As a reminder that retirement plans do not exist in an ERISA “bubble,” the SEC proposed Rule 30e-3 3 this past June which will fundamentally rework the manner in which mutual fund prospectuses, proxy material and other fund reports are delivered to shareholders. This proposed rule, if made final, would permit electronic delivery of these reports to be made the default-much in the same way as currently being proposed for the electronic delivery for required ERISA notices.
Why should this matter to retirement plans? First, it is a reminder that 403(b) participants are considered shareholders for SEC purposes and are required to receive the paper delivery of fund reports unless they opt for electronic delivery. The passage of this rule would substantially simplify this “heavy lift” for many 403(b) plan vendors and custodians. Much has been made under the ERISA proposals of the burden arising from the paper delivery of ERISA notices- but this is hardly anything when compared to what is required under the fund reports delivery rules for 403(b) participants.
It will also impact 401(a) plans. One of the more difficult problems arising from the use of omnibus trading platforms by trust companies is the ability to delivery fund reports (including things like proxy materials) to the fiduciaries of these plans. You see, the plans using these platforms (and they ARE in common use) aren’t typically carried as the shareholders of record by the fund company’s transfer agent (the fund company’s transfer agent typically is responsible for keeping the list of shareholders to whom fund reports are to be delivered). The transfer agent usually passes on this responsibility to the omnibus platform, and the omnibus platform passes on this responsibility to the trust company or other fiduciary. For those of you familiar with complex, multiparty administrative processes, you can see how this system is susceptible to “breakage.” Thus, by the way, the need for the payment of those “sub transfer agent fees” that you often read about. I strongly suspect that the electronic delivery rules, if implemented, will help make the current system work more reliably.
The SEC’s Rule 30e-3 fact sheet can be found here.
Rule 30e-3 is not without its opponents. The paper industry (go figure) has filed a lawsuit already challenging the rule as “arbitrary and capricious.” But this lawsuit has also been joined by consumer groups which raise the same issues as are being raised in opposition to the ERISA electronic delivery rules: e-delivery imposes hardship on the most vulnerable populations, including the elderly, as well as those less affluent and rural communities without access to broadband internet, while opening the door to new phishing scams, online fraud and cybersecurity threats. There is also a claim that this electronically delivered material is difficult to read on mobile devices.
What is particularly striking is that this lawsuit may have an effect on the efforts to change the ERISA delivery rules. More and more it is clear that ERISA is not an island…..