August, 2008
Fee Transparency
Part 1 – Disclosures to Plan Participants
There are three pieces of DOL guidance that Plan Sponsors should have on their list of “to dos”. Two are in the form of proposed guidance with the third in final form. Why should you have this on your “to do” list? Because they all have the same effective date – January 1, 2009!! If that is not enough, they all deal with a much publicized issue – fee transparency. This ErisaALERT will be the first in a series dealing with the guidance and their implications for Plan Sponsors. It is important to keep in mind that the proposed rules are just that, proposed; the DOL is either reviewing submitted comments or seeking additional comments. However, forewarned is forearmed!
The Guidance
The most recent guidance was issued on July 27, 2008 relating to changes to the 2009 Schedule C (http://www.dol.gov/ebsa/regs/fedreg/notices/20071116.pdf) in the form of 40 FAQs. The 2009 Form 5500 was finalized on November 16, 2007 and can be found at
http://www.dol.gov/ebsa/regs/fedreg/notices/20071116.pdf. This guidance deals with reporting what plan expense information is reported to the government on Schedule C.
A few days before the Schedule C FAQs, guidance was issued in the form of proposed regulations on July 23, 2008. The proposed regulations deal with Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans and can be found at (http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=20973). This guidance also made important changes to ERISA §404(c). This guidance primarily deals with information that must be disclosed to plan participants.
In December of last year, the DOL issues guidance in the form of proposed regulations covering Reasonable Contract or Arrangement Under Section 408(b)(2)—Fee Disclosure and can be found at http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=13443 .
Public hearings were held on February 27, 2008 and the written comments/testimony can be found at http://www.dol.gov/ebsa/regs/cmt-408(b)(2)-combined.html#section3. This guidance deals with information which must be obtained by the Plan Sponsor/fiduciary before entering into an agreement with a service provider where fees will be paid from plan assets.
In this ErisaALERT we will discuss the Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans. We will provide some background, and then discuss the what, the when and the how of the required disclosures.
Background
The preamble to the proposed rules state that according to the DOL’s 2005 Form 5500 data, there are an estimated 437,000 participant directed individual account plans covering an estimated 65 million participants and holding almost $2.3 trillion dollars in assets. Participants are increasingly responsible for making their own retirement savings decisions. This has led to a growing concern that participants may not have or may not be considering information that is critical to making informed decisions regarding their retirement accounts.
ERISA §404 provides rules regarding fiduciary responsibilities and in particular §404(c) provides rules affording Plan Sponsors some fiduciary relief from investment decisions made by participants if the plan satisfies the requirements of §404(c). The proposed regulations (§2550.404a-5) would establish uniform, basic disclosures without regard to whether the plan has declared itself a 404(c) plan. The proposed rules, in fact, amend the 404(c) rules to require compliance with the proposed rules for purposes of satisfying 404(c).
What must be disclosed?
In a nutshell, the proposed rules require that fiduciaries of participant directed individual account plans satisfy a “duty to disclose” certain information. Fiduciaries must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to the investment of assets on a regular and periodic basis by providing certain information.
The information which must be disclosed is described in terms of plan related information and investment related information.
Plan Related Information
General information which must be disclosed before the date of eligibility and annually thereafter includes:
- An explanation of the circumstances under which participants and beneficiaries may give investment instruction;
- An explanation of any limitations on such instructions under the terms of the plan including any restrictions on transfers 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 as well as any restrictions on such rights
- Identification of any designated alternatives offered under the plan and
- Identification of any designated investment managers.
In addition, any material changes to the above information must be provided to participants and beneficiaries no later than 30 days after the adoption of the material change.
Practical Implications
Most plan sponsors are probably already providing this general information. The requirement regarding providing information regarding any material change no later than 30 days after the adoption could be problematic in circumstance where a plan sponsor changes a fund line up on a prospective basis with the effective date more than 30 days after the adoption date. Further analysis may provide other examples of problems with this requirement. Hopefully this will be clarified and examples provided before the rules are finalized.
Administrative Expenses
Plan expenses – on or before the date of plan eligibility and at least annually thereafter, the participant or beneficiary must receive an explanation of any fees and expenses for plan administrative services (e.g., legal, accounting, recordkeeping) to the extent not otherwise included in investment expenses that will be charged to the plan and paid from plan assets. In addition, expenses must be reported quarterly to participants or beneficiaries for expense paid in the preceding quarter.
Individual expenses – on or before the date of plan eligibility and at least annually thereafter, the participant or beneficiary must receive an explanation of any fees and expenses that may be charged against the participant’s or beneficiary’s account for services provided on an individual basis (e.g., loan fees, QDRO determination fees, investment advice. In addition, expenses must be reported quarterly to participants or beneficiaries on a quarterly basis with the amount actually charged in the preceding quarter.
Practical Implications
Expenses paid from the Plan – some Plan Sponsors pay legal, accounting and recordkeeping fees from Plan Sponsor assets; these expenses do not have to be disclosed to participants and beneficiaries. For Plan Sponsors who pay plan administrative expenses from the plan, separately identifying recordkeeping fees in a bundled arrangement is problematic and is addressed in both the Schedule C changes and related FAQs as well as the Reasonable Contract proposed regulations. We will discuss this aspect in future ErisaALERTs in this series. Plan Sponsors who pay legal and accounting fees from the Plan should have this information readily available; the challenge will be responding to participants who see the charges broken out for the first time. You should make sure that your service provider can easily add another line or lines to the participant statement.
Individual expenses – individual expenses are most likely already communicated to plan participants and beneficiaries and reflected on participant statements. If not already reflected on participant statements, you should make sure that your service provider can do so.
Investment related information
A fiduciary or person designated by the fiduciary to act on his behalf, must, based on the latest available information, provide on or before the date of eligibility and at least annually thereafter:
Identifying information
- The name of the designated investment alternative
- An internet website address that will provide more specific information
- The type or category of investment (e.g., money market, balanced, large cap etc.)
- The type of investment management (e.g., active or passive)
Performance data (differs depending on whether the return is fixed or varies)
- Average annual return at the end of the calendar year as well as over a 1, 5 and 10 year period if available
- A statement indicating that past performance is not indicative of future performance
Benchmarks
- The name of and returns of an appropriate broad based securities market index over a 1, 5 and 10 year period comparable to the performance data provided as noted above and which is not administered by an affiliate of the investment provider, its investment adviser or a principal underwriter unless the index is widely recognized and used.
Fee and expense information
- The amount and a description of each shareholder-type fee (i.e., fees charged directly against participant’s accounts)
- The total annual operating expenses of the investment expressed as a percentage (e.g., expense ratio)
- A statement that fees and expenses are only one of several factors that participants and beneficiaries should consider when making investment decisions.
Comparative format
Investment related information must be provided in a chart or similar format that is designed to facilitate comparison of the information (a sample chart is provided in the proposed regulations). In addition, the chart must contain the
- Name, address and telephone number of the fiduciary or designee to contact for information
- A statement that more current information is available at the listed website.
Other Information
In addition, any materials provided to the plan relating to exercise of voting, tender and similar rights to the extent such rights are passed through to the participant must be provided to the participant subsequent to the initial election.
Participants have the right to request copies of:
- Prospectuses
- Financial statements and reports
- A statement of the value of a share or unit of a designated investment alternative as well as the date of valuation
- A list of the assets comprising the portfolio of each designated investment alternative
Practical Implications – with the exception of the unit value, much of this information is probably already provided or made available to participants and beneficiaries. Unit values are often found where a plan utilizes a group annuity contract and in some cases, Company stock. Explaining unit values is often challenging. If you utilize unit values, begin discussion with your service vendor to make sure you fully understand how it is calculated and begin work on developing a communication piece which explains the unit value concept.
It is important to note that under the proposed rules a prospectus is available upon request; it no longer must be automatically provided.
When must the information be disclosed?
As noted a number of times, generally the information must be disclosed
- Before eligibility and annually thereafter, and
- Quarterly reflecting expenses in the preceding quarter.
In addition, certain information must be provided upon request as well as within 30 days of adoption of certain material changes.
Practical Implications – generally such information is provided either before eligibility or at date of hire in the case of immediate eligibility. Individual expenses are generally reflected on participant statements. As noted previously, administrative expenses charged to the plan are generally not communicated to participants. The challenge for plan sponsors will be in communicating to participants that the charges were always made but not previously required to be disclosed; expect some feedback when this information is first disclosed.
How must the information be provided?
The proposed rules indicate that the comparative financial information can be disclosed utilizing the model chart provided.
With respect to disclosures relating to that summarized under general, plan and individual expenses, the information may be provided as part of the SPD or as part of a participant benefit statement as long as the frequency requirements are met. As always, the information must be written in a manner calculated to be understood by the average plan participant.
Practical Implications – much of the required disclosures are generally provided in a combination of general information provided in the summary plan description and supplemented by information provided by the service provider. Participant statements will require additional line items. The required communications must be added to your compliance calendar. Care should be taken not to run afoul of the DOL’s rules for electronic communication; in fact, the DOL specifically requested comments in this area. For more information on DOL’s rules see https://www.erisadiagnostics.com/compliance_cue_cards.asp?articleID=48
What should you do now?
- Review what information you currently disclose; when you disclose it and how you disclose it.
- Determine the potential changes to your current procedures/communication material should the proposed rules pass as written.
- Determine responsibility and develop a timeline for implementing the changes.
- Consider commenting on the proposed rules if anything seems impractical or just not possible to accomplish by the time the first quarterly statement is distributed in 2009. Comments must be submitted by September 8th.
- Become familiar with other DOL related guidance on fee transparency and stay on top of any changes with respect to the effective dates.
Note: 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 plans. 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.
Copyright©2008, ERISAdiagnostics, Inc. www.erisadiagnostics.com
ErisaALERT 2008-2
