The DOL Finalizes New Electronic 401(k) Disclosure Rules

On May 27, 2020, the Department of Labor (DOL) published a final rule that should greatly expand the electronic delivery of ERISA-mandated disclosure notices to 401(k) plan participants. More specifically, the rule creates two new safe harbors that give employers the ability to post notices to a website or e-mail them directly to plan participants when certain requirements are met. Both safe harbors take effect July 27, 2020. 

This 401(k) reform is great news, if long overdue.

E-delivery can be a win-win for plan participants

The paper delivery of 401(k) notices is costly and increasingly at odds with the way people intake information. I mean, when was the last time you read a paper book, magazine or newspaper? It’s probably been a while. Electronic delivery can lower the cost of 401(k) plan administration, while improving the usefulness of participant disclosure notices. In short, the method can be a win-win for plan participants.

How much savings? A lot! In a Fact Sheet, the DOL claims electronic delivery would save “an estimated $2.4 billion net cost over the next 10 years for ERISA-covered retirement plans by eliminating materials, printing, and mailing costs associated with furnishing printed disclosures.” 

Besides cost savings, electronic delivery can benefit 401(k) participants in other ways. In a 2015 white paper, the SPARK Institute – a major 401(k) industry group – cited several other potential benefits:

• Allows participants to respond quickly to plan information received electronically;
• Ensures information remains up-to-date and is accessed by participants in “real time;”
• Provides information that is more accessible – and digestible;
• Provides information that can be more readily customized; and
• Provides a better guarantee of actual receipt of information.

Paper delivery is always acceptable

401(k) notices can always be delivered in paper form – either by distributing copies at a company meeting or by mailing them to each participant’s last known address. Posting a required notice in an employee break room or other common area is not acceptable.

The old “wired at work” safe harbor

• The employee must be able to access their work e-mail at a location where he or she is reasonably expected to perform his or her duties as an employee.
• Access to the e-mail account is an integral part of the employee’s job responsibilities.

Employers must distribute a paper notice to 401(k) participants that don’t meet these requirements (e.g., former employees or beneficiaries with an account balance) unless they receive an affirmative consent from the participant for electronic delivery. 

The new DOL rule does not touch this old safe harbor. Employers can still take advantage of it.

The two new e-delivery safe harbors

The new DOL rule creates two safe harbor methods for electronic delivery:

1. A “notice-and-access” framework that allows employers to post notices to a website or other platform.
2.  Direct e-mail delivery.

The two new safe harbors share the following requirements:

• Covered individuals – Electronic delivery can only be made to 401(k) participants or beneficiaries that have provided an e-mail address or smartphone number. 
  • For current employees, an employer-provided e-mail address or smartphone number automatically satisfy this requirement.
  • Other participants can’t be assigned an e-mail address. They must provide their own.
  • A reasonable procedure must be in place to “ensure the continued accuracy and availability” of an electronic address once an employee terminates employment.
• Covered documents – All ERISA-mandated notices qualify, except for documents that must be furnished upon request. Covered documents must be electronically delivered no later than their ERISA deadline.
• Inoperable electronic addresses – The system for furnishing notices electronically must be designed to alert the employer of an invalid or inoperable electronic address. If an employer becomes aware of an invalid or inoperable electronic address, they must treat the covered individual as if they had opted out of electronic delivery if the issue cannot be promptly cured – generally through the use a secondary or new address.
• Paper copies and opting out - Reasonable procedures must be in place for covered individuals to request a paper copy of covered documents or opt out of electronic delivery altogether. Employers cannot charge a fee for participants to opt out, but they’re only required to provide one paper copy of a covered document for free - unless the terms of their plan or ERISA require otherwise.
• Initial paper notice – Before reliance is possible, covered individuals must receive an initial paper notice explaining the new electronic delivery method. This notice cannot be sent electronically, even to participants that already receive electronic disclosures under the “wired at work” safe harbor. The notice must be written in a manner calculated to be understood by the average plan participant and must contain the following information:
  • An explanation that covered documents will be furnished electronically
  • The electronic address to which covered documents will be sent
  • Instructions for accessing the covered documents.
  • A cautionary statement that covered documents posted to a website may not be available for more than one year or, if later, the date they are superseded by a subsequent version.
  • An explanation of the individual’s right to request a paper copy of covered documents for free, including how to do so
  • An explanation of the individual’s right to opt out of electronic delivery for all covered documents for free, including how to do so

Special “notice-and-access” requirements

Employers that intend to meet “notice-and-access” safe harbor must also satisfy the following requirements:

• Notice of Internet Availability - Covered individuals must receive an electronic (not paper) Notice of Internet Availability (NOIA) each time a covered document is posted to the website. Each NOIA must be written in a manner calculated to be understood by the average plan participant and include the following information: 
  • A prominent statement (such as a title or subject line) that reads: “Disclosure About Your Retirement Plan.”
  • A statement that reads: “Important information about your retirement plan is available. Please review this information.”
  • Identification of the document by name, and, if not clear solely from the name, a brief description of the document.
  • The website address - or a hyperlink to the address - where the document is available. The website address or hyperlink must be “sufficiently specific” to provide “ready access” to the document.
  • A cautionary statement that the document is not required to be available on the website for more than one year or, if later, after it is superseded by a subsequent version.
  • An explanation of the individual’s right to request a paper copy of the document for free, including how to do so
  • An explanation of the individual’s right to opt out of electronic delivery for all covered documents for free, including how to do so
  • A telephone number to contact the employer or other designated plan representative.
• Combining NOIAs – In general, employers must provide a separate NOIA for each covered document. However, employers can combine all or some of the following documents in an annual notice:
  • The Summary Plan Description (SPD)
  • Any covered document or information that must be furnished annually and does not require individuals to take any action by a particular deadline (e.g., 404a-5 fee disclosures, QDIA notices). 
  • Any other covered document authorized by DOL or IRS.
  The combined NOIA must be provided once each plan year and no more than 14 months after the prior plan year’s notice was given.
• Website standards – Employers must take measures reasonably calculated to ensure that covered documents are :
  • Posted to the website no later than their ERISA-mandated deadline.
  • Available for at least one year or until superseded by a revised version in later years.
  • Presented in an understandable format.
  • Suitable for both online viewing and printing.
  • Electronically searchable.
  • Presented in a format that allows the document to be permanently retained electronically.

Special direct e-mail requirements

The new DOL rule also allows employers to e-mail covered documents to plan participants directly – instead of posting them to a website. The e-mails used to deliver covered documents must meet the following requirements:

• Have a subject line that reads: “Disclosures About Your Retirement Plan.”
• Include the same information as the NOIA, minus the cautionary statement regarding how long a covered document would be retained on the website – which would no longer be applicable.
• Be written in a manner calculated to be understood by the average plan participant.

Employers can mix and match the two new safe harbors, using whichever method they want to send a specific document. One thing they can’t do, however, is text documents to a smartphone number.

It’s about time!

In general, inefficient or ineffective 401(k) regulation increases the cost of 401(k) administration. That’s a problem when you consider how much cost matters when saving for retirement. The posterchild for bad 401(k) regulation, in my view, is the participant disclosure rules. The number of required disclosures has grown dramatically during the past 20 years. Much of this information is redundant, making new information more difficult to discern and act upon. Further, plans need to jump through too many hoops to use cheap modern technology for distributing disclosures.

The new DOL rule won’t streamline or consolidate 401(k) disclosure notices, but it should make notice delivery more cost-efficient and effective. For that reason, I’m very happy to see it!