ESOPs subject to DOL participant fee disclosure requirements?

[Guest TaxedToDeath]

Is an ESOP that does not provide for participant-direction, other than the diversification required under IRC 401(a)(28), subject to the DOL's new regulation on participant fee disclosure?

[GMK]

I'd say no. My understanding is that the purpose of the fee disclosures to participants is to give them sufficient information to make informed decisions regarding their participant-directed investment elections within the plan.

[Guest TaxedToDeath]

I'd say no. My understanding is that the purpose of the fee disclosures to participants is to give them sufficient information to make informed decisions regarding their participant-directed investment elections within the plan.

That's why I am asking. The diversification election required by IRS 401(a)(28)(B) may result in a qualified participant choosing to diversify his/her account that is invested in qualifying employer securities into other investment options. These other investment options are not qualifying employer securities, and whether the qualifying employer securities are diversified into these other investment options is determined by the participant. Is this not participant direction? If so, does this not then result in the application of the participant fee disclosure requirements?

[ESOP Guy]

I have not seen anything authoritative on the subject so I can not give you a cite.

However, I lean towards saying "yes' the rules apply. If you use mutual funds in the ESOP for diversification and they have participant direction it seems like the rules apply.

As an aside this is just another reason to have all ESOPs written so the diversifications either go to the company's 401(k) plan (if they have one) which is set up to handle this kind of stuff already, or to an IRA. Either way it stops being the ESOP's problem. The few ESOPs I work with that keep the cash in the plan I try and convince them to change the plan and just leave the stock and uninvested cash in the ESOP. So far only one holdout and they are starting to talk about changing.

edit: minor typos

[GMK]

Agreed. I did not consider that the diversifications were going into other investment options within the ESOP. I assumed they were going out of the ESOP to another plan (like a 401(k)) or an IRA, as ESOP Guy described.

You need to send the participant fee notices, not because of diversification, but because you have participant-directed investments in the ESOP. And also seriously consider ESOP Guy's advice about changing the plan.