Labor Department Offers Guidance on Electronic Disclosure

January 23, 2012

In 2010, the United States Department of Labor (the DOL) issued a regulation (the Regulation) prescribing certain disclosures to be made to participants (including, for this purpose, beneficiaries and alternate payees) in defined contribution plans that permit them to control the investment of their accounts. The disclosures involve such matters as plan expenses and the performance of the investment funds made available to participants. Under an extension provided by the DOL last July, the initial disclosures under the Regulation must be furnished by the later of (i) May 31, 2012, or (ii) 60 days after the plan year beginning on or after Nov. 1, 2011. Further information on the Regulation can be found here.

Last month, the DOL published Technical Release 2011-03R (the Release), which describes when and how electronic delivery can be used to fulfill a plan administrator’s disclosure obligations under the Regulation. This article reviews the options available to plan administrators under the Release.

Present DOL Electronic Disclosure Safe Harbor

Before discussing the Release, it is necessary to consider the DOL’s existing “safe harbor” electronic disclosure regulation issued in 2002 (the Safe Harbor).

Documents that would otherwise be provided in hard-copy form can be delivered electronically under the Safe Harbor to the following groups of persons:

  • Group 1: This group consists of participants who can effectively access documents furnished in electronic form at any location where they are reasonably expected to perform their duties as employees and as to whom access to the employer’s or plan sponsor’s electronic information system is an integral part of those duties.
  • Group 2: In this group are all participants (including beneficiaries and alternate payees) not in Group 1 who are entitled to disclosures under Title I of ERISA, who affirmatively consent to receiving such disclosures through electronic media in the manner prescribed by the Safe Harbor and who have not withdrawn that consent. The plan administrator must follow special procedures if a change in hardware or software requirements needed to access or retain electronic documents creates a material risk that a participant will be unable to access or retain electronically furnished documents.

For Group 2 participants, the procedures for obtaining and maintaining consent are burdensome. Accordingly, many plan administrators have found it impractical to use the Safe Harbor for this group.

Acceptable Methods of Electronic Delivery under the Release

If a plan administrator chooses not to use the Safe Harbor for electronic delivery of information that must be disclosed under the Regulation and if the plan administrator wishes to avoid paper disclosure, the Release offers several electronic-disclosure alternatives:

  • Method 1, for Information that May Be Included in a Pension Benefit Statement : For any required disclosures that may be included in a pension benefit statement under the Regulation, electronic delivery can be used to the extent and in the same manner as has been permitted for pension benefit statements under the DOL’s Field Assistance Bulletin 2006-03 (the Bulletin). This means that, as clarified in the Release, a secure continuous-access website can be used. Disclosures that can be made using this method are general plan information about the direction of investments; fees and expenses for general plan administrative services that may be charged against participants’ accounts on a planwide basis; and fees and expenses that may be charged against a participant’s account on an individual basis (such as fees for processing a loan).
  • Method 2, for Information that May Not Be Included in a Pension Benefit Statement : This method applies to any information that cannot be disclosed using Method 1, i.e., required disclosures that may not be included in a pension benefit statement in accordance with the Regulation. Disclosures that can be made using this method consist of specific information as to designated investment alternatives, including performance data, fees and expenses. Pending further guidance from the DOL, a plan administrator may furnish such disclosures (and, if desired, any disclosures that can be made using Method 1) to a participant through electronic media if all of the following conditions are satisfied:
  1. The plan administrator must provide the participant with an “initial notice” requesting the participant’s email address. Such notice must indicate: (i) that providing such an email address is voluntary; (ii) the consequences of electronic disclosure; (iii) the information that will be electronically delivered and how the participant can gain access to it; (iv) that a paper copy is available upon the participant’s request; (v) that the participant can opt out of electronic delivery at any time; and (vi) the process by which the participant can change or update the email address that it previously provided to the plan administrator.
  2. The participant must voluntarily provide an email address. The participant must voluntarily send the employer, plan sponsor or plan administrator an email address that can be used to transmit the required disclosures. If the employer or plan sponsor supplies a participant with an email address for this purpose, this is not considered “voluntary” unless the participant subsequently and voluntarily furnishes that address back to the employer, plan sponsor or plan administrator. A special transition rule provides a limited exception to the requirement that the submission of an email address is “voluntary” where an email address for a participant is already on file with the employer, plan sponsor or plan administrator.
  3. The plan administrator must provide the participant with an annual notice. Such notice must describe the participant’s ability to opt out of the electronic delivery process and must be furnished in paper form unless the plan has had electronic interaction with the participant since the initial or last annual notice was delivered.
  4. The plan administrator must ensure “actual receipt” of the disclosures. As with the Safe Harbor, the plan administrator must take appropriate and necessary measures reasonably calculated to ensure that the electronic delivery system results in actual receipt of transmitted information. This requirement could be satisfied by the return receipt or notice of undelivered email functions to track receipts. Alternatively, the plan administrator might choose to conduct participant surveys or other reviews periodically to ensure actual receipt.
  5. The plan administrator must protect confidential participant information. In delivering the required disclosures electronically, plan administrators must take appropriate and necessary measures to ensure that any personal information contained in any of the disclosures remains confidential.
  6. Notices must be drafted to be understood by the average plan participant.

Observations

The Release provides little relief to plan administrators who want to satisfy the disclosure requirements of the Regulation electronically but are stymied by the cumbersome requirements of the Safe Harbor as to Group 2 participants. Inexplicably, however, Method 2 in the Release is more difficult to implement than the consent procedures in the Safe Harbor for Group 2 participants.

The Release allows electronic disclosure using the procedures specified in the Bulletin for some, but not all, information that must be disclosed under the Regulation. No rationale is given for this distinction, but in an earlier version of the Release the DOL explained that the Regulation does not allow information about the performance and fees associated with investment alternatives to be included as part of a pension benefit statement. However, nothing would appear to preclude the DOL from amending the Regulation to allow all required disclosures to be included in or with a pension benefit statement. The DOL issued the Regulation pursuant to Section 404(a) of ERISA, which describes in general how a plan fiduciary must discharge his or her duties as to the plan. This section of ERISA does not address disclosure, leaving the DOL free to issue regulations on the form of disclosure as it deems appropriate for this purpose.

In the Release, the DOL indicates its awareness that “some workers and retirees may not be sufficiently computer literate to receive information electronically or have reasonable access to the Internet, and others may simply prefer traditional paper disclosure.” The DOL should also be concerned as to how many of these non-computer-literate persons can be expected to understand and use the massive amount of information that they will receive as a consequence of the Regulation, such as that to be found in the model comparative chart.

In the Release, the DOL has left the door open to some form of interim relief as to electronic disclosure under the Regulation, as it has indicated that it may not be able to provide final regulatory guidance in this area before the Regulation takes effect. However, with the May 31, 2012, compliance date fast approaching for most plans, plan administrators wanting to use electronic disclosure will have to follow the guidance now available under the Safe Harbor and the Release. For many plan administrators, this may mean electronic disclosure to participants with email and Internet access at their desks and paper disclosure for everyone else.

For further information, please contact the authors or any other members of McGuireWoods’ Employee Benefits Team.

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