Department of Labor Field Assistance Bulletin No. 2012-02R (the Revised Bulletin) includes a set of FAQs that clarify certain aspects of the Department's new participant disclosure requirements for defined contribution plans, such as 401(k) plans that permit participants to direct the investment of their accounts. The Revised Bulletin modifies and replaces guidance originally published in Field Assistance Bulletin No. 2012-02 (the Original Bulletin), which had caused concerns over how the disclosure requirements should apply to plans that offer brokerage windows and other similar investment platforms. The Revised Bulletin alleviates most of the concerns raised by the Original Bulletin.
Deadlines under the disclosure regulation (the Regulation) are fast approaching. Administrators of calendar-year plans are required to distribute the first annual disclosure notice under the rules by Aug. 30, 2012, and to distribute the first quarterly statements that comply with the Regulation by Nov. 14, 2012 (covering the period from July through September). The Department has indicated that these deadlines will not be extended.
The following is a summary of some of the more significant interpretations included in the Revised Bulletin. For additional information on the requirements of the Regulation, see our previous article.
Application to 403(b) Plans
The Regulation applies to all retirement plans that provide for participant investment direction, excluding simplified employee pension plans and simple retirement accounts. Section 403(b) plans that are subject to ERISA are covered by the Regulation (as confirmed in the Revised Bulletin) and administrators of these plans will need to ensure they understand the disclosure requirements as they apply to the plans' investment options. However, consistent with the Department's approach to Form 5500 annual reporting for 403(b) plans, the Revised Bulletin exempts 403(b) plans from the investment-related disclosure obligations of the Regulation if the plan administrator determines that it would be impracticable or impossible to obtain the necessary information concerning any investment option that is part of an annuity contract or custodial account and if the following conditions are met:
- The contract or account was issued to a current or former employee before Jan. 1, 2009;
- For periods before Jan. 1, 2009, the employer has ceased to have any obligation to make any contributions (including employee salary reduction contributions) to the contract or account and has in fact ceased making contributions;
- The individual owner of the contract or account may legally enforce all his or her rights against the insurer or custodian without any involvement by the employer; and
- The individual owner is fully vested in the contract or account.
In addition to the guidance relating to 403(b) plans, the Revised Bulletin also clarifies that the Regulation applies to a plan that allows for both participant-directed investment of employee contributions and trustee-directed investment of employer contributions. However, the investment-related disclosure obligations apply only to the designated investment alternatives into which participants may direct their investments (not the portion of the plan's assets that are actively managed by the trustee).
Definition of "Designated Investment Alternative"
The Regulation defines a "designated investment alternative" (DIA) to mean an investment option that is specifically designated by the plan, into which participants and beneficiaries can direct the investment of the assets in their individual accounts. Characterizing an investment option as a DIA gives rise to certain fiduciary obligations, including the specialized disclosure obligations imposed under the Regulation. In addition, fiduciaries have an obligation to prudently select, review and monitor the DIAs offered to participants under the plan. Finally, plan recordkeepers have a duty to provide plan fiduciaries with information concerning DIAs that is required for the participant disclosures that must be made concerning those DIAs under the Regulation.
The Revised Bulletin provides some new insight into the proper categorization of various types of investment alternatives that do not easily lend themselves to classification as a DIA or a non-DIA under the definition in the Regulation. For example, the Revised Bulletin clarifies that a participant's option under a plan to elect to have a fiduciary investment manager allocate the participant's assets among the plan's DIAs (in accordance with an investment strategy designed by the investment manager) does not in itself constitute a DIA. So, too, model portfolios that are simply suggested methods of allocating plan assets among DIAs are not themselves DIAs.
Application to Brokerage Windows and Other Similar Arrangements
The Revised Bulletin significantly revises the guidance contained in the Original Bulletin relating to brokerage windows, self-directed brokerage accounts and other similar arrangements (collectively, "brokerage windows"). The Original Bulletin had created some controversy because it indicated, among other things, that individual investments selected by participants within such a window could be deemed to be DIAs for purposes of the Regulation, thus triggering the special disclosures required under the Regulation.
In a replacement FAQ, the Revised Bulletin makes the following changes to the guidance that was in the Original Bulletin:
- The Department clarifies that there is no requirement concerning how many investment alternatives should be offered under a plan. The Original Bulletin had indicated that there was a duty to offer a "manageable number of investment alternatives." However, the Department cautions in the Revised Bulletin that fiduciaries that only offer a brokerage window, with no core group of investment alternatives to also choose from, may need to be concerned about whether they have sufficiently satisfied their ERISA fiduciary duties of prudence and loyalty. This appears to reflect a concern by the Department that a plan may offer only a brokerage window for participant investment direction with the intent to avoid complying with the Regulation.
- Fiduciaries of plans that offer brokerage windows continue to be bound by their ERISA duties of prudence and loyalty with regard to participants who invest in such arrangements. In this regard, the Department specifically highlights the obligation to evaluate and monitor the nature and quality of the brokerage services, and notes that it intends to engage in ongoing discussions with interested parties to determine how best to ensure compliance with these duties.
- The requirement in the Original Bulletin that fiduciaries monitor for significant levels of investment by participants in a particular security or other investment has been eliminated. The Revised Bulletin also eliminates a safe harbor in the Original Bulletin that would deem certain a security or investment as a DIA if a specified number or percentage of plan participants were holding that security or investment in their brokerage account as of a particular date.
Information Required to Describe a Brokerage Window
The Regulation requires that there be a "description" of any brokerage window. The Revised Bulletin provides additional guidance on the types of information that must be provided to meet this requirement. The disclosures required are threefold:
- A plan administrator must provide participants with a general description of any brokerage window. The description must provide enough detail so that the participants have sufficient information to enable them to understand how the window works. The types of information that fall under this category include how and to whom to give investment instructions; account balance requirements, if any; any restrictions or limitations on trading; and how the brokerage window differs from the plan's DIAs.
- Each participant must receive an explanation of any fees or expenses that may be charged against the participant's account on an individual basis (rather than a planwide basis) in connection with a brokerage window throughout its duration. If a plan includes a brokerage window as an option, this explanation must be provided to all participants, even those who have not selected to allocate account assets to such an arrangement.
- A participant's quarterly statement must show the dollar amount of fees and expenses relating to the brokerage window that actually were charged against their individual accounts during the preceding quarter. Each statement must include a description of the services to which the charges relate.
Comparative Format for Disclosing Investment-Related Information
The Regulation requires that the information disclosed regarding each DIA be provided in a table or other comparative format so that participants are able to effectively compare the DIAs offered under the plan. The Revised Bulletin clarifies certain aspects of this requirement. For example, rather than requiring one consolidated table or chart, the new guidance allows a plan administrator to furnish multiple comparative charts or other documents provided by the plan's various service providers or investment issuers - as long as the documents are provided simultaneously to participants in a single mailing or transmission designed to achieve the comparative effect sought under the Regulation. This may be particularly helpful for 403(b) plans, which typically offer DIAs from a number of different providers.
The Revised Bulletin also clarifies aspects of the average annual total return information that must be included in the comparison for each DIA, as well as the "since inception" category that may be included, as necessary.
Specificity of Plan-Related Information
In addition to the information required to be disclosed relating to DIAs, the Regulation requires that information regarding general administrative expenses (e.g., legal, accounting and recordkeeping expenses) that may be charged to individual participants' accounts be disclosed on or before the date on which a participant may first direct his or her investments and at least annually thereafter. The Regulation permits these fees and expenses to be expressed in terms of a monetary amount, formula, percentage of assets or a per capita charge - as long as the disclosure is written to be understood by the average plan participant. Whether the explanation is written in such a manner will depend on the level of detail provided in the disclosure.
The Revised Bulletin gives additional guidance regarding the required specificity of the disclosure in situations in which the services and/or fees are known at the time of disclosure, and in situations where they are not. For example, where the fees for a given service are known, an explanation of the service itself, the cost of the service and the method of allocating the cost among participant accounts is required. On the other hand, when services or fees, or both, are not known at the time of disclosure, the amount of information required to be disclosed will depend on the facts and circumstances and the amount of information that is known regarding the plan?s administrative needs.
In addition, the Department states in the Revised Bulletin that such information as relates to investment in a brokerage window provided under the plan must be furnished to all plan participants - even if the percentage of the plan's participants who have actually selected the window is currently small.
One particularly beneficial aspect of the guidance in the Revised Bulletin is the description of arrangements that do not necessitate disclosures under the Regulation. As to disclosures of plan-related information, the Revised Bulletin describes various situations in which the Department considers the chance of any such expenses being charged against individual accounts to be either nonexistent or so slim that these particular disclosures are not required.
For example, where the plan document expressly allows for payment of these expenses from either the plan's forfeiture account or from the general assets of the plan sponsor, such expenses do not need to be disclosed to plan participants as expenses that may be charged against their plan accounts.
The Revised Bulletin also makes clear that, even in situations in which the plan document allows for administrative expenses to be paid from individual accounts, the disclosures may not be required if the plan has historically refrained from charging individual accounts and there is no chance that individual accounts will be charged in the foreseeable future.