurement process related to the Electronic Filing Acceptance System (EFAST).

The letter argues that given the amount of lead time that would be required for plans to comply with the proposal, that it should be effective is for the first plan year that begins no earlier than two to three years after publication of the final version of the forms and instructions and that “additional time should be provided to transition into the significant technology changes the proposal will require.”

Public Disclosure Considerations

The letter notes that new data elements in the proposal could provide sensitive business or participant information and that there also are data elements that can be reverse engineered to determine participant compensation or account balances under certain circumstances.

The ARA recommends that the agencies consider the potential for fraud and the disclosure of sensitive information that arises from the type of data being collected and made public through its Public Disclosure website (and the related Form 5500 Data Sets available through the EBSA website).

Requirement to Obtain Manual Signatures

The letter notes that under the proposal, the manual signature requirement — which applies to a plan administrator/plan sponsor when a service provider is signing on behalf of the plan administrator/sponsor and on the actuary of a defined benefit plan — may be imposed on even more parties.

“This manual signature requirement imposes a burden which involves manual transmission of a document from the preparer to the signer and the manual return of the document from the signer to the preparer. This is a time consuming and costly process,” says the letter.
The ARA recommends that the agencies develop guidance to explicitly permit electronic signatures related to the processing of 401k Form 5500 series that comply with the United States Electronic Signatures in Global and National Commerce (ESIGN) Act and the Uniform Electronic Transactions Act (UETA).

Public Hearing

The ARA recommends in the letter that the agencies hold a public hearing, conduct testing and provide additional time to survey and allow additional public comment “so that the information can be gathered in the least costly and burdensome manner.”

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