Close to 700,000 retirement plans filed a Form 5500 in 2011, representing $6 trillion in assets held by more than 130 million Americans.
Given the form’s role as a primary tool for enforcing the Employee Retirement Income Security Act, it’s safe to say that no reporting instrument is as vital to the accounting of retirement assets. It’s also safe to say that few have much respect for it.
Regulators, plan sponsors and others with a stake in the country’s retirement industry have spent years complaining about it.
Disparities in how assets are classified relative to accounting standards, confusion over how to report service provider fees, and an overall lack of data detailing plan investments and their performance have led many to question the quality, and ultimate usefulness, of the Form 5500.
“You can’t look at a Form 5500 and definitively say what a plan is paying in fees,” says Greg Carpenter, founder and CEO of Employee Fiduciary, a Mobile, Alabama-based retirement plan service provider. “Maybe you can make an educated guess, but you can’t say definitively.”
Carpenter would know. His firm, which principally serves smaller firms – those with fewer than 100 participants – prepares 1,500 Form 5500s a year.
He’s been wrestling with the form’s complexities since 1997, and says they’ve only grown worse as 401(k) plans have become more standardized.
“Form 5500 was conceived before mutual funds ruled the Earth,” explains Carpenter. “Previously, retirement plan options varied, and were more complex. As the 401(k) industry began to overtake the market, trading volumes went up, and fees went down. Form 5500 failed to adapt.”
The Government Accountability Office (GAO) examined the problem and found wide agreement among stakeholders that much needs to be done.
The GAO offered a number of recommendations based on surveys of officials from the Department of Labor, the IRS and the Pension Benefit Guarantee Corporation — the three government entities charged with developing the form under ERISA.
It also surveyed Form 5500 stakeholders from the private sector — plan sponsors, service providers, retirement consultants, ERISA attorneys and financial researchers and academics.
Here is a breakdown of the three areas that it identified as most problematic:
Weaknesses in format
The basic format of 5500 was called into question by many of those who spoke to the GAO.
What the Government Accountability Office suggests be done to make the Form 5500 useful again.