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Guest Article

Deloitte logo

(From the October 25, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

New ERISA Fee Disclosures for Participant-Directed Individual Account Plans

For plan years beginning on or after November 1, 2011, fiduciaries of individual account plans will be required to provide annual and quarterly fee disclosures to each participant and beneficiary who is able to direct the investment of their account under the plan.

Final regulations issued by the Department of Labor impose disclosure obligations on ERISA fiduciaries as part of their most basic duties under ERISA - the duties under ERISA § 404(a)(1)(A) and (B) to act prudently and solely in the interest of the participants and beneficiaries. The disclosures are similar to - but greatly expanded beyond - those required under ERISA § 404(c), which limits fiduciaries' exposure to liability participants' investment decisions. As a result, the new disclosure requirements will apply to all individual account plans in which participants or beneficiaries have the right to direct the investments, regardless of whether ERISA § 404(c) protection is sought. A narrow exception to the disclosure requirement is provided for individual account plans that are simplified employee pensions under Code § 408(k) or simple retirement accounts under Code § 408(p).

General Disclosure Requirements

Briefly, the new requirements require annual disclosure of plan-related fee information and of investment-related fee information - and require quarterly disclosure of the dollar amount of the individual and administrative fees that are charged to the participant's or beneficiary's account. A plan administrator will not be liable for the completeness or accuracy of the information it uses to satisfy the disclosure requirements if it reasonably and in good faith relies on information it receives from a plan service provider. The disclosures can be made electronically, consistent with Labor Regulation § 2520.104b-1. Further, the plan-related information can be included in the summary plan description or as part of the benefit statement as long as the items are distributed with the required frequency. The quarterly fee disclosure can likewise be included in the benefit statements, provided they are distributed timely. The investment-related fee information must be in the form of a comparative chart, and the Labor Department provides a model form which, if properly completed, will satisfy the requirement.

Similar to the current ERISA § 404(c) regulations, the fiduciaries must further ensure that a participant or beneficiary who invests in a designated investment alternative is provided with all the materials that are provided to the plan concerning voting, tender and similar rights, if the rights are passed through. The fiduciaries must further ensure that, if a participant or beneficiary requests it, he or she is provided with copies of the prospectus, the financial statements that are provided to the plan, a statement of the value of shares or units, and a list of the assets in the portfolio.

Plan-Related Fee Disclosures

The plan-related fee information, which must be disclosed on or before the first day the participant or beneficiary can direct the investments and at least annually thereafter, includes three categories of information: general information, administrative expenses, and individual expenses.

The general information to be disclosed consists of:

  • Investment Direction - The circumstances in which investment instruction can be given and any plan limitations that apply (such as limits on the transfer to, or from, an investment).
  • Voting Rights - Plan provisions regarding the exercise of voting, tender and similar rights appurtenant to an investment in a designated investment alternative.
  • Investment Alternatives - Identification of the designated investment alternatives under the plan.
  • Investment Managers - Identification of the designated investment managers under the plan.
  • Brokerage Window - Identification of any brokerage windows that enable participants and beneficiaries to select investments beyond those designated by the plan.

The administrative expenses include any fees and expenses for general plan services (e.g., legal, accounting, recordkeeping) that can be charged against the participant's or beneficiary's individual account and which are not reflected in the total annual operating expenses of any of the designated investment alternatives - and the basis on which the fees will be allocated (e.g., pro rata, per capita) to the account.

The individual expenses include any fees and expenses that may be charged against the individual account on an individual rather than a plan-wide basis (e.g., fees for loans, Qualified Domestic Relations Orders (QDROs), investment advice, brokerage windows, commissions, front or back-end loads or sales charges, redemptions fees, transfer fees, etc.).

Investment-Related Fee Disclosure

The investment-related fee information, which also must be disclosed on or before the first day the participant or beneficiary can direct the investments and at least annually thereafter, must be provided in a comparative format (i.e., chart or similar format designed to facilitate the comparison of information between the designated investment alternatives). The regulations contain a model form which, if properly completed and distributed, will satisfy the disclosure requirements. Essentially, the name and type (e.g., money market fund, balanced fund, etc.) of each designated investment alternative must be disclosed, along with performance data, benchmarks, and fee and expense information.

Performance data means:

  • No Fixed Rate of Return - For designated investment alternatives where the return is not fixed, the average annual rate of return for the investment for 1-, 5- and 10-calendar-year periods ending on the date of the most recently completed calendar year.
  • Fixed Rate of Return - For designated investment alternatives where the return is fixed or stated for the term of the investment, the fixed or stated annual rate of return and the term of the investment.

Benchmarks are required only for those designated investment alternatives where the return is not fixed. In that case, the name and returns of an appropriate broad-based securities market index must be reported over the 1-, 5-, and 10-calendar-year periods comparable to the performance data periods.

Fee and expense information for designated investment alternatives without a fixed rate of return include:

  • Shareholder-Type Fees - The amount and a description of each shareholder-type fee (i.e., fees charged directly against a participant's or beneficiary's investment, such as commissions, sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, and purchase fees, which are not included in the total annual operating expenses of any designated investment alternative).
  • Annual Operating Expenses as a Percentage - Total annual operating expenses of the investment expressed as a percentage, and calculated in accordance with the regulations.
  • Annual Operating Expenses as a Dollar Amount - The total annual operating expenses of the investment for a one-year period expressed as a dollar amount for a $1,000 investment.

For an investment with a fixed rate of return, fee expense information means any shareholder-type fees.

In addition, an internet Web address must be included for each designated investment alternative, where participants and beneficiaries can obtain additional specific information about the investment (e.g., portfolio turnover rate, performance data, etc.). In the case of employer securities and annuity investment options as designated investment alternatives, specific alternative disclosures are required.

Quarterly Fee Disclosure

Fiduciaries must ensure that, at least quarterly, the participants and beneficiaries receive a statement that discloses the dollar amount of fees and expenses that were actually charged to their individual account (by liquidating shares or deducting dollars) during the preceding quarter, along with a description of the services to which the fees relate. This applies to:

  • Administrative expenses, described above and including legal, accounting and recordkeeping fees.
  • Individual expenses, described above and including fees for loans, QDROs, investment advice, brokerage windows, commissions, front or back-end loads or sales charges, redemptions fees, transfer fees, etc.

Deloitte logoThe 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, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.

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