The Employee Retirement Income Security Act of 1974 (“ERISA”) requires participant-directed retirement plans to provide participants with in-depth disclosures of the plan’s fees, expenses, and investment performance on an annual basis. The deadline for distributing this year’s annual fee disclosures is fast approaching. Many plans have a bundled service arrangement with a single benefit provider, such as a mutual fund provider or insurance company, that has access to all of the necessary information and is responsible for producing and distributing the annual disclosures to plan participants. However, for those plan administrators who have to produce the required participant disclosure document themselves, now is the time to organize the disclosure production process and prompt service providers for any missing disclosure updates.

Annual Plan Participant Disclosures Under ERISA

Plan administrators of “covered participant-directed plans” have a fiduciary duty pursuant to Department of Labor Regulation § 2550.404a-5 (the “404a-5 Regulation”) to distribute information on the administrative fees and expenses actually charged during the most recent quarter and more comprehensive disclosures on plan investments, including performance and fee data for each alternative, on an annual basis. A plan’s 2013 annual disclosure must be distributed no later than twelve months after the 2012 annual disclosure was distributed. For most plans, a summer 2013 deadline applies.1 “Covered participant-directed plans” subject to the 404a-5 Regulation’s disclosure obligation include not only 401(k) plans, but also many 403(b) plans and profit sharing plans that permit participants to control their account investments. The participant disclosures must be provided to active participants, eligible employees not yet participating in the plan and any beneficiaries and alternate payees that can direct account investments.

The annual participant disclosures provide participants and beneficiaries with plan-related and investment-related information intended to enhance their knowledge of the plan and ability to make informed decisions with respect to management of their accounts. A comprehensive summary of the disclosure requirements is included in last spring’s Pillsbury Perspectives.2 Among other items, the annual participant disclosure must describe:

  • any plan administrative expenses that may be borne by participants;
  • any designated investment manager, brokerage window or self-directed account options offered under the plan;
  • all investment alternatives offered under the plan;
  • the actual and relative performance of the plan’s investment alternatives (including funds that are no longer open to new investments); and
  • any fees or expenses corresponding to the plan’s investment alternatives.

Complying with the participant disclosure requirements is relatively easy for those plans that have a bundled arrangement with a single benefit provider that is responsible for producing the participant disclosure. The plan administrator need only review the disclosure prepared by the benefit provider. For plan administrators that have retained the duty to prepare the participant disclosure, collecting and organizing the information needed for the participant disclosures may require a fair amount of effort. This is because many of the plans which have retained the obligation to prepare the participant disclosures have multiple service providers or make available to participants private investment fund options that are not otherwise required to report fees and investment performance similar to that required for a mutual fund. In these situations, the plan administrator must obtain information from all of the various direct and indirect service providers to the plan to prepare the participant disclosure.

ERISA 408(b)(2) Service Provider Disclosures of Investment and Fee Information

To collect the information needed to prepare the annual participant disclosure, plan administrators should confirm that each of their plan’s service providers are fulfilling their obligations under the service provider disclosure regulations under ERISA section 408(b)(2) (the “408(b)(2) Disclosure”). As explained in a prior client alert,3 covered retirement plan service providers must provide 408(b)(2) Disclosure to exempt their contracts for providing services to the plan from ERISA’s prohibited transaction rules. Among the covered service providers are investment advisors, recordkeepers and investment brokers contracting with participant-directed plans.

A covered service provider must alert the responsible plan fiduciary of any changes to its service or compensation schedule on an ongoing basis. Updates to any investment-related services or fees are due annually. Additionally, service providers must supply any information that the plan administrator needs to comply with the participant disclosures. Thus, if each of the plan’s service providers is complying with its 408(b)(2) Disclosure obligations, the plan administrator will have access to the information needed to prepare the participant disclosure.

The responsibility for ensuring that a service provider complies with these 408(b)(2) Disclosure rules lies with the plan fiduciary having authority for contracting with and monitoring the service provider. Should a plan administrator determine that materials needed for the participant disclosures have not been provided by a service provider, the first step is to identify the responsible plan fiduciary who oversees that service provider. If the plan administrator is not the responsible plan fiduciary (e.g., a separate investment committee or ERISA § 3(38) investment manager is the responsible fiduciary), then it is critical for the plan administrator to act promptly to alert the responsible party and set deadlines for receiving the needed disclosures.

Due to the threat of a prohibited transaction, service providers are motivated to close any disclosure gaps identified by the plan. Still, potential headaches exist. Unlike the sample chart provided in the 404a-5 Regulations, the Department of Labor failed to create a standard disclosure format for the 408(b)(2) Disclosure information. Furthermore, recordkeepers are not required to synthesize information provided by unaffiliated investment issuers. Accordingly, the administrator of a participant-directed plan with a large investment menu may need to assimilate a slew of different disclosure formats. Building a comfortable lead time into the participant disclosure production timeline may be the only way to mitigate this concern.