On October 22, 2019, the Department of Labor (DOL) proposed new regulations that would supplement the agency’s current rules for the electronic distribution of 401(k) disclosure notices to plan participants. Specifically, the proposal would add a new “notice and access” rule that permits employers to post notices to a website when certain requirements are met. This common-sense 401(k) plan reform is long overdue.
Electronic delivery can be a win-win
The paper delivery of 401(k) disclosure notices is costly and is at odds with the way most people intake information today. I mean, when was the last time you read a paper book, magazine or newspaper? More than likely, it’s been a while. Electronic delivery can lower the cost of an annual 401(k) plan administration while improving the usefulness of 401(k) disclosure notices. In short, the method can be a win-win for plan participants.
How much would electronic delivery save? A lot. The DOL estimates “$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 potential benefits:
- Allows participants to quickly respond to plan information received electronically;
- Ensures information remains up-to-date and accessible for 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.
Current electronic delivery rules
Required 401(k) disclosure notices can always be distributed to plan participants in hard copy form – either by distributing copies at a company meeting or by mailing them to each employee’s last known address. Posting a required disclosure in a break room or other common area is not acceptable.
Under current electronic delivery rules, employers can electronically distribute 401(k) disclosure notices to current employees at their work e-mail address if the following requirements are met:
- 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.
If a 401(k) participant does not meet these requirements (e.g., former employees or beneficiaries with an account balance), they must affirmatively consent to electronic delivery for the method to be an option.
What is the proposed “notice and access” rule?
The “notice and access” rule would allow employers to electronically deliver 401(k) disclosure notices to all plan participants – regardless of their current employment status - by posting them to a website. To qualify for the new DOL safe harbor, several requirements must be met:
- Covered individuals – Website disclosure can only be made to 401(k) participants or beneficiaries that have provided an e-mail address or smartphone number. For active employees, an employer-provided e-mail address or smartphone number automatically satisfies this requirement. Access to an employer-provided computer is not required.
- Covered documents – All ERISA-mandated notices qualify, other than documents that must be furnished upon request. Covered documents must be posted to the website no later than their ERISA deadline.
- Notice of Internet Availability - Covered individuals must receive an electronic Notice of Internet Availability each time a covered document is posted to the website. Certain covered documents may be covered by a combined notice. A combined notice must be provided at least once every 14 months. Notices must remind the participant of their right to a paper notice, of the right to opt-out of electronic delivery altogether, and the procedures to exercise such rights.
- Initial paper notice – Before reliance is possible, employers must provide each covered individual with a paper notice about the electronic delivery of future notices and the right to receive paper notices instead.
- Website standards – Employers must take measures reasonably calculated to ensure that covered documents are 1) posted to the website no later than their ERISA-mandated deadline, 2) available until they are superseded, 3) presented in an understandable format, 4) suitable for both online viewing and printing, and 5) searchable.
- Inoperable electronic addresses – The system for furnishing the notice of internet availability 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 can’t be promptly cured.
Electronic delivery is long overdue
In general, inefficient or ineffective 401(k) regulation increases the cost of 401(k) administration. That is a problem when you consider cost matters a lot when saving for retirement. The poster child for bad 401(k) regulation, in my view, is the participant disclosure rules. The number of required disclosures has grown dramatically during the past 15 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.
In the proposed form, the “notice and access” 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 support the rule.