404(a)(5)

[Madison71]

A participant directed plan has a core fund line-up and a brokerage window.  There are times where certain funds invested in by the participants in the brokerage window are liquidated/merged and their money in those funds are moved to a replacement fund.  I understand that brokerage windows are not DIAs and therefore do not have the same notice requirements.  However, a description of the window needs to be provided in an annual 404(a)(5) notice.  Is there a requirement to disclose to participants in the brokerage window prior to the replacement similar to what is required of other replacement funds in the core line-up? 

Thank you!

[Pam Shoup]

Are you talking about a list of funds that everyone seems to have in the brokerage window, or just a random fund that a small percentage of participants have?

[Madison71]

Thank you.  I don’t know the percentage just that there are participants who will be mapped to the new fund.  I think it is appropriate to provide notice in this case to the affected participants.  However, I don’t know if this is a 404a5 requirement in this case.

[RatherBeGolfing]

42 minutes ago, Madison71 said:

Thank you.  I don’t know the percentage just that there are participants who will be mapped to the new fund.  I think it is appropriate to provide notice in this case to the affected participants.  However, I don’t know if this is a 404a5 requirement in this case.

Look at FAB 2012-02r, specifically Q29 & Q13 (emphasis mine)

Quote

Q29: Does the regulation cover "brokerage windows"?

A29: Yes. The regulation covers "brokerage windows," "self-directed brokerage accounts," and other similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan. Coverage of brokerage windows under the regulation, however, is limited to the disclosure requirements in paragraph (c) of the regulation (relating to plan-related information). See question 13, above, as to the information that must be disclosed about a brokerage window. Pursuant to paragraph (h)(4) of the regulation, the disclosure requirements in paragraph (d) of the regulation (investment-related information) do not apply to brokerage windows, self-directed brokerage accounts, and similar arrangements, because such windows, accounts, and arrangements are not designated investment alternatives. Nor, for that matter, do the disclosure requirements in paragraph (d) of the regulation apply to any investment selected by a participant or beneficiary that is not designated by the plan (i.e., any investments made through the window, account, or arrangement). See also question 39.

Q13: What information must be disclosed under paragraph (c) of the regulation about "brokerage windows," "self-directed brokerage accounts," and other similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan?

A13: First, a plan administrator must provide a general description of any such window, account, or arrangement. See 29 CFR § 2550.404a-5(c)(1)(i)(F). The regulation does not state how specific and detailed a description must be to satisfy this requirement. Whether a particular description is satisfactory will depend on the facts and circumstances of the specific plan and the specific window, account, or arrangement. At a minimum, however, this description must provide sufficient information to enable participants and beneficiaries to understand how the window, account, or arrangement works (e.g., how and to whom to give investment instructions; account balance requirements, if any; restrictions or limitations on trading, if any; how the window, account, or arrangement differs from the plan's designated investment alternatives) and whom to contact with questions.

Second, a plan administrator also must provide an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis in connection with any such window, account, or arrangement. See 29 CFR 2550.404a-5(c)(3)(i)(A). This would include: (1) any fee or expense necessary for the participant or beneficiary to start, open, or initially access such a window, account, or arrangement (such as enrollment, initiation, or start up fees), or to stop, close or terminate access; (2) any ongoing fee or expense (annual, monthly, or any other similarly charged fee or expense) necessary for the participant to maintain access to the window, account, or arrangement, including inactivity fees and minimum balance fees; and (3) any commissions or fees (e.g., per trade fee) charged in connection with the purchase or sale of a security, including front or back end sales loads if known; but would not include any fees or expenses of the investment selected by the participant or beneficiary (e.g., Rule 12b-1 or similar fees reflected in the investment's total annual operating expenses). The Department understands that in some circumstances the specific amount of certain fees associated with the purchase or sale of a security through a window, account, or arrangement, such as front end sales loads for open-end management investment companies registered under the Investment Company Act of 1940, may vary across investments available through the window or may not be known by the plan administrator or provider of the window, account, or arrangement in advance of the purchase or sale of the security by a participant or beneficiary. In recognition of the foregoing, a general statement that such fees exist and that they may be charged against the individual account of a purchasing or selling participant or beneficiary, and directions as to how the participant can obtain information about such fees in connection with any particular investment, ordinarily will satisfy the requirements of paragraph (c)(3)(i)(A) of the regulation. Otherwise, plan administrators might inundate participants and beneficiaries with information about the cost of buying or selling all the various securities available through a window, account, or arrangement, despite the fact that participants and beneficiaries may not have the interest or expertise to purchase or sell each or any such security. Further, the statement should advise participants and beneficiaries to ask the provider of the window, account, or arrangement about any fees, including any undisclosed fees, associated with the purchase or sale of a particular security through a window, account, or arrangement, before purchasing or selling such security.

Third, a plan administrator also must provide participants and beneficiaries with a statement of the dollar amount of fees and expenses that actually were charged during the preceding quarter against their individual accounts in connection with any such window, account, or arrangement. See 29 CFR § 2550.404a-5(c)(3)(ii)(A). A statement of these fees must include a description of the services to which the charge relates. See 29 CFR § 2550.404a-5(c)(3)(ii)(B). The description of the services must clearly explain the charges (e.g., $19.99 brokerage trades, $25.00 brokerage account minimum balance fee, $13.00 brokerage account wire transfer fee, $44.00 front end sales load).

 

[Madison71]

RBG - thank you.  If I am understanding this correctly then, a description of the brokerage window must be provided annually or 30 to 90 days before if there is a change based on the disclosure requirement of plan-related information.  However, the disclosure of investment related information inside the brokerage window would not be required under 404(a)(5) because it is not a DIA. 

Is it also correct that disclosure of the liquidation and mapping of a fund held inside a brokerage window is not a regulatory requirement?  It may make sense for the plan sponsor to provide as a courtesy, but is not a requirement.  

[Bird]

I agree, no specific disclosure needed for changes inside a brokerage window.  But I am curious about these transactions - are we talking about fund mergers, terminations, etc. that are initiated by the investment company?  Your reference to "mapping" makes me wonder if there is some kind of oversight over the brokerage window including a list of approved funds...which seems to defeat the purpose and actually/potentially increase liability.

[Madison71]

Thanks Bird.  I guess "mapping" isn't the correct term.  These are fund mergers or termination initiated by the investment company.  They are alerting the sponsor to these changes and the question is whether they should alert the affected participants. 

[Bird]

OK, then no, I don't believe any notice requirements apply to those transactions.