By W. Andrew Douglass, Esq., Randell Montellaro, Esq., and M. John Burgess, Esq.
Seyfarth Shaw LLP , Chicago, IL, New York, NY, and Washington, DC, respectively
In October 2010, the Department of Labor (DOL) published final regulations under §404(a) of ERISA which require that the administrators of IRC §401(k) and other retirement plans which allow participants to direct their own investments to provide information regarding the plan's designated investment alternatives (DIAs) and the fees and expenses that are charged against participant accounts. A summary of these disclosures is provided in Seyfarth's Management Alert dated July 26, 2011, a copy of which can be accessed here. After a few delays in the effective date, calendar year plans will have to begin providing these disclosures by August 30, 2012, along with quarterly disclosures by November 14, 2012.
On May 7, 2012, the DOL issued Field Assistance Bulletin 2012-02 (the "FAB"), which provides additional guidance about these disclosures in a question and answer format. The FAB also contains several very helpful illustrative examples. The key issues discussed in the FAB are summarized below.
Applicability of the Regulations to Certain Plans
In the FAB, the DOL confirmed that an IRC §403(b) plan established by a tax-exempt organization is covered by the disclosure rules if the plan permits participant direction of investments. However, disclosures are not required with respect to annuity contracts or custodial accounts issued under IRC §403(b) plans to current or former employees before January 1, 2009, if the employer is not required to make contributions (and has stopped making contributions), the employee can enforce the contract or account without involvement of the employer, and the employee is fully vested.
Types of Investments for Which Disclosures Must be Provided
The FAB clarifies that a brokerage window, in which participants can choose investments not offered by the plan's investment fund lineup (such as individual stocks) is covered by the disclosure rules. If a plan has a brokerage window, the disclosures must include a general description of the brokerage window. This description must provide sufficient information to enable participants to understand how and to whom to give investment instructions under the window, any account balance requirements, any restrictions or limitations on trading, and whom to contact with questions. In addition, the plan must provide an explanation of any fees and expenses that may be charged against the account of a participant in connection with the use of the brokerage window, and a statement of any fees and expenses that were actually charged to the participant's account during each quarter. The description must be provided to all participants who are eligible to use the brokerage window, not just those participants who have actually used it.
Additionally, the FAB provides that a "model" portfolio, consisting of combinations of the plan's DIAs, is ordinarily not treated as a DIA if it is clearly presented as a means of allocating account assets among the specific investment alternatives. However, if in choosing a model portfolio, the plan participant acquires an equity security, unit participation, or similar interest that itself invests in a combination of the plan's DIAs, the model portfolio would ordinarily be treated as a DIA and would be subject to the disclosure rules.
The FAB also states that a plan must also provide the required disclosures for DIAs that are closed to new money, because the information will help participants invested in that alternative to decide whether to keep their funds invested there.
Furthermore, if the plan fiduciary has selected an investment platform, but has not designated any of the mutual funds on that platform as DIAs, the platform is not, by itself, a DIA, although the individual investments within the platform may be considered to be DIAs for which disclosure is required. While the DOL cautioned against a plan providing too many DIAs, it did state that when a platform holds more than 25 investment alternatives, the DOL will not, as a matter of enforcement policy, require all of the investment alternatives to be treated as DIAs if the plan administrator (1) makes the required disclosures for at least three of the investment alternatives on the platform that collectively constitute a "broad range" of alternatives under ERISA §404(c), and (2) makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants (or at least 1% of participants for plans with more than 500 participants) are invested at least 90 days before the annual disclosure.
Disclosures of Administrative Expenses Charged to Individual Accounts
The FAB addresses several questions regarding when fees must be disclosed and how to address possible uncertainties. First, the FAB states that when the cost of certain services and fees are not known at the time of the disclosure, the explanation must describe the facts and circumstances that are known at the time. Therefore, if the plan expects to incur fees for a particular service but does not know the amount of the fees that will be incurred, the disclosure should state that the fees are expected to be incurred, and describe how those fees would be allocated to participants.
Additionally, the FAB provides that fees that may not be charged against the individual accounts of participants (for example, because the plan does not permit them to be charged against individual accounts or because the employer has provided a written commitment to the plan to pay them) do not have to be disclosed. In cases where administrative expenses are offset by other payments (for example, revenue sharing payments from the plan's investments are commonly used to offset recordkeeping fees), the disclosures must describe the gross amount of the fees and the manner in which the plan allocates the fees, but can describe the amounts that offset the fees. In addition, the disclosure does not have to specify which administrative expense will be offset by the revenue sharing payments. Instead, it just needs to state that some or all of the expenses will be offset.
If a stable value fund purchases an insurance policy that is designed to smooth the rate of return of the fund's underlying investments, and the cost of the insurance is paid from the assets of the fund, this cost must be included in the total annual operating expenses of the fund.
Other Guidance on How to Provide the Disclosures
If there is a change to a DIA's fee and expense information after the plan has provided the annual disclosure, a new comparison chart with the updated information does not have to be provided earlier than the date of the next annual disclosure. However, the plan's website should be updated with the new fee and expense information as soon as practicable after the change.
The FAB provides that a plan may provide multiple comparative charts or documents that contain the information required by the disclosures, as long as the charts are provided at the same time and the tables are designed to facilitate a comparison among the DIAs. Performance data for DIAs that have been in existence for more than 10 years are not required to disclose investment returns since their inception, notwithstanding the fact that the model comparative chart published by the DOL included "since inception" performance and benchmark information.
In the FAB, the DOL also noted that it does not intend, at this time, to issue a model glossary of terms required to be provided with the disclosures. However, the FAB did reference sample glossaries submitted by industry groups and stated that plan fiduciaries should determine the glossary that is appropriate for their participants. The DOL also confirmed that disclosures can be furnished with other documents or as a stand-alone set of documents.
The DOL regulations also require the administrator to maintain a website which contains detailed information about each investment alternative. The FAB provides that the website landing page does not have to contain all of the investment information that is required for a DIA, but the information provided must be "sufficiently specific" to lead the participant to the required information.
Many service providers have already developed templates to facilitate the required disclosures and provided them to companies for their review. For those disclosures that have already been provided that do not comply with the FAB, the DOL stated that enforcement actions will generally be unnecessary if the disclosures applied the regulations in good faith and steps are taken to comply with the FAB in future disclosures. Companies should review the new DOL guidance with their service providers and legal advisors to determine whether the fee disclosures should be revised.
For more information, in the Tax Management Portfolios, see Horahan and Hennessy, 365 T.M., ERISA - Fiduciary Responsibility and Prohibited Transactions, and in Tax Practice Series, see ¶5530, Fiduciary Duties and Prohibited Transactions.
Copyright © 2012 Seyfarth Shaw LLP.