August 8, 2012
Department of Labor
Field
Assistance Bulletin No. 2012-02R (the Revised Bulletin) includes a set of
FAQs that clarify certain aspects of the Department’s new participant disclosure
requirements for defined contribution plans, such as 401(k) plans that permit
participants to direct the investment of their accounts. The Revised Bulletin
modifies and replaces guidance originally published in Field Assistance Bulletin
No. 2012-02 (the Original Bulletin), which had caused concerns over how the
disclosure requirements should apply to plans that offer brokerage windows and
other similar investment platforms. The Revised Bulletin alleviates most of the
concerns raised by the Original Bulletin.
Deadlines under the disclosure regulation (the Regulation) are fast
approaching. Administrators of calendar-year plans are required to distribute
the first annual disclosure notice under the rules by Aug. 30, 2012, and to
distribute the first quarterly statements that comply with the Regulation by
Nov. 14, 2012 (covering the period from July through September). The Department
has indicated that these deadlines will not be extended.
The following is a summary of some of the more significant interpretations
included in the Revised Bulletin. For additional information on the requirements
of the Regulation, see our
previous
article.
Application to 403(b) Plans
The Regulation applies to all retirement plans that provide for participant
investment direction, excluding simplified employee pension plans and simple
retirement accounts. Section 403(b) plans that are subject to ERISA are covered
by the Regulation (as confirmed in the Revised Bulletin) and administrators of
these plans will need to ensure they understand the disclosure requirements as
they apply to the plans’ investment options. However, consistent with the
Department’s approach to Form 5500 annual reporting for 403(b) plans, the
Revised Bulletin exempts 403(b) plans from the investment-related disclosure
obligations of the Regulation if the plan administrator determines that it would
be impracticable or impossible to obtain the necessary information concerning
any investment option that is part of an annuity contract or custodial account
and if the following conditions are met:
- The contract or account was issued to a current or former employee
before Jan. 1, 2009;
- For periods before Jan. 1, 2009, the employer has ceased to have any
obligation to make any contributions (including employee salary reduction
contributions) to the contract or account and has in fact ceased making
contributions;
- The individual owner of the contract or account may legally enforce all
his or her rights against the insurer or custodian without any involvement
by the employer; and
- The individual owner is fully vested in the contract or account.
In addition to the guidance relating to 403(b) plans, the Revised Bulletin
also clarifies that the Regulation applies to a plan that allows for both
participant-directed investment of employee contributions and trustee-directed
investment of employer contributions. However, the investment-related disclosure
obligations apply only to the designated investment alternatives into which
participants may direct their investments (not the portion of the plan’s assets
that are actively managed by the trustee).
Definition of “Designated Investment Alternative”
The Regulation defines a “designated investment alternative” (DIA) to mean an
investment option that is specifically designated by the plan, into which
participants and beneficiaries can direct the investment of the assets in their
individual accounts. Characterizing an investment option as a DIA gives rise to
certain fiduciary obligations, including the specialized disclosure obligations
imposed under the Regulation. In addition, fiduciaries have an obligation to
prudently select, review and monitor the DIAs offered to participants under the
plan. Finally, plan recordkeepers have a duty to provide plan fiduciaries with
information concerning DIAs that is required for the participant disclosures
that must be made concerning those DIAs under the Regulation.
The Revised Bulletin provides some new insight into the proper categorization
of various types of investment alternatives that do not easily lend themselves
to classification as a DIA or a non-DIA under the definition in the Regulation.
For example, the Revised Bulletin clarifies that a participant’s option under a
plan to elect to have a fiduciary investment manager allocate the participant’s
assets among the plan’s DIAs (in accordance with an investment strategy designed
by the investment manager) does not in itself constitute a DIA. So, too, model
portfolios that are simply suggested methods of allocating plan assets among
DIAs are not themselves DIAs.
Application to Brokerage Windows and Other Similar Arrangements
The Revised Bulletin significantly revises the guidance contained in the
Original Bulletin relating to brokerage windows, self-directed brokerage
accounts and other similar arrangements (collectively, “brokerage windows”). The
Original Bulletin had created some controversy because it indicated, among other
things, that individual investments selected by participants within such a
window could be deemed to be DIAs for purposes of the Regulation, thus
triggering the special disclosures required under the Regulation.
In a replacement FAQ, the Revised Bulletin makes the following changes to the
guidance that was in the Original Bulletin:
- The Department clarifies that there is no requirement concerning how
many investment alternatives should be offered under a plan. The Original
Bulletin had indicated that there was a duty to offer a “manageable number
of investment alternatives.” However, the Department cautions in the Revised
Bulletin that fiduciaries that only offer a brokerage window, with no core
group of investment alternatives to also choose from, may need to be
concerned about whether they have sufficiently satisfied their ERISA
fiduciary duties of prudence and loyalty. This appears to reflect a concern
by the Department that a plan may offer only a brokerage window for
participant investment direction with the intent to avoid complying with the
Regulation.
- Fiduciaries of plans that offer brokerage windows continue to be bound
by their ERISA duties of prudence and loyalty with regard to participants
who invest in such arrangements. In this regard, the Department specifically
highlights the obligation to evaluate and monitor the nature and quality of
the brokerage services, and notes that it intends to engage in ongoing
discussions with interested parties to determine how best to ensure
compliance with these duties.
- The requirement in the Original Bulletin that fiduciaries monitor for
significant levels of investment by participants in a particular security or
other investment has been eliminated. The Revised Bulletin also eliminates a
safe harbor in the Original Bulletin that would deem certain a security or
investment as a DIA if a specified number or percentage of plan participants
were holding that security or investment in their brokerage account as of a
particular date.
Information Required to Describe a Brokerage Window
The Regulation requires that there be a “description” of any brokerage
window. The Revised Bulletin provides additional guidance on the types of
information that must be provided to meet this requirement. The disclosures
required are threefold:
- A plan administrator must provide participants with a general
description of any brokerage window. The description must provide enough
detail so that the participants have sufficient information to enable them
to understand how the window works. The types of information that fall under
this category include how and to whom to give investment instructions;
account balance requirements, if any; any restrictions or limitations on
trading; and how the brokerage window differs from the plan’s DIAs.
- Each participant must receive an explanation of any fees or expenses
that may be charged against the participant’s account on an individual basis
(rather than a planwide basis) in connection with a brokerage window
throughout its duration. If a plan includes a brokerage window as an option,
this explanation must be provided to all participants, even those who have
not selected to allocate account assets to such an arrangement.
- A participant’s quarterly statement must show the dollar amount of fees
and expenses relating to the brokerage window that actually were charged
against their individual accounts during the preceding quarter. Each
statement must include a description of the services to which the charges
relate.
Comparative Format for Disclosing Investment-Related Information
The Regulation requires that the information disclosed regarding each DIA be
provided in a table or other comparative format so that participants are able to
effectively compare the DIAs offered under the plan. The Revised Bulletin
clarifies certain aspects of this requirement. For example, rather than
requiring one consolidated table or chart, the new guidance allows a plan
administrator to furnish multiple comparative charts or other documents provided
by the plan’s various service providers or investment issuers — as long as the
documents are provided simultaneously to participants in a single mailing or
transmission designed to achieve the comparative effect sought under the
Regulation. This may be particularly helpful for 403(b) plans, which typically
offer DIAs from a number of different providers.
The Revised Bulletin also clarifies aspects of the average annual total
return information that must be included in the comparison for each DIA, as well
as the “since inception” category that may be included, as necessary.
Specificity of Plan-Related Information
In addition to the information required to be disclosed relating to DIAs, the
Regulation requires that information regarding general administrative expenses
(e.g., legal, accounting and recordkeeping expenses) that may be charged
to individual participants’ accounts be disclosed on or before the date on which
a participant may first direct his or her investments and at least annually
thereafter. The Regulation permits these fees and expenses to be expressed in
terms of a monetary amount, formula, percentage of assets or a per capita charge
— as long as the disclosure is written to be understood by the average plan
participant. Whether the explanation is written in such a manner will depend on
the level of detail provided in the disclosure.
The Revised Bulletin gives additional guidance regarding the required
specificity of the disclosure in situations in which the services and/or fees are
known at the time of disclosure, and in situations where they are not. For
example, where the fees for a given service are known, an explanation of the
service itself, the cost of the service and the method of allocating the cost
among participant accounts is required. On the other hand, when services or
fees, or both, are not known at the time of disclosure, the amount of
information required to be disclosed will depend on the facts and circumstances
and the amount of information that is known regarding the plan’s administrative
needs.
In addition, the Department states in the Revised Bulletin that such
information as relates to investment in a brokerage window provided under the
plan must be furnished to all plan participants — even if the percentage of the
plan’s participants who have actually selected the window is currently small.
Exceptions
One particularly beneficial aspect of the guidance in the Revised Bulletin is
the description of arrangements that do not necessitate disclosures under
the Regulation. As to disclosures of plan-related information, the Revised
Bulletin describes various situations in which the Department considers the
chance of any such expenses being charged against individual accounts to be
either nonexistent or so slim that these particular disclosures are not
required.
For example, where the plan document expressly allows for payment of these
expenses from either the plan’s forfeiture account or from the general assets of
the plan sponsor, such expenses do not need to be disclosed to plan participants
as expenses that may be charged against their plan accounts.
The Revised Bulletin also makes clear that, even in situations in which the
plan document allows for administrative expenses to be paid from individual
accounts, the disclosures may not be required if the plan has historically
refrained from charging individual accounts and there is no chance that
individual accounts will be charged in the foreseeable future.
For further information, please contact one of the authors or any other
member of the McGuireWoods
employee
benefits team.