Compliance July 22, 2008

EBSA Issues New Participant Disclosure Regulations

Federal regulators on Tuesday unveiled the long-awaited final portion of their three-part plan disclosures regulatory package that calls for sponsors of employee-directed plans to supply participants with basic plan information including investment returns and expenses.
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The latest proposed rule from the Employee Benefits Security Administration (EBSA) mandates that required disclosures be provided generally when a participant becomes plan eligible and every year after that. Bradford P. Campbell, assistant secretary for the Labor Department’s EBSA, said the latest suggested rule was designed in part to pull together in a single document data that has traditionally been separately disclosed.

Under the proposal, the mandated disclosure is to be made in a comparative chart format. Regulators supplied a sample chart for a fictional retirement plan.

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“What people want are simple, concise disclosures that aggregate plan information in useful ways,” Campbell told reporters during a Tuesday conference call.

When finalized, the regulation will be effective for plan years beginning on or after January 1, 2009, EBSA said.

The proposal requires plan fiduciaries to disclose basic information about the plan, such as:

  • available investment options;
  • how participants can give investment instructions;
  • a description of fees and expenses charged to participants and beneficiaries for plan administrative services, such as legal, accounting, and recordkeeping charges, as well as how these charges will be allocated to their individual accounts;
  • a description of fees and expenses charged to a specific participant’s account based on actions taken by that participant, such as charges for processing loans, QDROs, or investment advice; and
  • how to obtain more detailed information.

In addition, plan fiduciaries must disclose to participants, on a quarterly basis, the actual dollar amount charged to the participant’s account during the preceding quarter for specified administrative expenses.

Participant-Directed Plans

According to Campbell, the agency is proposing conforming changes to its regulation under 404(c) of the Employee Retirement Income Security Act (ERISA) to standardize disclosure requirements across various types of participant-directed plans. EBSA said the disclosure responsibility is higher because 401(k)-type plans give so much responsibility to participants to make their own decisions.

“This increased responsibility has led to a growing concern that participants and beneficiaries may not have access to, or if accessible, may not be considering information critical to making informed decisions about the management of their accounts, particularly information on investment choices, including attendant fees and expenses,” the regulators said in the proposed rule.

Last December, EBSA released the proposed mandated disclosures from service providers to plan fiduciaries, which Campbell said Tuesday should be finalized soon (See EBSA Releases Proposed Revisions to Provider Fee Disclosures).

More Disclosure Regulation Information

Additional information and original documents are available as follows:

  • The first portion of the DoL’s three-piece regulatory package focused on the Form 5500 and plan-level disclosures is discussed at DoL Announces Changes to 2009 Form 5500. A list of FAQs recently released by the DoL regarding the Form 5500 disclosure mandates is available here.
  • EBSA’s proposed provider disclosure rule – the second piece of the three-part package – is available here, along with public comments and formal testimony.
  • The latest proposed disclosure rule is available here. EBSA’s model participant disclosure chart is available here.
Compliance July 22, 2008

Another Circuit Agrees Cashed-out Participants Have Right to Sue

The 1st U.S. Circuit Court of Appeals became the latest federal appellate court to decide that former employees who allege that fiduciary breaches reduced their lump-sum distributions from a defined contribution plan have standing to sue as participants under the Employee Retirement Income Security Act (ERISA).
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In reversing the dismissal of the case by a district court, the appellate court noted that other circuits have also found that cashed-out participants have legal standing under ERISA (See Cashed-Out Participants Keep Legal Standing Under ERISA). In its opinion, the court said the full “benefit” to which the participant is entitled by a defined contribution plan is “the value of [her] account unencumbered by any fiduciary impropriety” or “whatever is in the retirement account when the employee retires or whatever would have been there had the plan honored the employee’s entitlement, which includes an entitlement to prudent management.”

Since the plaintiffs seek only the amount that should have been in their accounts but for the defendants’ “fiduciary impropriety,” they have standing to sue as “participants” under ERISA § 502(a)(2), the court concluded.

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Keri Evans and Timothy Whipps are former employees of W.R. Grace & Co. and participated in the W.R. Grace & Co. Savings and Investment Plan. Evans and Whipps received lump-sum distributions of the balance of their plan accounts shortly after leaving the company.

Evans and Whipps filed a putative class action suit against various plan fiduciaries, alleging that they breached their fiduciary duties by continuing to offer Grace common stock as a plan investment option for participant contributions; utilizing Grace securities for employer contributions to the plan; and maintaining the plan’s pre-existing heavy investment in Grace securities when the stock was no longer a prudent investment.”

The district court dismissed the action, concluding that Evans and Whipps were asserting claims for compensatory damages, rather than for additional plan benefits, and thus had failed to meet the statutory definition of participants entitled to bring suit.

W.R. Grace’s Decision to Divest

Keri Evans and Timothy Whipps are former employees of W.R. Grace & Co. and participated in the W.R. Grace & Co. Savings and Investment Plan. Evans and Whipps received lump-sum distributions of the balance of their plan accounts shortly after leaving the company.

The plan offered as one choice on the menu of investment options available to participants the Grace Common Stock Fund, and Grace automatically invested all employer contributions in the fund. Employees were not permitted to move those contributions out of Grace stock and into other investments until they reached age 50. However, on January 1, 2001, with Grace stock becoming an increasingly risky investment due to mounting financial pressures from asbestos-related product-liability litigation, the plan stopped investing employer contributions in the fund and began allocating them instead in accordance with participants’ investment elections. It also permitted, but did not advise or require, participants to move past matching contributions out of the fund and into other plan investments.

Grace and its subsidiaries filed for bankruptcy protection on April 2, 2001. Two years later, the Grace stock fund ceased accepting any new contributions, but past contributions were not transferred to other funds unless a participant expressly changed her investment options. In February 2004, plan fiduciaries announced that investment in Grace stock was “clearly imprudent,” and the fund’s investment manager, State Street Bank & Trust Company, subsequently embarked on a program to sell the Grace stock and dissolve the Fund. The fund ceased to exist on April 19, 2004.

The U.S. District Court for the District of Massachusetts recently held that Grace and State Street did not breach their fiduciary duties when making the decision to divest Grace’s 401(k) plan of the Grace Stock Fund (See Company Stock Price Not Only Factor in ERISA Prudence).

The opinion in Evans v. Akers can be accessed through the Web site of the 1st U.S. Circuit Court of Appeals at http://www.ca1.uscourts.gov/.

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