Participant Disclosure Requirements

[Guest JMN]

We are starting to get ready for the new participant disclosure regulations. What kind of issues are others having with this process?

[Guest kramarica75]

I'm also interested in seeing what other companies are doing. We're looking at the participant disclosure (404a5) as well 408b2 disclosure. It is a slow moving process but we're making progress. First, identifying all the accounts (participants) then identifying (documenting) the fees associated with each account.

[Bird]

Well, fwiw, I've created an executive summary of the new participant disclosure rules, which I don't really expect my clients to read, but I feel I owe it to them. Then I'm picking off the easy ones: those who aren't self-directed, those on a platform that will handle most or all of the disclosures, and those with open-ended brokerage accounts, and writing a letter telling them they are ok or need to do some minor additional compliance (or in the case of the brokerage accounts, pushing the disclosure on to the brokerage firms), and including the executive summary as supplemental reading for those interested. And then, if necessary, making sure that any fees we get from the plan are (re)disclosed, with some commentary that the broker, brokerage firm, and/or recordkeeper might have additional disclosures but I'm not making it my problem.

I'm just getting into the more difficult ones - the ones that have some limitations (e.g. retail accounts at a single fund family, not on a platform) and will have, or try to have, a heart-to-heart talk with the broker and/or client about the fact that they won't be in compliance and there's no practical way to be in compliance under the present system. I think in some cases we'll move them to a platform, and in some cases they'll do nothing.

[Peter Gulia]

One difficulty I'm grappling with is what steps to take when a plan has more than one hundred investment alternatives.

[Jim Chad]

I have one Plan with many alternatives. Right now we are looking at each Participant having a self directed brokerage account.

[ESOP Guy]

One difficulty I'm grappling with is what steps to take when a plan has more than one hundred investment alternatives.

Convince the nim nut(s) who decided to put over 100 investment choices in a plan to get a grip on reality?

Be honest that is what you want to tell them even if you aren’t going to do so.

[Peter Gulia]

For the plan that has more than 100 investment alternatives, the plan's administrator selected about 20 of them and the other 80+ are specified by the plan's documents as a settlor act.

The administrator thought about trying to persuade the plan's sponsor (which is not my client) to change its mind, but he believes that's a lost cause.

He also considered whether he might have a duty not to obey the plan's documents, but hasn't (yet) found the reasoning that would support such a conclusion. He is aware of the studies that suggest that some participants might be harmed by a burden of too much choice. But it's not an easy leap to say that the plan's provisions are inconsistent with ERISA.

[four01kman]

I can just picture the disclosure documents for the 100+ investment options, the size of a small (or maybe not so small) book. Also I can picture the cost of putting it together and then the cost of distribution. The client might, just might, change the amount of options knowing the cost of all this, and then again, maybe not.

[Guest jims]

It should definitely motivate them to pursue electronic notices if they are not already doing so.

[Peter Gulia]

Another issue is how to allocate against participants' accounts the plan's expenses in obtaining and compiling the 404a5 information.

For example, if a plan in 2012 spends $25,000 to build a method for retrieving and compiling the information (and expects to use that method for at least the next few years), it might not be fair to allocate all of that expense to 2012 participants. Perhaps some of the expense should be allocated not only to the second half of 2012 but also to 2013, 2014, and later years. If so, how many later years? Does a plan fiduciary have a way to estimate a "useful life" for the method built to comply with the 404a5 rule? And if that useful life is many years, should one put an upper limit on the period by which we "amortize" this expense so that the expense of doing the allocating won't become disproportionate to the amounts to be allocated?

And for whatever one decides to allocate against participants' accounts for a quarter (or some other period), is it the same dollar amount per account, or is it proportionate to account balances? If one says proportionate by account balances, do we really believe that the 404a5 information furnished to a participant with a $600,000 account is one hundred times more valuable to her than it is to a participant who has a $6,000 account? Or is there some other reasoning for why the expense should not be allocated equally to each participant?

[ERISA1]

Hi - I am picking up a plan that has (1) self directed investments for 401(k) accounts (at John Hancock); and (2) Trustee Directed ("pooled") investments for Profit Sharing Contributions.

If the plan were entirely Trustee Directed, it would be exempt from Participant-level disclosure requirements. However, given that part of the plan is self-directed, does anyone know whether the pooled account becomes subject to participant disclosure? {Note that participants DO NOT have a choice between pooled and self-directed; i.e., profit sharing is pooled and 401k is self-directed. No choice.}

I'm thinking the pooled account is not 'tainted' with disclosure requirements. But my thinking and the DOL's often don't coincide. What do you know about this?

Thanks very much.