the Department of Labor (DOL) issued final regulations requiring broad
disclosures of fees, expenses and certain other plan and
investment-related information to participants and beneficiaries under
individual account plans.
The purpose of the new disclosure requirements is to ensure
participants and beneficiaries have access to adequate information to
enable them to comparison shop among investment options to make
informed investment decisions.
Below is a general overview of the regulations' key disclosure
requirements that become effective in 2012.
Plans Subject to the Disclosure Requirements
All individual account plans that are subject to the Employee
Retirement Income Security Act of 1974 (ERISA) and permit participants
and beneficiaries to direct their account investments must comply with
the disclosure requirements. Individual account plans include not only
401(k) plans but also profit sharing and other tax-qualified plans, as
well as 403(b) plans sponsored by tax-exempt employers that permit
participants and beneficiaries to direct their own account
The disclosure requirements do not apply to IRA-based plans such as
SEPs and SIMPLE plans. Also, governmental plans, as well as church
plans that have not elected to be treated as ERISA plans, are not
subject to the disclosure requirements.
For plans utilizing a calendar plan year (this is true of most
plans), plan administrators are required to provide the initial
disclosures of plan and investment-related information to participants
and beneficiaries no later than May 31, 2012. This deadline is
extended to 60 days after the first day of the first plan year
beginning on or after November 1, 2011, if this would be a later
The first quarterly statements of fees and expenses charged to
participants' and beneficiaries' plan accounts must be provided no
later than 45 days after the end of the calendar quarter in which the
first initial disclosures were required (August 14, 2012 for plans
utilizing a calendar plan year).
Who Must Provide the Disclosures?
The ultimate responsibility for providing all of the required
information and other materials belongs to the plan administrator
(usually the plan administrator is the plan sponsor).
As a practical matter, carrying out the responsibility for
providing the required information and materials will ordinarily be
delegated to a plan's recordkeeper. Accordingly, plan sponsors need to
verify that their recordkeepers will provide these services under
their contracts. If so, the plan administrator's responsibility will
be limited to overseeing the recordkeeper to make sure it is
fulfilling its obligations.
The regulations clarify that, to the extent a plan administrator
reasonably and in good faith relies on information from an investment
or other service provider in making the required disclosures, the
administrator will not be held liable for any resulting inaccuracy or
lack of completeness.
Designated Investment Alternatives
An important concept under the regulations is the "designated
investment alternative." Designated investment alternatives include
all funds and other vehicles under a plan into which participants and
beneficiaries can direct plan contributions other than brokerage
accounts, brokerage windows or similar options that permit investment
in vehicles beyond those designated by the plan's fiduciaries.
Before a participant or beneficiary may begin directing the
investment of his or her plan account, and at least annually
thereafter, the plan administrator must furnish disclosures of the
following plan-related information:
A description of procedures for directing account investments,
including any restrictions on changing investment elections with
respect to any designated investment alternative;
The designated investment alternatives available under the plan
as well as any designated investment managers (in most cases,
designated investment alternatives are mutual funds and similar
vehicles rather than managed accounts--accordingly, most of the
required information will pertain to the investment products rather
than any designated managers);
A description of any voting, tender or similar rights associated
with any designated investment alternative, including any
restrictions on them;
If applicable, a description of any brokerage account, window or
similar feature that permits participants and beneficiaries to
invest their plan accounts in any vehicle other than the plan's
designated investment alternatives;
An explanation of administrative expenses, such as
recordkeeping, legal and audit expenses that may be charged to all
plan accounts and the basis on which such charges will be allocated;
An explanation of any fees and expenses that may be charged to
individual accounts that are not already reflected in the operating
expenses of a designated investment alternative, such as:
Commissions and sales charges;
Redemption or transfer fees;
Fees for individual investment advisory services;
Processing fees for plan loans and QDROs; and
Charges for use of a brokerage window or similar feature.
Plan-related information may be included in (or with) an SPD or
benefit statement if the timing requirements can be met.
The plan administrator must also furnish to each participant or
beneficiary certain investment-related information in a chart or
similar comparative format. The following information must be provided
for all designated investment alternatives under the plan, regardless
of whether they have variable or fixed rates of return: the name of
the investment and the type or category of the investment (i.e.,
balanced fund, small cap equity fund, etc.).
Variable Rate of Return Investments
For each designated investment alternative with a variable rate of
return, such as a mutual fund, the following information must be
The average annual total return for 1-, 5- and 10-calendar-year
performance periods ending on the last day of the previous year and
the returns, over comparable performance periods, of an appropriate
broad-based securities index;
The amount and description of each shareholder-type fee, such as
commissions, sales loads, and redemption and transfer fees that are
not already reflected in the operating expenses of the designated
The operating expenses, both as a percentage and an annual
dollar amount for each $1,000 invested;
Any purchase, transfer or withdrawal restrictions;
A statement that fees and expenses are only one of several
factors that participants and beneficiaries should consider when
making investment decisions;
A statement that past performance is not necessarily indicative
of future performance; and
A statement that the cumulative effect of fees and expenses can
substantially reduce the growth of the retirement account and that
participants and beneficiaries can visit the Employee Benefit
Security Administration website for an illustrative example.
Fixed or Stated Rate of Return Investments
For each designated investment alternative with a fixed or stated
rate of return, such as a CD or guaranteed investment contract, the
following information must be furnished:
The fixed or stated annual rate of return;
Any restrictions on purchases, transfers, and withdrawals;
Any shareholder-type fees of the types described above; and
The term of the investment.
Stable value and money market funds are not considered to have
fixed or stated rates of return. Because they are not free from
investment risk, they are subject to the requirements for variable
return investments described above.
Website and Glossary Requirements
With respect to each designated investment alternative, the
disclosure must also include an Internet website address providing
access to certain information about the investment. The website
address provided cannot simply direct the participant or beneficiary
to the issuer's home page.
The disclosure must also include a glossary of investment-related
terms to assist participants and beneficiaries with understanding
their investment options or a website address that directs them to
such a glossary.
Quarterly Statements of Actual Fees and
Quarterly statements must also be furnished to each participant and
beneficiary, which must provide:
The dollar amount of any individual fees and expenses actually
charged to his or her account during the previous quarter;
A description of the services for which the fees were charged;
If applicable, an explanation that some administrative expenses
were paid from the operating expenses of one or more of the plan's
designated investment alternatives, such as through 12b-1 fees or
revenue sharing arrangements.
This information may be provided as part of the quarterly benefit
statement required under ERISA if the timing requirements can be met.
Doing so will allow plan sponsors to avoid the additional costs of
providing multiple participant notices each quarter.
Materials Provided Upon Request
Upon request, a participant or beneficiary must be furnished with
the following with respect to any designated investment alternative:
A copy of the prospectus or an SEC-approved short form or
Copies of financial statements or reports;
A statement of the value of a share or unit and the date of
A list of assets comprising the portfolio but only with respect
to investments that are "plan assets" under ERISA, and the value of
each such asset or its proportion of the investment alternative
(this requirement will not apply to mutual funds and most
traditional individual account investments as they are not
considered to be "plan assets" under ERISA).
Plan sponsors of individual account plans are encouraged to
understand and plan ahead for the new reporting and disclosure
requirements. Timely reporting and disclosure is necessary to satisfy
fiduciary duties under ERISA.
Compliance dates are rapidly approaching, so plan sponsors should
contact their service providers right away to coordinate
responsibility for providing the required information and materials.
This newsletter is intended to provide general
information on matters of interest in the area of qualified retirement
plans and is distributed with the understanding that the publisher and
distributor are not rendering legal, tax or other professional advice.
Readers should not act or rely on any information in this newsletter
without first seeking the advice of an independent tax advisor such as
an attorney or CPA.