The Department of Labor (the "DOL") recently released proposed regulations regarding fiduciary requirements for disclosure in participant-directed individual account plans (e.g., 401(k) plans) under section 404(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The DOL also proposed conforming amendments to the regulations applicable to ERISA section 404(c) plans.1 Upon adoption, these proposals would require the disclosure of certain plan and investmentrelated information, including fee and expense information, to participants and beneficiaries in all participant-directed individual account plans.
The comment period for these proposals is now underway and will continue through September 8, 2008. The DOL intends that final regulations will be issued by the end of the year and has proposed that these requirements become effective for plan years beginning on or after January 1, 2009.
The proposed regulations are based on the premise that under the fiduciary standards of ERISA section 404(a), all fiduciaries of participant-directed individual account plans should take steps to ensure that participants and beneficiaries have sufficient information with respect to the plan generally, the investment of assets in their accounts, and designated investment alternatives, so that they can make informed investment decisions. In order to comply with the proposed regulations, fiduciaries will need to provide both plan-related and investment-related information at specified times as described below.
Presently, certain participant-directed individual account plans may elect to comply with section 404(c) of ERISA, which generally provides that a plan fiduciary will not be liable to participants and beneficiaries for any plan loss that is the direct result of the participant's or beneficiary's exercise of control over the investment of assets in the individual account. The regulations thereunder currently require the disclosure of certain information to participants and beneficiaries of ERISA section 404(c) plans. The proposed conforming amendments to the regulations under section 404(c) of ERISA are intended to establish uniform disclosure requirements for all plans, regardless of whether they have sought to comply with section 404(c) of ERISA. While ERISA section 404(c) plans may currently provide for disclosure similar to that required under the proposed regulations, these plans would be required to take special care to comply with the new proposed regulations or risk losing the protection afforded thereunder. (In addition, the DOL affirmed its position that the relief afforded to section 404(c) plans does not extend to a fiduciary's duty to prudently select and monitor any designated investment manager or designated investment alternative under the plan.)
We provide the proposed disclosure requirements below, according to the time at which such information would need to be disclosed.
Initial and Annual Requirements
A plan fiduciary or its agent must provide the following information to a participant or beneficiary on or before the date an employee is eligible for participation and at least annually thereafter. This information may be provided in a summary plan description or as part of a pension benefit statement, provided that such summary plan description or pension benefit statement is distributed within the time frames required under the proposed regulation:
- General Plan Information. An explanation
of the circumstances under which participants and
beneficiaries may give investment instructions, including an
explanation of any specified limitations on such
instructions; a description of or reference to plan
provisions relating to the exercise of voting, tender and
similar rights appurtenant to an investment in a designated
investment alternative as well as any restrictions on such
rights; an identification of any designated investment
alternatives offered under the plan; and an identification of
any designated investment managers.
- Administrative Fees. An explanation of
any fees and expenses for plan administrative services (e.g.,
legal, accounting, recordkeeping) that are not otherwise
included in investment-related fees and expenses and may be
charged to the plan, as well as the basis on which such
charges will be allocated.
- Individual Fees. An explanation of any
fees and expenses that may be charged against the individual
account of a participant or beneficiary for services provided
on an individual, rather than plan, basis.
The following investment-related information (including identification, performance data, and fees and expenses) should be provided to the participant or beneficiary in a chart or similar format designed to facilitate a comparison of designated investment alternatives. The DOL provides a model format.
- Identifying Investment-Related
Information. The name of the designated investment
alternative; an Internet Web site address that is
sufficiently specific to lead participants and beneficiaries
to supplemental information regarding the designated
investment alternative, including the name of the
investment's issuer or provider, the
investment's principal strategies and attendant
risks, the assets comprising the investment's
portfolio, the investment's portfolio turnover, the
investment's performance and related fees and
expenses; the type or category of the investment fund; and
the type of management utilized by the investment.
- Performance Data. For designated
investment alternatives with respect to which the return is
fixed, both the fixed rate of return and the term of the
investment. For designated investment alternatives where the
return is not fixed,
-
- The average annual total return of the investment for
the following periods, if available: 1- year, 5-year and
10-year, measured as of the end of the calendar
year;
- A statement that an investment's past
performance is not indicative of future performance;
and
- The name and returns of an appropriate broad-based
securities market index over the 1- year, 5-year and
10-year periods to be used as benchmarks.
- The average annual total return of the investment for
the following periods, if available: 1- year, 5-year and
10-year, measured as of the end of the calendar
year;
- Fee and Expense Information. For
designated investment alternatives with respect to which the
return is fixed, the amount and a description of any
shareholder-type fees that may be applicable to a purchase,
transfer or withdrawal of the investment in whole or in part.
For designated investment alternatives where the return is
not fixed,
-
- The amount and a description of each shareholder-type
fee;
- The total annual operating expenses of the investment
expressed as a percentage; and
- A statement indicating that fees and expenses are
only one of several factors that should be considered
when make investment decisions.
- The amount and a description of each shareholder-type
fee;
- Additional Statements.
-
- The name, address and telephone number of the
fiduciary or designated agent to contact for the
provision of the additional information.
- A statement providing that more current information
may be available at the listed Internet Web site
addresses.
- The name, address and telephone number of the
fiduciary or designated agent to contact for the
provision of the additional information.
Information to Be Provided Upon a Material Change
- Not later than 30 days after the date of adoption of any
material change to any general plan information (as described
above), the fiduciary would be required to provide a
description of such material change to the participant or
beneficiary.
Quarterly Requirements
- At least quarterly, the fiduciary would be required to
provide a statement to the participant or beneficiary
detailing the dollar amounts actually charged during the
preceding quarter to the participant's or
beneficiary's account for administrative services and
individual services. In each case, these statements would
include a description of the services provided with respect
to those amounts.
Information to Be Provided Upon Request
Upon request, the fiduciary would be required to provide to the participant or beneficiary:
- Copies of prospectuses for the disclosure of information
to investors by entities registered under either the
Securities Act of 1933 or the Investment Company Act of 1940,
or similar documents relating to designated investment
alternatives that are provided by entities that are not
registered under either of these Acts;
- Copies of financial statements or reports, and any other
similar materials relating to the plan's designated
investment alternatives, to the extent such materials are
provided to the plan;
- A statement of the value of a share or unit of each
designated investment alternative as well as the date of the
valuation; and
- A list of the assets comprising the portfolio of each
designated investment alternative which constitute plan
assets and the value of such asset.
Information to Be Provided Subsequent to Investment
- In addition, the fiduciary would be required to provide
to each investing participant or beneficiary, subsequent to
an investment in a designated investment alternative, any
materials provided to the plan relating to the exercise of
voting, tender and similar rights appurtenant to the
investment, to the extent such rights are passed through to
such participant or beneficiary under the terms of the
plan.
IRS Circular 230 Disclosure:
Any US tax advice herein (or in any attachments hereto) was not intended or written to be used, and can not be used, by any taxpayer to avoid US tax penalties. Any such tax advice that is used or referred to by others to promote, market or recommend any entity, plan or arrangement should be construed as written in connection with that promotion, marketing or recommendation, and the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
Footnotes
1 These proposals are available on the internet at: http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=20973
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.