The Department of Labor (the “DOL”) recently released proposed regulations regarding fiduciary requirements for disclosure in participant-directed individual account plans (e.g., 401(k) plans) under section 404(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The DOL also proposed conforming amendments to the regulations applicable to ERISA section 404(c) plans.1 Upon adoption, these proposals would require the disclosure of certain plan and investmentrelated information, including fee and expense information, to participants and beneficiaries in all participant-directed individual account plans.

The comment period for these proposals is now underway and will continue through September 8, 2008. The DOL intends that final regulations will be issued by the end of the year and has proposed that these requirements become effective for plan years beginning on or after January 1, 2009.

The proposed regulations are based on the premise that under the fiduciary standards of ERISA section 404(a), all fiduciaries of participant-directed individual account plans should take steps to ensure that participants and beneficiaries have sufficient information with respect to the plan generally, the investment of assets in their accounts, and designated investment alternatives, so that they can make informed investment decisions. In order to comply with the proposed regulations, fiduciaries will need to provide both plan-related and investment-related information at specified times as described below.

Presently, certain participant-directed individual account plans may elect to comply with section 404(c) of ERISA, which generally provides that a plan fiduciary will not be liable to participants and beneficiaries for any plan loss that is the direct result of the participant’s or beneficiary’s exercise of control over the investment of assets in the individual account. The regulations thereunder currently require the disclosure of certain information to participants and beneficiaries of ERISA section 404(c) plans. The proposed conforming amendments to the regulations under section 404(c) of ERISA are intended to establish uniform disclosure requirements for all plans, regardless of whether they have sought to comply with section 404(c) of ERISA. While ERISA section 404(c) plans may currently provide for disclosure similar to that required under the proposed regulations, these plans would be required to take special care to comply with the new proposed regulations or risk losing the protection afforded thereunder. (In addition, the DOL affirmed its position that the relief afforded to section 404(c) plans does not extend to a fiduciary’s duty to prudently select and monitor any designated investment manager or designated investment alternative under the plan.)

We provide the proposed disclosure requirements below, according to the time at which such information would need to be disclosed.

Initial and Annual Requirements

A plan fiduciary or its agent must provide the following information to a participant or beneficiary on or before the date an employee is eligible for participation and at least annually thereafter. This information may be provided in a summary plan description or as part of a pension benefit statement, provided that such summary plan description or pension benefit statement is distributed within the time frames required under the proposed regulation:

  • General Plan Information. An explanation of the circumstances under which participants and beneficiaries may give investment instructions, including an explanation of any specified limitations on such instructions; a description of or reference to plan provisions relating to the exercise of voting, tender and similar rights appurtenant to an investment in a designated investment alternative as well as any restrictions on such rights; an identification of any designated investment alternatives offered under the plan; and an identification of any designated investment managers.
  • Administrative Fees. An explanation of any fees and expenses for plan administrative services (e.g., legal, accounting, recordkeeping) that are not otherwise included in investment-related fees and expenses and may be charged to the plan, as well as the basis on which such charges will be allocated.
  • Individual Fees. An explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary for services provided on an individual, rather than plan, basis.

The following investment-related information (including identification, performance data, and fees and expenses) should be provided to the participant or beneficiary in a chart or similar format designed to facilitate a comparison of designated investment alternatives. The DOL provides a model format.

  • Identifying Investment-Related Information. The name of the designated investment alternative; an Internet Web site address that is sufficiently specific to lead participants and beneficiaries to supplemental information regarding the designated investment alternative, including the name of the investment’s issuer or provider, the investment’s principal strategies and attendant risks, the assets comprising the investment’s portfolio, the investment’s portfolio turnover, the investment’s performance and related fees and expenses; the type or category of the investment fund; and the type of management utilized by the investment.
  • Performance Data. For designated investment alternatives with respect to which the return is fixed, both the fixed rate of return and the term of the investment. For designated investment alternatives where the return is not fixed,
    • The average annual total return of the investment for the following periods, if available: 1- year, 5-year and 10-year, measured as of the end of the calendar year;
    • A statement that an investment’s past performance is not indicative of future performance; and
    • The name and returns of an appropriate broad-based securities market index over the 1- year, 5-year and 10-year periods to be used as benchmarks.
  • Fee and Expense Information. For designated investment alternatives with respect to which the return is fixed, the amount and a description of any shareholder-type fees that may be applicable to a purchase, transfer or withdrawal of the investment in whole or in part. For designated investment alternatives where the return is not fixed,
    • The amount and a description of each shareholder-type fee;
    • The total annual operating expenses of the investment expressed as a percentage; and
    • A statement indicating that fees and expenses are only one of several factors that should be considered when make investment decisions.
  • Additional Statements.
    • The name, address and telephone number of the fiduciary or designated agent to contact for the provision of the additional information.
    • A statement providing that more current information may be available at the listed Internet Web site addresses.

Information to Be Provided Upon a Material Change

  • Not later than 30 days after the date of adoption of any material change to any general plan information (as described above), the fiduciary would be required to provide a description of such material change to the participant or beneficiary.

Quarterly Requirements

  • At least quarterly, the fiduciary would be required to provide a statement to the participant or beneficiary detailing the dollar amounts actually charged during the preceding quarter to the participant’s or beneficiary’s account for administrative services and individual services. In each case, these statements would include a description of the services provided with respect to those amounts.

Information to Be Provided Upon Request

Upon request, the fiduciary would be required to provide to the participant or beneficiary:

  • Copies of prospectuses for the disclosure of information to investors by entities registered under either the Securities Act of 1933 or the Investment Company Act of 1940, or similar documents relating to designated investment alternatives that are provided by entities that are not registered under either of these Acts;
  • Copies of financial statements or reports, and any other similar materials relating to the plan’s designated investment alternatives, to the extent such materials are provided to the plan;
  • A statement of the value of a share or unit of each designated investment alternative as well as the date of the valuation; and
  • A list of the assets comprising the portfolio of each designated investment alternative which constitute plan assets and the value of such asset.

Information to Be Provided Subsequent to Investment

  • In addition, the fiduciary would be required to provide to each investing participant or beneficiary, subsequent to an investment in a designated investment alternative, any materials provided to the plan relating to the exercise of voting, tender and similar rights appurtenant to the investment, to the extent such rights are passed through to such participant or beneficiary under the terms of the plan.

IRS Circular 230 Disclosure: Any US tax advice herein (or in any attachments hereto) was not intended or written to be used, and can not be used, by any taxpayer to avoid US tax penalties. Any such tax advice that is used or referred to by others to promote, market or recommend any entity, plan or arrangement should be construed as written in connection with that promotion, marketing or recommendation, and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.