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New Year - New Disclosure Requirements Beginning in 2012, Part I

Posted on February 20, 2012

Required Disclosures to Plan Participants

401(k) plans have become the most popular type of retirement plan. Participant direction of investment is a common feature of 401(k) plans. To insure that participants are provided with the information they need in order to make informed investment decisions, the Department of Labor (“DOL”) has issued participant disclosure regulations effective for plan years beginning in 2012. Before discussing the particulars of the disclosure requirements, employers, as plan sponsors, must understand that: (1) it is a fiduciary duty to provide participants with information regarding the rights and responsibilities pertaining to their individual accounts; and (2) the new disclosure rules apply to all participant directed account plans, including plans for which the employer does not seek the protection of ERISA Section 404©. ERISA Section 404© affords plan fiduciaries relief from the responsibility for investment losses resulting from a participant’s exercise of investment control;provided that the fiduciary has met certain disclosure requirements, the plan offers a broad range of diversified investments and the participant is able to exercise control. This article is Part I of the newDOL disclosure rules applicable in 2012. This article deals with the annual and quarterly disclosures that plans must make to participants who are entitled to see direct investments.

Timing. On February 3, 2012 the DOL released the final version of the regulations and set the effective dates. The initial annual disclosures must be provided on or before August 30, 2012. The first quarterly disclosure must occur no later than forty-five (45) days after the quarter in which the initial annual disclosure is made (November 14, 2012 for calendar year plan making its initial disclosure August 31, 2012).

Required Annual Disclosures. The Plan Administrator must provide participants with an Annual Disclosure Statement that includes the following:

  1. General plan information. This includes information as to how to give investment instructions, information regarding any permitted voting rights, designated investment alternatives (e.g. mutual funds designated by the plan from which participants may direct their investments, information regarding any investment manager, and if offered, information regarding self-directed brokerage accounts (e.g. broker name and contact information)).
  2. Administrative Expenses. A description of plan administrative expenses (e.g. accounting, record-keeping) that may be charged to participants’ individual accounts where such fees and expenses are not reflected in the operating expenses of a designated investment alternative and the basis on which such charges will be allocated among participants (e.g. prorata or per capita).
  3. Individual Account Expenses. A description of fees and expenses that may be charged against an individual account rather than allocated among all participants (e.g. loan charges, QDROreview charges).
  4. Investment related information. The investment disclosures must identify each designated investment alternative, provide performance data, benchmark comparisons, fee and expense information, provide an internet website information and provide a glossary of terms. The investment disclosures must be furnished in a chart or similar form. The DOL has provided a suggested format that is deemed to satisfy the comparative format requirements.

Proposed regulations regarding target date funds require an Addendum to the Comparative Chart setting forth: an explanation of the target date fund asset allocation and the manner in which the asset allocation will change over time (e.g. the point in time at which the target date fund will have its most conservative asset allocation); and an explanation of the age group for whom the target date fund is designed and any contribution and withdrawal assumptions. The disclosures must also include a statement that the participant may lose money by investing in the designated investment alternative including a statement that the participant may incur losses near the time of retirement and following retirement and that there is no guarantee that a directed investment alternative will provide adequate retirement income.

Required Quarterly Fee Disclosures. During each three (3) month period of the plan year the Plan Administrator must provide participants with a Quarterly Fee Disclosure Statement. The Quarterly Fee Disclosure Statement must identify any plan administrative expenses (e.g. record-keeping, legal, accounting) charged against the participant’s account. In addition, if any plan administrative expenses were paid or offset for a revenue sharing arrangement with any designated investment alternative, this must be disclosed. Individual expenses (e.g. loan fees, hardship distribution fees, mutual fund load fees) charged to and relating to that particular participant’s investment or other activities (as distinguished from the foregoing overall plan administration) must be identified along with the corresponding reason for each such individual charge.

Limited Exemptions. SIMPLE IRA’s are exempt from the disclosure rules. Government plans are exempt. 403(b) plans that are subject to ERISA are subject to the rules, but church or government sponsored 403(b) plans that are not subject to ERISA are exempt.

Distribution. The regulations do not specify a particular manner for delivering the Annual Disclosure Statement. One approach would be to deliver a copy with the summary annual report. The Plan Administrator must make the annual disclosures at least once every twelve (12) months and the quarterly disclosures once every three (3) months. The disclosures must be made to participants as well as any beneficiaries who have the right to direct investments. This could include alternate payees with benefits through QDRO’s.

Annual and Quarterly Benefit Statement. The Annual Disclosure Statement is in addition to, and not in lieu of, the Annual Benefit Statement. The Annual Benefit Statement has been required for plan years beginning after 2006 and requires disclosure of: (i) the participant’s total accrued benefit; (ii) vested benefit (vesting percentage); (iii) an explanation of the manner in which the plan applies permitted disparity (i.e. how the plan integrates with Social Security) if applicable; and (iv) the value of the investments in the participant’s account. The Quarterly Participant Fee Disclosure Statement is in addition to and not in lieu of the quarterly benefit reports that are required for plans that permit participant direction of investment. The quarterly benefit reports include the foregoing (i) – (iv), plus a statement explaining the rights, limitations and restrictions on investment direction and prescribed language regarding the importance of diversification. Part II will discuss the Service Provider Disclosures that must be given by service providers to the employer as plan fiduciary.

David M.Mosier

David M. Mosier

David M. Mosier's practice includes business and tax transactions, retirement benefits, designing and drafting of employee pension and welfare benefit plans, and more.

dmosier@kmgslaw.com • 814-923-4878

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