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Opinion: Retirement plan disclosure rule takes effect in 2011

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The Department of Labor issued a final regulation on Oct. 14 requiring plan administrators provide participants and beneficiaries in participant-directed individual account plans with specific information regarding plan features, investments and expenses.

This change – under Section 404(a) of the Employee Retirement Income Security Act – is the most recent in a series of fee-oriented disclosure rules, aimed at improving fee transparency and helping participants make informed account decisions. The latest regulation is effective for plan years beginning on or after Nov. 1, 2011.

The importance of fee disclosure is illustrated by a growing number of fee-related lawsuits. For example, California-based Bechtel Inc., an employer with more than 17,000 401(k) participants, paid $18.5 million to settle a suit filed by two former employees who alleged that Bechtel violated its fiduciary duties under ERISA by not using its size to obtain lower fees from
vendors.

The final regulation details specific plan and investment-related information that plan sponsors must ensure is adequately disclosed to participants and beneficiaries. The key items include: an explanation of the circumstances and limitations for giving investment instructions; a description of plan provisions relating to the exercise of voting, tender and similar rights; an identification of any designated investment alternatives offered; an identification of any designated investment managers; and a description of any “brokerage windows,” or similar arrangements that enable investment selections beyond those designated.

While plans voluntarily complying with the ERISA Section 404(c) regulations have provided these disclosures, an additional requirement is that plans with revenue sharing or similar features must provide an explanation of how the plan’s administrative expenses were paid. The requirements under the new rule affect all plan sponsors of participant-directed accounts, not just those voluntarily complying with the ERISA section 404(c) regulations. The final regulation has amended 404(c) to correspond with the new provisions, impacting the scope, method and frequency of disclosures.

The key items of investment-related information include a description of any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment alternative, such as sales loads, redemption fees or surrender charges; an illustration of the effect in dollars of each designated investment alternative’s total annual operating expenses; a statement indicating that fees and expenses are only one of several factors that should be considered when making investment decisions; a statement that the cumulative effect of fees and expenses can substantially reduce the growth of a participant’s account; a Web address to provide participants access to additional information about investment options; and a general glossary of terms to help participants understand designated investment alternatives. The final regulation also requires disclosure of the average annual total return for the investment of one-, five- and 10-year periods, or the life of the designated investment alternative, if shorter.

While there is no plan size exclusion under the final regulation, it does not apply to simplified employee pension plans or Savings Investment Match Plan for Employees, aka SIMPLE IRAs. This is because the DOL determined that existing disclosure regimes under the Internal Revenue Code are sufficient for these types of plans.

These requirements will certainly raise compliance and administrative costs. The upside, at least from the perspective employers’ fiduciary exposure, is that the new rule permits plan administrators to rely on the accuracy of information provided to it by service providers and issuers of investment alternatives.

While it will be awhile before the final regulation takes effect, it’s not too soon for plan sponsors, investment issuers, record keepers and advisers to formulate compliance strategies.

Chase Tweel is anEmployee Retirement Income Security Act research analyst at Pension Consultants Inc. He may be reached at ctweel@pension-consultants.com.
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