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In
October 2010, the U.S. Department of Labor ("DOL") issued
its final regulation under §404(a) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") that
requires fiduciaries of participant-directed individual account
plans to disclose certain plan and investment-related information to
plan participants and beneficiaries. The DOL believes that these
required disclosures will allow participants to make more informed
investment decisions when electing investment options available
under their plans.
Analysis
Section
2550.404a-5 of the DOL Regulations (the "Regulation")
clarifies that the act of investing plan assets is a fiduciary act
governed by the standards set forth under ERISA §404(a)(1)(A) and
(B). Such standards require plan fiduciaries to act prudently and
solely in the interest of plan participants and beneficiaries. To
satisfy this principle, fiduciaries of participant-directed
individual account plans are now required to provide participants
and beneficiaries with certain information concerning the
investment options provided under their plan. The Regulation became
effective on December 20, 2010, however, its disclosure
requirements apply starting with plan years that begin on or after
November 1, 2011 (for calendar-year plans, January 1, 2012).
Selection
and Monitoring of Investment Options
The
Regulation clearly states that providing plan and
investment-related information to participants and beneficiaries
does not in fact "relieve a fiduciary from its duty to
prudently select and monitor providers of services to the plan or
designated investment alternatives under the plan."
Affected
Plans
The
Regulation applies only to participant-directed individual account
plans. Under ERISA § 3(34), participant-directed account plans are
defined as plans that provide an individual account for every
participant and pay benefits based solely on the amount contributed
to each account (including income, gains, expenses, losses and
forfeitures allocated to the participant's account). Generally, any
defined contribution plan (e.g., 401(k), 403(b) and profit-sharing
plans) that permits its participants to make investment decisions
is considered a participant-directed account plan regardless of
size. However, the Regulation provides that individual retirement
accounts or individual retirement annuities are not
participant-directed account plans.
The
Regulation, as one of its primary goals, requires plan sponsors to
disclose certain information to participants and beneficiaries
about each designated investment alternative ("DIA")
available under their plan. Under the Regulation, a DIA is defined
as a plan investment in which participants and beneficiaries can
direct the investment of plan assets held in their individual
accounts. A DIA does not include brokerage windows, self-directed
brokerage accounts or comparable arrangements that allow
participants or beneficiaries to choose investments beyond those
offered by the plan. However, if they are available under the plan,
the plan sponsor must disclose certain basic information about
brokerage windows to participants and beneficiaries if they are
available under a plan.
Impact
on Plan Sponsors
As the
fiduciaries, plan sponsors must comply with the disclosure
requirements described above. The Regulation affords some relief to
plan sponsors, stating that plan sponsors are not responsible for
the completeness or accuracy of the information contained in the
required disclosures if they reasonably and in good faith rely on
information provided by a service provider.
Generally,
plan sponsors are now required to disclose certain plan-related and
investment-related information to participants and beneficiaries.
These disclosures must be made in a manner that allows the average
participant to understand them, and be provided to all eligible
employees and beneficiaries who have the right to direct the
investment of their individual accounts.
Plan-Related
Information
Plan
sponsors are required to provide each participant or beneficiary
with the following plan-related information: general plan
information, administrative expenses, and individual expenses.
General
Plan Information
Plan
sponsors must provide each participant or beneficiary with the
following general plan information:
· The
procedures for participants and beneficiaries to give investment
instructions;
· Any
limitations on investment instructions, including restrictions on
transfers to or from a DIA;
· A
description of every DIA offered under the plan;
· A
description of any plan provisions that relate to the exercise of
voting, tender and similar rights accompanying investment in a DIA;
· The
plan's designated investment managers (if any); and
· A
description of any brokerage windows, self-directed brokerage
accounts, or similar arrangements that allow participants to select
investments beyond plan-designated investments.
Administrative
Expenses
Plan
sponsors must provide each participant or beneficiary with an
accounting of all fees and expenses paid by the plan for general
administrative services (e.g., legal, accounting or recordkeeping)
that are permitted to be deducted from all individual accounts and
are not reflected in each DIAs total annual operating expenses. In
addition, plan sponsors must explain whether the plan's
administrative expenses will be allocated to each individual
account on a pro rata or per capita basis.
Individual
Expenses
Plan
sponsors are required to provide each participant or beneficiary
with a statement explaining any fees and expenses that can be
charged on an individual basis (as opposed to a plan-wide basis)
and that are not reflected in each DIA's total annual operating
expenses. The following are examples of fees and expenses that can
be charged on an individual basis:
· Fees
for processing plan loans or qualified domestic relations orders;
· Fees
for investment advice;
· Fees
for brokerage windows;
· Commissions;
· Front-end
or back-end loads or sales charges;
· Redemption
fees;
· Transfer
fees; and
· Optional
rider charges in annuity contracts.
Timing
and Method of Plan-Related Information Disclosures
The
Regulation requires plan sponsors to provide plan-related
information disclosures to each participant or beneficiary on or
before the date they can first direct their investments, and then
annually from that time forward. The Regulation also contains a
transitional rule that allows plan sponsors to provide the initial
disclosure to existing participants and beneficiaries within 60
days after the first day of the plan year beginning on or after
November 1, 2011 (i.e., March 1, 2012 for calendar-year plans).
In
addition, plan sponsors must communicate any changes in
plan-related information between 30 to 90 days before such changes
take effect, or, if the change is the result of an unforeseeable
event or uncontrollable circumstance, as soon as reasonably
practicable.
Statement
of Actual Charges
Each
quarter, plan sponsors must provide participants or beneficiaries
with a statement that includes the following information:
· The
dollar amount of the plan-related fees and expenses that were
actually charged to the participant's or beneficiary's account over
the past quarter;
· A
description of the services that the above charges relate to; and
· An
explanation that some of the plan's administrative expenses for the
preceding quarter were paid out of the total annual operating
expenses of one or more of the plan's DIAs (if applicable).
Investment-Related
Information
Under
the Regulation, plan sponsors are required to provide participants
or beneficiaries with the following investment-related information
for each DIA offered under the plan: identifying information,
performance data, benchmark information, fee and expense
information, each DIA's internet web site address, and a glossary.
It is anticipated that service providers will make this information
available to plan sponsors, but plan sponsors will need to review
the information for accuracy and clarity.
Identifying
Information
Plan
sponsors are required to provide the name of each DIA and the type
or category of the investment (e.g., money market fund, balanced
fund, large-cap stock fund, employer stock fund or employer
securities).
Performance
Data
Plan
sponsors are required to provide information regarding each DIA's
historical performance. For variable return DIAs (i.e., DIAs that
do not have a fixed rate of return) the required disclosure must
include the average annual total return for one-year, five-year and
ten-year periods as of the date of the most recently completed
calendar year. Additionally, the required disclosure must include a
disclaimer stating that a DIA's past performance does not
necessarily indicate how it will perform in the future.
For
fixed (or stated rate of return) DIAs, the required disclosure must
provide information regarding the annual rate of return and the
term of the investment. If the DIA's issuer has reserved the right
to adjust the fixed or stated rate of return prospectively during
the investment term, the required disclosure must include the
current rate of return, the minimum rate guaranteed under the
contract, and an explanation that the issuer has the right to
adjust the rate of return prospectively, and where participants and
beneficiaries can obtain the DIA's most recent rate of return.
Benchmark
Data
For
DIAs without fixed rates of return, the required disclosure must
provide the name and returns of an appropriate broad-based
securities market index over the one-year, five-year and ten-year
periods that are similar to the performance data periods mentioned
above. This index cannot be rendered by an affiliate of the
investment issuer, its investment adviser, or a principal
underwriter. (An exception applies for indexes that are widely
recognized and used.)
For
DIAs with a mix of equity and fixed income elements (e.g., balanced
funds or target date funds), plan sponsors can combine and present
the returns of more than one appropriate broad-based index in the
required disclosures. Nonetheless, the returns of the single
required benchmark index must still be presented.
DIAs
with fixed rates of return are not subjected to the benchmarking
requirement.
Fee and
Expense Information
Required
disclosures must include the following fee and expense information
for DIAs that have fixed rates of returns:
· The
amount and description of any shareholder-type fees (e.g.,
commissions, sales loads, sales charges, deferred sales charges,
redemption fees, surrender charges, exchange fees, account fees,
and purchase fees); and
· All
restrictions and limitations placed on a participant's ability to
purchase, transfer or withdraw the investment.
Required
disclosures must provide the following fee and expense information
for DIAs that do not have a fixed rate of return:
· The
amount and description of any shareholder-type fees;
· All
restrictions and limitations placed on a participant's or
beneficiary's ability to purchase, transfer or withdraw the
investment;
· The
aggregate annual operating expenses of the investment, shown both
as a percentage and as a dollar amount for a one-year period for
each $1,000 invested;
· An
explanation that fees and expenses are only one of several factors
that participants and beneficiaries should consider when making
investment decisions; and
· An
explanation that the long-term effect of fees and expenses can
substantially lower the growth of participants or beneficiaries plan
accounts, and that the DOL's Employee Benefit Security
Administration website contains an example that demonstrates the
long-term effects of fees and expenses.
Internet
Web Site Address
The
required disclosures must provide an internet web site address that
allows participants or beneficiaries to access additional
information about the plan's DIAs. The web site must include the
following:
· The
name of the DIA's issuer;
· The
objective or goals of the DIA;
· The
principal strategies and risks of the DIA;
· The
portfolio turnover rate of the DIA;
· Performance
data regarding the DIA (updated at least quarterly); and
· Fee and
expense information regarding the DIA.
Glossary
Finally,
the required disclosures must include a general glossary of terms
to help participants and beneficiaries understand certain terms
related to the plan's DIAs (or an internet web site address that
provides access to such a glossary).
Timing
and Method of Investment-Related Information Disclosures
Disclosures
of investment-related information must be provided to each
participant or beneficiary before such participant or beneficiary
can first direct their investments, and then annually from that
time forward. Under the Regulation's transition rule, initial
investment-related disclosures must be furnished to existing
participants or beneficiaries no later than 60 days after the
applicability date.
Format
of Investment-Related Information
Plan
sponsors are required to provide the investment-related information
in a chart (or similar scheme) that allows participants or
beneficiaries to compare information about each of the DIAs offered
under the plan. The chart must clearly display the date and include
the following:
· The
name, address and telephone number of the plan sponsor (or its
designee) to allow participants or beneficiaries to make requests
for further information;
· An
explanation that additional investment-related information about
the DIAs can be accessed at the listed web site address; and
· A
description of how participants and beneficiaries can obtain (free
of charge) paper copies of the information contained on such web
site.
Plan sponsors can include additional
information to further enable DIA comparisons as long as this
information is not inaccurate or misleading. The Regulation
contains a "Model Comparative Chart" in the Appendix,
which includes four model tables (variable return investment table,
fixed return investment table, fee and expense table and an annuity
options table). The Model Comparative Chart is available at: www.dol.gov/ebsa/participantfeerulemodelchart.doc.
Additional
Investment-Related Information
After
a participant or beneficiary invests in a DIA, plan sponsors must
provide any materials the plan receives regarding the exercise of
voting, tender and similar rights of a DIA if such rights pass
through to the participant or beneficiary.
Plan
sponsors must also provide the following information about plan
DIAs when a participant or beneficiary requests such information:
·
Prospectuses;
·
All
financial statements and/or reports (including statements of
additional information);
·
A
report on the value of a single share or unit of every DIA, along
with the date the valuation was made; and
·
A list
of the assets contained in the portfolio of each DIA (but only to
the extent that the assets are considered plan assets under DOL regulations)
and the value of such asset.
Special
Rules
The
Regulation adds special disclosure rules for DIAs consisting of
qualifying employer securities, annuity options or fixed-return
investments.
Qualifying
Employer Securities
For
DIAs designated to invest in qualifying employer securities, plan
sponsors are required to provide participants and beneficiaries
with a statement regarding the importance of a diversified
investment portfolio. Under the Regulation, qualifying employer
securities are exempt from certain requirements such as providing
fee and expense information and total annual operating expenses to
participants and beneficiaries.
Annuity
Options
For
DIAs consisting of a contract, fund or product that allows
participants and beneficiaries the option of allocating
contributions toward the purchase of an annuity, plan sponsors are
required to provide the following information:
·
Name of
the contract, product or fund;
·
The
objectives or goals of the contract, product or fund;
·
The
factors that determine the price of the contract, product or fund;
·
All
limitations on a participant's or beneficiary's ability to withdraw
or transfer amounts allocated to the contract, product or fund,
along with any costs associated with doing so;
·
All
fees that will reduce the value of amounts allocated by participants
or beneficiaries to the contract, product or fund;
·
An
explanation that an insurance company guarantee is subject to its
financial strength and claims-paying ability; and
·
The
internet web site where additional information can be obtained.
Fixed-Return
Investments
The
Regulation contains internet web site rules for a DIA whose return
is fixed for the investment term. Generally, this information will
be made available by the service provider. Plan sponsors are
required to provide an internet web site that includes the
following information:
·
Name of
the DIA's issuer;
·
The
DIA's goals or objectives;
·
Performance
data about the DIA (updated at least quarterly); and
·
Fee and
expense information related to the DIA.
Target
Date Funds
Within
the Regulation, the DOL reserved a subsection to provide disclosure
rules specific to target date and life-cycle funds. These are funds
that are invested in anticipation that monies will be distributed
at a specific time. Currently, many plans offer these funds as
default investments.
In
November 2010, the DOL issued a proposed regulation that, if
adopted, would require plan sponsors to disclose the following
additional information about the design and operation of any target
date funds offered under the plan:
·
A
statement of each fund's asset allocation;
·
A
statement of how each fund's allocation will change over time; and
·
An
explanation of when each fund will reach its most conservative
asset allocation.
If
a target date or life-cycle fund is related to a specific date, the
disclosure is required to include a statement of what age group the
fund is designed for, the significance of that date, and
assumptions made about a participant's or beneficiary's
contribution and withdrawal intentions on or after that date.
Plan
sponsors must also provide a statement to participants and
beneficiaries explaining that they may lose money investing in a
target date fund and that there is no guarantee that the target
date fund will provide sufficient retirement income.
The
above disclosures are required to be made to all participants and
beneficiaries, regardless of whether or not the target date fund
serves as the plan's default investment.
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