The first participant fee disclosures under the 404(a) (5) regulation are due by August 30. Much of the focus is on a plan’s “designated investment alternatives” (or DIAs), which excludes brokerage windows, self-directed brokerage accounts and the like (which we refer to as “brokerage accounts”). But the story doesn’t end there.
The DOL has issued Field Assistance Bulletin 2012-02 in the form of FAQs. The FAQs provide additional guidance on the required disclosures. Several questions bear on brokerage accounts and appear to create new challenges for broker-dealers.
Keep in mind that, since brokerage accounts are not DIAs, the disclosure requirements regarding performance, benchmarking, expenses, turnover ratio etc. required for DIAs, don’t apply.
So what has to be disclosed? The DOL explains that in Q&A 13. First, the DOL acknowledges that the regulation does not specify exactly what information is required. Instead, it points out that the description must provide “sufficient information” to enable participants to “understand how the [account] works (e.g., how and to whom to give investment instructions; account balance requirements, if any; restrictions or limitations on trading, if any; how the window, account, or arrangement differs from the plan’s designated investment alternatives) and whom to contact with questions.”
Comment: This is helpful, though it is isn’t clear what is needed to explain how the arrangement differs from the plan’s DIAs. Presumably, the disclosure would need to say that the fiduciaries do not select or monitor the investments in the brokerage account, that the costs may be greater than those for the DIAs and the participant is on his own for making investment decisions.
The DOL also makes it clear (in Q&A 14) that this information must be furnished – both initially and annually – to all eligible employees, not just to those who elect to use the account and not even just those with account balances.
The disclosures must include a description of “any commissions or fees (e.g., per trade fee) charged in connection with the purchase or sale of a security, including front or back end sales loads if known; but would not include any fees or expenses of the investment selected by the participant or beneficiary (e.g., Rule 12b-1 or similar fees reflected in the investment’s total annual operating expenses).” In the FAB, the DOL says that “in some circumstances the specific amount of certain fees associated with the purchase or sale of a security through a window, account, or arrangement, such as front end sales loads for open-end management investment companies registered under the Investment Company Act of 1940, may vary across investments available through the window or may not be known by the plan administrator or provider of the window, account, or arrangement in advance of the purchase or sale of the security by a participant or beneficiary.” In recognition of that, the DOL concludes that it would be sufficient to tell the participant that such fees exist and may be charged against the account and to explain how to obtain the information from the investment provider, along with an admonition to ask for the information.
Now comes the hard part. The regulation requires quarterly disclosures of individual expenses that were charged against a participant’s account, expressed in dollar amounts. For brokerage accounts, the DOL says that the plan administrator must provide a statement of the dollar amount of fees and expenses actually charged during the preceding quarter against the individual account, which must include a description of the services to which the charge relates. The description of services must clearly explain the charges (e.g., $19.99 for brokerage trades, a $25.00 minimum balance fee, a $13.00 wire transfer fee, a $44.00 front end sales load).
Comment: In our experience, there are two basic structures for brokerage accounts, one in which the recordkeeper designates a brokerage firm that participants must use and the other in which participants may select any broker-dealer.
In the first situation, it seems likely that the recordkeeper and broker-dealer will work together to establish systems to capture and disclose the initial and annual information. Without meaning to suggest that this will be easy, it appears that since the broker-dealer will have a significant number of accounts with the same recordkeeper, there will be a level of uniformity and some economies of scale that will make the disclosures less problematic.
In the second—where participants can select any broker-dealer they want – it is not clear what information must be provided to participants. However, certainly some information must be given. We are advising plan sponsors and broker-dealers in these circumstances on a case-by-case basis.
For the quarterly disclosures of dollar amounts, the reporting requirement may be less daunting than it appears because it is possible to provide the information through confirmations that are already required by the securities laws. For other types of products, however, such as annuities, CIFs, separate accounts and privately placed securities, where no similar confirmation requirement exists, brokerdealers will need to develop alternative approaches.
The additional guidance provided by the FAQs is welcome and largely helpful, but these examples related to brokerage accounts indicate some of the difficulties the financial services industry will face, difficulties that were not previously anticipated or even contemplated.