Last year the
Department of Labor (DOL) issued final regulations requiring broad
disclosures of fees, expenses and certain other plan and investment-related
information to participants and beneficiaries under individual account
plans.
The purpose of the new disclosure requirements is to ensure participants
and beneficiaries have access to adequate information to enable them to
comparison shop among investment options to make informed investment
decisions.
Below is a general overview of the regulations' key disclosure
requirements that become effective in 2012.
Plans Subject to the Disclosure Requirements
All individual account plans that are subject to the Employee Retirement
Income Security Act of 1974 (ERISA) and permit participants and
beneficiaries to direct their account investments must comply with the
disclosure requirements. Individual account plans include not only 401(k)
plans but also profit sharing and other tax-qualified plans, as well as
403(b) plans sponsored by tax-exempt employers that permit participants and
beneficiaries to direct their own account investments.
The disclosure requirements do not apply to IRA-based plans such as SEPs
and SIMPLE plans. Also, governmental plans, as well as church plans that
have not elected to be treated as ERISA plans, are not subject to the
disclosure requirements.
Compliance Dates
For plans utilizing a calendar plan year (this is true of most plans),
plan administrators are required to provide the initial disclosures of plan
and investment-related information to participants and beneficiaries no
later than May 31, 2012. This deadline is extended to 60 days after the
first day of the first plan year beginning on or after November 1, 2011, if
this would be a later deadline.
The first quarterly statements of fees and expenses charged to
participants' and beneficiaries' plan accounts must be provided no later
than 45 days after the end of the calendar quarter in which the first
initial disclosures were required (August 14, 2012 for plans utilizing a
calendar plan year).
Who Must Provide the Disclosures?
The ultimate responsibility for providing all of the required information
and other materials belongs to the plan administrator (usually the plan
administrator is the plan sponsor).
As a practical matter, carrying out the responsibility for providing the
required information and materials will ordinarily be delegated to a plan's
recordkeeper. Accordingly, plan sponsors need to verify that their
recordkeepers will provide these services under their contracts. If so, the
plan administrator's responsibility will be limited to overseeing the
recordkeeper to make sure it is fulfilling its obligations.
The regulations clarify that, to the extent a plan administrator
reasonably and in good faith relies on information from an investment or
other service provider in making the required disclosures, the administrator
will not be held liable for any resulting inaccuracy or lack of
completeness.
Designated Investment Alternatives
An important concept under the regulations is the "designated investment
alternative." Designated investment alternatives include all funds and other
vehicles under a plan into which participants and beneficiaries can direct
plan contributions other than brokerage accounts, brokerage windows or
similar options that permit investment in vehicles beyond those designated
by the plan's fiduciaries.
Plan-Related Information
Before a participant or beneficiary may begin directing the investment of
his or her plan account, and at least annually thereafter, the plan
administrator must furnish disclosures of the following plan-related
information:
- A description of procedures for directing account investments,
including any restrictions on changing investment elections with respect
to any designated investment alternative;
- The designated investment alternatives available under the plan as
well as any designated investment managers (in most cases, designated
investment alternatives are mutual funds and similar vehicles rather than
managed accounts--accordingly, most of the required information will
pertain to the investment products rather than any designated managers);
- A description of any voting, tender or similar rights associated with
any designated investment alternative, including any restrictions on them;
- If applicable, a description of any brokerage account, window or
similar feature that permits participants and beneficiaries to invest
their plan accounts in any vehicle other than the plan's designated
investment alternatives;
- An explanation of administrative expenses, such as recordkeeping,
legal and audit expenses that may be charged to all plan accounts and the
basis on which such charges will be allocated; and
- An explanation of any fees and expenses that may be charged to
individual accounts that are not already reflected in the operating
expenses of a designated investment alternative, such as:
- Commissions and sales charges;
- Redemption or transfer fees;
- Fees for individual investment advisory services;
- Processing fees for plan loans and QDROs; and
- Charges for use of a brokerage window or similar feature.
Plan-related information may be included in (or with) an SPD or benefit
statement if the timing requirements can be met.
Investment-Related Information
The plan administrator must also furnish to each participant or
beneficiary certain investment-related information in a chart or similar
comparative format. The following information must be provided for all
designated investment alternatives under the plan, regardless of whether
they have variable or fixed rates of return: the name of the investment and
the type or category of the investment (i.e., balanced fund, small cap
equity fund, etc.).
Variable Rate of Return Investments
For each designated investment alternative with a variable rate of
return, such as a mutual fund, the following information must be furnished:
- The average annual total return for 1-, 5- and 10-calendar-year
performance periods ending on the last day of the previous year and the
returns, over comparable performance periods, of an appropriate
broad-based securities index;
- The amount and description of each shareholder-type fee, such as
commissions, sales loads, and redemption and transfer fees that are not
already reflected in the operating expenses of the designated investment
alternative;
- The operating expenses, both as a percentage and an annual dollar
amount for each $1,000 invested;
- Any purchase, transfer or withdrawal restrictions;
- A statement that fees and expenses are only one of several factors
that participants and beneficiaries should consider when making investment
decisions;
- A statement that past performance is not necessarily indicative of
future performance; and
- A statement that the cumulative effect of fees and expenses can
substantially reduce the growth of the retirement account and that
participants and beneficiaries can visit the Employee Benefit Security
Administration website for an illustrative example.
Fixed or Stated Rate of Return Investments
For each designated investment alternative with a fixed or stated rate of
return, such as a CD or guaranteed investment contract, the following
information must be furnished:
- The fixed or stated annual rate of return;
- Any restrictions on purchases, transfers, and withdrawals;
- Any shareholder-type fees of the types described above; and
- The term of the investment.
Stable value and money market funds are not considered to have fixed or
stated rates of return. Because they are not free from investment risk, they
are subject to the requirements for variable return investments described
above.
Website and Glossary Requirements
With respect to each designated investment alternative, the disclosure
must also include an Internet website address providing access to certain
information about the investment. The website address provided cannot simply
direct the participant or beneficiary to the issuer's home page.
The disclosure must also include a glossary of investment-related terms
to assist participants and beneficiaries with understanding their investment
options or a website address that directs them to such a glossary.
Quarterly Statements of Actual Fees and Expenses
Quarterly statements must also be furnished to each participant and
beneficiary, which must provide:
- The dollar amount of any individual fees and expenses actually charged
to his or her account during the previous quarter;
- A description of the services for which the fees were charged; and
- If applicable, an explanation that some administrative expenses were
paid from the operating expenses of one or more of the plan's designated
investment alternatives, such as through 12b-1 fees or revenue sharing
arrangements.
This information may be provided as part of the quarterly benefit
statement required under ERISA if the timing requirements can be met. Doing
so will allow plan sponsors to avoid the additional costs of providing
multiple participant notices each quarter.
Materials Provided Upon Request
Upon request, a participant or beneficiary must be furnished with the
following with respect to any designated investment alternative:
- A copy of the prospectus or an SEC-approved short form or summary
prospectus;
- Copies of financial statements or reports;
- A statement of the value of a share or unit and the date of valuation;
and
- A list of assets comprising the portfolio but only with respect to
investments that are "plan assets" under ERISA, and the value of each such
asset or its proportion of the investment alternative (this requirement
will not apply to mutual funds and most traditional individual account
investments as they are not considered to be "plan assets" under ERISA).
Summary
Plan sponsors of individual account plans are encouraged to understand
and plan ahead for the new reporting and disclosure requirements. Timely
reporting and disclosure is necessary to satisfy fiduciary duties under
ERISA.
We will be working with our clients’ financial service providers to coordinate responsibility for providing the required information and materials.
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