New ERISA Fiduciary Requirements for Expense Disclosure
By Mark Johnson, Ph.D., J.D.
Self-directed retirement programs, in the form of 401(k) and other individual account balance plans, now fund retirement income security for 72 million Americans, according to the Employee Benefits Security Administration (EBSA) within the U.S. Department of Labor (DOL). An estimated 483,000 participant-directed individual account plans hold almost $3 trillion in assets. Most, but not all individual account balance plans are self-directed by the participants.
Helping participants make informed decisions with these 401(k) and other self-directed retirement plans is the driving force behind recent government regulations aimed at providing greater disclosure of plan fees, expenses, and comparative performance data. This article summarizes the new DOL disclosure requirements.
Effective Date for 401(k) Expense Disclosure Compliance
EBSA published new regulations titled “Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans” in the Federal Register on October 10, 2010. The rules took effect on December 20, 2010, and apply to plan years beginning on or after November 1, 2011 for all covered plans regardless of size.
Goal of Informed Investment Decisions Drive New ERISA Rules
A great number of choices – including the types of assets, degree of risk, length of holding period, and country of origin – make it difficult for many investors to make informed decisions about the best investment vehicles for their retirement funds. With choices ranging from stocks, bonds or mutual funds to derivatives or emerging marketing options, many investors may be making less than optimum investment decisions due to a lack of understandable data on fees, expenses, and fund performance.
Rules Extend Fiduciary Responsibilities to Increased Disclosure
A key provision of the Employee Retirement Income Security Act (ERISA) is that fiduciaries act prudently and “solely in the interest of the plan’s participants and beneficiaries.” As the responsibility for investment decisions is increasingly transferred to the individual participant, the new rules follow the reasoning that the plan administrators must also provide participants with clear disclosure of fees, expenses, and comparative performance data that allow the participant to make fully informed decisions.
General Operational and Identification Disclosure Requirements
The new rules require that plan participants and beneficiaries be provided with certain new operational information on or before the date of plan eligibility, and at least annually thereafter. Such information includes:
- The ability of plan participants and beneficiaries to give investment instructions
- Any plan limitations on investment instructions, including any restrictions on transfer to or from a designated investment alternative
- Rights (or restrictions) of the plan participant in regard to the exercise of voting, tender and similar rights associated with an investment
- Identification of any designated investment alternatives offered under the plan
- Identification of any designated investment managers
- A description of any “brokerage windows,” “self-directed brokerage accounts,” or similar plan arrangements that provide additional investment options
Legal, accounting, and other recordkeeping expenses of an administrative nature that can be charged to a plan must now be disclosed under the new rules. How the expenses are paid must also be revealed (such as by deducting dollars or liquidating shares), as well as allocation techniques used (e.g., pro rata or per capita). Revenue sharing arrangements, Rule 12b-1 fees, and sub-transfer agents are also addressed.
The new rules stipulate that expenses which may apply to an individual’s account rather than on a plan-wide basis must be disclosed. Examples of such fees include:
- Fees associated with the processing of plan loans or qualified domestic relations orders
- Fees for investment advice
- Front or back-end loads or sales charge
- Redemption fees
- Individual account investment management fees (for example, certain unregistered designated investment alternatives such as bank collective investment funds)
Individual expense fee information must be disclosed to the participant at least quarterly.
Model Comparative Chart
Investment-related information must be provided to plan participants in a way that supports comparisons for investment alternatives. A “model comparative chart” is included in an appendix to the rules for this purpose.
ERISA Plan Administrators Hold Compliance Responsibility
The “Plan Administrator,” as defined in ERISA, not the third party administrator or recordkeeper, has the responsibility for compliance with the new expense disclosure requirements.
Exceptions to Expense Disclosure Requirements
There are some exceptions to the ruling, based on feedback received during the public comment period. These exceptions include:
- IRA based plans under the Internal Revenue Code (IRC) of 1986, including
- Simplified employee pensions (SEPs) as defined under IRC § 408(k)
- Simple retirement accounts (SIMPLEs) as defined under IRC § 408(p)
ABOUT THE AUTHOR. Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778, firstname.lastname@example.org, or www.erisa-benefits.com.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
Contact ERISA Expert Dr. Mark Johnson
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