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A Call for a Change in Disclosure Defaults

How do you increase retirement security for 80 million 401(k) account owners?

By making electronic delivery of 401(k) plan information the default method for communicating with plan participants. This has the potential to significantly improve the retirement security of millions of Americans through reduced costs, improved access and interactive communication features, according to findings in an updated study commissioned by the American Retirement Association and Investment Company Institute.

Authored by Professor Peter Swire and DeBrae Kennedy-Mayo, the 2018 update to the 2011 study — “Delivering ERISA Disclosure for Defined Contribution Plans: Why the Time Has Come to Prefer Electronic Delivery” — makes the case that the time has come to provide retirement plan sponsors the flexibility to establish electronic delivery as the default method for communicating participant statements and other plan information, ARA CEO Brian Graff and ICI President & CEO Paul Schott Stevens explain in an accompanying letter to the Department of Labor.  

The ARA partnered with ICI to update the 2011 study, which outlined a number of compelling reasons to shift the default method to electronic delivery for holders of DC plan accounts rather than continuing to rely on paper delivery. The 2018 update concludes that the reasons to shift to e-delivery have become even stronger during the intervening years, specifically that:

  • paper delivery costs significantly more than e-delivery;
  • the government norm in other settings has become e-delivery;
  • for millions of people, effective access is better with electronic rather than paper delivery; and
  • the broad-based access to the internet via smartphone and tablets technology means that previous concerns about lack of access to the internet is no longer a sound basis for preferring paper delivery.

Improves Retirement Security for Millions

The 2018 update shows that participants could save more than $500 million per year, assuming about eight participant mailings per year across more than 80 million 401(k) account holders. “This can translate to an increase in savings over a work life of about 2.4%, equaling thousands of dollars for every 401(k) saver over a lifetime,” says Graff.

By contrast, once an electronic notice is drafted, the incremental cost of email to one person is essentially zero, the study notes. And as discussed in the 2011 study, there are also enormous environmental benefits to e-delivery from the reduction of tons of discarded paper every year.

A 2015 report prepared for the SPARK Institute offers similar findings, with estimated annual savings of shifting to e-delivery for retirement plan notices in the range of $300 million to $750 million per year.

Increased Savings and Better Retirement Outcomes

Moreover, building on behavioral economics to help people to make the right decisions at the right time, the report suggests that the interactivity of e-delivery — whether in the form of just-in-time notices involving saving more or diversified investing, layered notices or online calculators — facilitates participant action and engagement, leading to increased saving and better investing.

Consider that with layered notices, which in a paper system may include a top page that gives the summary, but to dig deeper, the consumer has to flip through the attached booklet or a stack of forms to find the relevant other pieces. By contrast, electronic disclosures can take advantage of hyperlinks, allowing the user to simply click on a link when interested in learning more or taking an action.

“With a paper notice, an individual must read the notice and then shift to another channel, such as filling in a form and handing it to HR, making a telephone call or visiting a website, to make any change,” the study explains. 

That interactivity can translate into higher savings rates. According to ICI’s survey of a cross-section of 401(k) plan recordkeepers conducted in the winter of 2017-2018, the average participant contribution rate among participants not interacting with the plan website was 5.8% of salary, compared with an average 7.8% contribution rate among participants who had interacted with their plan website. The report notes that similar results were also found in the 2011 study.

93% of DC Account Households Have Access to the Internet

Meanwhile, a concern about the lack of internet access has been one of the most consistent objections raised to a wider use of electronic notices, but evidence shows that a large majority of all households has access to the internet — and that access is even higher for households with DC accounts. As of 2016, 93% of households owning DC accounts have access to the internet, up from 86% in 2010, the authors note.

And even if they are members of demographic groups that are less inclined to use the internet, the study shows that households with DC plan accounts use the internet at higher rates. For example, 79% of DC account–owning households with income between $20,000 and $39,999 make use of the internet, compared with just 67% of all US households with income in that range. Among households age 65 or older, 76% of DC account holders use the internet, compared with just 56% of all households in that age group.

For Tens of Millions, Access is Better with Electronic Delivery

Technology has also notably improved access in two domains since the 2011 study. E-delivery has continued to improve access for the visually impaired and others with disabilities. For example, the study explains that electronic notices allows users with vision impairment or color blindness to adjust the font size, contrast and colors to their preference. In addition, individuals who do not have use of their hands may use speech recognition software to navigate a website.

Moreover, advances in translation software have improved access for those who prefer to use a language other than English. Free translation software is now available to translate more than 100 languages, accounting for more than 99% of the online population.

E-Delivery is the Norm for the U.S. Government

The study further emphasizes that the federal government has come to rely on electronic rather than paper delivery for important financial and health information and notices, recognizing the substantial cost savings from electronic delivery. For example, agencies including the Social Security Administration, the Centers for Medicare and Medicaid Services, the Office of Personnel Management, and the federal Thrift Savings Plan often provide notices electronically. “If it’s good enough for Medicare and Medicaid and the Social Security system, it should be good enough for the 401(k) system,” Graff declared.

Cybersecurity Advantages with Electronic Delivery

Finally, the study reiterates that there are important cybersecurity advantages compared to risks from paper notices and the voluntary use of online banking among the relevant population of DC plan holders further demonstrates the acceptance of e-delivery.