Participant Fee Disclosure – DOL Requires Fees and Investment-Related Information Disclosure by Plan Fiduciaries to Participants and Beneficiaries
Deadlines are fast approaching for compliance with the Department of Labor ("DOL") final regulations under ERISA Section 404(a) that impose new requirements for the disclosure of fee and investment information to participants in participant-directed individual account defined contribution plans (such as 401(k) plans). These new rules are effective for the first plan year beginning on or after November 1, 2011 (January 1, 2012, for calendar-year plans). These regulations do not apply to governmental plans, church plans, IRAs, SEPs or SIMPLE IRAs.
Basic information on the new requirements:
Who is subject to these new requirements? Defined contribution plans (profit-sharing plans, 401(k) plans, and money purchase plans) which have participant-directed individual accounts, regardless of size, if they are subject to ERISA. If individual participants have no ability to direct the investment of assets in their accounts, the plan is not subject to the requirements. However, a plan is subject to the regulations if participants can direct the investment of some, but not all, of their accounts. It is important to note that brokerage windows, self-directed brokerage accounts, or similar arrangements are not considered to be designated investment alternatives and therefore are not subject to the investment-related disclosure requirements described herein.
Who is responsible for providing participants with the required disclosures? The plan administrator. Important note: this does not mean a third-party administrator will handle these disclosures. For most plans, the employer, as plan administrator, is responsible for these disclosures. The information to make the disclosures will have to be obtained from whoever provides the investment options.
When are employers required to take action? As described in greater detail below, both annual and quarterly disclosures are required. For calendar year plans, the first annual disclosure is due by May 31, 2012, and the initial quarterly disclosure is due by August 14, 2012.
What are the penalties for non-compliance? There are no specific tax or monetary penalties for failing to provide fee disclosure notices. However, the disclosure requirements are a fiduciary obligation under ERISA. Failure to meet the requirements would be a breach of fiduciary duty, and plan administrators could be liable for remedies under ERISA.
If your retirement plan is not subject to these requirements, you can stop reading now.
The annual disclosure must be provided to eligible employees on or before the date they are first eligible to direct their investments under the plan. (Note that the annual disclosure must be made to anyone who would be eligible to direct the investment of contributions made to their account under the plan, regardless of whether an actual contribution is made.) The annual disclosure also must be provided on an annual basis thereafter. It can be combined with other types of participant disclosures, such as summary plan descriptions (SPDs) or participant benefit statements, provided that such disclosures comply with the timing and content requirements in the regulations.
In the event of changes to the general plan information in the annual disclosure, such changes must be disclosed no fewer than 30 days and no more than 90 days before the effective date of the change. However, advance notice can be provided within 30 days in cases of unforeseeable events or circumstances beyond the control of the plan administrator. In such cases, the notice of the change is required to be provided as soon as reasonably practicable.
Two broad categories of information are required to be included in the annual disclosure: Plan-related information and Investment-related information.
1. Plan-related information includes three categories: General Information, Administrative Expenses, and Individual Expenses.
Administrative Expenses: An explanation of fees and expenses for general plan administrative services (such as legal, accounting, or recordkeeping services) that may be charged to or deducted from individual participant accounts (and which are not reflected in the annual operating expenses of an investment vehicle).
Individual Expenses: An explanation of expenses that may be charged to the individual participant's account (i.e., the specific dollar amounts) on an individual, rather than on a plan-wide, basis. This includes fees related to qualified domestic relation orders (QDROs), loans, hardship withdrawals, distributions, redemptions, sales loads, brokerage windows, and investment advice services. [Note: The participant also must be provided with a quarterly statement of such amounts actually charged during the preceding quarter, as described below.]
2. Investment-related Information includes several subcategories of core information about each designated investment alternative under the plan:
The investment-related information must be presented in a comparative format, such as a chart. A model chart was published by the DOL along with the final regulations and may be accessed at http://www.dol.gov/ebsa/participantfeerulemodelchart.doc.
A plan administrator that uses and accurately completes the model chart published by the DOL, taking into account each designated investment alternative offered under the plan, will be deemed to have satisfied the annual requirements to present in a comparative format the information for each designated investment alternative available under the plan.
The model chart is broken down into several tables that focus on comparing investment returns, fee and expense information, and annuity options. The chart must prominently display its date; include a statement that additional investment information (including more current performance information) is available at the listed internet addresses; and include information on how to request free paper copies of the material. The chart must also contain the name of each designated investment alternative. (Brokerage windows and similar plan self-directed brokerage account options are not considered to be designated investment alternatives for this purpose.)
For each designated investment alternative, the following information must be provided, either automatically or upon the request of the participant:
Note that the "automatic prospectus" rule, currently required under ERISA Section 404(c), will no longer apply once the new rules take effect. This will help to reduce the sheer amount of paper provided to participants and will also allow for investment changes without first obtaining a prospectus, which is the current requirement for ERISA Section 404(c) compliance.
The new rules make clear that plan administrators will not be liable for the completeness and accuracy of information used to satisfy the disclosure requirements if the plan administrator has reasonably and in good faith relied upon the information received from or provided by a plan service provider or the issuer of a designated investment alternative.
Once the initial quarterly disclosures are provided no later than 45 days after the initial annual disclosure deadline (August 14, 2012, for calendar year plans), subsequent quarterly notices must be provided no less frequently than quarterly thereafter.
The following information is required to be included in each quarterly disclosure:
No quarterly statement must be furnished if there were no charges to a participant's account during the preceding quarter.
Other Required DisclosuresIn addition to the new participant fee disclosure requirements described above, the DOL also has issued interim final regulations under ERISA Section 408(b)(2) requiring the disclosure to plan fiduciaries of direct and indirect compensation received by covered service providers. For discussion of the new requirements for service provider fee disclosures, please see our Client Advisory here: http://www.shermanhoward.com/NewsAndEvents/View/C709E0B3-5056-9125-637BB69A63A7563D/.
If you have any questions about this Client Advisory, please contact any member of our Employee Benefits Team.
Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.
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©2011 Sherman & Howard November 22, 2011