The Department of Labor (DOL) has recently issued Field Assistance Bulletin (FAB) 2012– 02, in a question and answer format, providing guidance on the participant fee disclosure rules. The FAB addresses various uncertainties in the final DOL regulations and provides needed clarification on a wide array of issues, including disclosure of general plan-related information and administrative expenses, brokerage windows, disclosure of general investment-related expenses, benchmarks, and transitional rules.
The full text of FAB 2012– 02 is on the DOL website. For more information on the final participant-level disclosure regulations, see our February 2011 and September 2011 issues and for more information on the final service provider disclosure regulations, see our February 2012 Special Alert and our July 2010 issue.
The following is a summary of the guidance provided by the FAB with reference to the specific Q & As.
Scope — Covered Individual Account Plan
- Trustee-directed investments (if any) are not subject to the participant-level disclosure rules even if the plan has participant-directed investments. (Q & A 1)
- ERISA-covered 403(b) plans are subject to the participant-level disclosures rules, but the DOL will not take enforcement action against a plan administrator who reasonably determines it would be impracticable or impossible to obtain the information necessary to meet the disclosure requirements for certain pre-2009 403(b) annuity contracts or custodial accounts. (Q & A 2)
- Non-ERISA 403(b) plans are not subject to the participant-level disclosure rules. (Q & A 2)
Disclosure of Plan-Related Information —General and Administrative Expenses
- If both plan-related and investment-related information are provided in a singledocument it is not necessary for a plan administrator to duplicate identifying information about the designated investment alternatives, but if separate disclosures are provided, descriptions of the designated investment alternatives must be included in each. (Q & A 3)
- A designated investment manager (appointed to manage all or a portion of participant individual accounts) is not a designated investment alternative and therefore is not subject to the investment-related disclosure requirements, but the plan administrator must identify each designated investment manager and provide plan-level information concerning any fees for their services. (Q & A 4 and Q & A 27)
- The necessary detail for the required explanation of fees and expenses for general plan administrative services that may be charged against participants’ accounts, and the basis on which such charges will be allocated, depends on the facts and circumstances of the particular service and the particular fees or expenses. Examples of disclosures are provided for when services, fees or both are unknown at the time of disclosure and for when revenue sharing has historically covered the fees. (Q & A 5 and 6)
- Administrative expenses need not be disclosed if payment is made historically and exclusively from forfeitures or the general assets of the employer, even if the plan authorizes payment from participants’ accounts. (Q & A 7 and 8)
- Recordkeeping expenses must be disclosed separately and cannot be merely included in the operating expenses of the designated investment alternatives, unless such expenses reduce the rate of return of the designated alternatives. (Q & A 9)
- The required disclosure of payment of administrative expenses through revenue sharing must be disclosed, but need not itemize specific expenses paid in that manner. (Q & A 10 and 11)
- A plan may include the revenue sharing statement in the quarterly disclosure even if the administrative expenses are paid from revenue sharing on a more frequent basis (i.e., a semi-annual or annual basis). (Q & A 12)
Disclosure of Plan-Related Information — Brokerage Windows
- Brokerage windows, self-directed brokerage accounts and other similar arrangements must described, including an explanation of fees and expenses that may be charged to an individual account. If this fee and expense information is unknown at the time of disclosure, it may be described in a general statement accompanied by directions on how to obtain specific information. (Q & A 13)
- Fees and expenses actually charged to the participant’s account during the preceding quarter as a result of the participant’s use of brokerage windows, self-directed brokerage accounts or other similar arrangements must be disclosed along with a description of the services to which the charges relate. (Q & A 13)
- Detailed information on the investment securities available through one of these arrangements is not required (and in fact is discouraged) but participants should be advised to seek fee and expense information associated with any particular investment before purchase or sale. (Q & A 13)
- Even if utilization of a brokerage window or other arrangement is very low, the required annual fee and expense information must be provided to all participants. (Q & A 14)
Disclosure of Investment-Related Information — General
- The participant-level disclosures are required for designated investment alternatives that are closed to new investors, but the DOL permits such disclosure to be made only to those participants that remain invested in that investment alternative. (Q & A 15)
Disclosure of Investment-Related Information — Benchmarks
- Additional information is provided about creating and weighing a benchmark for a balanced fund by blending more than one appropriate securities market index. (Q & A 16)
Disclosure of Investment-Related Information — Internet Website Address
- Examples are provided on the different ways in whicha plan administrator can comply with the website requirement, including use of its own employer website, contracting with a third party administrator or using the website of the designated investment alternative. (Q & A 17)
- The website address landing page does not need to include all the supplemental investment-related information required by the regulations, but instead must provide participants with access to the information without difficulty. (Q & A 18)
- Detail is provided on the investment return information for a plan’s designated investment alternatives that must be made available at the required website address. (Q & A 19)
Disclosure of Investment-Related Information — Glossary
- The DOL does not intend to publish its own glossary of terms but instead believes plan administrators, in conjunction with service providers, are in the best position to determine the appropriate glossary or glossaries. (Q & A 20)
Disclosure of Investment-Related Information — Comparative Format
- Plan administrators may furnish multiple comparative charts as long as they are furnished at the same time in a single mailing or transmission, but cannot rely on comparative documents separately distributed by investment issuers. (Q & A 21)
- Only one comparative chart is required annually, even if fee and expense information has changed (but website must be kept reasonably up to date for changes in fee and expense information). (Q & A 22)
- Under extraordinary circumstances, duties of prudence and loyalty may require a plan administrator to inform participants and beneficiaries of important changes to investment-related information before the next annual disclosure. (Q & A 22)
- The annual comparative chart may include average annual return information for the most recent calendar month or quarter (information as of the most recently completed calendar year is not required), but the same reporting period should be used for all designated investment alternatives. (Q & A 23)
- Since inception performance and benchmark information is only required for designated investment alternatives that have been in existence for less than 10 years. (Q & A 24)
Disclosure of Investment-Related Information — Information to be Provided upon Request
- For designated investment alternatives not registered under the Securities Act of 1933 or the Investment Company Act of 1940, documents similar to a prospectus, or short form or summary prospectus, must be provided upon the request of a participant. Examples of similar documents are provided. (Q & A 25)
Form of Disclosure
- Required disclosures may be provided through other documents such as a summary plan description or a pension benefit statement, but the applicable timing requirements must be met. (Q & A 26)
Definition — Designated Investment Alternative and Brokerage Window
- An investment manager is not a designated investment alternative, and thus the disclosure requirements are limited to the plan-level information regarding fees charged for such services (also see Q & A 4 above). (Q & A 27)
- A model portfolio ordinarily is not treated as a separate investment alternative if it is clearly presented as merely a means of allocating account assets among designated investment alternatives, but if the portfolio is constructed so that each participant acquires an equity security, unitized participation or similar interest in a fund that invests in some combination of the designated alternatives, that model portfolio ordinarily would be a separate designated alternative. (Q & A 28)
- If the plan offers only model portfolios, then each must be treated as a designated investment alternative. (Q & A 28)
- The regulations cover brokerage windows, self-directed brokerage accounts and other similar arrangements, but disclosure requirements are limited to plan-level information (see Q & A 13 above). (Q & A 29)
- Investment platforms consisting of a large number of unrelated mutual fund families are not a designated investment unless the individual investment alternatives are specifically identified as available under the plan, but the DOL notes that failure to offer a manageable number of investment alternatives may raise fiduciary issues under ERISA. (Q & A 30)
- Pending further guidance, if a platform offers more than 25 investment alternatives, the DOL will not require that all investment alternatives be treated as designated alternatives if the plan administrator:
- makes the required disclosures for at least three alternatives that collectively meet the “broad range” requirements in the ERISA 404(c) regulations; and
- makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries or, if there are more than 500 participants and beneficiaries, at least 1 percent of all participants and beneficiaries are invested on a date that is not more than 90 days prior to each annual disclosure. (Q & A 30)
Definition — Total Annual Operating Expenses
- An open end fund-of-funds that invests totally in other mutual funds must reflect the annual operating expenses of its component funds in disclosing the total annual operating expenses for the fund-of-funds. (Q & A 31)
- Additional guidance is provided on disclosure of total annual operating expenses, including the frequency with which designated investment alternatives that are not registered under the Investment Company Act of 1940 must calculate their total annual operating expenses. (Q & A 32 – 34)
Dates and Transitional Rules
- For most plans, including calendar year plans, the initial participant-level disclosure is due August 30, 2012. (Q & A 35)
- The initial quarterly disclosure of fees and expenses is only required to provide information for the most recently ended quarter, and is not required to include any previous expense information. (Q & A 36)
- The DOL acknowledges it may be difficult to make changes to comply with these final regulations by August 30, 2012, but does not believe further broad-based extensions are appropriate. (Q & A 37)
- The DOL notes that for enforcement purposes, it will take into account whether covered service providers and plan administrators have acted in good faith based on a reasonable interpretation of the new regulations. (Q & A 37)
- For plans complying with ERISA Section 404(c), the participant-level disclosures are not required to be provided earlier than the date required in the final regulations for general participant-level disclosure purposes. (Q & A 38)
The FAB provides much needed guidance on the participant-level disclosure rules but also raises some questions and concerns, especially on the new obligations imposed on plans that offer a brokerage window and similar arrangement, which appear to require plans to disclose information about funds only offered through the brokerage window or similar arrangement if a specified number or percent of participants are invested in the fund (see Q & A 30). This unexpected requirement may affect the service provider disclosure rules because the service provider disclosures must be adequate for a plan administrator to disclose information to participants. We understand that industry groups have reached out to the DOL to seek clarification on Q & A 30.
The DOL has stated that it will be issuing a second set of FAQs on the disclosure rules. The next set is expected to focus primarily on the service provider disclosure rules under 408(b)(2) of ERISA.
The deadlines for fee disclosure are fast approaching, with the disclosure by covered service providers to plans due by July 1, 2012, and the initial participant-level disclosure for most plans due by August 30, 2012. The first quarterly participant disclosures are required for most plans by November 14, 2012. As noted above, no further extensions are expected (Q & A 37).
If you have any questions, please contact the author of this article or the attorney with whom you normally work.
