Out in the Open
In the January-February 2008 issue of PLANADVISER, I noted that the Department of Labor (DoL) was working on a three-prong approach to plan fee disclosure, including (i) rules on fee disclosure to the government; (ii) rules on fee disclosure to plan fiduciaries; and (iii) rules on fee disclosure to plan participants (see “Hidden in Plain Sight?“). On July 22, , the DoL completed the first phase of the third prong by releasing proposed regulations that will require plan fiduciaries to disclose regularly plan-related and investment-related fee information to participants and beneficiaries in participant-directed individual account plans—not only the obvious 401(k) plan, but also any other Employee Retirement Income Security Act (ERISA) individual account arrangement where participants are permitted to direct the investment of their accounts, such as 403(b) plans and profit-sharing plans. This column focuses on that proposal.
The DoL believes that, when fiduciaries permit participants and beneficiaries to direct their investments, the fiduciaries must ensure the participants and beneficiaries are provided with sufficient information to enable them to make informed investment decisions. According to the recent proposal, this is true whether or not the plan is intended to meet the standards of Section 404(c) of ERISA, which provides certain fiduciary protection for losses associated with participant-directed investments. Under the proposed regulations, fiduciaries must disclose two major categories of information to participants and beneficiaries.
The first category of disclosure, plan-related information, is divided into three distinct subcategories: general information, administrative expenses, and individual expenses. General information includes information about the plan, such as a list of the plan’s investments, investment instructions, restrictions on transfer, voting rights, and names of designated investment managers. By contrast, the remaining two subcategories address specific expenses that may affect participants’ accounts. Administrative expenses relate to plan-level expenses such as recordkeeping, accounting and/or legal fees and require not only the disclosure of the fees, but also the basis on which such fees will be allocated among the participants’ accounts, such as per capita or pro rata. Individual expenses include participant-level fees charged directly to the participant’s account, such as expenses related to loans, qualified domestic relations orders, and investment advice. The plan-related information must be disclosed on or prior to plan eligibility and annually thereafter. In addition, participants and beneficiaries must receive a statement (at least quarterly) reflecting any plan-level and/or participant-level expenses, expressed in a dollar amount, charged to their accounts during the preceding quarter, as well as a description of the services to which such amounts relate.
The second category of disclosure required under the proposed regulations is information about investment-related expenses. These types of expenses include: identifying information about the investments (e.g., investment alternatives, Internet addresses for such alternatives, investment management type, and investment category); data on past investment performance; comparable benchmark information; and fees and expense information. The disclosure must be in a format designed to permit participants and beneficiaries to compare the plan’s investment alternatives. To assist fiduciaries in meeting this requirement, the DoL developed a model chart. Although not required, the chart is useful in illustrating the current thinking of the DoL with respect to satisfying the comparative information requirement. Finally, investment-related information must be provided to individuals on or before they become eligible to participate in the plan and on an annual basis thereafter. Certain information (e.g., prospectus) need be provided only upon participant request.
There will be many comments (the DoL requested comments on the proposed regulations by September 8), particularly with respect to the proposed effective date of January 1, 2009. Although the final rules are yet to be seen, the proposed regulations reflect the DoL’s stated objectives of ensuring that fiduciaries regularly provide participants and beneficiaries with sufficient information to make informed decisions regarding plan investments and that such information be disclosed in a format intended to enable participants and beneficiaries to make important investment decisions about their retirement accounts.
Quana C. Jew is a partner at the law firm of Arent Fox, focusing on ERISA, employee benefits, and executive compensation. Quana has served as a guest lecturer in the employee benefits area for various law school, bar seminar, and employee benefits-related organizations. Most recently, Washingtonian magazine named Quana as one of Washington’s best tax lawyers.