SCOTUS Agrees Employees Lack “Actual Knowledge” of Retirement Plan Disclosures They Have Not Read

We often hear that employees don’t read, or don’t care to read, information about their benefits. This is most often the case when the information presented is too detailed and complex for employees to understand. Retirement communications that are well designed, written simply, and inspire comprehension are not just nice to have. They’re now even more important to your plan in light of a recent U.S. Supreme Court decision.

Employees are not CIOs or doctors. They’re doing the best they can to navigate very complex decisions about their wealth and health. And, in many cases, the required notifications and disclosures about benefits are not helping them. This is why the Supreme Court’s decision on February 26 is so interesting. The justices ruled unanimously in favor of a 401(k) participant in Intel v. Sulyma. The focus of the case was whether Intel Corporation breached its fiduciary duty to participants under ERISA and if participants have “actual knowledge” about investment products offered in their defined contribution plans. The “actual knowledge” stipulation determines the time period in which a participant can sue under ERISA with respect to an allegedly imprudent plan investment. The ERISA statute of limitations is generally 6 years, but it’s shortened to 3 years if the participant has actual knowledge of the alleged violation. In this case, the Supreme Court found that a participant doesn’t necessarily have “actual knowledge” of the information contained in defined contribution plan investment disclosures if the participant received but does not read or cannot recall reading the disclosures.

Tell me you understand

One implication of this ruling is that defined contribution plans may start asking participants to certify or otherwise acknowledge in writing that they’ve received and read their plan’s disclosure information. This would be similar to certain consumer practices, such as accepting terms and conditions from software companies or acknowledging cookies on a website. However, the challenge remains that most investment disclosures contain language that some characterize as investment jargon and/or legalese. As we’ve testified before to the ERISA Advisory Committee, legal disclosures can be difficult to understand and are not action oriented. That’s why they need to be paired with more consumer-friendly educational pieces that help employees better understand the investment products available to them.

Annual enrollment may be coming to more defined contribution plans

Some employers drive engagement within their defined contribution plans by following the lead from annual enrollment. Just as employees elect their medical plan on an annual basis, some employers have asked employees to reaffirm their savings rates and investment choices (into which many have been auto-enrolled). This process may now become more commonplace. There are several benefits to this approach. It forces employees to engage more regularly and meaningfully with their retirement savings plan. And research has shown that the more often people engage with their finances, the more financially literate they become over time.¹

Over the years, some plan sponsors have been reticent to re-enroll employees in their retirement savings plans. But now, re-enrolling may help ensure that individuals know where they’re invested and how much they’re saving, because they’re forced to review their choices every year. Of course, if participants don’t make a decision, plans could automatically move them to the plan’s default fund (Qualified Default Investment Alternative) at the plan’s default savings rate. This could be beneficial for participants who are inappropriately invested—especially longer tenured employees who haven’t made changes to their investment choices in years—or participants who are saving below the company match. Depending upon how the enrollment experience works, it could also mean that employees saving at above-average rates would be brought back to lower contribution rates, which could frustrate them. Plans that adopt this approach, should think through the participant experience and communications plan to ensure the best outcomes for employees.

Taking a human-centric approach to communicating with participants will be key

Another takeaway from this case is how plans communicate with their participants. Sending an email with “important plan information” simply won’t cut it. Rather, plans will need to explain why they’re communicating. Investment products are hard enough to understand, especially for the majority of Americans who are not professional investors. Going forward, it will be important for plans to contextualize why they’re asking employees to take action and what’s in it for them. Additionally, if you employ large groups of non-native English speakers, you may want to consider translating key pieces of material to ensure information is accessible to all your participants. Your retirement communications should help employees understand the steps involved in building secure financial futures. 

Process and documentation will continue to be the cornerstone of retirement plan administration

This ruling reiterates the need for strong plan governance, oversight, and frequent review. All of that work should be documented. Defined contribution plans have been the target of litigation for many years, which will likely continue with this ruling. What remains to be seen is whether this ruling will stifle further innovation in retirement plan offerings. Additionally, more employers may consider moving to an outsourced chief investment officer (OCIO) approach or join a Pooled Employer Plan (PEP), made feasible by the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in December of 2019.

What we should collectively keep in mind is that helping people prepare for retirement is not a set-it-and-forget-it endeavor. Strong plan design is built on automation and defaults, but it also needs to be paired with effective communication and outreach to plan participants. While this ruling will add another step to oversee and administer, it doesn’t change best practices—including the importance of frequent, simple, and bite-sized communications. In fact, it only reiterates the critical importance of meeting people where they are on a continuous basis.