Final Department of Labor regulations impose new disclosure requirements on participant-directed individual account plans, such as profit sharing, 403(b) and 401(k) plans. These new rules apply to all plans that allow participants to direct the investment of their accounts, not just plans that are designed to comply with Section 404(c) of ERISA.
The regulations are based on the assumption that participants need certain types of information to make well-informed investment and retirement decisions. Accordingly, they require administrators to provide quarterly and annual disclosure of specific investment-related information, administrative expenses and individual fees.
Each eligible employee, participant or beneficiary who has the right to direct the investment of assets in his plan account must receive this information.
These new rules apply to plan years beginning on or after November 1, 2011. This means that plans with calendar plan years will be subject to the new rules in 2012, although there is a short transition period.
Because these rules will go into effect soon, plan administrators should work closely with their service providers to determine how they need to change their current practices in order to comply with the new rules.
For many plans, the required information will come from their service providers and the investment fund issuers. Although the administrator is responsible for providing “complete and accurate” information, it may generally rely on the data provided by service providers and fund issuers.
The required disclosure includes the following information:
Investment Decision Making
Provide an explanation of the circumstances under which participants may, and may not, give investment instructions. In particular, the notice must describe how investment rights may be exercised and any other arrangements, such as brokerage accounts, that enable participants to select investments beyond those designated by the plan.
Provide the name of each “designated investment alternative” (essentially, each investment fund offered under a plan) and the type of investment it is (e.g., money-market fund, large-cap stock fund, employer securities).
Provide required performance data, which (as described below) varies based on whether or not the investment fund has a fixed or stated return.
If the investment fund does not have a fixed or stated return, the notice must list its annual returns for the previous year, the previous five years and the previous 10 years. Furthermore, the notice must list appropriate benchmarks by name and their returns for the same three time periods.
However, if the investment fund has a fixed or stated rate of return, the notice must indicate that rate as well as the term of such investment. If the issuer reserves the right to adjust the rate of return prospectively, this fact must be disclosed along with the minimum rate of return guaranteed under the contract and instructions on how participants may obtain information as to such minimum rate.
Special Disclosure Rules
Special disclosure rules apply to investment options that permit investment in an annuity, a vehicle with a fixed return or certain employer securities.
Administrative and Individual Expenses
Participants must also receive detailed information about plan-level and individual expenses.
Participants must be provided with an explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping), which may be separately charged to a plan and are not reflected in the total annual operating expenses of an investment fund.
Additionally, participants must receive a statement of the actual administrative expenses charged to the participants’ accounts and how these charges were allocated (e.g., pro rata, per capita). This disclosure will allow participants to see how arrangements such as revenue sharing affect them.
The plan administrator must disclose the fees that may be charged against a participant’s individual account. These expenses include fees pertaining to loan processing, commissions, qualified domestic relations orders, front- and back-end loads and sales charges, redemptions, transfers and other similar expenses.
Additionally, each participant must receive a statement listing the actual amount charged to his or her account with a description of the services provided. This information can be included on a participant’s regular account statement.
The timing of the notices depends on the type of information provided.
Participants must receive the investment-related information and the administrative and individual expense information each year.
Each new participant must receive the same information on or before the date on which a participant may first direct the investment of his plan account. However, the most recent annual notice (with any updates) given to existing participants may serve as the initial notice for new participants.
The statements of administrative and individual fees actually charged to participants’ accounts must be provided quarterly. However, if this information is provided earlier in connection with the underlying event that triggers the fee (such as a loan application), there is no need to disclose the fee again.
Changes to the required information must be announced between 30 and 90 days before the change is effective. However, if advance notice is not possible because of circumstances beyond the plan administrator’s control, the notice must be given as soon as reasonably practicable.
Plans have until May 31, 2012 to start providing initial notices to participants who are newly able to direct the investment of their accounts. Additionally, plans have until August 14, 2012 to provide quarterly reports of fees and expenses.
Certain required information (such as the current investment funds, performance data and web addresses containing additional Plan data) must be presented in a chart format.
The plan administrator must maintain a website that contains identifying information, performance data, fee and expense information, a glossary and other information that may be required by the Securities and Exchange Commission. Participants may also obtain a free paper copy of the materials on the website upon request.
These new rules, which also coordinate with the Department of Labor’s new regulations on service provider disclosure, mark a general move toward increased disclosure about plan fees. Plan fiduciaries responsible for prudent management of plan assets should take this opportunity to review their plan fees in anticipation of these new disclosure requirements.