Urban legend has it that the Chevy Nova didnt sell in Latin America because the brass at General Motors failed to recognize that no va in Spanish means It doesnt go. While the veracity of that story is questionable, the lesson it teaches is universal. Knowing your audience is the key to effective communication.
Pension Protection Act Section 501
This universal truth obviously wasnt top of mind when the drafters of the Pension Protection Act of 2006 scribbled Section 501, requiring defined benefit plan sponsors to provide defined benefit plan funding notices to all plan participants and other interested parties. Mercifully, these disclosures are now often referred to simply as annual funding notices.
Pension disclosure requirements
The annual funding notice (AFN) must be distributed no later than 120 days after the end of the plan year in written or electronic form. Required information within each AFN for single-employer plans includes:
- Plan identification information
- Address and phone number of the plan administrator (still want that job?)
- Plan funding status for the past three years
- Plan funding status at the end of the plan year just concluded (on a totally different basis from the other funded status measures)
- Number and type of participants (active, retired and terminated vested)
- Asset allocation and investment policy information
- Summary of Pension Benefit Guaranty Corporation benefit protections and rules regarding termination of the plan
Without a shred of irony, the PPA demands all of this be packed into the AFN and
written in a manner so as to be understood by the average plan participant.
The problem is the average plan participant is not immersed in pension issues each day. They are otherwise occupied as autoworkers, system coders, x-ray technicians, etc. (or retired versions of these), with other things on their minds.
They have different perspectives than actuaries, regulators, auditors and investors, and they predictably speak a totally different language than the one drenching the pages of their AFNs. Bloviating terms like funding target attainment percentage, prefunding balance, and actuarial value of assets have no meaning to them. Participants simply want to know if their pensions will be delivered as promised, not whether their employer (or former employer) is adhering to the shifting and capricious requirements of pension law.
Also see: "A look at how much 403(b) plans have changed."
After receiving their inaugural AFNs, many participants in an event reminiscent of the H.G. Wells War of the Worlds radio broadcast read the terrifying paragraphs about the PBGC and mistakenly thought their plans were terminating! This obviously led to a huge volume of panicked calls to plan administrators (whose phone numbers were readily available!) and quick changes to next years notices.
The confusion continues
You would think this episode would have highlighted the importance of clarity of communication. But AFNs continue to emphasize quantity over quality when it comes to disclosure.
- There are no fewer than seven required measurements of plan funding sufficiency over a period of three years included on a typical AFN.
- Measures are not consistent. Some liabilities are based on spot corporate bond rates, some on 24-month average bond rates, some on 25-year average rates.
- The actual interest rates used in the calculations arent disclosed, so liabilities jump inexplicably from year to year (or within the same year). This makes it difficult for even blogging actuaries to make sense of it all.
As a result, most overwhelmed readers relegate their AFNs to the recycle bin or deleted files folder immediately. With an average length of five pages printed duplex, the rapid disposal of the notices gives new meaning to the expression three sheets to the wind.
Freedom of expression?
Seeking to get some return from the thousands of dollars spent to produce their notices, sponsors have tried their best to soften and clarify the frightening and confusing nature of AFNs with limited success. Many have taken to including their own cover letters and caveats with disclaimers like, The government forces us to send this to you! or Your plan is not terminating!!!
Others have attempted to include funding ratios more meaningful to participants and more representative of the long-term viability of the plan. This elicited the following unintentionally hilarious comment from the Department of Labor in February: The Department is of the view, however, that ordinarily a funding notice with more than one funding percentage for the same plan year would be very confusing to participants and beneficiaries. Thus the Department strongly discourages the practice.
Yet, this exact practice has been specifically mandated within the AFN supplement since 2012! Plan sponsors are required to include funding ratios with and without the impact of funding relief laws two funding percentages for the same plan year. To quote the DOL, very confusing.
Participant disclosure is generally a good thing, but too much disclosure becomes a sausage factory tour. Transparency is desirable, but too many layers of transparency ultimately become opaque, like accidentally putting your glasses on while wearing your contact lenses. Its time for regulators to recognize the annual funding notice in its current form is a shrug-inducing mess that does little to improve participant understanding.
Perhaps speaking the language of the audience would be more effective. Tell people what they want to know:
- Assets in the plan available to pay benefits
- Liability of pension promises calculated on a consistent basis from year to year
- Actual contributions to the plan versus what the law requires
- Relative financial strength of the funding employer
- Assurance that benefits are protected by the PBGC in unlikely event of plan failure
True disclosure would distill the complexities of our technical retirement world into a language that average plan participants can actually understand, as opposed to dumping reams of information on people ill-equipped and disinclined to sift through it.
And, it should be done in a single page of 12-point font. A lot of these folks are retirees, after all. Otherwise, No leen!*
*They dont read.
Clark is a consulting actuary at the Principal Financial Group, an investment management and retirement leader. He is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries, who once owned a 1988 Chevy Nova even after taking three years of Spanish in high school. A version of this blog originally ran on The Principal blog.
The subject matter in this communication is provided with the understanding that The Principal is not rendering legal, accounting or tax advice. You should consult with appropriate counsel or other advisers on all matters pertaining to legal, tax or accounting obligations and requirements.
Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group (The Principal), Des Moines, IA 50392.
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