The Department of Labor on July 23 issued proposed regulations that will govern required disclosures of investment information by participant-directed individual account retirement plans. These proposed regulations round out the suite of guidance the Department of Labor has issued in recent months regarding disclosures of plan fees and expenses.
New Disclosure Obligations
The proposed regulations, which are issued under the section of ERISA governing fiduciary duties, apply to any retirement plan that is subject to ERISA and that permits participants to provide investment instructions for their accounts, regardless of whether the plan is a "404(c)" plan. The regulations take a practical approach to mandating disclosure both about the plan and about the investment options under the plan. They attempt to ensure participants are sufficiently informed about the investments available to them and how they can use those investment options within the confines of the plan.
The new disclosures will be required for plan years beginning on or after Jan. 1, 2009. The Department of Labor has requested comments on the proposed regulations by Sept. 8, 2008—and has indicated that issuing final regulations this year is a priority.
Mandated disclosures under the proposed rules fall into two categories: plan information and investment information.
On or before the date the participant becomes eligible to participate in the plan, and at least annually thereafter, the plan must provide information that falls into three categories. First, the plan must provide the following general information:
- The circumstances under which the participant can give investment instructions.
- Limits on the ability to give investment instructions, including restrictions on transfers between investment options.
- Voting, tender and similar rights with respect to an investment option.
- Identification of "designated investment alternatives" available under the plan, as well as designated investment managers. Designated investment alternatives include only "core" investment options under the plan, and specifically do not include self-directed brokerage accounts.
The plan must also provide a description of any material change to the above information to participants within 30 days after the adoption of the change.
Second, the plan must provide information about certain administrative expenses that will be charged against participant accounts. These expenses include only those legal, accounting and recordkeeping charges that are not netted against the return of the plan's investment options. The plan must provide a description of the expenses, including the basis on which they will be charged. This information must be provided on or before the date of plan eligibility and at least annually thereafter. The plan must also provide a quarterly statement that discloses the actual expenses charged to each participant's account, although the expenses do not need to be itemized.
Third, the plan must provide information about transaction-based or individual expenses that are charged to a participant's account based on actions the participant took or services the participant used, such as loan processing fees, fees for qualified domestic relations order processing, and fees for investment advice. Again, the plan must provide both a description of the expenses and a quarterly statement of the actual expenses charged.
The plan must provide information about the investment options available under the plan. Similar to the disclosure regime under ERISA Section 404(c), some information must be provided automatically and some must be provided upon request.
Information to be provided automatically includes:
- Identifying information about each designated investment alternative, including the name of the investment, a Web site that provides supplemental information about the investment (including the name of the investment provider, the strategies and risks of the investment, the portfolio holdings, and performance and fee information), the investment's category, and whether the investment is actively or passively managed. The requirement to provide a Web site address for further information about an investment option may pose a compliance challenge for certain types of investments, such as those managed in-house by a plan sponsor. The Department of Labor has requested comments on this issue.
- Performance data in a comparative format, showing average annual total return for one-, five- and 10-year periods. This data must be provided both for each designated investment alternative and for a companion broad-based securities index. The index must be maintained by an entity independent of the fund's provider, adviser or underwriter, unless the index is widely recognized and used. The requirement to disclose a companion broad-based securities index may be difficult for certain investment options. For example, due to the nature of the investment, target retirement funds do not yet have widely accepted companion indices.
- Fee and expense information, including "shareholder-type" fees, which include sales loads, redemption fees, and the like; an expense ratio; and a statement that fees and expenses are only one of several factors a participant should consider in selecting an investment option.
This information must be provided on or before the date of plan eligibility and annually thereafter. It is not required to be continuously updated throughout the year. The plan is permitted to provide the annually updated disclosure to new participants as they join the plan.
Upon request, the plan must also provide a fund prospectus (or short-form prospectus), financial statements or reports, a statement of the value of a share or unit of the fund, and a list of the assets comprising the fund's portfolio.
How Information Must Be Provided
The required disclosure of general information may be included in the plan's summary plan description (SPD), as long as the SPD is provided with sufficient frequency. The expense information may be provided with participant statements, which, in a participant-directed plan, must be furnished quarterly. The Department of Labor has provided a model chart that is a safe harbor for compliance with the investment information disclosure requirements; the model chart may be found here.