The Department of Labor (the “DOL”) issued a proposed regulation (the “Proposed Regulation”) under Section 404(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), which sets forth fiduciary requirements for participant-level disclosure in participant-directed individual account plans (e.g., most so-called 401(k) plans). The Proposed Regulation represents the DOL’s third recent step in imposing additional fee disclosures on persons providing services to ERISA plans. The first two steps, which included enhanced Form 5500, Schedule C reporting requirements and a proposed regulation under Section 408(b)(2) of ERISA relating to service provider fee disclosures, were discussed in the January 1, 2008 Alert. The Proposed Regulation would require plan fiduciaries to disclose certain plan-related information and certain investment-related information to plan participants and beneficiaries.
Plan fiduciaries would have to disclose certain plan-related information to participants and beneficiaries on or before plan eligibility and at least annually thereafter. This information could be included in the plan’s summary plan description (“SPD”). In addition, certain specific information would have to be provided to participants and beneficiaries at least quarterly. Plan fiduciaries would also have to disclose any material change to such information. The required plan-related information would include the following:
general information relating to participant investment instructions, including how participants and beneficiaries may give investment instructions, an explanation of any limitations on such investment instructions, and identification of the plan’s designated investment alternatives;
information relating to plan-level administrative expenses that are not included in investment-related fees and expenses that may be charged against a participant’s account, plus a quarterly statement indicating the amount actually charged to the participant’s account during the prior quarter; and
information relating to participant-specific administrative expenses (e.g., loan or QDRO fees), plus a quarterly statement indicating the amount actually charged to the participant’s account during the prior quarter.
Plan fiduciaries would also have to disclose certain investment-related information to participants and beneficiaries on or before plan eligibility and at least annually thereafter. This information would have to be provided with respect to each designated investment alternative in a comparative format. The DOL provided a safe harbor comparative chart, a copy of which is available at DOLSafeHarborComparativeChart. The required investment-related information for each designated investment alternative would include the following:
identifying information, including (i) the name of the investment alternative, (ii) a specific internet web site address leading to supplemental information regarding the investment alternative, (iii) the type or category of investment (e.g., large-cap, money-market), and (iv) the type of management of the investment alternative (e.g., active or passive);
performance data, including (i) average annual total return of the investment alternative for the prior one, five and ten calendar years (to the extent available), (ii) for investment alternatives with a fixed rate of return (e.g., GICs), both the fixed rate of return and the term of the investment, and (iii) comparisons of the returns to an appropriate broad-based index for the prior one, five and ten calendar years (to the extent available); and
fee and expense information, including (i) the amount and description of each fee charged against a participant’s account (e.g., sales loads and redemption fees), (ii) the total annual operating expenses of the investment alternative expressed as a percentage (e.g., the expense ratio), and (iii) a statement indicating that fees and expenses are only one of several factors that participants and beneficiaries should consider when making investment decisions.
Certain additional investment-related information would have to be provided to participants and beneficiaries upon request, including prospectuses and financial statements or reports. The Proposed Regulation would generally permit disclosure of asset-based expenses by describing the relevant rate or formula. The Proposed Regulation would not require disclosure of revenue-sharing payments and would not require a breakdown of expenses on a service-by-service basis. Importantly, the above requirements concerning investment-related information would apply only with respect to the plan’s designated investment alternatives, and would not apply to brokerage windows or other investment alternatives that were not designated investment alternatives. Further, the DOL noted that plan fiduciaries would be able to rely in good faith on information provided by service providers.
The DOL also issued a proposed an amendment to its regulation under Section 404(c) of ERISA to conform the participant-disclosure requirements under the two regulations.The Proposed Regulation is proposed to be effective for plan years beginning on or after January 1, 2009. Comments are due by September 8, 2008, and the Proposed Regulation is expected to be finalized by the end of the year.