With Department of Labor guidance now complete and a new firm deadline in place, it is time for plan administrators to start preparing to distribute fee disclosures to all plan participants. This article explains the new deadline, summarizes the disclosure requirements, and describes the options for paper or electronic distribution of the disclosures.
The DOL had previously tied the effective date of participant disclosures to the disclosures that plan service providers must provide to the plan. Please see the accompanying advisory for more information about the service provider disclosures. With the latter deadline pushed back to July 1, initial participant-level disclosures are due by Aug. 30, 2012 and the first quarterly disclosure is due Nov. 15, 2012, for a calendar year plan. For non-calendar years beginning July 1 to Nov. 1, 2012, the initial disclosure is due 60 days after the plan year begins. Note that if using certain electronic delivery options described below, there may be deadlines to contact participants before the due date.
The participant fee disclosures (also known as the “404(a) rules”) apply to all ERISA plans with participant investment direction, which includes almost all 401(k) and 403(b) plans and many profit sharing plans. The disclosures consist of the initial disclosure (which must also be given annually) and quarterly disclosures.
The initial/annual disclosure consists of two parts, which tie into the electronic disclosures below.
- 1. Plan-Related Information
- General plan information (how to direct investments, transfer restrictions, available investment funds, and any “brokerage window” option);
- Plan level fees (administrative, audit, recordkeeping fees if charged to accounts and not part of fund operating expenses); and
- Individual transaction fees (such as for loans, QDROs, investment advice services, or to use a brokerage window).
- 2. Investment-Related Information
In a table format, this section must include:
- Performance of each fund compared to a benchmark for one, five, and 10-year periods;
- Operating fees of each fund as a percentage and in dollars per $1,000;
- Any other charges (sales loads, surrender charges);
- Website addresses to obtain more information on each fund and for a glossary of investment terms; and
- Special disclosures for annuities and target date funds.
Various templates of the initial/annual disclosure are now becoming available from plan providers. Check with your plan provider for a Sample Participant Disclosure Notice.
The quarterly fee disclosure is much simpler: the actual dollar amount of plan fees assessed in the prior quarter. This would include any recordkeeping or trustee fees passed through to the participant and any individual transaction fees actually incurred in that quarter. It does not include the dollar amount of fund operating fees. But if applicable, there must be a statement that additional fees are paid out of fund operating expenses.
With an estimated 72 million plan participants covered by the disclosure rule, many plan sponsors are interested in saving costs through electronic distribution. The DOL released its guidance on electronic distribution in 2011. While helpful, it may still require a combination of methods to reach all participants.
Under the DOL guidance, there are now several available methods to electronically distribute some or all of the participant fee disclosures. All of the disclosures (both Plan-Related Information and Investment-Related Information) can be distributed using the “DOL safe harbor rule” or a new alternative voluntary disclosure method. The DOL safe harbor allows electronic distribution (including access through a website) to all active employees who have email access as part of their job duties, and to others (like former employees and beneficiaries) who affirmatively opt into email distribution. Thus, for some employers who routinely distribute plan materials by email, the safe harbor will cover active employees and other participants can be reached by another method.
The new alternative voluntary method is available for any participant who voluntarily provides an email address in response to a request that describes the materials to be distributed electronically and the right to opt out of electronic delivery. If participants’ emails are already on file, and used within the last 12 months, the plan can treat them as voluntary if they are sent a “Transition Group” notice, 30 to 90 days before Aug. 30, notifying them of the ability to opt out of electronic delivery. Again, this method can be used for all the participant fee disclosures.
The DOL guidance also allows the annual “Plan-Related Disclosures” and quarterly expense disclosures, but not the annual “Investment-Related Information,” to be furnished electronically along with or as part of the quarterly benefit statements that are already required. The advantage of furnishing information with the benefit statements is that more liberal rules apply to electronic disclosure of benefit statements, and plans already have systems in place to distribute them.
Under prior guidance, benefit statements can be provided using either the DOL safe harbor or IRS electronic delivery methods. The IRS rules allow distribution through electronic means if a participant has reasonable access (such as through a kiosk) and the option to receive a paper copy. For example, benefit statements can be provided through a website if participants have received a notice of how to access the website and the right to obtain a paper copy.
If none of these electronic methods fit (for example, investment-related information going to a former employee who has not opted for email delivery), then it will have to be provided on paper—but it can still be provided along with a paper benefit statement.
Between now and August 30, plan administrators should be working with their record-keeper or platform provider to obtain a template initial/annual disclosure and tailor it to their plan. Plan administrators must also decide which methods of electronic delivery, or combination of electronic methods and paper, they want to use to reach all plan participants.