Participant Fee Disclosure Deadline Approaching

April 2012

Beginning on August 30, 2012, plan administrators of 401(k) plans and other participant-directed individual account plans must disclose certain plan and investment-related information to participants and beneficiaries under final regulations issued by the Department of Labor (“DOL”). The regulation is intended to ensure that all plan participants who have the right to direct the investment of their accounts will have the information they need to make informed decisions about the management of their plan accounts and the investment of their retirement savings.

Which Plans are Subject to the Participant-Level Fee Disclosure Rules?

Participant-level fee disclosures must be made to participants in any participant-directed individual account plan, other than:

• A simplified employee pension; or
• A SIMPLE retirement plan.

Participant-level fee disclosures are not required to be made with respect to any plan where the employer directs plan investments, such as a defined benefit plan.

Who Has The Responsibility to Make the Participant-Level Fee Disclosures?

The plan administrator of the plan.

Which Individuals Have the Right to Receive the Fee Disclosures?

Any participant or beneficiary who has the right to direct the investment of assets contributed to his or her individual account. This includes any employee who is eligible to participate in the plan, even if that employee is not actually enrolled in the plan.

What Types of Information Must Be Disclosed to Participants?

The plan administrator must disclose information in two categories: (1) plan-related information and (2) investment-related information.

What Kind of Plan-Related Information Must be Disclosed?

Initial and Annual Disclosures. The following plan-related information must be disclosed on or before the date the participant can first direct his or her investments and annually thereafter:

• An explanation of how the participant gives investment instructions;
• An explanation of any plan limitations on giving investment instructions, including any restrictions on transfer to or from a designated investment alternative;
• A description of plan provisions relating to the exercise of voting, tender and similar rights as to a designated investment alternative, and any restrictions on these rights;
• An identification of any designated investment alternatives offered under the plan. A “designated investment alternative” means any investment alternative designated by the plan into which participants can invest their accounts, but does not include any brokerage windows, self-directed brokerage accounts or similar arrangements;
• An identification of any designated investment managers;
• A description of any brokerage windows, self-directed brokerage accounts or similar arrangements;
• An explanation of any fees and expenses for general plan administrative services (auditor’s fee, recordkeeping) that may be charged against the participant’s account which are not reflected in the total annual operating expenses of any designated investment alternative, as well as the basis on which these fees are allocated (i.e., per capita or pro rata); and
• An explanation of any fees and expenses that may be charged against a participant’s account on an individual, rather than a plan-wide, basis (such as a loan processing fee) and that is not reflected in the total annual operating expenses of any designated investment alternative.

The above information can be distributed as a standalone document or it can be distributed as part of the SPD or a participant benefit statement. Note, if the required disclosures are part of the SPD or participant benefit statement, these documents must be distributed before the initial investment decision and at least annually thereafter to comply with the fee disclosure timing rules.

If there is a change to any of the annual disclosures, the plan administrator must notify each participant of the change at least 30 days, but not more than 90 days, in advance of the effective date of the change.

Quarterly Disclosures. The following plan-related information must be disclosed to participants on a quarterly basis:

• The dollar amount of fees and expenses for general plan administrative expenses charged to the participant’s account during the preceding quarter and a description of the services to which the charges relate;
• If applicable, a statement that, in addition to the fees and expenses deducted from the participant’s account, some of the plan’s administrative expenses for the preceding quarter were paid from the total annual operating expenses of the plan’s designated investment alternatives (e.g., through revenue sharing arrangements, Rule 12b-1 fees or sub-transfer agent fees). In other words, one or more mutual funds offered under the plan shares a portion of the operating expense that it collects with the plan’s recordkeeper, thereby reducing the plan’s out of pocket expenses; and
• The dollar amount of fees and expenses for individually-assessed fees charged to the participant’s account during the preceding quarter and a description of the services to which the charges relate (i.e., loan processing fee).

The quarterly disclosures may be distributed as a standalone document or as part of the quarterly participant benefit statement.

What Kind of Investment-Related Information Must Be Disclosed?

Initial and Annual Disclosures. The plan administrator must disclose the following investment-related information to participants before the participant’s initial investment election and annually thereafter with respect to each designated investment alternative.

1. Identifying Information.
• The name of each designated investment alternative; and
• The type or category of the investment (e.g., money market fund, balanced fund).
2. Performance Data. If the return of the designated investment alternative is not fixed, show the average annual return for the 1, 5, and 10-calendar year periods ending on the date of the most recently completed calendar year and a statement that past performance is not necessarily an indication of future return. If the designated investment alternative has a fixed rate of return, show the fixed or stated annual rate of return and the term of the investment.
3. Benchmarks. For any designated investment alternative where the rate of return is not fixed, show the name and returns of an appropriate broad-based securities market index over a 1, 5 and 10 calendar year period.
4. Fee and Expense Information. For any designated investment alternative where the rate of return is not fixed, include:
• The amount and a description of each shareholder-type fee charged directly against a participant’s investment (such as commissions and sales loads) and a description of any restriction or limitation that may apply to a purchase, transfer or withdrawal of the investment (such as a round trip, equity wash or other restriction);
• 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 should consider when making investment decisions, and
• A statement that the cumulative effect of fees and expenses can substantially reduce the growth of a participant’s retirement account and that participants can visit the Employee Benefit Security Administration’s website for an example demonstrating the long-term effect of fees and expenses. For any designated investment alternative with a fixed rate of return, include the amount and a description of any shareholder-type fees and a description of any restriction or limitation that might apply to a purchase, transfer or withdrawal of the investment.
5. Website Address. An Internet website address that provides additional information about the designated investment alternative, such as the alternative’s objectives or goals, principal strategies and risks, portfolio turnover rate and quarterly performance data.
6. Glossary. A general glossary of terms to help participants understand the designated investment alternatives, or a website address providing access to a glossary. A sample glossary has been published by The SPARK Institute and the Investment Company Institute, which has been endorsed by the American Benefits Council, the American Council of Life Insurers, the American Society of Pension Professionals & Actuaries, and the Society for Human Resources Management. The sample glossary is available online at www.ici.org/401k/11_401k_glos.

The above investment-related information must be provided in a comparative chart format. The DOL published as a model comparative chart as part of the regulations, which can be viewed at: www.dol.gov/ ebsa/participantfeerulemodelchart.doc.

Information Provided Subsequent to Investment. If the plan passes through voting and tender rights to participants, then the plan administrator must give investing participants any information received by the plan relating to the exercise of those rights.

Information Provided on Request. The plan administrator must also furnish, either at the time of the initial investment, annually, or upon request:

• copies of prospectuses;
• copies of financial statements and reports; and
• The per-share or unit valuation for each designated investment alternative.

Special Rules. The regulations contain special rules for disclosures related to annuity options and qualifying employer securities.

Can the Required Disclosures be Made Electronically?

The required disclosures can be made electronically under the DOL’s existing relatively stringent rules which require, among other items, that the participant use a computer as part of his or her integral job duties. 

The DOL has also provided a temporary enforcement policy in Technical Release 2011-03R which somewhat loosens these restrictions. Under the Technical Release:

1. If a participant benefit statement is provided electronically, planrelated information that is provided as part of the participant benefit statement can be provided electronically in the same manner (including through a secure continuous access website if guidance under the DOL’s Field Assistance Bulletin 2006-3 is followed.)

2. Plan-related information and investment-related information can be provided electronically if the participant voluntarily provides an e-mail address in response to an initial notice. This notice must include, among other things, a statement that the participant can request a paper copy of the disclosures and can opt out of electronic delivery. This notice must also be sent to the participants annually.

The cost of delivering the disclosures can be mitigated somewhat to the extent that they can be delivered electronically.

When Must the Disclosures Be Made?

The initial plan-related and investment-related annual disclosures must be made by August 30, 2012. The quarterly disclosures (for fees incurred from July through September) are due no later than November 14, 2012.

What are the Possible Sanctions if a Plan Administrator Fails to Make the Required Disclosures?

A plan administrator who fails to make the required disclosures has breached its fiduciary duties under ERISA. As such, it could be subject to enforcement action and the assessment of civil penalties by the DOL or to a lawsuit brought by participants.

If a Plan is not an ERISA 404(c) Plan, Does it Have to Comply with These Disclosure Rules?

Yes. A plan that has not elected to take advantage of protection from fiduciary liability under ERISA Section 404(c) must still comply with the participant-level disclosure rules if it allows participants to direct the investment of their accounts.

What Should a Plan Administrator do to Prepare for the Participant Disclosure Rules?

The plan administrator should first consider how it wants to disclose the annual plan-related information - as a standalone document, as part of the SPD or as part of a participant benefit statement. Some of this information should be included in the SPD to comply with the SPD disclosure rules, such as how and when participants make investment choices and fees that could affect the account balance. However, because this information must be disclosed before the participant’s initial investment decision and every year thereafter, and SPDs are not generally distributed on an annual basis, it may make sense to include the plan-related information as an appendix to the SPD, so it can be separately updated and distributed.

The plan administrator should also confirm that the recordkeeper is preparing to show the required quarterly disclosures (showing planlevel and individual fees assessed) on the third quarter participant benefit statements and the plan administrator may wish to review a sample participant benefit statement before the deadline.

The plan administrator should check with its recordkeeper, investment adviser or other service provider to make sure that they will assist in the preparation and distribution of the annual plan-related and investment-related disclosures by the required deadline. Covered service providers are required by the fiduciary-level disclosure rules to provide relevant investment-related information to the plan fiduciary, so recordkeepers should be preparing to comply with these rules and provide the information to the plan fiduciary by July 1, 2012, in advance of the participant-level fee disclosures, which are required by August 30, 2012. A copy of our Client Alert regarding service provider disclosures can be found at www.dickinson-wright.com/news.

Investment-related information must be disclosed in the form of the model comparative chart, so the plan administrator does not need to consider the disclosure format. The plan administrator should work with its recordkeeper or other service provider to determine whether the information will be disclosed in electronic form or paper form, and whether any other explanations to participants would be helpful.

Last, the plan administrator should consider how to answer questions from participants about the disclosures, and in particular questions relating to administrative fees paid by the designated investment alternatives. Participants may not be aware that revenue sharing payments from the designated investment alternatives are being used to pay the costs of operating the plan so they may be unpleasantly surprised to learn this. The plan administrator should emphasize that these payment arrangements are not new, and should describe the steps taken to manage the fees so they are reasonable in relation to the services generally afforded to a typical 401(k) plan participant - including 24/7 website or telephone assistance, online investment or other plan tools, electronic loan modeling, etc.

 
FOR MORE INFORMATION CONTACT:

Cynthia A. Moore, is a member and practice department
mananger in Dickinson Wright’s Troy office. She can be
reached at 248.433.7295 or cmoore@dickinsonwright.com.

Deborah L. Grace, is a member in Dickinson Wright’s
Troy office. She can be reached at 248.433.7217 or
dgrace@dickinsonwright.com.