Getting Out of the Way of 404(a)
In October 2010, the U.S. Department of Labor (DoL) issued its final regulation amending §404(a) of the Employee Retirement Income Security Act of 1974 to require fiduciaries of participant-directed individual account plans to disclose certain plan- and investment-related information to plan participants and beneficiaries. The DoL believes that these required disclosures will allow participants to make more informed investment decisions. The Regulation became effective on December 20, 2010; however, its disclosure requirements apply starting with plan years that begin on or after November 1, 2011 (for calendar-year plans, January 1, 2012).
The Regulation amends ERISA but does not change any of its prior requirements, clearly stating that providing plan- and investment-related information to participants and beneficiaries does not, in fact, “relieve a fiduciary from its duty to prudently select and monitor providers of services to the plan or designated investment alternatives under the plan.”
The Regulation affords some relief, stating that plan sponsors are not responsible for the completeness or accuracy of the information contained in the required disclosures if they reasonably and in good faith rely on information provided by a service provider.
Generally, plan sponsors are now required to disclose certain plan-related and investment-related information to all eligible employees and beneficiaries who have the right to direct the investments of their individual accounts, on or before the date they can first direct those investments (and annually thereafter), and in a manner that allows the average participant to understand them. The Regulation also contains a transitional rule that allows plan sponsors to provide the initial disclosure to existing participants and beneficiaries within 60 days after the first day of the plan year beginning on or after November 1, 2011 (i.e., March 1, 2012, for calendar-year plans).
Additionally, plan sponsors must communicate any changes in plan-related information between 30 and 90 days before such changes take effect, or, if the change is the result of an unforeseeable event or uncontrollable circumstance, as soon as reasonably practicable.
Plan sponsors must provide each participant or beneficiary with the following general plan information: The procedures for participants and beneficiaries to give investment instructions; any limitations on investment instructions, including restrictions on transfers to or from a designated investment alternative (DIA); a description of every DIA offered under the plan; a description of any plan provisions that relate to the exercise of voting, tender, and similar rights accompanying investment in a DIA; the plan’s designated investment managers (if any); a description of any brokerage windows, self-directed brokerage accounts, or similar arrangements that allow participants to select investments beyond plan-designated investments.
Administrative and Individual Expenses
Plan sponsors also must provide each participant or beneficiary with an accounting of all fees and expenses paid by the plan for general administrative services (e.g., legal, accounting, or recordkeeping) that are permitted to be deducted from all individual accounts and are not reflected in each DIA’s total annual operating expenses. Also, plan sponsors must explain whether the plan’s administrative expenses will be allocated to each individual account on a pro rata or per capita basis.
In addition, each participant or beneficiary must be provided with a statement explaining any fees and expenses that can be charged on an individual basis (as opposed to a plan-wide basis) and that are not reflected in each DIA’s total annual operating expenses, such as fees for processing plan loans or qualified domestic relations orders; fees for investment advice; fees for brokerage windows; commissions or front-end or back-end loads or sales charges; and redemption fees.
Plan sponsors also must provide participants or beneficiaries with a statement that includes the following information: the dollar amount of the plan-related fees and expenses that were actually charged to the participant’s or beneficiary’s account over the past quarter; a description of the services that the above charges relate to; and an explanation that some of the plan’s administrative expenses for the preceding quarter were paid out of the total annual operating expenses of one or more of the plan’s DIAs (if applicable).
In addition to the plan-related disclosures, there are a host of investment-related disclosures required by the regulation, which I will discuss in my next column.
Marcia S. Wagner is an expert in a variety of employee benefits issues and executive compensation matters, including qualified and nonqualified retirement plans, and welfare benefit arrangements. A summa cum laude graduate of Cornell University and Harvard Law School, she has practiced for 24 years. Wagner is a frequent lecturer and has authored several books and numerous articles.