DOL Proposes New Fee Disclosure Rules for 401(k) Plans
The Department of Labor (DOL) has issued a new proposed regulation that would require the disclosure of fee and expense information to participants in participant-directed individual account plans such as 401(k) plans. If adopted in its current form, the proposed regulation would take effect in 2009.
The new fee disclosure regulation is the last installment in a three-part series of new regulations dealing with fee and expense disclosure rules for qualified retirement plans. The first two sets of regulations were:
• A final regulation requiring additional Form 5500 disclosure of compensation paid to service providers, effective for plan years beginning on or after January 1, 2009; and
• A proposed regulation requiring service providers to disclose the details of their compensation to the plan, including compensation received from third parties, which could impose liability on plan fiduciaries who fail to obtain the required disclosures.
The latest proposed regulation establishes uniform fiduciary disclosure requirements for all participant-directed individual account plans, which must be provided on or before the date the participant becomes eligible to participate in the plan and thereafter on a periodic, ongoing basis. The information required falls into two categories: plan-related information and investment-related information.
Plan-Related Information
General plan-related information includes several familiar disclosures, including:
• How to give investment instructions,
• Limitations on investment instructions,
• Exercise of voting and other shareholder rights, and restrictions on investments and investment alternatives,
• Designated investment alternatives offered under the plan, and
• Identification of any designated investment managers to whom participants and beneficiaries may give investment elections.
In addition, the proposed regulation would require that a participant receive (at the time of eligibility to participate in the plan and at least annually thereafter) an explanation of any fees and expenses for plan administrative services that may be charged to the plan and the basis (per capita or pro rata) on which the charges will be allocated to, or affect the balance of, each individual participant account. Plan expenses include legal, accounting, and recordkeeping services. The explanation may be disclosed in the plan’s summary plan description. At least quarterly, participants must also receive a statement of the dollar amount actually charged to their account for administrative services and a general description of the services provided for the charge. The administrative expenses may be disclosed on an aggregate or summary basis; thus, the disclosure may provide a single amount for recordkeeping, accounting and legal services. The quarterly fee disclosure may be included on the quarterly benefit statement.
Under the proposed regulation, participants must also receive disclosure of amounts assessed against their account on an ongoing basis, such as fees related to QDROs, participant loans, and investment advisory services. An explanation of the individual fees that may be charged to a participant’s account must be disclosed at the time of eligibility and at least annually thereafter, and the actual amount of individual expenses charged to a participant’s account must be disclosed quarterly (and may be included in the quarterly benefit statement).
Investment-Related Information
Investment-related information must be provided automatically to each participant for each investment option offered under the plan (other than arrangements that enable participants to select investments outside of those selected by the plan, such as self-directed brokerage accounts and brokerage windows) and includes:
• Name and category of the investment alternative,
• Internet web site address for additional information regarding the investment alternative,
• Average annual total return on the investment for one-, five-, and 10-year periods,
• Performance data for “an appropriate broad-based benchmark” over the same or comparable time periods, and
• Fees and expenses related to the purchase, holding and sale of an investment alternative (shareholder fees such as sales loads, sales charges, and redemption fees and the alternative’s expense ratio).
Investment-related disclosures must be provided to each participant on or before the date of plan eligibility and at least annually thereafter. The disclosure requirement may be satisfied by providing the participant with the most recent annual disclosure for the investment.
Other investment-related information must be provided subsequent to the particular investment (information primarily related to pass-through voting rights) or upon request by the participant (both disclosure requirements are similar to the current ERISA Section 404(c) requirements).
