The final rule gives greater leeway for the distribution deadline of annual participant disclosures.

In its 2010 participant disclosure rule for participant-directed individual account plans (Regulation 404a-5), the US Department of Labor (DOL) required that certain disclosures be provided on or before the date that a participant can first direct his or her investments and “at least annually thereafter.”[1] The DOL has now addressed questions and concerns regarding the timing of the annual disclosures.

Amended Timing Requirement

The 404a-5 disclosure rule requires that plan participants be furnished with specified information regarding their plans’ administrative fees and investment options at the time that they begin participating in the plan. The rule further requires, among other things, that this information be furnished again to all participants “at least annually.”

The original regulation defined “annually” as “at least once in any 12-month period.” In subsequent guidance, the DOL took the position that each annual disclosure must therefore be made no more than exactly one year—that is, 365 days—after the previous annual disclosure. At the same time, in response to concerns that this interpretation prevented plan administrators from consolidating these participant disclosures with other annual participant disclosures (for example, annual “safe-harbor” or “qualified default investment alternative” notices) subject to different deadlines, the DOL solicited comments on whether it should provide more flexibility to plan administrators (and provided a one-time extension to permit plan administrators to coordinate the timing of different annual disclosures). Another issue raised was that furnishing disclosure one year before the deadline would then move up the deadline for subsequent years—a deadline “creep,” so to speak.

In response to comments that support added deadline flexibility as benefiting plan participants, the DOL has now revised the definition to add a buffer period.[2] The amended definition defines “at least annually thereafter” to mean “at least once in any 14-month period,” an extension of two months (up to 62 days) from the prior definition. According to the DOL, this change should achieve the “correct balance” by ensuring that participants will receive these disclosures on a consistent and regular basis, without unwarranted delays between the disclosure dates, while at the same time offering plan administrators some flexibility.

Although the change is not effective until June 17 (90 days after publication), the DOL also announced that it is adopting a temporary enforcement policy, under which it will treat plan administrators as satisfying the annual notice requirement if they comply with the new definition based on having reasonably determined that doing so will benefit the plan participants. This effectively permits plan administrators to rely on the new definition prior to the effective date.[3]

The DOL noted that it had also requested comments on whether to change the definition of “at least quarterly,” which describes the timing requirement for disclosures of administrative and individual expenses actually charged to participant accounts. Because no comments asked for a change to this definition, the DOL did not revise it. The DOL noted that the reason may be that prior DOL guidance provides a 45-day window for furnishing quarterly pension benefit statements and that the 404a-5 regulation permits the quarterly fee disclosures to be furnished with quarterly pension benefit statements, implying that people are reading the quarterly disclosure requirement under the 404a-5 regulation in light of the pension benefit statement guidance. The DOL did not comment on whether this is a reasonable interpretation, but also did not suggest otherwise.

Observations

This change provides needed flexibility to the deadline for furnishing the 404a-5 participant disclosures. The original interpretation raised many practical questions and complications around meeting the annual disclosure deadline. Although the DOL had provided a grace period to permit plan administrators to synchronize the 404a-5 annual disclosures with other plan annual disclosures, that grace period could only be used one time, and left the potential for future complications in the event of problems in meeting any one of the annual disclosures by the strict 365-day deadline.

The rulemaking is in the unusual form of a “direct final rule,” meaning that it has been published as a final rule in the Federal Register without first being proposed with an opportunity for comment. The DOL did so on the basis that, having already solicited public comments (albeit in a field assistance bulletin rather than a proposed regulation), a proposed rulemaking is unnecessary. As such, there is a possibility that the DOL will be required to withdraw the rule in the event that it receives significant adverse comments within 30 days after publication (i.e., by April 20). Just in case, the DOL has concurrently published a notice of proposed rulemaking.[4] However, in view of the unanimously favorable comments on the issue, a need to withdraw the rule seems unlikely.