This is the second in a series of Technical Updates relating to the Participant Fee Disclosure regulations issued by the Department of Labor (DOL) and published on October 20, 2010. This Technical Update provides an explanation of how the new regulations affect fiduciary protection under ERISA §§404(c)(1) and (c)(5). The 404(a) regulation project that provided the new participant fee disclosure regulations also revised the 404(c) regulations. Note: If the plan permits a beneficiary to direct investments, the new regulations also apply to the beneficiary. In this Technical Update, any reference to participant also applies to a beneficiary.
Q: To which type of plans do the new participant fee disclosure regulations apply?
The new regulations apply to participant-directed defined contribution plans that are subject to ERISA.
Q: Do the new regulations apply only if the employer-sponsor intends the plan to comply with ERISA §404(c)?
No. The new regulations apply irrespective of whether the employer intends a plan to be 404(c) compliant.
Note: Some participant-directed plans have declined to take advantage of 404(c) protection because the sponsor was concerned with trying to comply with the long list of disclosure requirements. Now that the DOL has applied the disclosure requirements to all participant directed plans, employers may want to reconsider the decision regarding 404(c) status. Once a plan has provided the newly required 404(a) disclosures, very little remains to be done to qualify for 404(c) protection.
Q: In a participant-directed plan, what are the plan administrator’s fiduciary responsibilities under the new regulations?
When a plan provides for participant direction of investment, the plan administrator “must take steps to ensure … that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts and are provided sufficient information regarding the plan, including fees and expenses, and regarding designated investment alternatives, including fees and expenses attendant thereto, to make informed decisions with regard to the management of their individual accounts."
Q: What fiduciary protections do the participant fee disclosure regulations provide to a plan administrator?
If a plan administrator complies with the new regulations, the DOL will treat the plan administrator as satisfying its duty to disclose to participants investment and fee information necessary to make informed decisions regarding their individual accounts. However, compliance with the regulations does not absolve the fiduciary of responsibility for prudently selecting and monitoring service providers and designated investment alternatives.
Q: What changes do the new regulations make regarding the disclosure requirements under ERISA §404(c)?
With the exception of two requirements, the DOL transferred the long list of disclosure requirements under the 404(c) regulations to the new participant fee disclosure regulations under 404(a). The only two disclosure requirements retained under the 404(c) regulations are: (1) the explanation that the plan is intended to comply with 404(c); and (2) a description of the procedures for maintaining confidentiality when a participant invests in employer securities.
Q: Must a fiduciary that wishes to afford itself of the protection of ERISA §404(c) satisfy the disclosure requirements under the participant fee disclosure regulations?
Yes. In order for a fiduciary to qualify for 404(c) protection, the plan must satisfy the disclosure requirements under the participant fee regulations.
Q: Will the new participant fee disclosure regulations require any disclosures in addition to those currently required to qualify for 404(c) protection?
Yes. The new regulations require the plan administrator to provide: (1) annual and quarterly information on administrative and individual expenses; (2) a comparative chart on plan investments, including benchmarks; (3) web sites for plan investments; (5) information regarding brokerage accounts or windows; and (5) certain statements regarding plan investments. Note: In future tech updates, we will explain the additional disclosures in more detail.
Q: Do the new participant fee disclosure regulations modify any of the disclosure requirements previously required under ERISA §404(c)?
Yes. Under the 404(c) regulations prior to amendment, the DOL required the plan to automatically provide a participant with a copy of the prospectus for an investment subject to Securities Act of 1933. The participant fee disclosure regulations require the plan to provide a prospectus (or short form or summary prospectus) only upon request of the participant. However, the scope of request includes both securities under the Securities Act of 1933 (e.g., stocks) and securities under the Investment Company Act of 1940 (e.g., mutual funds).
Q: How do the participant fee regulations affect the fiduciary protection that ERISA §404(c)(5) provides to a fiduciary for its investment of a participant’s account in a qualified default investment alternative (QDIA)?
The 404(c)(5) regulations cross reference the 404(c) regulations with respect to the delivery of: (1) the prospectus; and (2) materials regarding voting rights. These two disclosure requirements continue to apply but have been moved to the participant fee disclosure regulations. As explained above, the prospectus requirement will be upon request instead of automatic.
Q: If a plan fails to comply with the participant fee disclosure regulations, has the plan administrator breached its fiduciary duty? Will the plan fiduciary lose 404(c) protection?
Yes. The regulations require the plan administrator to comply with the disclosure requirements. Therefore, a plan administrator that fails to comply with the disclosure requirements has breached its fiduciary duty. However, the DOL does not impose any penalties for a failure to comply with the new regulations. The consequence of the failure would be its use as evidence of imprudence in a legal action maintained by the DOL or the participant. Of course, the DOL or the participant still would need to prove damages. For a plan that intends to be 404(c) compliant, a plan that fails to comply with the participant fee disclosure regulations will cause the plan fiduciary to lose 404(c) protection.
Plan Fees Workshop: Navigating the Maze – Jan/Feb 2011
The DOL has spent years working on guidance related to plan fees. What can the plan pay? How can fiduciaries understand what the plan is paying? What must fiduciaries tell participants? What must fiduciaries tell the DOL? What must those charging the fees disclose? Finally, it is all coming together, with several sets of new regulations and new requirements. Unfortunately, the various pieces of guidance use different thresholds and different terminology (or, even worse, the same terms to mean different things). The result, instead of understanding, is a maze of confusion and frustration. Attend this new workshop to find out what the rules are and what they mean for you. Learn what to expect and what to do. We will help you get through the maze of regulations to achieve compliance with the new disclosure requirements. Register for the workshop on our Web site.
Don’t miss our upcoming Web seminars on these timely topics:
DOL and IRS Compliant Participant Notices – Tuesday, November 30, 2:00 p.m. ET
Making the Most of In-Plan Roth Rollovers -Tuesday, December 7, 2:00 p.m. ET and Tuesday, December 14, 2:00 p.m. ET
Issuing 1099-R Forms for New Distribution Types - Thursday, December 9, 2:00 p.m. ET
Making Sense of Required Minimum Distributions - Thursday, December 16, 2:00 p.m. ET
Keeping Current – A 2001 Review - Tuesday, December 21, 2:00 p.m. ET
To view more information about these Web seminars and to register, go to our Web site.
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