New participant disclosure rules apply to self-directed 401(k) plans. Employers generally must begin complying with these rules no later than August 30, 2012.
You may have heard about new participant disclosure rules that will soon apply to 401(k) plans. Before describing what’s ahead, a look back may be helpful. (While we’ll refer to 401(k) plans, these rules also apply to certain other plans, known as self-directed plans, which allow participants to direct their own investments.)
Most 401(k) plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA) (governmental plans, single participant plans, certain 403(b) plans, and certain church plans are not). One of the reasons Congress enacted ERISA was to protect retirement plan assets, and one of the important ways ERISA does so is through its rules governing the conduct of plan fiduciaries. Plan fiduciaries must discharge their duties with respect to the plan prudently and solely in the interest of participants and beneficiaries. In general, the plan fiduciaries include the plan administrator, anyone providing investment advice for a fee, and anyone who exercises discretionary authority or control over the plan or plan assets. A fiduciary that breaches his or her duty to the plan may be personally liable for any losses that occur as a result of that breach.
The investment of plan assets is a fiduciary act governed by ERISA’s fiduciary standards. But who is responsible when a plan allows participants to direct the investment of their own accounts? In 1992, the Department of Labor (DOL) issued regulations that allow 401(k) plan fiduciaries to avoid responsibility for losses in self-directed plans that occur as a result of a participant’s exercise of investment control over his or her own account. To avoid liability, plans must provide participants with a diversified choice of investments and very specific information about the plan and its investments (and comply with certain other requirements). While these rules are voluntary, many (if not most) 401(k) plans choose to comply in order to shift liability away from the plan fiduciaries. A 401(k) plan that complies with these rules is known as a “404(c) plan,” after the section of ERISA that governs self-directed plans. A plan’s summary plan description (SPD) should indicate if a plan intends to be a 404(c) plan.
However, as self-directed plans have grown more popular, the DOL became concerned that participants were becoming increasingly responsible for making their own retirement savings decisions, and might not have access to, or might not be considering, information critical to making informed decisions about the management of their accounts–particularly information on investment choices, fees, and expenses. As a result, in October 2010, the DOL issued new regulations that require that all self-directed 401(k) plans–both those that choose to comply with Section 404(c) and those that do not–provide the same detailed information to participants about the plan and its investments, on a regular and periodic basis, so that participants can make informed decisions with regard to the management of their individual accounts. Some information must be provided on an annual basis, and some information must be provided quarterly. For calendar year plans, the initial annual disclosure must be furnished no later than August 30, 2012. The first quarterly statement must be furnished no later than November 14, 2012 (for July through September 2012).
Participants in 401(k) plans that comply with Section 404(c) are already receiving most of the information required by the new regulations. In general, more detailed information about investment fees and expenses must now be disclosed to participants. Another change is that plan investment information must be provided in a chart, so that participants are better able to compare investment alternatives. And plans will no longer be required to automatically provide a prospectus to participants, although one must be provided upon request.
These new disclosure rules apply to 401(k) plans and other plans that allow participants to direct their own investments, but they do not apply to IRAs, SEPs, or SIMPLE IRA plans. They also do not apply to plans that are not covered by ERISA, including governmental plans, owner-only plans, certain 403(b) plans, and certain church plans.
The following is a DOL outline of the information that must be provided under the new rules. Note that employers have some flexibility in how this information will be provided (electronically, via the Web, on paper, in SPDs, in currently provided quarterly statements, etc.).
Plan-Related Information
The first general category of information that must be disclosed is plan-related information. This general category is further divided into three subcategories:
General Plan Information
Information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions under the plan, a current list of the plan’s investment options, and a description of any “brokerage windows” or similar arrangement that enables the selection of investments beyond those designated by the plan.
Administrative Expenses Information
An explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts. Examples include fees and expenses for legal, accounting, and recordkeeping services.
Individual Expenses Information
An explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant based on the actions taken by that person. Examples include fees and expenses for plan loans and for processing qualified domestic relations orders.
The information in these three subcategories must be given to participants on or before the date they can first direct their investments, and then again annually thereafter.
In addition to the plan-related information that must be furnished up front and annually, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether “administrative” or “individual”) actually charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These specific disclosures may be included in quarterly benefit statements currently provided to plan participants.
Investment-Related Information
The second general category of information that must be disclosed is investment-related information. This category contains several subcategories of core information about each investment option under the plan, including:
Performance Data
For investment options that do not have fixed rates of return, such as mutual funds, 1-, 5-, and 10-year historical returns must be provided. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.
Benchmark Information
For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods (matching the Performance Data periods) must be provided. Investment options with fixed rates of return are not subject to this requirement.
Fee and Expense Information
For investment options that do not a have a fixed rate of return, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested must be provided, along with any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment. For investment options that have a fixed rate of return, any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment must be disclosed.
Internet Website Address
Investment-related information includes an Internet website address that is sufficiently specific to provide participants access to specific additional information about the investment options for participants who want additional, or more current, information.
Glossary
Investment-related information includes a general glossary of terms to assist participants in understanding the plan’s investment options, or an Internet website address that is sufficiently specific to provide access to such a glossary.
Investment-related information must be furnished to participants on or before the date they can first direct their investments, and then again annually thereafter.
Comparative Format Requirement
Investment-related information must be furnished to participants in a chart or similar format designed to facilitate a comparison of each investment option available under the plan.
Miscellaneous
After a participant has invested in a particular investment option, he or she must be provided any materials the plan receives regarding voting, tender, or similar rights in the option.
Upon request, the plan administrator must also furnish prospectuses, financial reports, and statements of valuation and of assets held by an investment option.
Information required to be provided to plan participants must also be provided to beneficiaries receiving benefits from the plan.
If you have questions, contact the experts at Henssler Financial: 770-429-9166 or experts@henssler.com.
Disclosures:
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
