New Disclosure Requirements Proposed for Self-Directed Defined Contribution Plans
The U.S. Department of Labor (DOL) recently issued proposed regulations that would require all participant-directed individual account plans (e.g., 401(k) and profit-sharing plans) to make additional disclosures to participants. The regulations are part of the DOL’s continued emphasis on ensuring plan participants and beneficiaries have all the information they need to make informed decisions regarding the management and investment of their retirement savings. If finalized, the regulations would apply for plan years beginning on or after January 1, 2009.
The proposed regulations would apply to all participant-directed individual account plans that are subject to the fiduciary responsibility requirements of the Employee Retirement Income Security Act (ERISA). That means plans that are not subject to ERISA, such as governmental and church plans, will not be subject to the new disclosure requirements.
The proposed regulations require two categories of information be disclosed to plan participants and beneficiaries: “plan-related information” and “investment-related information.” The disclosures would be required to be provided before a participant is eligible to participate in the plan and then on an annual basis. Any material change in the information would need to be disclosed within thirty days after the change is adopted. The disclosures must be written in a manner that can be understood by the average plan participant. Investment information must be provided in chart form to allow participants to easily compare investment alternatives. The DOL has provided a model chart for that purpose.
- Plan-Related Information
- Plan-related information includes the following:
General Investment Disclosures:
- how participants may give investment instructions and any limitations on such instructions, including restrictions on making or changing investments;
- information on the exercise of voting, tender and similar rights (including any restrictions on those rights) provided by a designated investment alternative;
- the plan’s investment options; and
- information regarding any designated investment managers.
Administrative Expenses Disclosures. The proposed regulations require that participants receive an explanation of any fees and expenses for plan administrative services (e.g., legal, accounting, recordkeeping) that may be charged to the plan that are not included in the investment-related fees described below. Participants must be told how these charges will be allocated to the participants (e.g., pro rata, per capita).
Individual Expenses Disclosures. Participants must be provided an explanation of fees and expenses that may be charged against their accounts for services provided on an individual basis, such as fees related to plan loans, QDROs, and investment advice services.
In addition, the proposed regulations would require the plan fiduciary to notify each plan participant quarterly of the administrative expenses and individual expenses actually charged during the preceding quarter, along with a description of the services provided.
Investment-related information includes the following:
Identifying Information Disclosures. Each available designated investment alternative must be disclosed, including the type of investment and the type of investment management (e.g., active or passive). The disclosure must also include a website where the participant can obtain additional information regarding the investment.
Performance Data Disclosures. Performance data must be disclosed for each investment without a fixed rate of return. The data must include the average annual total return for one-, five- and ten-year periods. For fixed rate of return investments, the rate of return and term of investment must be disclosed.
Fees and Expenses Information. For investments without a fixed rate of return, the following disclosures must also be made:
- the amount and a description of any shareholder fees related to the investment alternative (e.g., sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, mortality and expense fees);
- the total annual operating expenses of the investment expressed as a percentage (i.e, expense ratio); and
- a statement that fees and expenses are only one factor among many that participants should consider when making investment decisions.
The disclosures will also need to include the name and contact information of the fiduciary who can provide additional requested material and a statement that more current investment-related information may be available at the listed website.
Many plan service providers will be able to provide most of the required disclosures, but plan sponsors will need to be prepared to provide additional information or to coordinate with their service providers to ensure the disclosure requirements are met. It is expected that many, if not most, service providers will be unable to fully comply with the proposed regulations by the January 1, 2009, effective date. The DOL is aware of that issue and hopefully some relief will be provided to give plan service providers and plan sponsors sufficient time to comply with the new regulations.
Justin W. Stemple, Attorney
Warner Norcross & Judd LLP