The Pension Committee of the American Academy of Actuaries has presented comments to the ERISA Advisory Council of the Employee Benefits Security Administration regarding employer requirements for supplying Annual Funding Notices for Defined Benefit Plans, known as AFNs.
As noted by the Academy’s letter, AFNs are issued in accordance with Employee Retirement Income Security Act (ERISA) Section 101(f). Generally, employers sponsoring a pension are required to send an Annual Funding Notice each year to everyone covered by their pension plan, providing information about how well the pension plan is funded; the value of the plan’s assets and liabilities; how the pension plan’s assets are invested; and the legal limits on how much the Pension Benefit Guaranty Corporation (PBGC) can pay if the pension plan ends.
Those with some time spent in the retirement industry may recall that AFNs grew out of the Pension Protection Act of 2006 (PPA) and replaced the old Summary Annual Report (SAR) structure. The Academy’s letter, spelling out this background, acknowledges the positive intentions that went into crafting the new reporting approach, but it goes on to argue that “the AFN as it stands is an example of a good idea gone wrong.”
“The AFN should provide plan participants with useful, comprehensible information regarding the security of their pension benefits. The regulations even go so far as to forbid adding additional information designed to obscure the intended message,” the letter points out. “But the AFN overwhelms participants with a flood of numbers that they will have neither the context nor technical expertise to interpret—leading to the very confusion the regulations specifically seek to prevent.”
The Academy has three suggestions for improving the notices: “Narrow the focus, encourage helpful narrative context, and provide generic information on the internet.” It also admits that, “to be fair, the AFN shoulders a heavy burden in trying to simply and clearly communicate complex information. The statutory disclosure requirements are lengthy.”
The Academy experts warn that the statutory requirements cannot easily be changed, so barring additional regulatory action, the best way to “narrow the focus” of the AFN might be to reorganize it.
“The notice often must provide seven different measures of the plan’s funded status, but there is nothing in the statute that requires every measure to be presented with equal emphasis,” the Academy argues. “We believe it would help participants grasp the key message if the notice focused on a single measure—perhaps the market value of assets and non-stabilized liabilities as market-based measures, or the assets and liabilities used to determine the minimum required contribution—and put some context around these numbers, such as a simple explanation of the year-over-year asset and liability changes.”
NEXT: The power of narrative
Disclosure of this information could be placed on the first page with appropriate explanatory text to help participants put the results in context. “The remaining required disclosures would still have to be included in the notice, but could start on the second page,” the Academy says. “The DOL could determine the minimum level of disclosure to appear on this first page—for example, the pertinent measures for the current year, or the same information for the past two years, or the three years required by statute.”
The Academy’s idea of “encouraging helpful narrative” is meant to “permit the plan sponsor to provide additional information on the notice that is necessary or helpful to understanding the mandatory information in the notice.”
“The DOL has actively discouraged certain deviations,” the Academy notes. “For example, the preamble to the final regulations strongly discourages showing an additional funded ratio where assets are not reduced for credit balances. The strong DOL position against what many practitioners and sponsors considered to be a reasonable clarifying modification to the notice has led many to conclude that it is risky and not worth the effort to deviate from the model notice in an effort to improve its communication value. This type of DOL direction has left many sponsors unwilling to deviate from the model, even when additional information would add significant clarity.”
Importantly, the Academy says it “recognizes that our first two suggestions might lengthen the notice, an undesirable outcome given that the notice is already five pages long … The longer the notice, the less likely anyone will actually read it all the way through.”
“However, we believe the notice can be significantly shortened by permitting generic information about plan termination and PBGC guarantees to be provided through a link to a webpage, either on the plan sponsor’s website, or—even better—on a website provided by the DOL specifically for this purpose,” the Academy concludes. “At this point, it is reasonable to assume most people have access to the internet on a computer, tablet, or phone; however, to be equitable for those without such access, the AFN could also notify participants without internet access that they can request the generic information from the plan administrator (at no charge).”