On October 14, 2010, the Department of Labor released final regulations detailing a plan administrator's fiduciary responsibilities regarding disclosure of plan and investment-related information, including fee and expense information, to participants and beneficiaries of participant-directed individual account plans such as 401(k) plans. Because the final regulation is promulgated under the general fiduciary provisions of section 404(a) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), it applies generally to all participant-directed plans, not just those that intend to meet the ERISA section 404(c) plan requirements. Based on the final rules, as amended, sponsors of calendar year plans must begin providing this information to participants no later than August 30, 2012.
Under the final regulations, the plan administrator of each "covered individual account plan"2 that allocates investment responsibility to participants and beneficiaries must take steps to ensure that such participants and beneficiaries are made aware, on a regular and periodic basis, of their rights and responsibilities with respect to the investment of the assets in their accounts and are provided sufficient disclosure regarding the plan and the plan's designated investment alternatives to make informed investment decisions.
Failure to comply with the final regulation's disclosure obligations would result in the plan administrator's breach of fiduciary duty under sections 404(a)(1)(A) and (B) of ERISA, and the plan administrator could be personally liable for participants' losses resulting from the breach.3 The plan administrator would not, however, be liable for the completeness and accuracy of any information used to satisfy the administrator's disclosure obligations if the administrator reasonably and in good faith relied on information provided by a plan service provider or the issuer of a designated investment alternative.
Even though plans that voluntarily comply with ERISA's 404(c) safe harbor for participant-directed plans currently disclose similar investment information, the final regulations also amend the section 404(c) regulations to conform to the final regulations.
Specific Disclosure Requirements
The plan administrator must provide each participant and beneficiary of a covered individual account plan with certain plan-related and investment-related information, as described below.
Disclosure of Plan-Related Information
The following subcategories of plan-related information must be disclosed to participants and beneficiaries under the final regulations:
General Plan Information. The plan administrator must disclose the following general plan information regarding the structure and mechanics of the plan and its designated investment options:
- Explanations of the circumstances under which investment instructions may be given and any plan-based limitations on investment instructions, such as transfer restrictions;
- A description of or reference to plan provisions relating to the exercise of voting, tender or similar rights with respect to plan investments;
- Identification of the designated investment alternatives offered under the plan and any designated investment managers;
- A description of any brokerage windows, self-directed brokerage accounts or similar arrangements that enable participants to select investments outside those designated under the plan.
- Administrative Expense Information. The plan administrator must provide an explanation of any fees and expenses for general plan administrative services (such as legal, accounting and recordkeeping services) that may be charged against individual accounts and are not reflected in the total annual operating expenses of any designated investment alternative. The administrator must also disclose the basis on which such charges will be allocated (e.g., pro rata vs. per capita).
- Individual Expense Information. The plan administrator must also provide each participant and beneficiary with an explanation of any fees and expenses that may be charged to individual accounts on an individual, rather than plan-wide, basis (such as fees for processing plan loans or QDROs, commissions, sales charges, brokerage window fees, redemption or transfer fees, etc.) and are not reflected in the total annual operating expenses of any designated investment alternative.
When Must the Plan-Related Information be Disclosed. Disclosure of the plan-related information described above must be made on or before the date that a participant or beneficiary can first direct his or her investments under the plan, and at least annually thereafter. If there is a change to any plan information that was previously disclosed, the plan administrator must provide each participant and beneficiary a description of the change at least 30 days, but not more than 90 days, before the effective date of the change, except in the case of unforeseeable circumstances or circumstances beyond the control of the plan (in which case notice of the change must be made as soon as reasonably practicable).
- Note: Previously under the section 404(c) regulations, prospectuses and other fund information were required to be given only after a participant made his or her initial investment in the fund.
Quarterly Fee Statements. In addition to the required annual disclosures, at least quarterly the plan administrator must provide a statement that includes the dollar amount of the administrative and individual fees and expenses actually charged to the participant's or beneficiary's account for such services during the preceding quarter and a description of the services to which the charges relate. If any of the administrative expenses for the preceding quarter were paid out of the total operating expenses of any of the plan's designated investment options (e.g., through revenue sharing arrangements, 12b-1 fees, sub-transfer agent fees, etc.), an explanation to such effect must also be provided with the quarterly fee disclosure statement. The quarterly fee disclosure may be included as part of the quarterly benefit statement required under section 105 of ERISA.
- Note: This will require the benefit statements to be redesigned to provide the required information.
Disclosure of Investment-Related Information
The following subcategories of investment-related information must be disclosed to participants and beneficiaries on or before the date that a participant or beneficiary can first direct his or her investments under the plan, and at least annually thereafter:
- Identifying Information Regarding Investment Alternatives. For each designated investment alternative offered under the plan, the plan administrator must disclose the name of the investment alternative and the type or category of the investment (e.g., money market fund, balances fund, large-cap stock fund, employer stock fund, etc.).
Performance Data. The performance data that must be disclosed under the final regulations varies depending on whether or not the investment has a fixed rate of return.
Return not Fixed. For investment alternatives that do not have a fixed rate of return, the average annual total return for 1-, 5- and 10-calendar year periods (or the life of the alternative, if shorter) must be disclosed. The disclosure must also include a statement that the investment's past performance is not necessarily an indication of how the investment will perform in the future.
- Note: Plans that are registered with the Securities and Exchange Commission (SEC) on Form S-8 are required to include in the Section 10(a) prospectus performance data for each of the last three fiscal years. Thus, to satisfy both the SEC and ERISA requirements, registered plans will need to disclose performance data for 1-, 2-, 3-, 5- and 10-calendar year periods.
- Fixed Return. For investment alternatives that have a fixed return for the terms of the investment, both the fixed rate of return and the terms of the investment must be disclosed. If the issuer reserves the right to prospectively adjust the rate of return, additional disclosure is required regarding such right.
- Return not Fixed. For investment alternatives that do not have a fixed rate of return, the average annual total return for 1-, 5- and 10-calendar year periods (or the life of the alternative, if shorter) must be disclosed. The disclosure must also include a statement that the investment's past performance is not necessarily an indication of how the investment will perform in the future.
Benchmarks. For designated investment alternatives for which the return is not fixed, the disclosure must also include the name and returns of an appropriate broad-based securities market index over the same 1-, 5- and 10-calendar years period for which the performance data is provided. Benchmark information is not required for fixed rate investments.
- Note: Prior to these final regulations, there was no requirement to disclose benchmark information, even for SEC-registered plans or plans intended to qualify for ERISA section 404(c) protection.
Fee and Expense Information. For each designated investment alternative, the amount and description of each shareholder-type fee (such as commissions, sales charges, redemption fees, exchange fees, etc.) that is not included in the total annual operating expenses of any designated investment alternative, and a description of any restriction or limitation relating to the purchase, transfer or withdrawal of the investment in whole or in part, must be disclosed. Also, for each investment alternative that does not have a fixed rate of return, the following additional fee and expense information must be disclosed:
- The total annual operating expenses for the investment alternative expressed both as percentage (i.e., expense ratio) and as a dollar amount per each $1000 invested.
- Statements indicating that (i) fees and expenses are only one of several factors to consider when making investment decisions, (ii) the cumulative effect of fees and expenses can substantially reduce the growth of the participant's or beneficiary's retirement account and (iii) participants and beneficiaries can visit the Employee Benefits Security Administration's website for an example demonstrating the longterm effect of fees and expenses.
Internet Website Address. For each designated investment alternative, the final regulations require disclosure of an Internet website address that participants and beneficiaries can access to obtain more current and specific additional information regarding the investment alternative.
- Note: Many plan sponsors already provide this information on their own or their recordkeeper's or other service provider's Internet platforms. Other plan sponsors may need to develop a new website to provide this information.
- Glossary. Participants and beneficiaries must be provided with either a glossary of terms to assist them in understanding the plan's investment alternatives or an Internet website address that provides access to such a glossary.
- Comparative Chart. The investment-related information described above must be provided to participants and beneficiaries in a chart or similar format that prominently displays the date and is designed to facilitate a comparison of each investment alternative available under the plan. The chart must include the name, address and telephone number of the plan administrator or other person to contact for additional information, a statement that additional information regarding each investment alternative is available on the websites provided, and a statement explaining how to obtain, free of charge, paper copies of the information available on the websites. An appendix to the final regulations includes a model comparative chart that plan administrators can use to satisfy the requirement that investment-related information be provided in a comparative format. The model comparative chart is available at www.pillsburylaw.com/modelchart.pdf.
- Additional Disclosure Requirements. In additional to the annual disclosures described above, the final regulations require the plan administrator to furnish each participant or beneficiary who is invested in a designated investment alternative with any materials provided to the plan relating to the exercise, voting, tender and similar rights with respect to the investment alternative to the extent that the plan provides that such rights are passed through to the investing participants and beneficiaries. Also, upon request, each participant and beneficiary must be provided with prospectuses, financial statements, valuations and an assets list (to the extent that investments in a portfolio constitute plan assets under ERISA's plan asset regulations).
The regulations require that the initial fee disclosures for existing participants or new participants of calendar year plans be provided not later than August 30, 2012. The initial quarterly disclosures must be provided not later than 45 days of the end of the quarter which includes August 30, 2012. Thus for plans operating on a calendar year, the initial quarterly disclosure must be provided for the quarter ending September 30, 2012, and that quarterly disclosure must be provided to participants not later than November 14, 2012.
Plan sponsors of covered participant-directed individual account plans should review their summary plan descriptions, plan prospectuses, benefit statements, plan websites and other plan communications to determine what additional information must be provided under the final regulations and how they will comply with the information and disclosure requirement. Plan administrators will also need to coordinate with the various investment managers and other plan service providers to assure that the required information within their possession will be made available to the plan administrator for disclosure. Much of this information is required to be provided to the plan fiduciary under the Department of Labor's final regulations under ERISA section 408(b)(2). For more information, see our Advisory on the final regulations on service provider fee disclosure obligations at www.pillsburylaw.com/Final-Retirement-Disclosure-Rules-Compliance-Required-July-1.