In 2008, we issued a series of ErisaALERTs discussing the proposed regulations regarding fee transparency (Plan participants, Reasonable Contract, 2009 Schedule C). The Obama administration delayed finalization of the regulations pending review. In July 2010 we issued an ErisaALERT discussing the Reasonable Contract interim final regulations. In this ErisaALERT, we will cover the final regulation issued on October 20, 2010 regarding Fiduciary Requirements for Disclosure in Participant-Directed Account Plans.
Snapshot:
- This regulation attempts to establish basic uniform disclosures including investment-related information that will enable participants to perform a comparative review among a plan’s investment alternatives.
- The regulations are effective December 20, 2010 however the final rule will apply to individual account plans beginning on or after November 1, 2011 (the applicability date). For calendar year plans, the regulations are effective beginning with the 2012 plan year. However, there is a transition rule which permits disclosures as late as March 1, 2012 (60 days after the applicability date) for participants eligible to direct investments on January 1, 2012.
- Plans that are covered “individual account plans” as defined in ERISA § 3(34) that provide for participant direction excluding SEPs, IRAs, SIMPLEs and governmental plans are subject to the disclosure requirements.
- Each participant and beneficiary who has the right to direct the investment of assets held in or contributed to his or her individual account must receive the disclosures.
- Generally, information must be provided to plan participants on or before the date on which they can first direct their investments and annually thereafter.
- The regulation provides two basic categories of information – plan related information and investment related information.
- Nothing in the regulations relieves a fiduciary from its duty to prudently select and monitor providers of services to the plan or designated investment alternatives offered under the plan.
- The regulation amends ERISA §404(c) to integrate the new disclosure requirements.
- Rules related to target date or similar funds were reserved because the DOL expects to issue separate guidance which will supplement these regulations.
- The plan sponsor won’t be liable for the completeness and accuracy of the information used to satisfy the requirements when the plan sponsor relied in good faith on the disclosures provided by the issuer of a designated investment alternative or plan service provider.
Overview of the regulations
Plan related information
Plan related information requires the disclosure of information some of which is already provided either in the summary plan description or in information provided by the plan’s investment providers, such as:
- Information regarding when a participant/beneficiary can provide investment direction
- An explanation of any limitations
- A description of voting, tender and similar rights
- Identification of the various investment alternatives including brokerage windows
- Fees or expenses charged against the individual participant’s account ( e.g., QDROs, loans)
- The total operating expense of investment fund.
That said, plan sponsors, especially those in revenue sharing arrangements, should carefully review the required disclosures related to fees charged to the plan that are not included in the total operating expense. This disclosure must be included together with information related to actual plan administrative fees and expenses must be provided quarterly.
The disclosure can be included in the summary plan description or pension benefit statement provided they satisfy the timing requirements.
The disclosures can be provided electronically utilizing the current rules regarding electronic communication. Interestingly, because of the amount and varying opinions submitted on this topic, the DOL has reserved this section of the regulations pending further guidance.
Any changes to plan information must be provided to participants at least 30 days before but not more than 90 days in advance of the change unless due to events that were unforeseeable or circumstances beyond the control of the plan administrator.
Investment related information
Investment related information which must be disclosed includes:
- Identifying information, e.g., the name of the investment fund and the category of investment (e.g., money market, balanced fund etc.)
- Performance data and benchmarks
- Fee and expense information
- Internet website for participants to obtain specific information
All plans provide some of this information. Plans which invest primarily in mutual funds probably already provide most if not all of this information. Plans which invest in collective trust funds will have some work to do.
There are special rules for disclosures related to employer securities and annuity options.
However, there is some information which plan sponsors may or may not currently provide including:
- A glossary of investment terms or a web site which will provide a glossary
- A chart which compares the various investment options. The regulations provide a Model Comparative Chart which, if used and accurately completed, will be deemed to satisfy the comparative chart requirement.
Other disclosures
In addition to providing certain information upon request (e.g., prospectuses), the regulations require specific statements which provided to participants. Two of the statements are:
- “an investment’s past performance is not necessarily an indication of how the investment will perform in the future” and
- “fees and expenses are only one of several factors” that must be considered.
After providing investment related information – investing participants must receive any materials provided to the plan relating to the exercise of voting, tender and similar rights if such rights are passed through to the participant under the terms of the plan.
What does it mean to the Plan Sponsor
- Review your current disclosures and identify any gaps.
- Talk to your plan’s service/investment providers and ask them how they think their current disclosures compare to what will be required and how they will provide the information.
- Begin to prepare now; 2012 will be here before you know it and the potential reformatting of statements takes time.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen or 973-994-7539 and ask for Theresa Borzelli.
