As reported in prior newsletter articles, sponsors of defined contribution qualified retirement plans having participant-directed investments, including most 401(k) and 403(b) plans, must provide participants detailed information concerning certain fees associated with their plan’s operations and investment choices. For purposes of these disclosure requirements, participants include employees eligible to participate, whether or not they are enrolled in the plan. The first annual disclosure under the Department of Labor regulations must be made by August 30, 2012 in the case of calendar year plans. The disclosure requirements are intended to facilitate more informed decision-making by plan participants about their investment decisions.
The disclosure rules are elaborated in recently finalized Department of Labor regulations, which require the plan administrator (usually the plan sponsor) to disclose to participants “plan-related information” and “investment-related information.” Plan-related information includes matters such as the circumstances under which participants can give investment instructions; explanation of any expenses for general plan administrative services that may be charged against a participant’s account; and expenses that may be charged against a participant’s account on an individual basis (e.g., fees for processing plan loans and qualified domestic relations orders and for investment advice). Investment-related information covers identification of each investment option available under the plan; average annual rates of return for the plan’s investment options and benchmark returns for similar classes of investment; sales charges, redemption fees and other expenses that may be charged directly against a participant’s account; restrictions or limitations on purchases, withdrawals or transfers; expense ratios, expressed as both a percentage and a dollar amount for a $1,000 investment; and various disclosures specific to particular investment types (e.g., fixed-return, employer stock and annuity purchase investments).
Department of Labor guidance published in the form of thirty-eight frequently asked questions (FAQs) further elaborates the operation of the disclosure rules in various contexts, such as where recordkeeping fees are reduced by revenue sharing proceeds the recordkeeper receives from the plan’s investment options and in cases of self-directed brokerage windows. These initial disclosures must be followed, beginning no later than November 14, 2012, by quarterly individualized statements reflecting the dollar amount of fees and expenses charged against each participant’s account during the preceding quarter and a description of the services to which the charges relate. While plan administrators will typically rely on their plans’ service providers to furnish the information required for the disclosures, the plan administrator bears ultimate responsibility for compliance. Therefore, it is essential that plan administrators work closely with their vendors to ensure that the required disclosures will be provided on a timely basis to plan participants.