Guest Article
(From the May 27, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)
Updated "401(k) Fair Disclosure Act" Passed by House Education and Labor Committee
The House Education and Labor Committee recently reported a modified version of H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act. The modifications relate to the: (1) fee information to be disclosed by service providers, (2) investment election and benefit statement information to be provided by plan administrators to participants, and (3) the index fund "minimum investment option" to be required for fiduciary relief under ERISA 404(c). Although not likely to be enacted this year, developments with H.R. 3185 are worth noting as both Congress and the Department of Labor push to complete their respective efforts to compel greater fee disclosure and awareness in individual account plans.
The changes the modified version of H.R. 3185 makes to the original bill are briefly summarized below.
Service Provider Disclosure Statement: More Expansive but Less Onerous
Under the original bill, service providers would have been required to provide plan administrators with a written statement disclosing the fees and financial relationships relative to their engagement. The new bill refines this obligation and generally makes it less onerous.
- Applies to All Individual Account Plans. Disclosure would be required for all "individual account plans." Previously, the disclosures were required only for 401(k) plans.
- 10-Day Advance Notice. The disclosure would have to be provided at least 10 days before the service contract is entered into. Previously, it was required "reasonably in advance" of the contract date.
- Minimum Allocation of Expected Total Annual Charges. Instead of the detailed itemization of the thirteen types of charges under the original version, the new bill would require a "reasonable allocation" of expected total annual charges among four categories:
- Charges for plan administration and record-keeping,
- Transaction-based charges,
- Charges for investment management, and
- All other charges as may be specified by the Secretary.
Transaction-based charges could be disclosed as either a dollar or percentage amount, but charges for administration and recordkeeping and investment management would have to be expressed as an aggregate dollar amount (but could also be expressed as a percentage of assets).
- Estimates by the Service Provider. Reasonable estimates could be provided by the service provider based on the previous year's experience. Previously, the bill would have permitted estimates to be used only if actual information was not known, was to be provided by the plan administrator, and was required to be updated if the estimate turned out to be materially incorrect.
- Reliance on Information from Federally or State Regulated 3rd Party. A totally new provision in the modified bill would entitle the service provider to rely on information disclosed to it by an unaffiliated person who is regulated by the Federal or a State government -- unless the service provider knows or has reason to know that the information is inaccurate.
- Expanded Disclosure of Financial Relationships. Instead of the unclear "conflicts of interest" disclosures under the old bill, the new bill would require a more straightforward disclosure of:
- Any payment or credit provided to the service provider (or any affiliate) in connection with the service contract, and the amount and type of payment or credit.
- Any personal, business or financial relationship with the plan sponsor, plan or service provider (or any affiliate) -- or any totality of such relationships with is material -- if the relationship results in the service provider (or any affiliate) deriving any material benefit.
- Other similar arrangements as specified by the Secretary.
The disclosure would have to include the extent to which the service provider (or any affiliate) may benefit from offering its own proprietary investment products or those of third parties.
- Update as Soon as Reasonable. If there is a material change, the disclosure would have to be updated "as soon as is reasonable after the occurrence of the change is known." Previously, the update would be required within 30 days after the change. An annual update of the statement would still be required, but the new bill clarifies that where no material change has occurred this requirement could be met by a statement setting forth that fact.
- Participant Dissemination Eliminated. Presumably because of the extensive fee disclosure otherwise required to participants under the Act, no dissemination to participants would be required of the service provider disclosure. Previously, the disclosure would have been required to be posted on the plan sponsor's Intranet website site, and provided to participants within 30 days after a request for it.
- Dollar Threshold Increased. Disclosure would not be required unless the total charged for services under the contract equals or exceeds $5,000 in any plan year. The limit would be subject to annual adjustment (in $500 increments) beginning in 2011 based on the cost of living. The original bill had fixed the threshold at $1,000.
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Investment Election Information to Participants: Some Relief but Not Much
The updated bill would provide some relief in terms of required disclosures, but the disclosure provisions in the two bills are nonetheless very similar.
- 10 Business Day Notice Period. Notice regarding the available investment options would have to be provided at least 10 business days before the date of initial investment for each plan year and 10 business days before the effective date of any material change. The original bill would have set the deadline at 15 days before the beginning of the plan year or effective date of the change.
- Automatic Contribution Arrangements and Default Investments. In a new provision, where there is an automatic contribution arrangement, the bill would permit the notice to be provided within any reasonable period before the initial investment. The notice could also be combined with notices that are required for default investment arrangements under ERISA § 404(c)(5).
- Changes to the Notice. The notice would need to disclose whether the investment option is actively or passively managed in relation to an index fund, and explain the difference between active and passive management. Instead of a fee menu, the notice would be required to attach a fee comparison chart providing substantially the same information. Fees would be stated in dollar format, but could also be set forth in terms of a percentage of assets, and the notice would need to include examples demonstrating how the charges would be assessed against a participant's account. The four fee categories would remain the same: (1) charges that vary by investment option, (2) charges that are assessed as a percentage of total assets in the participant's account regardless of the elected investments, (3) administration and transaction-based charges, and (4) any other charges. Instead of general historical returns and percentage fees, the new provision would specifically require disclosure, for each investment option, of the amounts of fees assessed and a history of the returns derived net of fees for the previous year, 5 years, and 10 years (or since inception if later).
- Electronic Media. A new provision would make clear that the investment option notice could be delivered electronically under rules to be prescribed by the Secretary.
- Changes to Quarterly Benefit Statements. The updated bill would somewhat simplify the content of the new benefit statements. Significantly, instead of the eleven categories of service fees previously required to be itemized and shown as reducing the participant's account for each investment option, the updated bill would provide that the fees for each investment option are to be aggregated and expressed as a dollar amount, which reduces the account during the quarter.
- Small Plan Relief. A new provision would provide that a plan with fewer than 100 participants may provide the benefit statements on an annual rather than quarterly basis.
- Electronic Media. As with the investment option notice, new provisions would make clear that the benefit statement could be delivered electronically under rules to be prescribed by the Secretary.
- Sanctions Increase for Service Providers. A service provider who failed to provide the fee disclosures required under the bill would be subject to civil penalties imposed by the Secretary of up to $1,000 per day. The original bill would have set the penalty at up to $100 per day. Potential penalties for plan administrators who fail to provide the investment option information or benefit statements would remain at $100 per day.
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Index Fund Option: Requirement for Fiduciary Relief
The updated bill would make clear that fiduciaries would not be relieved of liability where participants exercise investment control over their account under ERISA § 404(c) unless the plan offered at least one investment option, which consisted of an "appropriate broad-based securities market index fund (or a combination of 2 or more funds) which (in the aggregate) is diversified so as to minimize the risk of large losses." The fund would also need to offer "a combination of historical returns, risk and charges... that is likely to meet retirement income needs at adequate levels of contribution."
Additional Tweak: Department of Labor to Assume Greater Advisory Role
The updated bill eliminated the establishment of a Department of Labor Advisory Council on Improving Employer-Employee Retirement Practice, and, instead, now calls for the Secretary to improve employeremployee retirement practices by utilizing public input and outreach, and issuing annual reports to Congress on the employer-sponsored retirement system.
| The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.
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Copyright 2008, Deloitte. |
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