Better 401(k) Planning…the OPEN Government Data Act Could Help
Guest blog post by Aron Szapiro, Director of Policy Research, Morningstar.
The OPEN Government Data Act (S. 2046; H.R. 4174, Title II) would unleash fintech and regtech firms to help ordinary Americans by contextualizing and analyzing the vast stores of data the federal government already has but often does not share in a useful way. The benefits of contextualized, standardized data should also extend to an area that most workers and employers already have to deal with – retirement security.
The American retirement system is a massive public-private partnership. The government incentivizes employers to offer retirement plans with tax incentives, who in turn use third-party plan providers, consultants, and investment managers to construct a mechanism to help ordinary workers save for retirement.
How does the government orchestrate this massive effort, which includes more than a half million employers according to public filings, and assess the system’s strengths and weaknesses? The government collects data on retirement plans, like the information collected on the Department of Labor’s (DOL) Form 5500, and tries to use that data to assess risk. However, while some of this data is available in a machine-readable format, much of the important information is still on “digital paper,” such as PDFs, where valuable data sets are locked in a document, undermining efforts to shed light on plan investments and fees.
The Benefits of Open Retirement Plan Data
Retirement savers, regulators, advisors, and plan sponsors all want to know the same thing: is a given 401(k) plan meeting participants’ needs? Which participants does the plan serve the best? Further, workers (and their advisors, if they have one) need to know whether leaving money in their 401(k) is the best option after a job change or retirement.
These are critically important questions — and fixing the main disclosure that retirement plans file DOL, known as the Form 5500, would help.
Right now, most critical information on the Form 5500 — the investment options a participant can access — is on digital paper, and it is difficult to extract the data.
The OPEN Government Data Act would require data, like that on the Form 5500, to be presented electronically. That would, in turn, more easily help third-parties advise retirement savers and help advisors determine the relative quality of 401(k) plans, or even whether a rollover from one 401(k) to another made sense. Over the long-term, it could also help regulators assess the retirement system holistically, better understand how it’s working, and where it can be improved. The employers who set up plans could use such answers to help ensure that they’re offering the best investment lineup they can (Individuals also get a “404a5” disclosure, but they are not structured or public-facing).
The reason it’s so hard to answer some basic questions about retirement plans is that the disclosures filed with the DOL have not been updated since the 1970s to embrace modern technology or practices. The information that is collected by the forms is locked in a static document, and the DOL continues to collect the disclosures with outdated reporting regimes. The OPEN Government Data Act would not solve all these problems, but it would be an important start. The proposed legislation would require the government to share data in machine-readable formats by default, meaning fintech and regtech firms would be in a stronger position to get the data they need to help ordinary workers investing for retirement.
What are the real-world problems with the retirement data on digital paper?
Given the limitations of retirement plan disclosures, it’s often difficult for financial professionals and regulators — let alone investors — to compare retirement plans’ investment lineups to each other or to fully understand the state of defined-contribution plan lineups.
Making Form 5500 machine-readable, as the OPEN Government Data Act mandates, would:
- Make it much easier to see how much of a retirement saver’s hard-earned money pays for investment management (the selection of individual stocks and bonds to buy and sell), and how much goes to third parties for services or for administering the retirement plan itself. Such transparency could also put pressure on high-cost providers to reduce fees.
- Allow federal regulators who collect the data to more easily identify retirement plan sponsors with investment options that may not be appropriate given their plan participants demographics.
- Better inform investors (and the advisors who serve them) on crucial decisions, such as, whether to roll over money from one 401(k) to another, or from a 401(k) to an IRA. Right now, there’s no central repository of information from which to gather key data.
In general, the disclosure data that the government collects, maintains, and publishes will work better if the data is interoperable, standardized, and machine-readable. Starting with the central idea that Form 5500 should be available in a machine-readable format, as the OPEN Government Data Act would require, would be a huge step forward. The main benefit would be to help tens of millions of American workers saving for retirement make better decisions.