The Department of Labor ("DOL") recently released final regulations under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (published in the Federal Register on October 20, 2010) that impose new disclosure requirements on plan administrators of defined contribution retirement plans that permit participant-directed investments, including 401(k) and 403(b) plans.
To support the DOL's continued efforts to increase fee transparency, the final regulations require additional disclosures of plan fees and expenses related to general plan administration, along with new investment-related disclosures, such as performance data, investment returns and benchmarks, in a comparative format so that participants may more easily understand and compare a plan's investment options.
The final rules are generally effective December 20, 2010, but apply only for plan years beginning on or after November 20, 2011 (January 1, 2012 for calendar year plans).
INITIAL AND ANNUAL DISCLOSURES
Plan administrators must disclose the following plan-related and investment-related information to each participant or beneficiary on or before the date on which the participant or beneficiary can first direct his or her investments and at least annually thereafter:
- An identification of investment alternatives offered under the plan and any designated investment managers;
- An explanation of the rules and procedures governing the giving of investment instructions, including any limitations on such instructions (e.g., restrictions on transfers to or from an investment option);
- A description of plan provisions governing the exercise of voting, tender and similar rights;
- A description of any "brokerage window" or similar arrangement;
- An explanation of administrative expenses, including any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping) which may be charged against participant accounts and are not otherwise reflected in the annual operating expenses of any designated investment alternative, and a description of how these fees and expenses are allocated to participant accounts (pro rata, per capita, etc.);
- An explanation of individual fees and expenses that may be charged against a participant's account on an individual rather than plan-wide basis and that are not otherwise reflected in the total annual operating expenses of any designated investment alternative (e.g., plan loan or QDRO processing fees, brokerage window fees, commissions, redemption fees, etc.).
- Identifying information, including the name and type or category of each investment alternative (e.g., large cap stock fund or balanced fund);
- Performance data, including: (i) the average annual total return for 1-, 5-, and 10-calendar year periods (or the life of the fund, if shorter) if the return is not fixed, or (ii) the fixed or stated annual rate of return and the term if the return is fixed or stated for the term of the investment (including, if the issuer may adjust the rate of return during the term, the current rate, the minimum rate guaranteed, if any, and a statement advising that the rate may be adjusted prospectively);
- Benchmarks, including the name and return of an independent, broad-based securities market benchmark index for each option without a fixed return, over the 1-, 5-, and 10-calendar year periods (or life, if shorter) comparable to the performance data (disclosed above); Fee and expense information, including: (i) the total annual operating expenses expressed as a percentage (e.g., expense ratio) and the total dollar amount per $1,000 invested, and (ii) the amount and description of each shareholder type fee and a description of any restrictions or limitations on purchase, transfer or withdrawal;
- A website address providing access to specific investment information, including the investment's issuer, the objectives of the investment, the principal strategies (i.e., types of assets held) and risks, portfolio turnover rate, performance data (updated at least quarterly) and fee and expense information;
- A glossary of investment terms (which may be provided by web address).
The final regulations also include special rules addressing disclosure requirements with respect to employer securities, fixed-income investments and annuity options. In addition, the DOL states that rules relating to target date funds will be published at a later date.
The amount of plan-related fees and expenses actually deducted from participant and beneficiary accounts must be disclosed on a quarterly basis. Quarterly disclosures must also describe the services to which the charges relate (e.g., recordkeeping, accounting) and, if applicable, provide an explanation that some of the administrative expenses were paid from operating expenses of one or more investment alternatives (e.g., through revenue sharing). The required quarterly disclosures may be included as part of the quarterly benefit statement required under ERISA.
OTHER INFORMATION TO BE PROVIDED AFTER INVESTMENT OR UPON REQUEST
A participant or beneficiary who is actually invested in a particular option must be provided with plan materials relating to the exercise of voting, tender or similar rights to the extent these rights are passed through to participants and beneficiaries. In addition, upon request, a participant or beneficiary must be provided with prospectuses, financial statements and reports, a statement showing the value of a share or unit and an asset list comprising the portfolio to the extent such underlying assets are treated as "plan assets" under ERISA rules.
FORMAT FOR DISCLOSURE
General plan-related information must be based on the latest information available to the plan and may be included as part of the summary plan description or annual benefit statement required under ERISA.
Investment related information must be provided in a chart or similar format that is designed to facilitate a comparison of each investment alternative. The chart must include the name, address and phone number of a person to contact for the information that must be provided upon request and must contain information on how to obtain paper copies of information available on the required website. Additional information may be included in the chart as long as it is not misleading or inaccurate.
The DOL has published a model chart showing the required comparative format. If the model chart is used, the plan administrator will be deemed to be in compliance with the comparative format requirement.
CHANGES IN INFORMATION
If there is a change in any of the information required to be disclosed, each participant or beneficiary must be provided a description of such change at least 30 days, but not more than 90 days, in advance of the effective date of the change, unless the reason for the failure is unforeseeable and not within the plan administrator's control. In that case, such information must be furnished as soon as reasonably practicable.
FIDUCIARY LIABILITY PROTECTION FOR PLAN ADMINISTRATORS
As fiduciaries, plan administrators are responsible for providing the required disclosures. However, the DOL regulations provide protection to plan administrators with respect to the completeness and accuracy of information to participants if the administrator "reasonably and in good faith" relies on information provided by an investment or other service provider.