On August 10, 2010, we issued an Alert about proposed Department of Labor (DOL) regulations defining required disclosures from designated plan service providers to plan fiduciaries in order to avoid ERISA and tax code prohibited transaction penalties. On October 14, 2010, the DOL issued final rules on additional required disclosures by plan administrators to participants directing their own investments under a participant directed plan.
The new rules were issued under the fiduciary standards of ERISA, Sections 404(a)(1)(A) and (B), which means that they are applicable to all participant directed plans, including those which have not elected fiduciary protections under ERISA Section 404(c) and the related regulations. Failure to provide the required disclosures will be considered a breach of fiduciary duty actionable by the DOL and/or plan participants.
There are two categories of required disclosures under the final rules that are effective for plan years beginning on or after November 1, 2011 (2012 for calendar year plans).
The first category of disclosures relates to plan information. This includes procedures (Web-form or call-center based) on giving investment instructions to the plan administrator and a current listing of available plan investment options, including any open brokerage options available under the plan. Additional plan-related disclosures include an explanation of fees and expenses for any administrative costs that may be charged or deducted from all participants' accounts, such as legal, auditing and recordkeeping services. The final category of plan-related information is an explanation of fees and expenses that may be charged to participant accounts based upon transactions initiated by the participant or beneficiary, including loans, hardship withdrawals and qualified domestic relations orders (QDROs).
Information on these plan-related expenses must be provided at least quarterly, showing the dollar amount of plan-related fees and expenses charged or deducted from the individual participant's account. The information may be combined with the quarterly benefits statement required under Section 105 of ERISA for participant directed accounts.
The second category of information required under the final rules relates to the investment options under the plan. Specifically, participants must receive historical investment performance over a 1-, 5- and 10-year period for pooled investment options such as mutual funds, insurance company separate accounts and collective funds. Fund options with a fixed or stated rate of return must disclose the annual rate of return and the period of time during which the rate is fixed. Along with the historical performance numbers, disclosure must include appropriate securities market indices over the same 1-, 5- and 10-year periods. Fixed rate investment options are not subject to the benchmark requirement.
For each pooled investment option, the disclosure statement must include the total annual operating expenses expressed both as a percentage of assets and as a dollar amount for each $1,000 invested and any shareholder-type fees (i.e., 12b-1 or declining sales charges) or restrictions on a participant's ability to purchase or redeem from that particular investment. In the case of fixed income options, shareholder-type fees or restrictions on the ability to purchase or withdraw must be disclosed (i.e., "equity wash" requirements to move between fixed income options).
Disclosures must be provided annually and must be distributed to new participants generally before they become eligible under the plan. Individuals who are eligible to participate in the plan but are not actively participating must also receive this disclosure. In addition, participants must receive annual notices of all changes to the information at least 30 but not more than 90 days before the effective date of the change, except when notice is not possible. These notice requirements are likely to increase administrative costs for plans.
Direction to a Web site address where participants and beneficiaries can access additional information about the investment options must also be included.
Model Chart Available
The DOL has provided a model chart that can be used for formatting the required investment information (the second category of information above). The model chart is available in a Microsoft Word format here.
In recent years there have been a growing number of class action lawsuits by participants against plan fiduciaries for the payment of excessive fees. It is the government's hope that providing for greater disclosure from service providers to plan fiduciaries and from plan fiduciaries to plan participants will create a greater awareness as to the total amount of fees charged to participant accounts in participant directed plans. The government also hopes that greater awareness may lead to increased competition and lower fees for plans and participants.