By Carol Buckmann
Plan provider Dream Forward decided to investigate the questions that were coming into its website from plan participants, and the results were disheartening. 30% of the questions were about 401(k) plan basics such as withdrawal options. If you added questions about tax and investments into the mix, 63% of the questions were basic.
Isn’t a description of withdrawal options exactly the kind of information ERISA requires to be provided in the Summary Plan Description (SPD) in language understandable by the average plan participant? This information was clearly provided at one time, back when SPDs had to be filed with the Department of Labor and people actually reviewed them. Does anyone else remember when the DOL was applying the Flesch standard of readability, and we used to worry if too many syllables were in the words that were used to make them understandable by rank-and-file employees?
Nowadays the problem goes far beyond the number of syllables used and nobody seems to be monitoring compliance.
SPD standards declined when the requirement to send SPDs to the Department of Labor was eliminated. This coincided with the expansion of pre-approved plans. Pre-approved plans have lots of design choices, and vendors did not want to prepare different versions of their SPDs for plans with particular provisions, so they developed what I call the “kitchen sink” SPD that didn’t spell out which particular provisions the plan sponsor had elected. Many of these are ineffective communications documents.
The kind of clause I usually see is on the order of the following: “Your plan may permit catchup contributions by employees age 50 and over. Ask your Plan Administrator for more information.” That isn’t wrong whether or not the sponsor elected catchup contributions, but does it convey useful information? Another unhelpful type of description is along the lines of: “Your plan may permit you to make a special deferral election for bonuses. Ask your Plan Administrator if your plan provides this special election.” I have even seen: “Your plan may provide for discretionary employer contributions in addition to the fixed matching contribution. If your plan has such a contribution, it may be an additional match or a nonelective contribution, and it may allocated in proportion to your plan compensation or on some other basis.” Good luck figuring out what you are entitled to based on that language!
Is it any wonder that participants are confused about the basics if this is the kind of plan description they are getting?
I have long believed that “kitchen sink” SPDs may not comply with the letter, let alone the spirit, of the SPD regulations because they do not tell participants exactly which plan rules apply to THEM. It was never intended that the SPD would be a document that basically told participants to ask their Plan Administrator about important plan provisions. However, there is nothing clearly saying that this type of SPD can’t be provided. We don’t hear from the Department of Labor questioning whether these kinds of uninformative SPDs are compliant, and the DOL is not regularly assessing penalties for deficient SPDs. It is time that we got some more current guidance about what does and does not constitute a compliant SPD.
Of course, not everyone will read the SPD, even if it is well written. This survey also points to a clear need for more and better participant education. But having clearly written and informative SPDs would be an important step in improving financial and plan literacy. If your vendor doesn’t provide a good SPD, your ERISA counsel can help you improve it, and it will be money well spent. If participants get communications that are understandable, at least some of them may actually start referring to them when they have questions and learn to understand how their plans work.