By Peter J. Wiedenbeck

A central but generally neglected objective of federal regulation of pension and welfare benefit plans was to provide workers with accessible and reliable information on which to base their career and financial planning, thereby improving overall economic efficiency. But few workers are equipped with the skills needed to evaluate the costs and benefits of complex retirement saving or health care programs. For that reason ERISA, the Employee Retirement Income Security Act of 1974, requires disclosure of plan-related information in a format that is both understandable to the average plan participant and sufficiently complete to empower workers to make the best use of the program. The length and complexity of most employee benefit plans creates tension between understandability and completeness, calling for tradeoffs to achieve optimal disclosure.

As implemented ERISA’ understandability standard has been jettisoned by plan sponsors seeking protection from liability for failing to tell workers enough. Required plan summaries became unreadable, but plan sponsors could get away with that, both because there was no administrative or judicial enforcement of the understandability standard, and because they could tout the advantages of their benefit plans to workers by means of unregulated informal communications. The demise of understandability is only half the story. The federal courts have also degraded the reliability of mandatory disclosures by finding that the obligation to provide reasonably accurate and complete information is enforceable only in a suit for appropriate equitable relief. In consequence, disclosure defects are often presented as estoppel claims, and the necessary showing of individual detrimental reliance translates into widespread under-enforcement of the reliability standard.

Source: SSRN