DOL Issues New Guidance on Participant Fee Disclosures
The deadline is fast approaching for distribution of new ERISA Section 404(a) "fee disclosures" to participants/beneficiaries in participant-directed individual account plans. Plan fiduciaries generally must make the initial participant-level disclosures on or before August 30, 2012 (and then on or before November 14, 2012 with respect to required quarterly statement disclosures). ERISA 404(c) fiduciary "protection" for participant-directed account plans requires that the new disclosure requirements be met.
On May 7, 2012, the DOL issued Field Assistance Bulletin 2012-02 which provides some helpful clarification on issues relating to the participant-level fee disclosures. Some highlights from the list of 38 Q&As:
- 403(b) Plans. Although, in general, the new participant-level fee disclosure regulations apply to Section 403(b) plans, for certain 403(b) annuity contracts or custodial accounts to which employer contributions stopped before January 1, 2009, and in which the participants are fully vested, an exception may be applicable.
- Level of Disclosure of Administrative Expenses. For known expenses, the FAB states that the explanation must clearly identify the service provided (e.g., recordkeeping), the cost of the service (e.g., 0.12 percent of the participant's account balance or the flat dollar amount account charge); and the allocation method (e.g., pro rata). For unknown expenses at the time of disclosure (i.e., future anticipated expenses), the plan administrator must take into account the known facts and circumstances. For example, if an administrator expects to incur legal fees, but does not know the precise amount of the fees, the disclosure should reference the anticipated services (e.g., legal services) and the allocation method (e.g., pro rata).
- Payment of Administrative Expenses from Plan Assets. The FAB clarifies that for those plans which pay administrative expenses from forfeitures or general plan assets, and not from individual accounts, no disclosure regarding this practice need be made.
- Revenue Sharing Arrangements. However, the FAB does provide a different answer for revenue sharing arrangements. For example, if all or some of a plan's administrative expenses which are charged to participant accounts may be reduced by investment-related revenue sharing amounts (sometimes identified as "rebates") then disclosure of such arrangements must be included – even where no expenses are expressly allocated to participant accounts. The FAB also states that even if all of a plan's administrative expenses are paid from revenue sharing, and no fees or expenses are charged to individual accounts, the plan must still provide an explanation of the revenue sharing arrangement.
- Brokerage Windows. The FAB explains that even if only a few participants take advantage of a "self-directed brokerage account" feature in the plan, annual fee and expense information must be provided to all participants.
- Closed Investment Funds. The FAB clarifies that disclosures must be made for investment funds that are closed to new investments. The DOL's reasoning is that participants need the required disclosures in order to decide whether or not to transfer money out of a designated investment alternative.
- Multiple Comparative Charts. The FAB clarifies that comparative charts provided by separate service providers need not be combined into one chart – but must be provided to participants at the same time and in the same mailing or electronic transmission in a manner that facilitates comparison between investment options.
- Model Portfolios. The FAB states that model portfolios consisting of investment options available under the plan that are not separate investments (that is, the model is simply made available for participants to use or not use in making their own investment elections) are not "designated investment alternatives" subject to the disclosure rules. However, if a plan offers only model portfolios made up of investments not separately designated under the plan, then each model portfolio would be treated as a designated investment alternative requiring disclosures.
- Fund of Funds. If a plan offers a "fund-of-funds" that is registered under the Investment Company Act of 1940 as a designated investment alternative, the acquiring fund's total annual operating expenses must reflect the operating expenses of the acquired funds. The plan administrator must determine the total annual operating expenses according to the required SEC form. Special rules apply for non-registered funds.
For those plans which have already furnished the Section 404(a) disclosures or which have already prepared and are about to furnish such disclosures, the FAB specifies that no extension of time to adjust the disclosures to reflect the FAB is going to be provided. However, the FAB goes on to state that for enforcement purposes, the DOL will take into account whether covered service providers and plan administrators have acted in good faith based on a reasonable interpretation of the regulations.
Nelson Mullins Executive Compensation and Employee Benefits attorneys are ready to assist with your compensation and benefits related matters in a cost-effective and responsive manner. Please contact one of our Executive Compensation and Employee Benefits partners or the Nelson Mullins attorney with whom you work. Also, be sure to visit our Employee Benefits Blog.
This Comp & Benefits Brief is a periodical publication of Nelson Mullins Riley & Scarborough LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have. Any tax information or written tax advice contained herein (including any attachments) is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice) ©2012 Nelson Mullins Riley & Scarborough LLP. All Rights Reserved.
The articles published in this newsletter are intended only to provide general information on the subjects covered. The contents should not be construed as legal advice or a legal opinion. Readers should consult with legal counsel to obtain specific legal advice based on particular situations.