Beginning in 2012, fiduciaries of defined contribution plans, such as 401(k) plans, which allow participants to direct investments will need to provide new annual and quarterly disclosures about investments and expenses. The first new annual disclosure must be provided by May 31, 2012, and the first new quarterly disclosure must be provided by August 14, 2012. The major provisions of these rules are summarized in the following Qs & As.
WHAT IS THE PURPOSE OF THE FEE TRANSPARENCY RULES?
The fee transparency rules are intended to ensure that participants in self-directed plans get investment information in a format that allows them to make "apples-to-apples" comparisons among their plan's investment options so they can make informed investment choices.
WHAT INFORMATION MUST PLAN SPONSORS PROVIDE?
Plan administrators must provide each participant (and any beneficiary who can direct investments) with the “Plan-Related” and “Investment-Related” information, as follows:
- Performance Data: For investment options with no fixed rate of return, provide 1, 5, and 10-year returns; for investment options with a fixed rate of return, provide the annual rate of return and the term of the investment.
- Benchmark Information: For investment options with no fixed rate of return, provide the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods, as applicable.
- Fee and Expense Information: For investment options with no fixed rate of return, provide the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested; for all investment options, provide any shareholder-type fees or restrictions on the ability to purchase or withdraw from the investment (e.g., to discourage market timing).
- Internet Website Address: Provide an website address that affords access to additional or updated information about the investment options.
- General Plan Information: Provide information about the structure and mechanics of directing investments under the plan, such as a current list of the plan's investment options, how to give investment instructions, and a description of any "brokerage windows" or similar arrangement.
- Administrative Expenses Information: Provide an explanation of any fees and expenses for general plan administrative services that are charged to or deducted from all plan accounts which are not reflected in the total annual operating expenses (e.g., expenses for recordkeeping services).
- Individual Expenses Information: Provide an explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary (e.g., for plan loans or qualified domestic relations orders).
- Quarterly Statements of Actual Charges or Deductions: Statements must be provided to participants, at least quarterly, itemizing the type and dollar amount of plan-related fees and expenses ("administrative" and "individual") actually charged to their accounts. If some of the plan’s administrative expenses are paid from the total annual operating expenses of an investment alternative (e.g., through revenue sharing, 12b-1 fees or sub-transfer agent fees), this must be noted.
HOW MUST THE INVESTMENT INFORMATION BE PRESENTED?
Investment-related information must be furnished in a chart or similar format designed to facilitate a comparison of each investment option available under the plan. The Department of Labor has issued a model chart that may be used by the plan administrator to satisfy the requirement for a comparative format.
WHO MUST RECEIVE THIS INFORMATION?
The plan and investment-related information must be provided to plan participants and beneficiaries (including alternate payees) who can direct investments under the plan (including newly eligible enrollees).
WHEN MUST THE INVESTMENT-RELATED INFORMATION BE PROVIDED?
Annual Notice: The plan and investment-related information (excluding the quarterly statements of actual charges) are required to be furnished to individuals on or before the date they can first direct their investments, and in each year thereafter. The first annual notice must be distributed by May 31, 2012. Thereafter, the notice must be provided at least once during each plan year.
Quarterly Statements: For calendar year plans the first quarterly statement is due August 14, 2012, to report fees and expenses for the quarter ending June 30, 2012. Thereafter, a quarterly statement should be issued once each quarter.
CAN THE ANNUALLY REQUIRED PLAN AND INVESTMENT INFORMATION BE PROVIDED IN THE SUMMARY PLAN DESCRIPTION?
Yes, so long as the SPD complies with the distribution timing and format rules of the fee transparency rules.
CAN THE FEE TRANSPARENCY INFORMATION BE PROVIDED ELECTRONICALLY?
Yes. Under interim rules, fee transparency information may be distributed electronically to current employees who have regular access to the company’s website as part of their job functions. However, prior consent generally is required from all other individuals to whom it is distributed electronically. Electronic distribution is discussed in more detail in our companion article, “DOL Releases Interim Policy on Electronic Disclosures under Fee Transparency Rules.”
CAN THE QUARTERLY FEE TRANSPARENCY REPORT BE DELIVERED WITH THE PENSION BENEFIT STATEMENT?
Yes, although if distributed electronically, different distribution requirements apply. See our companion article, “DOL Releases Interim Policy on Electronic Disclosures under Fee Transparency Rules.”
CAN THE PLAN ADMINISTRATOR RELY ON SERVICE PROVIDERS TO PROVIDE THIS INFORMATION?
Yes. A plan administrator should not be liable for the completeness and accuracy of information provided if the plan administrator reasonably and in good faith relied upon information provided by a service provider.
WHEN MUST PARTICIPANTS BE NOTIFIED OF CHANGES IN THE INFORMATION?
Participants must receive notification of changes in plan-related information (e.g., the investment alternatives) or fee and expense information (e.g., loan fees) no fewer than 30 days and no more than 90 days before the effective date of the change. However, if a change is due to unforeseeable circumstances (e.g., a change in fund manager requires a prompt replacement of an investment option) then notification of the change must be made as soon as reasonably practicable.
IS COMPLIANCE WITH THE FEE TRANSPANCY DISCLOSURE RULES VOLUNTARY OR MANDATORY?
Unlike the elective “404(c) plan status,” compliance with the new fee transparency disclosure requirements is mandatory.
WHAT IS THE CONSEQUENCE FOR FAILING TO COMPY WITH THE FEE TRANSPARENCY REGULATIONS?
The plan administrator and other plan fiduciaries can be sued under ERISA for breach of fiduciary duty. An individual who sustains losses as a result of the failure to disclose the required fee information may be able to recover damages.