Prepare to Comply with the DOL’s Disclosure Regulation for Participant-Directed Individual Account Plans

Over 4 years ago, the DOL put plan fiduciaries on notice that it intended to implement new rules to enhance the transparency of fees charged both to plans themselves and participants individually. In its first step, the DOL revamped Schedule C to the Form 5500 with respect to the disclosure of service provider compensation to the government. (See our October 2008 issue). Next, the DOL focused on fee disclosure by service providers to plan fiduciaries with the issuance of regulations under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) (See our July 2010 issue). The final piece of the new rules took the form of regulations requiring the disclosure of plan fees to participants in “covered individual account plans” (defined below). These participant disclosure regulations were finalized on October 14, 2010. A detailed analysis of the final regulation is in our February 2011 issue. With the effective date of the new participant disclosure regulations approaching at the end of this year, this article is focused on some practical suggestions to ensure your plan is in compliance with the new regulations from the start.

What Plans Must Comply

A “covered individual account plan” is any participant-directed individual account plan as defined in ERISA section 3(34) (e.g., 401(k) and 403(b) plans), except that any plan involving individual retirement accounts or individual retirement annuities described in Internal Revenue Code (“Code”) section 401(k) or 408(p) are not included. Plans that currently take advantage of the limited exemption from fiduciary liability under ERISA section 404(c) will find that some, but not all, of the information required to be disclosed is already being disclosed by plan fiduciaries. For the first time, the new regulations make disclosure of detailed plan and investment information an affirmative fiduciary duty of the plan administrator, regardless of whether or not the plan is intended to comply with ERISA section 404(c). For this reason, it is important for all plan fiduciaries of covered individual account plans to realize that these new rules apply to their plans.

Be Ready to Comply by April 30, 2012, under the New “120-Day Rule”¹

The regulations go into effect for plan years beginning on or after November 1, 2011. For calendar year plans, this means that as of January 1, 2012, plan fiduciaries must begin providing the required disclosures to participants and beneficiaries. Generally, anyone who is a participant or beneficiary with the right to direct investment of their individual account must receive the appropriate notices on or before the date they can first direct their investments, and annually thereafter. However, new guidance issued by the DOL on May 31, 2011, provides that a transitional 120-day rule applies to all participants in a plan. As a result, the required disclosures must be made no later than 120 days after the effective date of the regulation, or April 30, 2012, for a calendar year plan. Even with this extended period for compliance, plan fiduciaries should begin to work with their service providers now to develop the disclosures and a process for providing them to participants in order to be in a good position to comply with the new regulations as of the April 30, 2012, deadline.

Plan Ahead to Avoid the Need to Provide Multiple Disclosures during the Plan Year

The regulation requires the disclosure of general plan information, administrative expenses information and individual expenses information. General plan information includes a description of the structure and mechanics of the plan, such as information about how participants and beneficiaries can give investment instructions, and an identification of any designated investment alternatives offered under the plan. The disclosure of administrative expenses information requires the disclosure of an explanation of any fees and expenses for general plan administrative services which may be charged against the individual accounts of participants and beneficiaries and that are not reflected in the total annual operating expenses of any designated investment alternative, as well as the basis on which such changes will be allocated (e.g., pro rata or per capita) to, or affect the balance of, each individual account. (For purposes of this disclosure it is important to note that any fees paid by a plan sponsor out of its general, corporate assets do not need to be disclosed. This exception is in line with the general purpose of the regulation, because fees paid out of corporate assets do not affect the account balances of participants and beneficiaries in the plan.) Individual expenses information includes a description of fees that may be charged to participants individually, as opposed to the plan as a whole, such as loan processing fees, QDRO fees, fees for brokerage windows and commissions.

As mentioned above, these disclosures must be provided to participants and beneficiaries on or before the first date they can direct the investment of their accounts, and annually thereafter. In addition, if there are any changes to the information disclosed, each participant and beneficiary must be furnished a description of such change at least 30 days, but not more than 90 days, in advance of the effective date of the change. Such changes may result if there are negotiated changes to the third party administrator’s service agreement, or if the plan sponsor decides to make plan design changes mid-year. Any such change that affects the information provided in the annual disclosure results in the need for a notice communicating the change to participants. In order to avoid the administrative burden of preparing and distributing multiple notices of changes throughout the plan year, plan fiduciaries should keep an eye on contemplated changes during the year and, if possible, attempt to make multiple changes at or near the same time. If the changes are correctly timed, a single notice of changes may be used to notify the participants and beneficiaries in a timely manner.

Modify Existing Quarterly Statements to Satisfy Requirements

In addition to the annual disclosures described above, the plan administrator is also required to provide a quarterly statement that describes the dollar amount of the fees and expenses that are actually charged during the preceding quarter to the participant’s or beneficiary’s account for administrative services, and a description of the services provided for such fees and expenses. It is acceptable to identify such services generally, rather than providing a detailed description of such services. For example, the amount of fees paid for accounting services do not have to be broken down to identify that the fees were paid for the annual audit, preparation of the financial statements and Form 5500 preparation. Such fees can simply be identified as “accounting fees.” If applicable, the quarterly disclosure must also include an explanation that, in addition to the fees and expenses disclosed, some of the plan’s administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan’s designated investment alternatives, for example through revenue sharing agreements. Again, it is not necessary to provide a detailed description, but rather it must be stated that revenue sharing agreements are used to pay administrative expenses. The dollar amount of the fees and expenses actually charged during the preceding quarter to the participant’s or beneficiary’s account for individual service must also be disclosed in the quarterly statement. These types of fees include loan processing fees, QDRO processing fees, or withdrawal processing fees.

For plans that are currently providing quarterly statements to participants it is likely that the new disclosures can be added to those quarterly statements. Plan administrators should contact their service provides to discus how any information that will now be required to be disclosed, but is not currently being disclosed in the quarterly statements, can be added to the statements.

No Need to Recreate Annual Investment Information Mid-Year for New Participants

The regulation requires the plan fiduciary (or the person designated by the plan fiduciary to act on its behalf) to disclose to participants detailed information about each designated investment alternative offered under the plan. This disclosure must be made on or before the fist date on which a participant can first direct his or her investments under the plan, and at least annually thereafter. The disclosure of the investment-related information must be based on the latest information available to the plan fiduciary. This requirement does not mean that as participants become eligible to participate during a plan year a new disclosure must be created based on the “latest information available.” Rather, this requirement is considered satisfied by furnishing to the participant the most recent annual disclosure, along with any updates that have been provided throughout the year. For example, if a participant becomes eligible to participate on July 1, the annual notice furnished to participants at the beginning of that year may be provided to the new participant, if the information is still accurate. Any change notices provided to participants up until that point must also be provided to the new participant. It is not necessary to create a new disclosure in the middle of the plan year.

Website Information for Disclosure of Investment Related Information

The investment-related information disclosure must include an internet website address that is sufficiently specific to provide participants and beneficiaries access to detailed information about each designated investment alternative offered under the plan. One way to satisfy this requirement is to list a website address specific to each designated investment alternative in the comparative chart that is required by the regulation. An alternative way to satisfy this requirement is to provide participants with a website address for the plan generally. This website can then guide participants to the specific websites that provide the required information for each designated investment alternative. A drawback of the first alternative is that if a designated investment alternative changes its website the comparative chart becomes out of date immediately. If the latter approach is taken and a designated investment alternative changes its website address, the plan’s website can be easily revised to point participants to the designated investment alternative’s new website address, without the need to revise and provide a new chart to participants.

Use of Plan’s SPD to Satisfy the New Requirements

Some of the information required to be disclosed under the new regulation is also required to be contained in a plan’s summary plan description (“SPD”). Any information that is not currently contained in the SPD can be added to it to satisfy the new disclosure requirements. Plan administrators can choose to provide the new required information in the SPD if the SPD is furnished to participants with a frequency that complies with the requirements of the regulation. Taking this approach would mean that the SPD must be provided on or before the date on which a participant can first direct his or her investments, as well as annually thereafter. Any changes to the disclosures would need to be provided no later than 30 days and no earlier than 90 days before such change is effective. These frequency and timing requirements are much different than the SPD requirements. A participant must be provided an SPD within 90 days of first becoming eligible to participate in the plan, and SPDs must be updated every 5 years. Any changes to the information in an SPD is required to be communicated to participants through a summary of material modifications (“SMM”) which must be provided within 210 days following the end of the plan year in which the change is effective. While it is possible to use the SPD to satisfy the new disclosure requirements, based on the differences in the frequency requirements plan administrators may determine it is more burdensome to do so. It may be simpler to keep the required fee disclosures separate from the SPD.

Protection for Good Faith Efforts at Compliance

The regulations clarify that, to the extent a plan administrator reasonably and in good faith relies on information from an investment or other service provider in making the required disclosures, the plan administrator will not be held liable for any inaccuracy or lack of completeness. Plan administrators should proactively address these rules with their TPAs, recordkeepers, legal counsel and fund managers to make any necessary amendments to their plan and trust documents, and their service agreements, to allocate responsibility for satisfying the various disclosure requirements. Also, if the plan administrator is a committee, the committee charters should be reviewed and amended as appropriate to address the committee’s new disclosure duties.

Please contact us is if you would like to discuss the process of implementing these rules.


¹ The original transition rule in the regulation was 60 days and applied only to participants in the plan on the effective date. On May 31, 2011, the Department of Labor proposed extending the transition period to 120 days and applying it to all participants in the plan, including those who become eligible between January 1, 2012 and April 30, 2012. For purposes of this article, we will refer to the transition period as “the 120-day period.”