On July 23, 2008, the U.S. Department of Labor (“DOL”) published its proposed rule for disclosure of plan fees to participants. The proposed regulation is intended to ensure that participants in 401(k) plans and other defined contribution plans receive uniform and useful fee and expense information about their investment options. The proposed regulation requires that standard, basic disclosures be given to all participants and beneficiaries who direct the investment of assets in their individual accounts, and that investment-related information be presented in a format that makes comparisons easy.
The proposed regulation applies to all participant-directed 401(k) and other defined contribution plans. This article highlights some of the key requirements under the new fee disclosure regulation and explains how its implementation will change the current disclosure requirements under Section 404(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
Effective Date
As proposed, the regulation is effective for all plan years that begin on or after January 1, 2009. Depending on when the regulation is finalized, the effective date may be adjusted.
Required Disclosures
The proposed regulation requires the disclosure of three types of plan-related information:
- General Plan Information
- Administrative Expenses
- Individual Expenses
General Plan Information
General plan information that must be disclosed to participants includes the following:
- The circumstances under which participants and beneficiaries may give investment instructions;
- Any specific limitations on such instructions, including any restrictions on a transfer to or from a designated investment alternative;
- Any plan provisions relating to the exercise of voting, tender and similar rights related to an investment in a designated investment alternative, as well as any restrictions on such rights;
- The identification of any designated investment alternatives specifically offered under the plan; and
- The identification of managers of designated investment alternatives.
Administrative Expenses
Another type of plan-related information that must be disclosed involves a description of administrative expenses that may be assessed against participants’ accounts for plan administrative services. Examples of such expenses include legal, accounting and recordkeeping charges as long as those expenses are not included in investment-related fees and expenses.
Individual Expenses
The final type of plan-related information that must be disclosed is the description of individual fees and expenses that may be assessed on an individual-by-individual (rather than a plan-wide) basis. Examples of such expenses include those related to QDROs, participant loans or investment advice services.
In addition to the disclosure of plan-related information, the proposed regulation also requires the disclosure of investment-related information. The regulation requires that participants and beneficiaries be furnished certain basic information with respect to each designated investment alternative offered under the plan. The investment-related information that must be disclosed includes the following:
- The name of the investment alternative;
- The type or category (e.g. money market mutual fund, balanced fund, index fund) of the investment alternative;
- Whether the investment alternative is actively or passively managed; and
- An internet website address that is sufficiently specific to lead participants and beneficiaries to supplemental information, including:The name of the investment’s issuer or provider; Principal strategies and attendant risks; The assets comprising the investment’s portfolio; Portfolio turnover; Performance; and Related fees and expenses.
- The name of the investment’s issuer or provider;
- Principal strategies and attendant risks;
- The assets comprising the investment’s portfolio;
- Portfolio turnover;
- Performance; and
- Related fees and expenses.
The proposed regulation also requires that certain investment-related information be disclosed subsequent to investment. The proposed regulation requires that when a plan provides for the pass-through of voting, tender and similar rights, the fiduciary must furnish participants and beneficiaries who have invested in a designated investment alternative with these features any materials about such rights that have been provided to the plan. Finally, the proposed regulation requires a plan to provide certain information, such as copies of prospectuses, to each participant or beneficiary upon request.
Format of Disclosures
All disclosures are required to be in writing and must be written in a manner that can be understood by the average plan participant. A chart or similar format is required to facilitate comparison of the investment-related information required to be disclosed as explained above. The DOL provided a model comparative chart with the proposed regulation which would satisfy the comparative format requirement. The model chart includes areas for comparative index data such as risks, turnover ratio, performance and fees as well as a column where the investment approach of each investment alternative is identified as “active” or “passive.”
Timing of Disclosures
The proposed regulation requires that the required plan-related and investment-related disclosures be provided on a regular and periodic basis, generally when a participant becomes eligible to participate in the plan, and at least annually thereafter. At least annually thereafter means at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis. The proposed regulation also requires that participants and beneficiaries be furnished with a description of any material changes (e.g. changes in designated investment alternatives) to the required information not later than 30 days after the date of adoption of such changes.
Additionally, certain information must be provided to participants and beneficiaries on a more frequent basis. The actual dollar amounts charged to an individual’s account during the preceding quarter for administrative and individual services must be disclosed at least quarterly.
Current 404(a) Requirement
Under ERISA, the investment of plan assets is a fiduciary act governed by the fiduciary standards in ERISA section 404(a)(1)(A) and (B), which require fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. The DOL took the opportunity in the proposed regulation to issue rules that apply under ERISA’s general prudence framework, even if the protection of ERISA Section 404(c) is not sought. ERISA Section 404(c) provides plan fiduciaries with the opportunity to limit their liability if the retirement plan provides for participant-directed investments, but only if the plan satisfied the current ERISA Section 404(c) requirements.
By amending ERISA’s general prudence rules, the proposed regulation would apply generally to all plans in which participants may direct investments regardless of whether the plan sponsor is attempting to qualify for fiduciary and protection under ERISA Section 404(c). As a result of the changes to the regulatory framework, plans that currently comply with ERISA Section 404(c) would no longer be required to make certain disclosures.
Specifically, ERISA section 404(c) currently requires that a plan fiduciary provide a description of available investment alternatives (along with their objectives and risk and return style), a description of the investment and instruction process, a description of transaction fees and expenses, and the name and address of the plan fiduciary. In place of such provisions, the proposed regulation includes a simple cross-reference to the new disclosure rules, on the premise that a plan complying with ERISA Section 404(c) would need to supply the information required under the proposed regulation.
The proposed regulation does not change a fiduciary’s duty to prudently select and monitor the designated investment alternatives and (if applicable) investment managers that are available under the plan. It is these duties that are at the heart of the current litigation regarding defined contribution plans, and the DOL makes it clear that the plan’s fiduciaries must provide adequate information to participants to permit them to make informed decisions.
The proposed regulation under ERISA 404(a) may bolster claims by participants, although the level of detail required in the proposed regulation does not go as far as many plaintiffs’ claims assert. Ultimately, the effect of the proposed regulation on the comprehensive issue of plan fees remains to be seen, although the additional guidance provided by the DOL should give plan sponsors and their advisors an opportunity to revisit this critical issue and make adjustments in the plan’s policies and operation.
The comment period for the proposed regulation ends September 8, 2008, and the DOL intends to issue a final regulation this year. Because of this intention, and the political environment that has seen both the House of Representatives and Senate conduct hearings on plan fee disclosures, it is unlikely that the DOL will delay the effective date of the proposed regulation. However, some large employers and trade groups have strongly urged delays in the effective date, since the impact of the proposed regulation could be felt as early as the first quarter of 2009.
For further information or help analyzing the impact of the proposed regulation on fee disclosures for your participant-directed 401(k) and other defined contribution plans, please also contact any member of the McGuireWoods Employee Benefits or Labor & Employment Teams.