Alert November 02, 2010

DOL Issues Final Regulation on Disclosure Requirements for Participant-Directed ERISA Plans

The Department of Labor (the “DOL”) issued a final regulation (the “Final Regulation” or “Regulation”) under Section 404(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  The Regulation sets forth fiduciary requirements for disclosure to participants in individual account plans that provide for the direction of investments by participants (e.g., most so-called 401(k) plans).  The Regulation was initially proposed in July 2008 and was discussed in the July 29, 2008 Alert.  The Final Regulation will apply for plan years beginning on or after November 1, 2011.

Scope of the Regulation

The Final Regulation generally applies to all participant-directed individual account plans subject to ERISA’s fiduciary rules (except for certain plans that involve individual retirement accounts). The Regulation requires that specific disclosures relating to a plan and its “designated investment alternatives” be made to each participant or beneficiary who has the right to direct the investment of assets held in, or contributed to, his or her individual account under the plan.  (For purposes of the Final Regulation, “designated investment alternative” means any investment alternative designated by the plan.  It does not include brokerage windows, self-directed brokerage accounts, or similar arrangements.)

The Regulation imposes these disclosure obligations on the plan administrator (which, under ERISA, is generally the plan sponsor or a person or committee named as administrator in the plan document).  However, the plan administrator is not liable for the completeness or accuracy of information provided by plan service providers or issuers of investment alternatives designated by the plan, so long as the plan administrator relies reasonably and in good faith.  As a practical matter, it is likely that plan administrators will look to service providers and issuers of designated investment alternatives for the required information. 

Plan-Related Disclosures

The Final Regulation requires that the general plan information, the plan administrative expense information, and the individual participant expense information described below be provided on or before the date on which a participant or beneficiary can first direct his or her investments (the “Initial Investment Date”) and at least annually thereafter.  If there is a change to this information, the plan generally must furnish each participant and beneficiary a description of such change at least 30 days, but not more than 90 days, in advance of the effective date of such change.  In addition, as indicated below, certain information must be provided at least quarterly.

General Plan Information.  The required general information regarding the plan may be disclosed through the plan’s summary plan description (“SPD”).  This information includes:

  • An identification of any designated investment alternative offered under the plan;
  • An explanation of the circumstances under which participants and beneficiaries may give investment instructions;
  • An explanation of any specified limitations on such instructions under the terms of the plan, including any restrictions on transfer to or from a designated investment alternative;
  • A description of or reference to plan provisions relating to the exercise of voting, tender and similar rights appurtenant to an investment in a designated investment alternative as well as any restrictions on such rights;
  • An identification of any designated investment managers; and
  • A description of any brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan.

Administrative Expenses Information.  This information includes explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping) that may be charged against the individual accounts of participants and beneficiaries and that are not reflected in the total annual operating expenses of any designated investment alternative, and the basis on which such charges will be allocated to each individual account.

In addition, the plan administrator must disclose the following information at least quarterly:

  • The dollar amount of the fees and expenses described above that are actually charged during the preceding quarter to the participant’s or beneficiary’s account for such services;
  • A description of the services to which the charges relate (e.g., plan administration, including recordkeeping, legal, accounting services); and
  • If applicable, an explanation that, in addition to the fees and expenses disclosed, some of the plan’s administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan’s designated investment alternatives (e.g., through revenue sharing arrangements, Rule 12b-1 fees or sub‑transfer agent fees).

Individual Expense Information.  This information includes an explanation of any fees and expenses (1) that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis (e.g., fees related to processing plan loans or qualified domestic relations orders, fees for investment advice, fees for brokerage windows, commissions, redemption fees, and optional rider charges in annuity contracts) and (2) that are not reflected in the total annual operating expenses of any designated investment alternative.

In addition, plan administrators must disclose, at least quarterly:  the dollar amount of the individual fees and expenses that are actually charged during the preceding quarter to the participant’s or beneficiary’s account; and a description of the services to which the charges relate  (e.g., loan processing fee).

Investment-Related Disclosures

The Final Regulation requires plan administrators to disclose the following information before the Initial Investment Date, and at least annually thereafter:

  • With respect to each designated investment alternative offered under the plan—(A) The name of each designated investment alternative and (B) the type or category of the investment (e.g., money market fund, balanced fund (stocks and bonds), large-cap stock fund, employer stock fund, employer stock fund or employer securities);
  • Performance data such as (i) the average annual total return of the investment alternative for 1‑, 5-, and 10-calendar year periods (or for the life of the investment alternative, if shorter) ending on the date of the most recently completed calendar year or (ii) the fixed or stated annual rate of return and term of an investment alternative;
  • The name of an appropriate broad-based securities market index for each investment alternative and its returns over the same periods for which the investment alternative’s performance is shown;
  • The amount and a description of each shareholder-type fee and a description of any restriction or limitation that may be applicable to a purchase, transfer, or withdrawal of the investment in whole or in part (such as round trip, equity wash, or other restrictions);
  • The total annual operating expenses of the investment expressed as a percentage (i.e., expense ratio);
  • The total annual operating expenses of the investment 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 participants and beneficiaries should consider when making investment decisions, and that cumulative effect of fees and expenses can substantially reduce the growth of a participant’s or beneficiary’s retirement account in whole or in part;
  • An internet website address for each designated investment alternative where participants can find the following information with regard to the alternative:  name; objectives or goals; principal strategies (including a general description of the types of assets held by the investment) and principal risks; portfolio turnover rate; performance data; and fee and expense information.

The Final Regulation includes a safe harbor comparative chart with the required investment-related disclosures. 

In addition, the Regulation requires the plan administrator to provide participants and beneficiaries with information received by the plan relating to the exercise of voting and similar rights relating to a designated investment alternative in which the participant or beneficiary is invested (to the extent such rights are passed through to participants and beneficiaries).  Further, the plan administrator must provide certain information upon request by a participant or beneficiary – e.g., prospectuses, financial reports, or similar documents relating to designated investment alternatives that have been provided to the plan; a statement of the unit value of a designated investment alternative (as well as the date of valuation); and a list of assets comprising the portfolio of each designated investment alternative that is considered to hold “plan assets” under the applicable DOL regulation.

Changes to ERISA Section 404(c) Regulation

The DOL also amended its regulation under Section 404(c) of ERISA.  Under Section 404(c), if certain conditions are satisfied with respect to an individual account plan with investments directed by participants (or beneficiaries), fiduciaries will not be held liable under ERISA for the results of the participant’s (or beneficiary’s) exercise of control over his or her account.  One of the conditions to the relief under Section 404(c) is that the participant (or beneficiary) be provided with the information specified in the DOL regulation under Section 404(c).  The amendment to the Section 404(c) regulation provides that the required information under that section includes the information that is required to be provided under the Section 404(a) Final Regulation, described above.

The amendment also incorporates into the Section 404(c) regulation a statement that Section 404(c) does not serve to relieve a fiduciary from his or her duty to prudently select and monitor any service provider or designated investment alternative under the plan.  While the DOL had previously (e.g., in litigation) taken the position described in this statement, this position was not previously set forth in the Section 404(c) regulation.