On May 7, 2012, the Department of Labor (“DOL”) released a set of 38 questions and answers (“Q&As”) regarding the participant-level fee disclosures required for individual account retirement plans such as 401(k) and 403(b) plans that seek fiduciary protection under ERISA Section 404(c). The Q&As can be found here.
These Q&As supplement the revised participant-level fee disclosure regulations published under 29 CFR § 2550.404a-5, which require plan administrators to disclose certain plan information and certain investment-related information (including fees and historical performance) for a plan’s designated investment alternatives and make additional information available on a website. These Q&As also provide guidance to certain covered service providers who are required under ERISA Section 408(b)(2) regulations to provide investment information for a plan’s designated investment alternatives.
This alert highlights some of the Q&As we found to be most relevant and/or surprising and includes some observations about these Q&As.
Fees and Expenses for Administrative Services That Are Charged Against Participants’ and Beneficiaries’ Accounts Must be Specifically Described
If the amount of an administrative fee is known at the time of the required fee disclosure, the disclosure must identify the service, the cost of the service and the plan’s method of allocating the fee to participants’ and beneficiaries’ accounts. If the precise amount of the administrative fee is unknown at the time of disclosure, the disclosure should describe the service and the allocation method and may (but is not required to) estimate the cost of the service based on prior years.
- It might not be permissible to simply list the types of fees that theoretically could be charged against participants’ and beneficiaries’ accounts if they are not typically charged against such accounts.
- Even if administrative fees are reduced by revenue-sharing payments, they must still be disclosed in accordance with the Q&As.
- Administrative fees that are paid through a plan’s forfeiture account, and not through participants’ and beneficiaries’ accounts, are not required to be disclosed.
- Many plan documents are drafted broadly so that administrative fees could be charged against plan accounts, the plan’s forfeiture account or to the plan sponsor directly. If fees are regularly paid by the plan sponsor and there is no intent by the plan sponsor to have the fees charged against plan accounts, the fees are not required to be disclosed.
Brokerage Window Minimum Disclosures
If a plan has a brokerage window or other arrangement that allows participants and beneficiaries to select investments beyond those designated by the plan, then the following items must be disclosed: information about how the window works (e.g., how and to whom to give investment instructions; any account balance requirements; any restrictions or limitations on trading; and how the window differs from the plan’s designated investment alternatives); who to contact with questions; and any individual fees charged to a participant’s or beneficiary’s account in connection with the window, such as enrollment fees, annual or monthly fees, per-trade fees, etc. Some exceptions apply for fees or expenses specific to investments selected by the participant through the window and certain fees associated with the purchase and sale of securities through the window.
On quarterly statements, the actual dollar amount of fees and expenses charged against an account in connection with the brokerage window must be disclosed along with a specific description of the services to which the charge relates.
- It appears that the description of brokerage window fees on a quarterly statement cannot be lumped under one heading of “Brokerage Window Service Fees” or the like. Instead, the description of services must clearly explain the charges (e.g., $19.99 brokerage trades, $25.00 brokerage account minimum balance fee, $13.00 brokerage account wire transfer, $44.00 front end sales load, etc.)
Heightened Monitoring Responsibilities for Plans With Brokerage Windows or Large Number of Investment Alternatives
The Q&As indicate that plans with brokerage windows and/or a large number of investment alternatives may have heightened monitoring responsibilities and may, under the right circumstances, be required to treat some investment alternatives within a brokerage window or otherwise offered in the plan as “designated investment alternatives” for purposes of the disclosure rules. For instance, if “significant numbers” of participants and beneficiaries select investments through a brokerage window, the plan fiduciary has an “affirmative obligation” to examine these investments to determine whether they should be treated as designated investment alternatives for purposes of the disclosure rules.
The Q&As contain a non-enforcement safe harbor for plans with more than 25 investment alternatives (which presumably would include a plan with a brokerage window). To avoid treating all investment alternatives offered by the plan in the brokerage window or otherwise as “designated investment alternatives,” the plan must:
- Make the required fee disclosures for at least three of the investment alternatives that together constitute a broad range of investment alternatives; and
- Make the required fee disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries are invested (or, in the case of a plan with more than 500 participants and beneficiaries, at least 1 percent of all participants and beneficiaries are invested).
- The Q&A on this topic is probably generating the most controversy of any of the Q&As.
- To fall within the non-enforcement safe harbor, it appears that the plan administrator of any plan that offers a brokerage window should examine the actual investment options that participants have selected through a brokerage window, and treat options that are selected by a certain number of participants as a designated investment alternative subject to the fee disclosure requirements regardless of the actual number of other designated investment alternatives that the plan offers.
- Plan administrators should pay particular attention to company stock offered through a brokerage window, as that may be an investment that a number of participants would select.
- The DOL has not addressed whether fiduciaries have a duty to screen options available through a brokerage window to determine if they are prudent options to be offered to participants.
Web Site Address Requirements
Plan administrators are required to disclose web site addresses that contain certain information about each designated investment alternative. The Q&As clarify that the web site address “landing page” does not need to contain all of the investment-related information, but that the landing page must be sufficiently specific to lead the participant to the information “without difficulty.”
- It is not clear whether simply providing the website address of an investment provider is sufficient if the website's landing page is not sufficiently specific to easily lead the participant or beneficiary to the investment information.
The “Staple Approach” is Permissible
The Q&As condone the “staple approach” for providing comparative information about a plan’s designated investment alternatives. A plan administrator using the “staple approach” must provide multiple comparative charts or documents to participants and beneficiaries at the same time in a single mailing or transmission as long as the charts or documents permit a comparison among the designated investment alternatives. It is not permissible, however, for the vendors or investment providers to separately provide comparative documents to plan participants and beneficiaries.
- This clarification will be particularly relevant to administrators of 403(b) plans, which frequently have numerous vendors that do not coordinate disclosures.
Applicability Date and Good Faith Rule
The Q&As confirm that the initial participant-level disclosures must be provided to participants and beneficiaries on or before August 30, 2012, and that the first quarterly fee disclosures must be provided on or before November 14, 2012 for the third quarter (for calendar year plans). Perhaps in recognition of the significant new guidance presented in the Q&As, the DOL will not take an enforcement action against a plan administrator if it acted in good faith based on a reasonable interpretation of the final regulations and if it establishes a plan for complying with the requirements of the Q&As in future disclosures; although, there is no relief from participant claims and suits.
- This good faith enforcement policy provides some relief to plan sponsors that have already provided the initial disclosures to plan participants.