The Department of Labor (the “DOL”) has issued final regulations that will require fiduciaries of individual account plans with participant-directed investments to periodically disclose to participants certain plan and investment-related information. For calendar-year plans, the initial disclosures are required by August 30, 2012. The purpose of this new disclosure requirement is to ensure that participants receive sufficient information regarding the plan and its investment options to make informed decisions regarding the investment of their accounts.
A. Who Must Disclose.
The plan administrator is responsible for complying with this new disclosure requirement, although the plan administrator may delegate this duty to a service provider (e.g., investment manager or third-party administrator). The plan administrator will probably not have in its possession all the required information and will need to obtain that information from service providers. Recognizing that plan administrators will need to use information prepared by third parties, the regulations provide that a plan administrator will not be liable for the completeness and accuracy of the disclosed information so long as the plan administrator reasonably and in good faith relies on the information received from a service provider or investment issuer.
B. Who Must Receive the Disclosure.
The plan administrator must disclose the required information to all plan participants and beneficiaries. The term “participant” includes employees who are eligible to participate under the terms of the plan but are not actually enrolled in the plan. The term “beneficiary” means only those beneficiaries who have accounts in the plan and a right to direct the investment of their accounts (e.g., an alternate payee under a QDRO or the beneficiary of a deceased participant). (For purposes of this article, a reference to “participants” includes beneficiaries who have plan accounts.)
C. Which Plans Are Subject to the Disclosure Requirement.
The disclosure requirement applies to ERISA-covered individual account plans with participant-directed investments. The disclosure requirement applies regardless of the number of participants, and regardless of whether or not the plan is attempting to comply with ERISA Section 404(c). The disclosure requirement does not apply to SEPs or SIMPLE IRAs.
D. What Information Must Be Disclosed.
Plan administrators are required to disclose two categories of information: (1) plan-related information, and (2) investment-related information.
1. Plan-Related Information.
The plan administrator must disclose the following plan-related information on or before the date on which a participant can first direct the investment of his or her accounts (the “initial disclosure”) and at least annually thereafter (the “annual disclosure”). (All the information described in this article must be included in the initial and annual disclosures, except that certain information described in (b) and (c) below must be disclosed on a quarterly basis.)
a. General Information. This includes:
an explanation of the circumstances under which participants may give investment instructions;
an explanation of any limitations on investment instructions, including restrictions on transferring to or from a designated investment option;
a description of plan provisions relating to the exercise of voting, tender, and other rights in a designated investment option
identification of the designated investment options
identification of any designated investment managers; and
a description of any brokerage windows or self-directed brokerage accounts that enable participants to select investments other than the designated investment options.
b. Administrative Expenses. The initial and annual disclosures must include an explanation of any fees and expenses related to general plan administrative services (e.g., recordkeeping, accounting, legal) that may be charged against a participant’s account and are not reflected in the total annual operating expenses of the designated investment options. The disclosures must also include the basis on which such charges will be allocated to each account (e.g., pro rata, per capita).
In addition to the initial and annual disclosures, the plan administrator must provide a quarterly statement that shows the dollar amount of fees and expenses actually charged against a participant’s account in the preceding quarter and a description of the services that relate to those charges. If applicable, the quarterly disclosure must also include an explanation that, in addition to the expenses reported on the statement, some of the plan’s administrative expenses were paid from the annual operating expenses of one or more of the plan’s designated investment options (such as through revenue-sharing arrangements, 12b-1 fees, or sub-transfer agent fees).
c. Individual Expenses. The initial and annual disclosures must include an explanation of the fees and expenses that may be charged against a participant’s account on an individual, rather than on a plan-wide, basis that are not included in the total annual operating expenses of any designated investment option. Such charges include fees for processing loans or QDROs, fees for investment advice, brokerage window fees, front- or back-end loads or sales charges, and redemption fees.
In addition, the plan administrator must furnish a quarterly statement disclosing the dollar amount of any fees and expenses actually charged against a participant’s account in the preceding quarter and a description of the services relating to those charges.
d. Changes to Plan-Related Information. If there is any change to the plan-related information listed in (a) through (c) above, each participant must receive a description of the change at least 30 days but not more than 90 days before the effective date of the change. This rule does not apply to plan-related information disclosed on a quarterly basis.
2. Investment-Related Information.
The plan administrator must include the following investment-related information in the initial and annual disclosures:
a. Identifying Information. The disclosure must include the name of each designated investment option and the type of investment (e.g., money market fund, balanced fund).
b. Performance Data. For designated investment options with variable returns, the disclosure must include the investment’s performance for one-, five-, and ten-calendar year periods (or for the life of the investment, if shorter), along with a statement indicating that past performance is not indicative of future performance.
For designated investment options with a fixed or stated return, such as certificates of deposit and guaranteed insurance contracts, the disclosure must include the fixed or stated annual rate of return and the term of the investment. If the fixed or stated rate of return can be adjusted prospectively, the plan administrator must disclose the current rate of return, the minimum guaranteed rate, if any, a statement that the rate of return may be adjusted prospectively, and an explanation of how to obtain the most recent information on the rate of return.
c. Benchmarks. For designated investment options with variable returns, the disclosure must include the name and returns of an appropriate broad-based securities market index over one-, five-, and ten-calendar year periods (or for the life of the investment, if shorter). The plan administrator should not use an index administered by an affiliate of the investment issuer, its investment adviser, or a principal underwriter, unless the index is widely recognized and used.
d. Fee and Expense Information. The disclosure must include the fee amount and a description of each shareholder-type fee charged directly against a participant’s investment. A shareholder-type fee is any fee that is not included in the total annual operating expense, such as a commission, sales load, sales or surrender charge, or redemption, exchange, or purchase fee. The disclosure must also describe any restrictions concerning the designated investment option, such as trading restrictions or limitations on how amounts liquidated from the investment may be reinvested.
For designated investment options with variable returns, the disclosure must also include:
the total annual operating expense expressed as a percentage (i.e., the expense ratio) and the total annual operating expense for a one-year period expressed as a dollar amount for a $1,000 investment;
a statement indicating that fees and expenses are only one of several factors that should be considered when making investment decisions; and
a statement indicating that the cumulative effect of fees and expenses can substantially reduce the growth of an account and that an example demonstrating the long-term effect of fees and expenses can be found on the DOL’s website.
e. Internet Website Address. The disclosure must include an Internet website address that provides access to the names of the investment issuers, a general description of the types of assets held by the investments, and the investments’ objectives, principal strategies, attendant risks, portfolio turnover rates, performances (updated at least quarterly), and fees and expenses.
The plan administrator is responsible for maintaining the website and making it available to participants. If the plan administrator delegates its website responsibilities to a service provider, the plan administrator will not be liable for the completeness and accuracy of the information on the website to the extent that it reasonably and in good faith relies on information provided by the service provider.
f. Glossary. To assist participants in understanding the designated investment options, the plan administrator must provide a general glossary of relevant terms. The glossary may be furnished with the required disclosures or made available on the website.
g. Annuity Options and Employer Securities. If participants are permitted to allocate their accounts toward the future purchase of an annuity, the disclosure does not need to include the information in (a) through (e) above. Instead, the disclosure must include information about the annuity option, including the name of the contract, a description of its objectives, the factors that determine the price of the guaranteed payments, any limitations on the ability to withdraw or transfer amounts allocated to the option and any fees applicable to withdrawals or transfers, any fees that will reduce the value of amounts allocated to the option, a statement that guarantees of an insurance company are subject to its long-term financial strength and claims-paying ability, and a website address that provides access to information about the annuity option.
If a designated investment option consists of qualifying employer securities, the disclosure must include, in lieu of the explanation of the investment’s principal strategies and risks in (e) above, an explanation of the importance of a well-balanced and diversified portfolio. Additionally, the requirements relating to fee and expense information and total annual operating expenses do not apply unless the qualifying employer security option is a fund with respect to which participants acquire units of participation, rather than actual shares. The disclosure also does not need to include information about portfolio turnover rate.
h. Comparative Format Requirement. The investment-related information described in (a) through (g) above must be furnished in a chart that is designed to facilitate a comparison of each designated investment option. The chart must include the date of the chart, the name, address, and telephone number of the plan administrator, the website address, and a statement explaining how to obtain paper copies of the information on the website.
The regulations include a model comparative chart, which is available at www.dol.gov/ebsa/participantfeerulemodelchart.doc.
i. Additional Disclosures. After participants have invested in a designated investment option, the plan administrator must provide them with any materials that the plan receives with respect to the exercise of voting, tender, and similar rights to the extent that those rights are passed through to participants under the terms of the plan.
Additionally, the plan administrator must provide to each participant upon request (or automatically with the initial and annual disclosures) certain investment-related information, including prospectuses, financial statements, a statement of an investment share’s value and valuation date, and a list and value of the assets in each designated investment option that constitute plan assets under ERISA.
E. When to Disclose.
The DOL aligned the date on which the first initial disclosure must be provided with the effective date of the new fee disclosure requirements under ERISA Section 408(b)(2) (for more details about the 408(b)(2) fee disclosure requirements, see http://www.millernash.com/new-fee-disclosure-requirements-under-erisa-section-408b2-03-20-2012/). The first initial disclosure must be furnished no later than August 30, 2012 (or, if later, no later than 60 days after the first day of the first plan year beginning on or after November 1, 2011). Thus, for calendar-year plans, the first initial disclosure must be made by August 30, 2012. Subsequently, plan administrators must disclose plan-related and investment-related information on or before the date that the participant can first direct the investment of his or her accounts and at least annually thereafter. The initial and annual disclosures may be provided as part of the summary plan description or quarterly benefit statements, as long as these documents are furnished at the appropriate times. The initial and annual disclosures may also be provided as a stand-alone document.
Plan-related expenses that are actually charged to participants must be disclosed on a quarterly basis and may be provided with quarterly benefit statements. The first quarterly disclosure must be furnished no later than 45 days after the end of the quarter in which the first initial disclosures are required to be furnished (e.g., by November 14, 2012, for calendar-year plans).
F. Action Items.
Before the deadline for the first initial disclosure (i.e., August 30, 2012, for most plans), plan administrators need to contact the appropriate service provider to determine who will be preparing and distributing the disclosures. Plan administrators who will prepare the disclosures themselves should start gathering the required information and requesting investment-related information from issuers as early as possible to ensure timely compliance with the new regulations. If a service provider will be preparing the disclosures, the plan administrator should carefully review the information prepared by the service provider to make sure that it satisfies the regulations. It is possible that a service provider will prepare some, but not all, of the disclosures. In that case, the plan administrator must determine which part of the disclosures the plan administrator will be responsible for preparing and begin to prepare the applicable disclosures.
The participant-level fee disclosure regulations can be found at http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=25179.