A Plea for Pension Plan Disclosure

By Roberts, Richard Y. | American Banker, February 10, 1993 | Go to article overview

A Plea for Pension Plan Disclosure


Roberts, Richard Y., American Banker


Self-directed defined contribution plans have become very popular pension offerings with employers and employees alike.

Employers like the relief from liability for investment losses that the plans provide, and employees like being able to exert some control over how their retirement assets are invested. It is likely that the use of defined contribution pension plans, in particular self-directed ones, will continue to increase.

But many pension plan participants who direct the investments of assets in their defined contribution accounts may not receive adequate information about the underlying investments.

The Mutual Benefit Case

Sadly, as demonstrated by the Mutual Benefit Life Insurance debacle, employees often lack adequate information to make informed investment decisions.

In 1991, Mutual Benefit Life Insurance Co. failed, and the state of New Jersey took over its management and froze its assets. Many individuals were surprised to discover that the assets of their 401(k) employee savings plans, some of which were self-directed and invested in guaranteed investment contracts, or GICs, with Mutual Benefit, were not necessarily covered by the state insurance-guarantee fund.

These individuals may have to wait a substantial period of time for Mutual Benefit's illiquid real estate investments to be converted to cash before they receive any funds. Because of this, the retirement date for some of these people may have to be extended by several years.

A Helpful Regulation

The 404(c) disclosure regulations issued by the Labor Department under the Employee Retirement Income Security Act, which covers self-directed defined contribution plans, have been substantially improved recently.

Under rules issued last October, employers who offer the plans can obtain exemptions from liability for losses that result from investment decisions, provided they extend certain options and disclosures to participants.

However, compliance with these regulations is optional. In addition, they apply only to private pension plans, not to the many self-directed defined contribution plans offered by federal, state, and local governments.

Moreover, it is arguable that even under the regulations, employees would not receive adequate disclosure about the investments that fund their pension plans. For example, information concerning the annual operating expenses of the available investment options need only be provided to the employee upon request, rather than automatically.

While the Labor Department should be congratulated for the 404(c) regulations, the continuing lack of information in this area causes a great deal of concern, and these information gaps should be closed.

Legal Protection

One potential solution is to provide individuals who direct the investment of their defined contribution plans with the protection of the federal securities laws, like any other investor in securities.

Since the assets of pension plans are frequently invested in bank collective trust funds and in insurance company separate accounts, such as the Mutual Benefit GICs, that protection does not always exist now.

For example, in 1990, according to the Employee Research Institute, the total pension plan assets invested in pooled vehicles stood at $438 billion, $267 billion of which was invested in bank collective trust funds, $135 billion of which was invested in insurance company separate accounts, and only $36 billion of which was invested in mutual funds.

Although pooled investment vehicles such as bank collective trust funds and insurance company separate accounts are functionally similar to mutual funds, unlike mutual funds, they are generally exempted from most provisions of the federal securities laws. …

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