The Department of Labor (DOL) released proposed regulations that if adopted impose new requirements for the disclosure of fee and expense information to participants in self-directed individual account plans (such as 401(k) plans). The proposed rule is expected to be effective for plan years beginning on or after January 1, 2009 and is part of an ongoing effort to ensure that participants receive sufficient information about plan fees and expenses so that they can make informed investment decisions. In the same notice, DOL proposed changes to the regulations under Section 404(c) of the Employee Retirement Income Security Act (ERISA) to integrate the disclosure requirements and to restate DOL’s position with respect to the scope of ERISA Section 404(c)’s protection.

Background

The investment of plan assets is governed by the fiduciary standards set forth in ERISA, which require fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. If a plan assigns investment responsibilities to plan participants, it is DOL’s view that plan fiduciaries must take steps to ensure that participants are provided adequate information regarding the plan, including its fees and expenses, to make informed decisions about the management of their individual accounts. Even prior to the effective date of the proposed regulations, such disclosure is already required by plans that elect to comply with the requirements of ERISA Section 404(c). However, these proposed regulations are being issued at a time when DOL is still considering rules that would apply new disclosure requirements to contracts between plans and service providers under ERISA.

Summary

Under the proposed rule, fiduciaries of a participant-directed individual account plan, such as a 401(k) or profit-sharing plan, must take steps to ensure that participants receive certain information at the time they first invest and on a periodic basis. The information that must be disclosed falls into two categories: (1) plan-related information and (2) investment-related information.

Plan-Related Information

Plan-related information includes general information about the plan, as well as specific information about the administrative expenses charged to the plan and to individual articipant accounts.

General Plan Information

For plans that have already elected ERISA Section 404(c) compliance, the list of general plan information that must be disclosed is very similar:

• How participants and beneficiaries may give investment instructions
• Any specified limitations on such instructions, including any restrictions on transfer to or from a designated investment alternative
• 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
• The specific designated investment alternatives offered under the plan
• The identity of any designated investment managers to whom participants and beneficiaries may give investment directions.

This information must be furnished to an employee on or before the date he or she becomes eligible to participate in the plan and at least annually thereafter. In addition, the proposal requires that participants be furnished a description of any material changes to the required information not later than 30 days after such changes are adopted.

Participants must receive information about plan fees and expenses at regular intervals.

If adopted, this new rule will impose significant new disclosure obligations on plan sponsors, and consideration should now be given to how each plan will be able to implement these requirements consistent with the 2009 proposed effective date.

1. At the time an employee becomes eligible to participate in the plan, and at least annually thereafter, he or she must receive an explanation of any fees and expenses for plan administrative services (e.g., legal, accounting, recordkeeping) that may be charged to the plan and the basis (e.g., pro rata, per capita) on which such charges will be allocated to, or affect the balance of, each individual account. The information may be disclosed in the plan’s summary plan description.
2. In addition, each participant must receive, at least quarterly, a statement of the dollar amounts actually charged during the preceding quarter to the participant’s account for administrative services, and a general description of the services to which the charges relate.
   1. "the total administrative fees and expenses assessed during the quarter with, for example, an indication that the charges for plan administrative expenses include legal, accounting, and recordkeeping costs to the plan."
   2. Administrative expenses may be disclosed on an aggregate or summary basis. It is not necessary to break out administrative charges on a service-by-service basis. The quarterly fee information may be disclosed as part of a quarterly benefit statement.

3. Participants must receive information about expenses that are assessed on an individual basis, rather than plan wide, such as fees related to QDROs, loans, and investment advice services.

   1. The timing of such disclosure tracks the administrative expenses rule: the fiduciary must provide an explanation of fees that may be charged to individual accounts at the time of plan eligibility and annually thereafter, and must provide a quarterly statement of dollar amounts actually charged during the preceding quarter.

4. The following information must be provided automatically to each participant with respect to each investment option in the plan (other than a brokerage window, self-directed brokerage account, or similar plan arrangement that enables a participant to select investments beyond those designated by the plan):

   1. The name and category of the investment alternative (e.g., money market mutual fund, balanced fund, index fund, and whether the investment is actively or passively managed) and an Internet address that will lead participants to supplemental information about the investment option.
   2. Average annual total return on the investment for one-year, five-year, and 10-year periods, if available
   3. Performance data for “an appropriate broad-based benchmark” over time periods comparable to the performance data periods
   4. Fees and expenses related to the purchase, holding, and sale of the investment alternative, including shareholder-type fees charged directly against the investment, such as sales loads, sales charges, and redemption fees, total annual operating expenses expressed as a percentage (i.e., expense ratio)

The proposed rule includes a suggested format for presenting the information.

Investment-related information must be provided to each participant on or before the date of plan eligibility and at least annually thereafter. The preamble states that a plan fiduciary may satisfy this requirement by providing the most recent annual disclosure for the investment (such as a mutual fund annual report).

Also included in the DOL proposal are amendments to the regulation under Section 404(c) of ERISA. ERISA Section 404(c) relieves fiduciaries of liability for investment losses that result from a participant’s exercise of control over assets. The DOL has taken the position that the relief afforded by ERISA Section 404(c) does not extend to a fiduciary’s duty to prudently select and monitor investment funds under the plan.

For further information, please contact Jere Cowden, President and CEO, or Jim Bartoszewicz, Executive Vice President, Defined Contribution & Investment Advisory Services. They can be reached at 412-394-9330 or toll-free at 888-889-9432. Full Proposed Regulations can also be found at the DOL website.