The Employee Benefit Security Administration has developed a two-step disclosure requirement designed to make all fees paid in connection with retirement plans more transparent. The first disclosure required a service provider-to-plan sponsor notice detailing the fees received by the service provider in connection with its services rendered on behalf of the plan. These were colloquially referred to as 408(b)(2) Notices as the disclosure came from regulations issued by the Department of Labor (DOL) pursuant to ERISA Section 408(b)(2). These notices were generally required to be provided to plan sponsors on or before July 1, 2012.
The second disclosure in this two-step dance is the disclosure of plan and investment-related information by the plan administrator to the eligible employees for, and participants within, certain qualified retirement plans. These notices are generally being referred to as Participant Level Fee Disclosures or Section 404 Disclosures as they are required pursuant to regulations issued by the DOL pursuant to Section 404 of ERISA.
Who Must Comply?
The new DOL rules require plan administrators of: (i) ERISA-covered; (ii) defined contribution retirement plans; (iii) in which the participants and beneficiaries are permitted to make investment elections in regards to the plan assets; to make certain written disclosures to both participants with account balances in the plan and those employees who are eligible to participate or defer in a plan but do not currently have an account balance. The responsibility for providing the new disclosures falls on the ERISA plan administrator.
What Must be Provided?
Plan administrators must provide a Plan Related Information Notice discussing three main areas: (i) general plan information, (ii) administrative expense information, and (iii) individual expense information.
Under the regulations, this Related Information Notice must be provided to participants with account balances and those employees who are eligible to participate or defer in a plan, but do not currently have an account within the plan, on or before the date that such individuals can first direct investments and annually thereafter. In initially implementing these disclosure requirements, the DOL has required delivery of the initial disclosure of the Plan Related Information Notice to all such individuals no later than August 30, 2012. If employees become eligible to participate after August 30, 2012, they must be given that initial disclosure of the Plan Related Information Notice on or before the date they first become eligible.
In addition, quarterly disclosure of actual fees incurred by a participant with respect to their plan account must be provided to participants by no later than 45 days after the end of the quarter. This first notice is due November 14, 2012 for calendar year plans. In subsequent years, these quarterly disclosures for a plan with a December 31 plan year end need to be provided no later than February 14, May 15, August 14 and November 14.
Finally, certain notices, explained below, specific to investment options must be provided at differing times based upon the investment elections, or the elections of, a participant.
Plan Related Information Notice
The initial/annual Plan Related Information Notice to participants and eligible employees requires a discussion of general plan information which includes a discussion of the following:
Information on how the participant can provide investment instructions;
An explanation of any limitations on investment instructions, including any investment transfer restrictions;
A description of how voting, tender or similar rights may be exercised;
Identification of all designated investment alternatives offered to participants under the plan;
Identification of all designated investment managers; and
A description of any brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan. (See notation at the end of this article.)
Administrative Expense Information
The Plan Related Information Notice also requires a discussion of administrative expenses. Pursuant to this requirement, plan administrators must provide information regarding all fees for administrative services to the plan that may be allocated to participant accounts. These are administrative expenses which are not reflected in the total annual operating expenses of any of the plan's investment options, such as the fee for recordkeeping,. This disclosure must include an explanation of how such fees will be allocated to participants -e.g. on a pro rata or per capita basis.
Individual Expense Information
Finally the Plan Related Information Notice must discuss individual expenses including fees charged to the participant’s account on a “per transaction” or individualized basis. For example, distribution, loan and QDRO processing fees, investment advice fees, self-directed brokerage account fees (see notation at the end of this article), transfer fees, redemption fees, sales charges, commissions and similar expenses must be disclosed if they are not reflected in the total annual operating expenses of any investment option.
Plan administrators must also provide participants with investment-related information, both. automatically within the initial/annual Plan Related Information Notice, andupon a participant's investment election or upon the request of a participant.
The investment related information that plan administrators must detail within the initial/annual disclosure of Plan Related Information includes:
The name of each investment option, and the type or category of each (for example, stable value fund, money market fund, large-cap mutual fund).
The performance data for each investment option available under the plan. For investments• where the return is not fixed, the disclosure must include the average total return of the investment for 1-, 5- and 10- year periods (or for the life of the investment option, if shorter) ending on the date of the most recent calendar year. The disclosure must also include a statement indicating that an investment's past performance is not necessarily an indication of its future performance. For investments with a fixed rate of return, both the fixed annual rate of return and the term of the investment must be disclosed. If the rate of return is adjustable, participants must be so informed and provided with the current rate of return, the minimum guaranteed rate of return, if any, and the phone number or website to obtain the most recent rate of return information.
The name of an appropriate broad-based securities market index and its performance relative to the plan's investment options over the 1-, 5- and 10- year periods (or for the life of the investment option, if shorter). The benchmarks cannot be administered by an affiliate of the investment issuer, its investment adviser, or a principal underwriter, unless the index is widely recognized and used.
The amount and a description of each shareholder-type fee and any restriction or limitation that may be applicable to a purchase, transfer or withdrawal of the investment. For those investments where the return is not fixed, the following additional information must be disclosed:
i) The total annual operating expenses of the investment expressed as a percentage calculation (i.e. the expense ratio);
ii) The total annual operating expenses of the investment for a one-year period expressed as a dollar amount for a $1,000 investment;
iii) A statement indicating that fees and expenses are one of several factors that participants should consider when making investment decisions; and,
iv) A statement that the cumulative effect of fees and expenses can substantially reduce the growth of a participant's account, including an invitation to visit the Employee Benefit Security Administration's website for an example demonstrating the long-term effect of fees and expenses.
A website address providing access to more specific information regarding each designated investment alternative.
A general glossary of terms to assist participants in understanding the designated investment alternatives, or a website address that provides access to the glossary along with an explanation of the purpose of the website.
Investment-related information must be provided in a comparative format, such as a chart, to help participants evaluate and compare the disclosed information for each of the plan's designated investment alternatives. The Department of Labor provided a model comparative chart in the 404(a) regulations and a copy of that chart can be located here: www.dol.gov/ebsa/participantfeerulemodelchart.doc.
Other Investment Related Information
There are two additional pieces of investment related information that must be provided to participants. First, after investing in a specific investment option under the plan, a participant must receive any materials relating to any voting, tender or similar rights that are passed on to the participant.
Second, upon request, the plan administrator must provide the following:
Copies of prospectuses or similar documents for unregistered investment options;
Copies of any financial statements or reports, such as statements of additional information and shareholder reports, or similar material;
A statement of the value of a share or unit of each designated investment alternative, including the date of valuation;
A list of assets in the portfolio of each designated investment alternative that constitutes a plan asset, and the value of each such asset or the proportion of the investment that it comprises.
In addition to the initial/annual Plan Related Information Notice, the regulations require plan administrators to provide participants• retaining account balances with a quarterly statement of the actual dollar amount of fees charged to that participant's account. This disclosure must include:
The dollar amount of the fees and expenses actually charged to the participant's account during the preceding quarter;
A description of the services to which the charges relate; and
If applicable, an explanation that some of the plan's administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan's investment options (for example, through revenue sharing arrangements, 12b-1 fees or sub-transfer agent fees).
What Investment Options?
The disclosures above were initially intended by the DOL to include any investment alternative designated by the plan into which participants and their beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts.
However, in a recent piece of guidance, the DOL changed course and is now requiring a general disclosure of basic information regarding the brokerage window to all participants and eligible employees -how the window works, to whom to give investment instructions, any account balance requirements, trading restrictions and whom to contact with questions. Furthermore, the disclosure must indicate: any start-up fee; ongoing fee or expense; and the commissions charged for purchases and sales of securities including sales loads. The disclosure must also advise participants to ask the provider about all investment related fees. Furthermore, the participant must be provided a quarterly statement of fees actually charged against the account for the preceding quarter.
Finally, the recent guidance indicates that any window that offers more than 25 investment alternatives must provide the above indicated fee information for: (1) at least three investment alternatives: equity, fixed income and balanced; that are otherwise available through the window; and (2) every other investment in which at least the greater of five participants or 1% of all participants are invested.