August 5, 2008

Coming Soon: New Participant Disclosure

The Employee Benefits Security Administration of the Department of Labor has been on a mission to improve information sharing, particularly as it relates to qualified plan fee disclosure.  This mission has been divided into three parts:

The first prong of the DOL’s efforts relates to increased disclosure to the government via the Form 5500.  The Form 5500 is the annual report required of plans subject to ERISA.  Beginning with the 2009 plan year, additional disclosure will be required on the Schedule C, the Form 5500 schedule used to report plan payments to service providers.  The DOL recently issued explanatory guidance for plan administrators and service providers about the 2009 Schedule C in the form ofFrequently Asked Questions.

The second prong relates to disclosure to the plan sponsor.  According to the recently issued proposed regulations and related class exemption, a service provider must enter into a written agreement with a plan, disclosing direct and indirect compensation it will receive, as well as any potential conflicts of interest that may arise.  These regulations would apply to retirement, as well as welfare benefit plans.

The disclosure would also have to indicate whether, and to what extent, a service provider would be a fiduciary to the plan. The regulations propose that if services are offered in a bundled approach, the disclosure would have to include all of the services being delivered, as well as the fee for those services; though, the agreement would not have to break down the fees by service, except to the extent that a separate fee would be charged for a particular service. If these regulations are finalized, they will become effective 90 days thereafter.

The third prong relates to plan participant level disclosure.  On July 22, 2008, the DOL issued proposed regulations relating to this topic.  These regulations are proposed to become effective for plan years beginning on or after January 1, 2009.  It will remain to be seen whether the regulations will actually be finalized sufficiently quickly to meet this timeline. 

In a nutshell, the regulations propose four categories of disclosure:

  1. General plan information disclosure,
  2. Administrative expense disclosure;
  3. Individual expense information; and
  4. Investment information disclosure. 

General Plan Information disclosure would include the types of designated investment alternatives, the method for giving investment instructions and any limitations thereon, information regarding exercise of voting rights or tender rights, and a listing of designated investment managers or others to whom investment instructions can be given. 

Timing and Method of Disclosure.  The general plan disclosure information must be given on or before the date the individual becomes eligible to be a participant or beneficiary under the plan, and annually thereafter.  If there is any material change in any of the information, a disclosure must be provided within 30 days of the adoption of the change. 

It would appear that a summary plan description (SPD) would be an acceptable vehicle for providing the disclosure, as long as the SPD is provided within the time prescribed by the regulations.

Administrative Expense Information would include general administrative expenses, such as legal, accounting, or recordkeeping expenses that are assessed to individual accounts, and must include the method, such as per capita or pro rata, that the allocation is made to such individual account. 

Timing and Method of Disclosure. Like the general plan information, the administrative expense information must be provided at or before the plan eligibility, and annually thereafter.  Again, the SPD would appear to be an appropriate vehicle for this disclosure.

Individual Expense Disclosure.  Individual expenses that would be assessed against participant accounts, such as expenses for QDRO processing, loan processing, or investment advisory services, would have to be disclosed, in the manner described above. 

At least quarterly, individuals would have to be given a statement of expenses actually charged in the previous quarter.  This would include both administrative and individual expenses.  The quarterly statement required for participant-directed account plans could be used for this disclosure.  The disclosure would have to include both the expense and the services, at least in general terms, for which the expense was assessed.

Investment-related Information.  At, or before, plan eligibility, and annually thereafter, a plan must disclose investment-related information.  The proposed regulations include a model comparative chart that can be used for this purpose.  The regulations would not require that the model chart be used, but a similar comparative method would have to be used. 

The type of information to be included on the chart would be the name and category of the investment, whether it is actively or passively managed, together with a website where additional information can be obtained.  If the investment does not have a set rate of return, past performance data must be provided.  For fixed investment products, both the fixed rate and the term must be listed.  In addition, fees and expenses related to the investment alternatives must be included.

Finally, the regulations would propose to align the ERISA Section 404(c) participant directed investment regulations, with these proposed participant disclosure regulations, to ensure that no conflicts would arise.  The regulations would underscore the fact that a fiduciary cannot waive its responsibility for prudent selection of investment managers or other similar service providers.


The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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