Beginning January 1, 2012 (for calendar year plans), the Department of Labor's Employee Benefits Security Administration ("EBSA") will require retirement plans that allow participants to direct the investment of their accounts (typically 401(k) and 403(b) plans) to provide extensive information regarding fees and expenses related to a plan's investment options so plan participants can more easily compare the costs of various investment options. The annual disclosure must also include performance information for each investment option offered under a plan. Additionally, participants must receive quarterly disclosures of the amounts and nature of expenses deducted directly from their accounts.
The burden of this new and complex set of disclosures will rest with a plan's fiduciaries, who are typically officers of the plan sponsor. The investment of a plan's assets is a fiduciary act governed by the fiduciary standards in the Employee Retirement Income Security Act of 1974 ("ERISA"). Plan fiduciaries may allow participants to self-direct investments under ERISA section 404(c), which has always required the disclosure of information about a plan's investments under a participant-directed plan. This requirement has typically been met by making available fund prospectuses (or equivalent information) or information generated by software providers that consolidate such information. Knowledgeable plan participants have been able to make informed investment decisions under the existing regulations; however, EBSA believes that enabling the average plan participant to make informed decisions requires the use of standard methodologies when calculating and disclosing fee, expense, and investment return information in order to provide ease of comparison between investments.
The final regulation applies to the plan administrator (typically the plan sponsor) of "covered individual account plans," which means any participant-directed individual account plan that is subject to ERISA. The required disclosures discussed below must be provided to participants and beneficiaries. A covered participant includes those employees who are eligible to contribute to the plan, but who are not currently making contributions and accordingly may not have an account balance in the plan.
Employer-sponsored, ERISA-covered plans - such as SEP and SIMPLE plans, which are funded by Individual Retirement Accounts ("IRAs") - are exempt from the final regulation.
Initial And Annual Disclosure
The information below must, generally, be given to participants on or before the date they can first direct their investments, and then annually thereafter. A transition rule under the regulation provides that the required disclosure may be made to existing participants and eligible employees within sixty days of the regulation becoming effective. For calendar year plans, this date would be March 1, 2012.
General plan information consists of information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions, a current list of the plan's investment options, and a description of any brokerage or similar arrangement that enables the selection of investments beyond those designated by the plan.
Administrative expense information provides an explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from individual participant accounts - for example, fees and expenses for legal, accounting, and recordkeeping services.
Individual expense information provides an explanation of any fees and expenses that may be charged to or deducted from the individual participant's account based on the actions taken by the participant - for example, fees and expenses for participant loans and for processing qualified domestic relations orders.
Performance Data. Participants must be provided specific information about historical investment performance. The one-, five- and ten-year investment returns must be provided for investment options, such as mutual funds, that do not have fixed rates of return. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.
Benchmark Information. For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over one-, five-, and ten-year periods (matching the performance data periods above) must be provided.Investment options with fixed rates of return are not subject to this requirement.
Fee and Expense Information. For investment options that do not have a fixed rate of return, the total annual operating expenses of the investment - expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant's ability to purchase or withdraw from the investment - must be provided. For investment options that have a fixed rate of return, any shareholder-type fees or restrictions on the participant's ability to purchase or withdraw from the investment must be disclosed.
Internet Website Address. Investment-related information includes the requirement to provide an Internet website address that is sufficiently specific to provide access to additional information about the investment options available under a plan for those participants who want more detail or more current information.
Glossary of Terms. Investment-related information includes a general glossary of terms to assist participants in understanding the plan's investment options, or an Internet website address that is sufficiently specific to provide access to such a glossary.
In addition to the above information, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses actually charged to or deducted from their individual accounts along with a description of the services for which the charge or deduction was made. Plan administrative charges that are not part of the annual operating expenses of the investment alternatives offered under the plan would be disclosed as part of the quarterly disclosure. These disclosures must be made in dollar terms even if the associated fees are charged as a percentage of a plan's assets.
These disclosures may be (but are not required to be) included in the quarterly benefit statements that are required to be provided to plan participants who participate in participant-directed plans.
Comparative Performance and Fee Information
The investment information required under the final regulation must be furnished in a chart or similar format designed to facilitate a comparison of each investment option available under the plan.
The good news is that the final regulation includes a model comparative chart that may be used by a plan administrator to satisfy the regulation's requirement that a plan's investment option information be provided in a comparative format, which may be viewed at www.dol.gov/ebsa/participantfeerulemodelchart.doc. The model chart contains three sections. The first section shows historic performance information for each of a plan's investment alternatives. The second section lists fee and expense information related to each of a plan's investment alternatives. These first two sections are further broken down between investment options that provide a fixed rate of return and those that provide a non-fixed rate of return. The third section of the model chart would be used by plans to disclose information regarding any annuity features provided under the plan.
The bad news is that the information required under the regulation is extensive, and plan fiduciaries are going to need to spend a considerable amount time and money if their plan's investment advisor cannot produce the information in a compliant format. If a request is made, the plan sponsor or plan fiduciaries must also furnish prospectuses, financial reports and statements of valuation of assets held by an investment option under a plan.
Currently, most plan sponsors make information regarding the plan's investment alternatives and fees available to plan participants through web-based resources. The final regulation requires affirmative disclosure of the information required under the regulation. Thus, it will not be sufficient to only make the information available online.
Under the regulation, paper copies of the required disclosure are required unless a participant consents to the electronic delivery of the information or uses a computer as an integral part of their work.
Penalties For Failure To Disclose
The required disclosure creates a fiduciary obligation of the plan administrator to provide the information required by the regulation. While the final regulation does not prescribe specific financial penalties for a failure to provide the required information, such failure would result in a breach of fiduciary duty by the plan administrator. Under ERISA, a breach of fiduciary duty could result in the DOL or plan participants asserting a right to equitable remedies.
Impact On Plan Sponsors And Fiduciaries
This new requirement will create additional work and/or costs for plan sponsors. Plan sponsors and fiduciaries need to begin now in order to identify and quantify all expenses paid from their plan's assets and then decide on a compliant format and medium for communicating this information to plan participants. Additionally, discussions should begin now with the plan's investment advisor or investment provider to determine whether compliant performance data, performance benchmarks, and a glossary of terms will be provided timely for inclusion with the general information required under the final regulation, including how such information will be maintained and updated.
The final regulation will become applicable to covered individual account plans for plan years beginning on or after November 1, 2011. For calendar year plans, compliance will be required on January 1, 2012.
Peter Alwardt is a Tax Partner with more than 25 years of consulting experience, specializing in employee benefits, tax and ERISA issues for domestic and international clients. He has an extensive background in consulting on qualified and non-qualified plan design, operational compliance, equity-based plans, employee communications, and representation before the Internal Revenue Service and Department of Labor.