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New Regulations Regarding Disclosure of Plan and Fee Information
October 25, 2011
By: Terrence M. Finn and Kathleen A. McGinley
The Department of Labor (“DOL”) has issued its final regulations regarding the substance, timing and form of disclosures required by plan administrators of participant directed individual account plans. Fortunately, the DOL recently decided to extend the effective date for the disclosure. Plan sponsors now generally have until May 1, 2012, to comply with the new regulations.
Covered plans are ERISA retirement accounts that allocate investment responsibilities to participants and beneficiaries. The rules do not apply to individual retirement accounts, or individual retirement annuities. The objective of the new regulation is to provide participants and beneficiaries with investment performance and fee information. This article is a condensed explanation of the required notices that must be distributed by plan sponsors regarding (1) plan and investment fees and expenses; and (2) the rights and responsibilities concerning investment of assets. The DOL prefers the notice regarding Investment-Related Disclosure to be a comparative chart. A sample chart is available here [PDF].
Plan-Related Disclosures
Plan-related disclosures include notices regarding (1) general information, (2) administrative expenses and (3) individual expenses.
General Information Notice
General information notice must be given annually, beginning on or before the date upon which participants and beneficiaries can first start directing their investments, and must include:
- Information on investment instructions and the limitations on such instructions;
- Availability and identification of investment alternatives under the plan;
- A summary of voting, tender or similar rights and restrictions applicable for any such investment alternatives;
- Identification of investment managers under the plan; and
- A description of any arrangement for participants and beneficiaries to invest beyond the investments designated under the plan.
Administrative Expense Notice
Information regarding administrative expenses must also be given annually and must include:
- An explanation of fees and expenses for general plan administration such as legal, accounting and recordkeeping services and how such fees are charged to the individual participant or beneficiary.
Additionally, a quarterly statement must be distributed to participants and beneficiaries containing information regarding:
- The dollar amount of fees and expenses charged to an individual account for administrative services charged, with a description of the service; and
- Whether any part of the total administrative expense for that quarter was paid with plan assets.
Individual Expense Notice
Information regarding individual expenses charged to a participant and beneficiary’s account must be given annually and must include an explanation of any fees or expenses charged to the individual for individual services such as investment advice fees, commissions, sales charges and transfer fees.
A quarterly notice, similar to the administrative expense quarterly notice described above, must also be distributed and state the dollar amount of fees incurred as well as a description of the services charged.
Investment-Related Disclosures
Investment-related information must also be given annually and must include the name of each designated investment alternative, with its category, such as money market funds, stocks and bonds. The notice must also include the following information:
Non-fixed Return Notice
- The average annual return for the past 1, 5 and 10 year periods, if possible, with a statement that such performance is not indicative of future performance;
- A comparison of the annual return to the average annual returns over the same periods of broad-based securities market indices that are generally not issued by an affiliate of the investment issuer, its advisor or principal underwriter;
- Fee and expense information regarding the amount and type of any fee charged directly to the individual’s investment, and a description of any limitations applicable to a purchase, transfer or withdrawal of an investment in whole or part;
- Total amount and percentage of annual operating expenses; and
- Total dollar amount of annual operating expenses for one year for a $1,000 investment.
The notice must explain that fees and expenses are only one of several factors that participants and beneficiaries should consider in their investment decision-making process, as well as a statement that the cumulative effect of fees and expenses can substantially reduce growth of the account.
Fixed Return Notice
- Performance data of both the fixed annual return and term of the investment, whether the issuer can adjust the rate, the current rate of return, minimum return guaranteed and, if adjustable, how to obtain information on the current rate of return; and
- Fee and expense information regarding the amount and a description of any individual fees incurred and any restrictions on the purchase, transfer or withdrawal of an investment in whole or part.
For both fixed and non-fixed return, the specific internet web address of the designated investment alternative, as well as a glossary defining general terms must be provided in a notice or available online to assist participants in understanding each alternative.
Additionally, upon request, participants and beneficiaries are entitled to copies of prospectuses, financial statements, the value of a share or unit of each designated investment alternative and a list of the portfolio assets of each alternative.
Fortunately, the regulations confirm that a plan administrator will usually have to rely on information from service providers in order to formulate the required disclosures. Plan administrators therefore enjoy a safe-haven pertaining to the completeness and accuracy of the information in the notices if they reasonably relied on information received from a service provider.
We recommend that plan administrators contact their service providers for assistance in gathering this information as soon as possible in order to meet the impending deadline.
For more information on how these regulations affect your retirement plans, please contact Terrence Finn or Kathleen McGinley.
