The Department of Labor (DOL) issued guidance to help plan administrators and service providers comply with retirement plan fee and expense disclosure rules under Section 404 of the Employee Retirement Income Security Act of 1974 (ERISA).
On May 7, 2012, the DOL's Employee Benefits Security Administration (EBSA) released a set of frequently asked questions (FAQs) and answers to help plan administrators and service providers comply with the retirement plan fee disclosure rules issued in October 2010 under ERISA Section 404. The guidance supplements the participant-level disclosure regulation that was previously issued (DOL Reg. § 2550.404a-5 (2011)) by answering some questions on implementing the regulation.
EBSA is working on a second set of FAQs that focuses specifically on the disclosure rules for covered service providers under ERISA Section 408(b)(2). However, these current FAQs are relevant to covered service providers as they offer guidance on what information covered service providers must give plan administrators to help the administrators comply with their disclosure requirements.
The FAQs answer questions on the disclosure of plan-related and investment-related information and explain, in part, that:
The required explanation of general plan administrative fees and expenses that may be charged against beneficiaries' and participants' accounts must:
identify the services, include the specific cost of the services and explain the plan's allocation method if the given fees are known at the time of the disclosure; or
reasonably take into account known facts and circumstances and identify the services that are expected to be performed and the allocation method typically used if the given fees are not known at the time of the disclosure.
Plans that use revenue sharing arrangements to help pay plan fees:
must treat any of these arrangements as fees known at the time of disclosure, even though revenue sharing payments may ultimately reduce the gross fee amount, and therefore must clearly identify the relevant service (for example, "recordkeeping"), the amount or cost of the service (for example, ".02% of plan assets each month") and the plan's allocation method subject to any reduction from revenue sharing payments received (for example, "if expected revenue sharing payments are received, the plan will pay less than .02% of the plan assets each month and only those expenses not offset by revenue sharing will be deducted from your account");
may not disclose any fee or expense charged against participants' or beneficiaries' individual accounts except as provided under paragraph (c)(2) or (c)(3) of the regulation (so, for example, plan administrators may not include the cost of a recordkeeping expense in the total annual operating expenses of a plan's designated investment alternatives unless the fee is paid in a way that reduces the investment alternatives' rates of return); and
must provide participants and beneficiaries with revenue sharing explanations even if all of a plan's administrative expenses are paid from revenue sharing and no fees or expenses are allocated to individual accounts in any given quarter.
Plan administrators must provide required disclosures even for frozen investment options (designated investment alternatives that are closed to new investments), as the disclosures may help participants and beneficiaries decide whether to transfer out of that investment.
Plans must have a website address, but plan administrators may contract with a third-party administrator or recordkeeper to maintain the website or may use the plan sponsor's or a designated investment alternative's existing website. Plan administrators are not responsible for the website's completeness or accuracy if they reasonably and in good faith rely on information received from a plan service provider or a designated investment alternative issuer.
The DOL does not currently plan to publish its own sample glossary of terms to help participants and beneficiaries understand designated investment alternatives, but it will rely on plan administrators to determine which glossaries are appropriate for their participants, considering the available investment alternatives.
For designated investment alternatives with variable rates of return, a plan's comparative chart may provide the average annual total return for the one-, five- and ten-year periods (or for the life of the alternative, if shorter) for the most recently completed calendar month or quarter, but it must use the same ending date for a particular period for all designated investment alternatives under the plan.
A plan that offers designated investment alternatives and model portfolios (such as a "conservative" portfolio or a "moderate" portfolio) may, but is not ordinarily required to, treat the model portfolios as designated investment alternatives for purposes of the regulation, but it must clearly explain how the model portfolio functions. If a plan offers only model portfolios made up of investments that are not separately designated under the plan, each model must be treated as a designated investment alternative.
Pending further guidance, the DOL provides that, as a matter of enforcement policy, it will not require a plan that offers an investment platform consisting of more than 25 investment alternatives to treat all of the investment alternatives as designated investment alternatives if the plan administrator makes the required disclosures for:
at least three of the platform's investment alternatives that collectively meet the regulations' "broad range" requirements; and
all other investment alternatives on the platform in which at least five participants and beneficiaries are invested (or, for plans with more than 500 participants and beneficiaries, at least 1% of all participants and beneficiaries) on a date no more than 90 days before each annual disclosure.
A designated investment alternative is considered unregistered for purposes of calculating its total annual operating expenses under the regulation if when participants and beneficiaries invest in the alternative they acquire units of the alternative, not of the mutual fund in which the alternative invests, even if it invests only in a mutual fund that is registered under the Investment Company Act of 1940.
Although the DOL is not extending any compliance dates, it will take a plan's good faith efforts to comply into consideration when determining whether a plan has complied with the fee disclosure rules.