Private Pensions:

Targeted Revisions Could Improve Usefulness of Form 5500 Information

GAO-14-441: Published: Jun 5, 2014. Publicly Released: Jul 7, 2014.

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What GAO Found

In a two-phase online GAO survey, stakeholders identified problems with the usefulness, reliability, and comparability of data from the Form 5500 (see table). Despite longstanding concerns with the Form 5500—the annual report that employee benefit plans file with the federal government—agency officials have made only minimal changes over the last 3 years.

Key Challenges Identified with Form 5500

Weaknesses in the format

Plan asset categories break out plan assets differently from the investment industry, and provide little insight into plan investments, their structure, or the level of associated risk. In particular, the majority of respondents indicated that the “other” plan asset category in the form is too broad because it can include many disparate types of investments. Respondents also indicated challenges in identifying the underlying holdings of plan assets invested in indirect investments.

Challenges in finding key information

The form lacks detailed information on plan investments because there is no structured, data-searchable format for attachments to the form and the filing requirements on plan investments is limited for small plans, which have less than 100 participants.

Inconsistent data

Naming conventions and identification numbers may be inconsistent, making it difficult to collect and accurately match records.

Source: GAO analysis of survey responses from our two-phase Form 5500 stakeholders panel.

Stakeholders said the form's information on service provider fees was misaligned with other required fee disclosures, and also cited various exceptions and gaps in current reporting requirements as major challenges. Specifically, Form 5500 service provider fee information does not align with other information that service providers must disclose to plan sponsors, forcing providers to produce two different sets of information. Also, differences in service provider compensation types and the lack of definitions for codes designating the types of services provided can result in inconsistent and incomplete data being reported. Other exceptions and gaps in service provider information result in an incomplete picture of plan fees. For example, large plans—those with 100 or more participants—are not required to report fee information for certain types of compensation and small plans file only limited fee information.

The Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) face significant administrative, statutory, and contractual challenges to collecting and revising the annual reporting information required for regulating private pensions. While the rulemaking process and other informal efforts to solicit stakeholder input have provided opportunities for public reaction to proposed changes to the form, these opportunities have been limited and have not included the advance testing OMB guidance suggests. Stakeholder input could lower costs by reducing subsequent changes, improve filer comprehension, and increase the comparability and reliability of the form's data. Additionally, a statutory prohibition against requiring electronic filing caused IRS to remove certain data elements from the Form 5500 after DOL mandated electronic filing of the form. If IRS were able to require electronic filing, it could add the data elements back to the form, which would improve its compliance, restore robust information to its enforcement activities, and decrease its data collection costs.

Why GAO Did This Study

The Form 5500 is the primary means of collecting information for use by the federal government and the private sector on retirement plan assets, which exceeded $6 trillion in fiscal year 2011. Stakeholders, including those who prepare and use the form, have raised concerns about the quality and usefulness of form data. GAO was asked to review Form 5500 plan investment and fee information.

In this report, GAO examined: (1) stakeholder problems with Form 5500 plan investment information; (2) stakeholder problems with Form 5500 service provider fee information, and (3) challenges DOL, IRS, and PBGC face in collecting and revising Form 5500 information. GAO surveyed a panel of plan sponsors, service providers, representatives of plan participants, and researchers; interviewed agency officials; and reviewed studies on Form 5500 data.

What GAO Recommends

GAO recommends DOL, Treasury, and PBGC consider modifying Form 5500 plan investment and service provider fee information to address challenges identified by our panel. DOL, Treasury, and PBGC should look for options to conduct advance testing when making major revisions to the form. Congress should consider granting Treasury authority to require Form 5500 data be filed electronically. PBGC agreed with the recommendations. DOL and Treasury did not state whether they agreed or disagreed with the recommendations; however, they identified actions underway to address the first recommendation. GAO continues to believe the recommendations are valid.

For more information, contact Charlie Jeszeck at (202) 512-7215 or jeszeckc@gao.gov.

Matter for Congressional Consideration

  1. Status: Open

    Comments: Congress has taken no action to date.

    Matter: To improve IRS's enforcement and compliance efforts, decrease the administrative and financial burden of maintaining both electronic and paper-based form processing systems, and reduce plan reporting costs, Congress should consider providing the Department of the Treasury with the authority to require that the Form 5500 series be filed electronically.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS and PBGC have agreed to consult with DOL on the potential benefits and costs of conducting advanced testing, such as focus groups, in-person observations, and users' perceptions of forms and questions, before proposing major changes to the form for public comment.

    Recommendation: To ease the burden on preparers and ensure the collection of consistent and reliable data, the Secretaries of DOL and Treasury, and the Director of PBGC should conduct advance testing--such as focus groups, in-person observations and users' perception of forms and questions--as appropriate and before proposing major changes to the form for public comment, in addition to its other outreach efforts.

    Agency Affected: Department of Labor

  2. Status: Closed - Implemented

    Comments: IRS agreed to consult with the DOL and the PBGC on the potential benefits and costs of conducting advanced testing, such as focus groups, in-person observations, and users' perceptions of forms and questions, before proposing major changes to the form for public comment.

    Recommendation: To ease the burden on preparers and ensure the collection of consistent and reliable data, the Secretaries of DOL and Treasury, and the Director of PBGC should conduct advance testing--such as focus groups, in-person observations and users' perception of forms and questions--as appropriate and before proposing major changes to the form for public comment, in addition to its other outreach efforts.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: PGBC agreed with this recommendation, and stated that it would work with DOL and Treasury to explore options to conduct advance testing when making revisions to the form.

    Recommendation: To ease the burden on preparers and ensure the collection of consistent and reliable data, the Secretaries of DOL and Treasury, and the Director of PBGC should conduct advance testing--such as focus groups, in-person observations and users' perception of forms and questions--as appropriate and before proposing major changes to the form for public comment, in addition to its other outreach efforts.

    Agency Affected: Pension Benefit Guaranty Corporation

  4. Status: Open

    Comments: DOL stated that DOL, Treasury, and PBGC are in the process of an overall re-examination of the Form 5500, called the 21st Century Initiative, which is part of a long-term strategic project to modernize and improve the Form 5500 Annual Return/Report. This initiative's scope includes all of our recommendations for improvement of Form 5500 plan investment and service provider fee information. However, due to the time needed to develop form and instruction changes through a three-agency process, integrate changes into the EFAST processing system, and conduct public notice and comment, DOL is targeting the 2019 Form 5500 for implementation of the improvements. DOL has also made efforts to improve the consistency of key identifying information on the Form, including EIN, Plan Number and Name, by developing specifications for cross year edit check that notifies the filer and government agencies of inconsistencies. When implemented, this action would afford filers the ability to review and modify inconsistent identifying information prior to submission and provide government users the ability to detect filings containing potential identifying information errors for review and correction. While GAO acknowledges that DOL has taken steps to identify potential Form improvements, including cross year edit checks for key identifying information, our recommendation calls for action to be taken by the agencies to implement these modifications to the form. DOL has not provided an update on the specific progress of these initiatives.

    Recommendation: To improve the usefulness, reliability, and comparability of Form 5500 data for all stakeholders while limiting the burden on the filing community, the Secretaries of DOL and Treasury, and the Director of PBGC should consider implementing the findings from our panel when modifying plan investment and service provider fee information, including: (1) revising Schedule H plan asset categories to better match current investment vehicles and provide more transparency into plan investments; (2) revising the Schedule of Assets attachments to create a standard searchable format; (3) developing a central repository for EIN and PN numbers for filers and service providers to improve the comparability of form data across filings; (4) clarifying Schedule C instructions for direct, eligible indirect, and reportable indirect compensation so plan fees are reported more consistently and, as we recommended in the past, better align with the 408(b)(2) fee disclosures; and (5) simplifying and clarify Schedule C service provider codes to increase reporting consistency.

    Agency Affected: Department of Labor

  5. Status: Open

    Comments: The IRS is working with DOL and the PBGC to make comprehensive changes the Form 5500 as Part of the 21st Century Initiative, whose scope includes all of our recommendations, but explained that it currently lacks the funding and staffing needed to specifically develop the type of electronic repository that we recommended. Based on the timeline for agreeing on proposed revisions to the Form 5500 series, publishing notice of the proposed changes in the Federal Register, reviewing public comments, and working with vendors to revise the architecture of the EFAST processing system, which includes integrating the final changes with the new technology. Implementation is targeted for 2019 (if the updated pension processing system is funded by all three agencies simultaneously).

    Recommendation: To improve the usefulness, reliability, and comparability of Form 5500 data for all stakeholders while limiting the burden on the filing community, the Secretaries of DOL and Treasury, and the Director of PBGC should consider implementing the findings from our panel when modifying plan investment and service provider fee information, including: (1) revising Schedule H plan asset categories to better match current investment vehicles and provide more transparency into plan investments; (2) revising the Schedule of Assets attachments to create a standard searchable format; (3) developing a central repository for EIN and PN numbers for filers and service providers to improve the comparability of form data across filings; (4) clarifying Schedule C instructions for direct, eligible indirect, and reportable indirect compensation so plan fees are reported more consistently and, as we recommended in the past, better align with the 408(b)(2) fee disclosures; and (5) simplifying and clarify Schedule C service provider codes to increase reporting consistency.

    Agency Affected: Department of the Treasury

  6. Status: Open

    Comments: PBGC agreed with this recommendation and stated that the form's current plan asset categories do not provide users with the means to identify the nature of plan investments and the level of investment risks, adding that improvements in this area are critical to PBGC's efforts to protect and sustain their insurance programs and monitor plan financial status. PBGC also stated it will work with Treasury and DOL as part of the 21st Century Initiative to address challenges identified in our report.

    Recommendation: To improve the usefulness, reliability, and comparability of Form 5500 data for all stakeholders while limiting the burden on the filing community, the Secretaries of DOL and Treasury, and the Director of PBGC should consider implementing the findings from our panel when modifying plan investment and service provider fee information, including: (1) revising Schedule H plan asset categories to better match current investment vehicles and provide more transparency into plan investments; (2) revising the Schedule of Assets attachments to create a standard searchable format; (3) developing a central repository for EIN and PN numbers for filers and service providers to improve the comparability of form data across filings; (4) clarifying Schedule C instructions for direct, eligible indirect, and reportable indirect compensation so plan fees are reported more consistently and, as we recommended in the past, better align with the 408(b)(2) fee disclosures; and (5) simplifying and clarify Schedule C service provider codes to increase reporting consistency.

    Agency Affected: Pension Benefit Guaranty Corporation

 

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