New Requirements on Fee Disclosure for Retirement Plans

Fee transparency in retirement plans, particularly participant directed plans such as 401(k) and 403(b) plans, has been the subject of heated debate for the past several years. The Department of Labor (DOL) recently issued several sets of regulations designed to facilitate fee transparency by requiring various forms of disclosure by service providers and plan administrators. The most recent of these regulations was issued on Oct. 14, 2010, and requires plan administrators to disclose information about plan fees, expenses and investment options to participants and beneficiaries in 401(k), 403(b) and other types of defined contribution plans if investments are participant-directed. These regulations are effective for plan years beginning on or after Nov. 1, 2011 (Jan. 1, 2012, for calendar year plans).

Section 404(a) of ERISA requires plan administrators and other fiduciaries to discharge their duties prudently and solely in the interest of plan participants and beneficiaries. The investment of plan assets is a fiduciary act subject to these fiduciary standards. The Oct. 14, 2010, final regulations are intended to assist plan administrators of 401(k) and 403(b) and other participant-directed individual account plans in satisfying this obligation by requiring that participants and beneficiaries be provided on a regular and periodic basis with sufficient information regarding fees, expenses and investment options to allow them to make informed decisions regarding the investment and management of their accounts. These new disclosure rules apply regardless of whether the plan already meets the fiduciary standards set forth in Section 404(c) of ERISA. Although the regulations apply only to retirement plans that are governed by the Employee Retirement Income Security Act of 1974 (ERISA), governmental and church plans will likely be affected by these new requirements as well, to the extent that the disclosure rules become standard or best practices in the industry.

What Plan, Expense and Fee Information Must be Disclosed to Participants and Beneficiaries?

The plan administrator is required to provide each participant or beneficiary the following plan, expense and fee information on or before the date on which a participant or beneficiary can first direct his or her investments, and then annually thereafter:

· General plan-related information, including an explanation of the circumstances under which participants and beneficiaries may give investment instructions and any plan limitations on such instructions; a list of the investment options available under the plan; identification of investment managers; information regarding the exercise of voting, tender and similar rights associated with any investment option, as well as any restrictions on such rights; and a description of any self-directed brokerage accounts or windows that enable participants and beneficiaries to select investments beyond those designated by the plan.

· Plan administrative expense information, including an explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping), which may be charged against the individual accounts of participants and beneficiaries and that are not reflected in the total annual operating expense of any investment option, as well as the basis on which such charges will be allocated (e.g., pro rata, per capita) to each individual account.

· Individual expense information, including an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual basis and that are not reflected in the total annual operating expense of any investment option. These include fees for processing plan loans or qualified domestic relations orders, fees for investment advice and brokerage windows, commissions, front or back-end loads, or sales charges and similar expenses.

In addition to the initial and annual information disclosure requirements, actual administrative and individual expenses charged to a participant or beneficiary account on an individual rather than plan-wide basis (that are not otherwise included in the annual operating expenses of the investment), must be disclosed to the participant or beneficiary in a quarterly statement. This quarterly statement must also include a statement, if applicable, that some of the plan’s administrative expenses for the preceding quarter were paid from the annual operating expenses of one or more of the plan’s investment options through revenue sharing arrangements, Rule 12b-1 fees or other such fees and arrangements.

What Investment-Related Information Must be Disclosed to Participants and Beneficiaries?

The plan administrator is required to provide each participant or beneficiary the following information for each investment option available under the plan on or before the date on which a participant or beneficiary can first direct his or her investments, and then annually thereafter:

· Identification information, including the name of each investment option and the type or category of the investment (e.g., money market, balanced, large cap).

· Performance data, including the average annual total return of the investment for the 1-, 5-, and 10- calendar year periods ending on the date of the most recently completed calendar year. For investment options with a fixed or stated return, the annual rate of return and the term of the investment must be disclosed. The disclosure must also include a statement that an investment’s past performance is not necessarily indicative of future performance.

· Benchmark information, including comparisons to appropriate benchmarks that are broad-based securities market indices.

· Fee and expense information, including the amount and a description of each shareholder type fee charged against the investment which is not included in the total annual operating expenses of the investment option and a description of any restrictions on the ability to transfer, purchase or withdraw from the investment option. For investment options that do not have a fixed or stated rate of return, the disclosure must also include the total annual operating expenses of the investment option expressed as a percentage (i.e., expense ratio) and as a dollar amount for each $1,000 investment. Finally, the disclosure must include a statement that fees and expenses are only one of several factors that participants and beneficiaries should consider when making investments, that the cumulative effect of fees and expenses can substantially reduce the growth of an individual’s retirement account, and that participants and beneficiaries can visit the Web site of the Employee Benefits Security Administration for an example demonstrating the long term effects of fees and expenses.

· Internet Web site address that provides participants and beneficiaries access to additional information regarding each investment option available under the plan and that is updated on at least a quarterly basis, or more frequently if required by other applicable law.

· General glossary of terms to assist participants and beneficiaries in understanding the investment options or an Internet Web site address that provides access to such a glossary.

The regulations also set forth special rules for employer securities, annuities, investment options with fixed or stated rate of return, and target date funds.

In What Form Must Disclosure be Provided?

Initial disclosure of plan, expense and fee information can be provided in a summary plan description if the timing rules are satisfied. Disclosure of actual expenses and fees for the preceding quarter may be made as part of the annual benefit statement already required under Section 105(a) of ERISA, if not earlier disclosed through a confirmation statement or other means.

Investment-related information must be provided in a chart or similar format that is designed to facilitate a comparison of such information for each investment option available under the plan. The chart must prominently reflect its date, and include contact information for the plan administrator, a statement that additional information is available at the disclosed Web site address, an explanation as to how to request and obtain, free of charge, paper copies of the information required to be made available on the Web site, and contact information as to who the participant or beneficiary can contact for copies of propectuses, financial statements, a statement of the value of a share or unit of each investment option, and a list of assets comprising the portfolio of each investment option. The DOL has provided a model chart that can be used to satisfy investment-related reporting requirements.

It is important to note that the disclosures must be provided to all employees eligible to participate in the retirement plan, and not just to those who are actively participating.  While the final regulations are silent regarding the applicable methods available to furnish disclosure, the fact sheet accompanying the final regulations provides that the long-standing general ERISA disclosure rules that generally apply to all ERISA documents – including the safe harbor for electronic disclosures - apply to disclosures under these regulations until further guidance is issued. However, since the electronic disclosure rules require participant consent, they may present some obstacles to ready use of electronic distribution of the disclosures required by the final regulations. The preamble to the regulations states that the DOL is reviewing these requirements and intends to issue further guidance before the effective date of the regulations.

When Must Changes to Disclosures be Made?

If there is a change to the general information or administrative or individual expenses that was disclosed, each participant and beneficiary must be provided a description of the change 30 to 90 days in advance of the effective date of the change. There is an exception to this time limit for events that were unforeseeable or circumstances beyond the control of the plan administrator (e.g. dropping an inappropriate investment), in which case notice of such change must be provided as soon as reasonably practicable.

What Should Employers be Doing Now?

Although the effective date of the final regulations is not until Jan. 1, 2012, for calendar year plans, plan administrators should consider taking certain steps now to ensure timely compliance:

· There is a transitional rule for compliance with the initial disclosure rules that permits plan administrators to make the initial disclosure to all current participants within 60 days after the effective date of the final regulations, or by March 1, 2012, for calendar year plans. Employers will need to be prepared to meet this initial disclosure requirement through revised summary plan descriptions or other disclosure materials.

· Plan administrators are responsible for complying with the regulations, but may reasonably and in good faith rely on information received from plan service providers and investment providers. Therefore, it will be important to update contracts with third party administrators, custodians, record keepers and other service providers now in order to appropriately delegate responsibility for these new disclosure requirements, including Web site access to required information, and provide for indemnification for failures.

· Plan administrators should begin determining what changes need to be made to administrative and operational procedures to ensure timely compliance with these new rules.

· Plan, summary plan description, trust and custodial documents will likely need to be amended to reflect these new requirements.

· Investment committees will need to examine their charters and investment policies statements and determine whether any revisions are needed to address these fiduciary responsibilities.

· Plan administrators might consider revising the DOL model chart in order to include additional information regarding the benefits of participation in the plan, and to provide answers to questions that are anticipated in light of fee and expense disclosure under the plan.

· Plan administrators may want to increase investment education and/or make investment advisors available to assist participants with their investment decisions under the plan in order to assist participants in evaluating the additional information disclosed and make appropriate decisions in reaction to that information.

· Plan sponsors should be prepared for participant questions regarding plan fees when these disclosure requirements become effective, and might consider putting in place a system for addressing participant questions and concerns to ensure timely and complete responses.

Plan administrators may also need to address the potential longer-term affects of fee disclosure. For example, participants may start shifting their investments to lower cost index funds available under the plan in reaction to the apples-to-apples comparison of investment fees and expenses on the model chart. Plan administrators that rely on revenue sharing to pay administrative expenses will be impacted by this shift in investment strategy, and may need to add an administrative fee to the plan to cover these expenses.

For more information regarding the fee disclosure Regulation, please contact Tara Schulstad Sciscoe, Craig Burke, Marc Sciscoe, or your Ice Miller employee benefits attorney.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.