The Department of Labor (DOL) on October 14, 2010, issued long-awaited final regulations requiring broad disclosures of fees, expenses, and certain other plan and investment-related information to participants and beneficiaries under participantdirected individual account plans, such as 401(k) and 403(b) plans, that are subject to the fiduciary provisions of ERISA. The new requirements do not apply to governmental and non-electing church plans, nor to IRA-based plans such as SEPs and SIMPLE plans.
Under the regulations, the new requirements apply for plan years commencing on or after November 1, 2011 (January 1, 2012, for a calendar year plan).
Information that Must be Provided Up Front and Annually. Prior to the first day a participant or beneficiary may begin directing the investment of his or her plan account (after the new requirements apply to the plan), and at least annually thereafter, the plan administrator must furnish to the participant or beneficiary certain plan-related information, including:
- identification of the investment alternatives and any designated investment managers;
- a description of procedures for directing investments, any restrictions on changing investment elections, and voting and tender rights associated with the various investment options;
- a description of any brokerage window or similar arrangement;
- an explanation of administrative expenses, such as recordkeeping and audit expenses, that may be charged to all plan accounts and the basis upon which such charges will be allocated; and
- an explanation of fees and expenses that may be charged to individual accounts, such as fees for processing plan loans and QDROs.
The above information may be included in a summary plan description or a benefit statement. Any change to the above information generally must be communicated to participants and beneficiaries no less than 30 and no more than 90 days prior to the effective date of the change.
The plan administrator must also furnish to the participant or beneficiary certain investment- related information in a comparative format. The DOL has published a model chart for this purpose. The information must include for each identified investment alternative:
- the type or category of investment;
- performance data – (i) the average annual total return for one-, five- and 10-calendar-year periods (or the life of the alternative, if shorter); (ii) returns of an appropriate benchmark;
- the amount and description of each shareholder-type fee (e.g., commissions, sales load);
- the operating expenses, both as a percentage (expense ratio) and a dollar amount for each $1,000 invested;
- any purchase or withdrawal restrictions (e.g., round trip, equity wash);
- an internet website address providing access to specified investment information.
Special rules apply with respect to employer securities, fixed return investments and annuity options.
Information that Must be Provided Quarterly. Additionally, quarterly statements must be provided setting forth the amount of any fees and expenses actually charged to a participant’s or beneficiary’s account, describing the services for which the fees were charged and explaining, if applicable, that some administrative expenses were paid from the operating expenses of one or more investment alternatives (e.g., Rule 12b-1 fees, revenue sharing arrangements). This information may be provided as part of the quarterly benefit statement required under ERISA.
Other Materials that Must be Provided. Upon request, a participant or beneficiary must be furnished with prospectuses, financial reports, asset lists and valuation information for any investment option under the plan. In addition, a participant or beneficiary who is actually invested in a particular option must be provided with any materials received by the plan administrator regarding voting or tender rights in the option.
Protection for Good Faith Efforts at Compliance. The regulations clarify that, to the extent a plan administrator reasonably and in good faith relies on information from an investment or other service provider in making the required disclosures discussed above, the administrator will not be held liable for any resulting inaccuracy or lack of completeness.
Coordination with Other ERISA Provisions. The final regulations also contain additional provisions designed to coordinate the new requirements with existing ERISA standards. Of note:
- The information to be furnished under the new rules is subject to the same standards for delivery that apply to other ERISA-required disclosures, including provision of required plan information via the internet (or an employer’s intranet or e-mail system).
- The final regulations also include conforming changes to the regulations under Section 404(c) of ERISA, which provides fiduciaries with protection from liability for losses resulting from a participant’s investment direction if certain notice and procedural requirements are met.