On October 14, 2010, the Department of Labor (the “DOL”) issued a final rule (the “Final Rule”) on fee disclosures to participants in participant-directed individual account retirement plans, such as 401(k) plans, effective for plan years beginning on or after November 1, 2011. That means, for calendar year plans, compliance will be required on January 1, 2012. The stated purpose of the Final Rule is to provide participants with sufficient information about a plan’s investment options, including fees and expenses, in order to be able to make informed investment decisions.
The Final Rule is the last step in a three-pronged effort by the DOL to increase fee transparency in retirement plans. The first step was the expansion of Form 5500 Schedule C reporting requirements. The second step was enhancing the disclosures required to be provided to plan sponsors by service providers. The July 16, 2010 SGR Client Alert addressing the enhanced disclosure to plan sponsors can be accessed by clicking here.
As summarized below, the Final Rule requires plan administrators to provide participants in participant-directed individual account retirement plans with certain plan- and investment-related information.
The following sets forth the categories of plan-related information that must be provided to participants, and provides examples of the information to be provided under each category:
- General Plan Information- a current list of designated investment alternatives and an explanation of how to give investment instructions under the plan
- Administrative Expenses Information- expenses for general plan administrative services, such as legal, accounting, and recordkeeping expenses, as well as the basis on which such charges are allocated (e.g., pro rata or per capita)
- Individual Expenses Information- expenses that can be charged to an individual participant’s account as a result of actions taken by that person (e.g., loan expenses)
- Statements of Actual Charges or Deductions- a quarterly statement of Individual and Administrative Expenses actually charged to a participant’s individual account
General Plan, Administrative Expenses, and Individual Expenses Information must be given on or before the date participants can direct their investments, and annually thereafter.
Investment-Related Information A plan administrator must provide the following investment-related information:
- Identifying Information- the name and category of each designated investment alternative
- Performance Data-
- For investments with a fixed rate of return, the annual rate of return and term of the investment
- For investments without a fixed rate of return (such as mutual funds), the 1-, 5-, and 10-year average annual rate of return
- Benchmark Information- for investments without a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-calendar year periods
- Fee and Expense Information- any fees charged directly against a participant’s investment, any restrictions on the participant’s ability to withdraw from the investment, and for investments without a fixed rate of return, the total annual operating expenses, expressed as both a percentage and a dollar amount per $1,000 invested
- Website Address- a website where participants can obtain additional information about each designated investment alternative
- Glossary- a glossary of investment terms to assist participants
- Annuity Options- certain additional information, including goals/objectives and pricing factors
Investment-related information must be furnished on or before the date participants can direct their investments, and annually thereafter in a format that is designed to facilitate comparison of the investment options offered under the plan. The Final Rule includes a model comparative chart that will satisfy this requirement which is available here. The Final Rule can be obtained by clicking here.