On July 23, 2008, the Department of Labor (“DOL”) issued proposed regulations that would require fiduciaries of individual account plans to provide specific disclosures concerning plan investment options, including fees, to participants. 73 Fed. Reg. 43014.1 The DOL has also proposed amendments to 29 C.F.R. § 2550.404c-1(b), (c) and (f) to integrate the new disclosure requirements of proposed section 2550.404a-5 into the 404(c) regulations. These proposed regulations are discussed below, followed by a discussion of their potential impact on the pending fee litigation.
This is the third and final set of regulations proposed by the DOL to address fees paid through defined contribution plans. On November 16, 2007, the DOL issued the first group of regulations, augmenting the annual reporting and disclosure requirements for employee benefit plans on Form 5500. 72 Fed. Reg. 64710; 72 Fed. Reg. 64731. On December 13, 2007, the DOL issued proposed regulations that would require fiduciaries of employee benefit plans to obtain from certain service providers specific information on fees, compensation and conflicts of interest, and would also provide a new prohibited transaction class exemption. 72 Fed. Reg. 70988.
I. The Proposed Participant Disclosure Regulations
The new disclosures fall into two categories: (1) plan-related information; and (2) investmentrelated information. Plan-related information is broken down into three sub-categories: (1) general; (2) administrative expenses; and (3) individual expenses. The disclosures must be made by “[a] fiduciary (or a person or persons designated by the fiduciary to act on its behalf)” but the regulations do not specify whether the disclosure obligation applies only to fiduciaries with discretionary responsibility for participant communications, or applies to all fiduciaries — irrespective of the scope of their fiduciary discretion.
A. Plan-Related Disclosures
1. General Disclosures
The general plan-related disclosures must be made on or before the date of plan eligibility and at least annually thereafter, and include:
- an explanation of the circumstances under which participants may give investment instructions;
- an explanation of any limitations on such instructions, including any restrictions on transfer to or from a designated investment alternative;
- a description of or reference to plan provisions relating to the exercise of voting, tender and similar rights arising from plan investments;
- an identification of the plan’s designated investment alternatives; and
- an identification of any designated investment managers.
§ 2550.404a-5(c)(1).2 Not later than 30 days after a material change in this information, a description of such change must be provided. Id.
2. Administrative Expenses
On or before the date of plan eligibility, and at least annually thereafter, fiduciaries must provide participants with an explanation of any fees and expenses incurred for plan administrative services (e.g., legal, accounting, recordkeeping), which are not otherwise included in investment-related fees and expenses. Fiduciaries must also disclose the basis on which such charges will be allocated to, or affect the balance of, each individual account (e.g., pro rata, per capita).
On a quarterly basis, fiduciaries must provide a statement that includes:
- the dollar amount actually charged during the preceding quarter to the participant’s account for administrative services; and
- a description of the services provided for such amount.
3. Individual Expenses
On or before the date of plan eligibility, and at least annually thereafter, fiduciaries must provide individual participants with an explanation of any fees and expenses that may be charged against that participant’s individual account for services provided on an individual, rather than plan-wide, basis (e.g., fees attendant to processing plan loans or qualified domestic relations orders, fees for investment advice, etc.). § 2550.404a-5(c)(3).
On a quarterly basis, fiduciaries must provide to individual participants:
- the dollar amount actually charged during the quarter for individual services; and
- a description of the services provided.
B. Investment-Related Disclosures
Fiduciaries must automatically provide to participants: (1) information identifying investment options; (2) performance data; (3) benchmarks; and (4) fees and expenses. Additional information, discussed below, must also be provided upon request.
1. Identifying, Performance and Benchmark Disclosures
The identifying information must include:
- the name of the designated investment alternative;
- a Web site address that is sufficiently specific to lead participants to supplemental information regarding the investment alternative’s issuer or provider, the principle investment strategies and risks, the portfolio’s assets, turnover, investment performance and fees and expenses;
- the type or category of the investment (e.g., money market, balanced, large cap, etc.); and
- the type of management utilized (e.g., actively managed, passively managed).
Performance data must be provided for designated investment alternatives with respect to which the return is not fixed. The disclosure must provide (as a percentage) the average annual total return of the investment for 1-year, 5-year, and 10-year periods, measured as of the end of the applicable calendar year. The disclosure must also include a statement indicating that an investment’s past performance is not necessarily an indication of how the investment will perform in the future. Further, the name and returns of an appropriate (unaffiliated) broad-based securities market index over these periods must be provided. § 2550.404a-5(d)(1).
2. Investment-Related Fee and Expense Disclosures
For investment alternatives without a fixed return, fiduciaries must disclose:
- the amount and a description of each “shareholder-type fee” (i.e., fees charged directly against a participant’s investment), such as sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, purchase fees, and mortality and expense fees;
- the total annual operating expenses of the investment expressed as a percentage (e.g., expense ratio); and
- a statement indicating that fees and expenses are only one of several factors that participants should consider.
§ 2550.404a-5(d)(1). In the case of designated alternatives with a fixed return, fiduciaries must disclose the amount and a description of any shareholder-type fees that may be applicable to a purchase, transfer or withdrawal of the investment. Id. Except where dollar amounts are expressly required, the fee and expense information by the proposed regulation “may be expressed in terms of a monetary amount, formula, percentage of assets, or per capita charge.” § 2550.404a-5(e)(4).
In the overview section, the DOL discusses the possibility of providing more detailed fee information, but concluded that: “Information that is too detailed may overwhelm participants.” 73 Fed. Reg. 43016. Accordingly, as discussed below, the proposed regulations do not require the highly detailed breakdown of the components of various fees that plaintiffs in the fee litigation have advocated.
3. Disclosures Upon Request
Fiduciaries must provide to participants upon request the following documents:
- copies of prospectuses or similar documents relating to designated investment alternatives;
- any financial statements or reports, such as statements of additional information and shareholder reports, to the extent such materials are provided to the plan;
- a statement of the value of a share or unit of each investment alternative and the valuation date; and
- a list of assets comprising the portfolio of each designated investment alternative and the value of each such asset (or the proportion of the investment which it comprises).
4. Disclosure Format
The fee information discussed above must be disclosed in a chart (or similar format) that is designed to facilitate a comparison of such information for each designated investment alternative. § 2550.404a- 5(d)(2). Also required is a statement that more current investment-related information may be found at a Web site of the type described in § 2550.404a-5(d)(1)(i)(B). All of the disclosures must be “written in a manner calculated to be understood by the average plan participant.” § 2550.404a-5(e)(4).
The regulations specifically provide that these requirements shall not “preclude a fiduciary from including additional information that the fiduciary determines appropriate for such comparisons, provided such information is accurate and not misleading.” § 2550.404a-5(d)(2)(ii). The regulations attach a model format, and provide that: “A fiduciary that uses and accurately completes the model format set forth in the Appendix will be deemed to have satisfied the requirements of paragraph (d)(2) of this section.” § 2550.404a-5(e)(3).
II. Impact on Current Litigation
It is unclear what impact the proposed regulations will have on the pending fiduciary litigation challenging the fees received by or paid to providers of services to defined contribution plans. As proposed regulations, they are not binding. Further, proposed regulations do not provide any guidelines for determining whether the amounts of fees or compensation are, in and of themselves, reasonable.
Nevertheless, the previously proposed fee regulations have had an impact on the disclosure allegations in some of the fee cases. For example, in Hecker v. Deere Corp. (a 401(k) fee action in the Western District of Wisconsin, dismissed for failure to state a claim in the complaint) the court found that the previously proposed fee regulations indicated that additional fee disclosures are not required by existing law. Hecker v. Deere Corp., 496 F. Supp. 2d 967, 974 (W.D. Wis. 2007). The District of Connecticut in Taylor v. United Technologies also adopted this reasoning. Taylor v. United Techs. Corp., No. 3:06- CV-1494, 2007 WL 2302284, at *5 (D. Conn. Aug. 9, 2007).
However, the new proposed regulations contain the following language, which specifically addresses fiduciary disclosure duties:
… plan fiduciaries must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses, and designated investment alternatives, including fees and expenses attendant thereto, to make informed decisions about the management of their individual accounts.
The Department believes, as an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose on fiduciaries of all participant-directed individual account plans a duty to furnish participants and beneficiaries information necessary to carry out their account management and investment responsibilities in an informed manner.
73 Fed.Reg. 43014. Plaintiffs will likely argue that this language supports their position that ERISA’s general fiduciary requirements include an affirmative obligation to disclose information about fees. But more importantly, the DOL has considered the level of detail about fees that should be disclosed, and opted to require only the aggregate amount of fees, not the component (and sub-component) aspects of these fees (e.g., the amount of the total fee used to satisfy recordkeeping fees, trustee fees, management fees, transfer and sub-transfer agent fees, etc.). That decision should preclude plaintiffs from arguing that greater detail must be disclosed under existing law.
However, the proposed regulations may not affect the allegations that fiduciaries breached their duties by selecting service providers who charged excessive fees. In fact, the proposed regulations explicitly state that: “Nothing herein is intended to relieve a fiduciary from its duty to prudently select and monitor providers of services to the plan or designated investment alternatives offered under the plan.” § 2550.404a-5(f). Further, in the context of the proposed amendments to § 2550.404c-1, the DOL reiterated its “long held position” that “the relief afforded by section 404(c) and the regulation thereunder does not extend to a fiduciary’s duty to prudently select and monitor designated investment managers and designated investment alternatives …” 73 Fed.Reg. 43018.
As a result, the proposed participant disclosure regulations likely eviscerate plaintiffs’ argument that more detail about the structure of fees should have been disclosed. However, the proposed regulations may not have a material impact on the allegations that fees were excessive or service providers imprudently selected or monitored.