On November 30, 2010, the Department of Labor (“DOL”) issued proposed regulations that will require plan fiduciaries to make additional disclosures to participants and beneficiaries with respect to qualified default investment alternatives (“Default Investments”) generally and target date funds (“TDFs”) specifically even where the TDFs are not one of a plan’s Default Investments. To view these proposed regulations, click here.
The Pension Protection Act of 2006 added a new Section 404(c)(5) to ERISA. This new section provided fiduciary relief for a plan fiduciary who takes action to invest a participant’s self-directed individual account in specified Default Investments because the participant failed to make an investment election for his or her selfdirected individual account. The DOL published final regulations implementing the provisions of Section 404(c)(5) of ERISA with respect to Default Investments on October 24, 2007 (“2007 Regulations”). A plan fiduciary who complies with the final regulations is not liable for any loss, or by reason of any breach, that occurs as the result taking action to make a Default Investment on behalf of participants who do not make an investment election.
One of the permissible Default Investments under the 2007 Regulations was an investment fund or model portfolio that changed its asset allocations and associated risk levels over time based on a participant’s age, target retirement date, or life expectancy, now commonly referred to as a TDF.
In order for a fiduciary to take advantage of the relief provided under Section 404(c)(5), participants and beneficiaries must be provided an initial notice and an annual notice containing information about the plan’s Default Investments. In addition to the notice requirement, fiduciaries must also provide certain investmentrelated information pursuant to Section 404(c) of the regulations.
Since the issuance of the 2007 Regulations, the DOL has continued to receive questions regarding the notice. The DOL issued a Field Assistance Bulletin in April 2008 that addressed these questions and indicated at that time, it was developing a regulation to establish disclosure requirements for all participant-directed individual account plans which would address how to satisfy the investment fee and expense disclosures.
On October 20, 2010, the DOL issued these final participant disclosure regulations which provide that the ERISA Section 404(a) fiduciary rules are satisfied only if certain plan and investment-related disclosures are made to participants in a participant-directed individual account plan (“2010 Regulations”). The 2010 regulations apply to all participant directed individual account plans even if such plans are not attempting to get ERISA Section 404(c) relief.
In addition, recent attention has been given to the increased use of TDFs. After public hearings and an extensive review of materials relating to TDFs, the DOL and the SEC published a joint Investor Bulletin to help educate investors and plan participants who intend to invest in TDFs, and the SEC issued proposed rules to address concerns regarding the potential for investor misunderstandings about TDFs. [See K&S Compensation & Benefits Insights, August, 2010]
The DOL has now issued proposed amendments to both the 2007 Regulations and the 2010 Regulations.
The proposed amendments amend the 2007 Regulations to more specifically describe certain investment-related information that must be included in the Default Investment notice to participants and beneficiaries, which is intended to complement the new investment-related disclosure requirements in the 2010 Regulations. For example, the proposed amendments require that the plan fiduciary provide to a participant or beneficiary comparable materials with respect to a participant’s or beneficiary’s investment in a Default Investment to the materials described in section 2550.404a-5(d)(3) and (4) of the 2010 Regulations. Further, the initial and annual Default Investment notices under the 2007 Regulations only require that the notice include “a description of the qualified default investment alternative, including a description of the investment objectives, risk and a return characteristics (if applicable), and fees and expenses attendant to the investment alternative”. To better conform these requirements to those of all participant-directed individual account plans under the 2010 Regulations, the proposed regulations would clarify that investment-related information for any Default Investment must include all of the following elements:
- the name of the investment’s issuer;
- the investment’s objectives or goals;
- the investment’s principal strategies (including a general description of the types of assets held by the investment), and the principal risks (as required by the applicable SEC form);
- the investment’s historical performance data (e.g., 1, 5 and 10 year returns) and, if applicable, any fixed return, annuity, guarantee, death benefit, or other ancillary features; as well as a statement indicating that an investment’s past performance is not necessarily an indication of how the investment will perform in the future;
- the investment’s attendant fees and expenses, including: any fees charged directly against the amount invested in connection with an acquisition, sale, transfer of, or withdrawal (e.g., sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, and purchase fees); any annual operating expenses (e.g., expense ratio); and any ongoing expenses in addition to annual operating expenses (e.g., mortality and expense fees); and
- with respect to a TDF,
- an explanation of the asset allocation, how the asset allocation will change over time, and the point in time when the investment will reach its most conservative asset allocation, including a chart, table, or other graphical representation that illustrates such change in asset allocation over time and that does not obscure or impede a participant’s or beneficiary understanding of the information explained;
- if the TDF name includes a particular date (like a TDF for 2030), an explanation of the age group for whom the investment is designed, the relevance of the date, and any assumptions about a participant’s or beneficiary’s contribution and withdrawal intentions on or after such date; and
- if applicable, a statement that the participant or beneficiary may lose money invested in the TDF, including losses near and following retirement, and that there is no guarantee that the investment will provide adequate retirement income.
The proposed regulations will also amend the 2010 Regulations to include in the participant or beneficiary disclosure (in an appendix) the above three elements with respect to TDFs.
The 2007 Regulations already require that “an explanation of where the participants and beneficiaries can obtain investment information concerning the other investment alternatives available under the plan.” Under the proposed rules, this requirement is expanded to allow the participants and beneficiaries to also obtain additional investment information concerning the Default Investment and the other investment alternatives. In addition, the Default Investment disclosure must include a description of the right of a participant invested in a Default Investment to redirect those investments, including a description of fees and limitations that may apply if the participant wants to redirect the investment and an explanation of where additional information may be obtained.
The DOL proposes that the amendments contemplated in the proposed regulations will be effective 90 days after publication of the final rule in the Federal Register.
What’s to come
The DOL has stated it intends to publish a series of tips intended to assist plan fiduciaries in obtaining and evaluating relevant information when selecting and monitoring TDFs as investment options for participantdirected retirement plans. Further, the DOL is reexamining the electronic disclosure standards that govern the furnishing of notices under the 2007 and 2010 Regulations and will be issuing proposed regulations on electronic distribution in the near future.