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.
Compliance dates are rapidly approaching, so plan
sponsors should contact their service providers right away
to coordinate responsibility for providing the required
information and materials.
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