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Guest Article

(From the April 27, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

401(k) Fair Disclosure Bill Is Introduced

As expected, George Miller (D-CA), Chairman of the House Education & Labor Committee, introduced a bill (H.R. 1984) to impose special reporting and disclosure rules -- focused primarily on investment related fees -- for individual account plans. The bill is similar to one which the Committee approved in April 2008, but has some notable additions, including the requirement that a plan must include at least one low-cost index fund to be eligible for ERISA § 404(c) protection.

Nuts and Bolts of the Proposal

As proposed, the 401(k) Fair Disclosure for Retirement Security Act of 2009 has four basic components.

Service Providers. Service providers are required to disclose certain information to plan administrators where $5,000 or more is to be charged for the services under a contract.
- Time. Disclosure must be made at least 10 business days before entering into any contract.
- Services and Fees. Disclosure must be made of the services to be performed and the expected total annual charges (including a reasonable allocation among administrative and recordkeeping charges, transaction-based charges, investment-management charges, and all other charges). A reasonable estimation, based on the previous year's experience with a comparable plan, may be used.
- Relationships. Disclosure must be made of:
  - Any payment that is provided to the service provider in connection with the contract.
  - Any personal, business or financial relationship with the plan sponsor, the plan, or the service provider (or any affiliate of the service provider) if it results in the service provider deriving any material benefit.
  - Other similar arrangements benefitting the service provider as may be specified by the Secretary.
  The disclosure must include the extent to which the service provider (or any affiliate) may benefit from the offering of its own proprietary investment products or those of third parties.
- Impact of Share Class. The disclosure must state, if applicable, that the share prices of certain mutual funds may be different from the prices outside the plan due to the existence of different share classes, and must provide the basis for these differences.
- Free or Discounted Services. If services are provided without charge or at a discounted rate, the disclosure must state the manner by which the service provider (or any affiliate), the plan, or plan sponsor, is otherwise compensated by means of any charges against participant accounts.
Plan Administrators. Plan administrators are required to disclose certain information to participants and beneficiaries.
- Investment Options. Notice of the investment options must be given at least 10 business days prior to the individual's initial investment -- and at least 10 business days prior to any material change in the investment options. The notice must include:
  - Specifics. The notice must disclose the investment option's name, objectives, risk level, whether the option is diversified, whether the option is actively managed, where additional information may be obtained, and a statement that an investment option should not be evaluated solely on the basis of the charges but on careful consideration of other key factors.
  - Fee Comparison Chart. The chart must compare actual investment and service charges that could be assessed against the participant's account for the plan year. Four categories of charges apply: (1) asset-based investment charges that vary depending on the investment option selected, (2) asset-based charges that apply regardless of the investment option selected, (3) administrative and transaction based charges, and (4) other charges. For each investment option, a history of returns derived net of fees and expenses must be provided for the previous year, 5 years, and 10 years.
Quarterly Benefit Statements. Quarterly benefit statements must provide certain periodic account information: the starting balance, the contributions made during the quarter (itemized separately for employer and employee contributions), the investment earnings during the quarter, the actual or estimated charges which reduced the account during the quarter, the ending balance, the participant's asset allocation to each investment option (including the net return expressed as an amount and a percentage), and how to obtain the most recently updated plan fee comparison chart.
Index Fund. ERISA § 404(c) plans must include at least one unmanaged or passively managed mutual fund with a portfolio designed to match the performance of the entire United States equity market or the entire United States bond market, or a combination thereof. The fund must offer a combination of historic returns, risks and charges that is likely to meet retirement income needs at adequate levels of contribution.

Comments Thus Far

Some commentators have expressed concern with certain aspects of the bill, which they contend may increase costs and/or require more burdensome notices without enhancing the ability of participants to make good investment choices. The requirement for the service provider to allocate its fees among the sub-categories, for example, has been potentially targeted as not adding real value to participants while creating a greater disclosure burden on the service provider. The requirement that the service provider disclose its financial relationships has also been targeted as potentially confusing inasmuch as it requires disclosure even if there is no conflict of interest, and where the prohibited transaction rules are otherwise satisfied. The proposed changes to ERISA § 404(c), by which at least one passively managed index fund must be offered under the plan, has also raised concerns about whether specific investment options should be required by law -- particularly in light of the well-established regulatory structure under ERISA § 404(c) which otherwise requires the selection of a "broad range of investment alternatives" by means of a prudent fiduciary process.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.