New Fee Disclosure Rules for Participant-Directed Plans*

The Department of Labor (DOL) released new rules, which require employers to disclose information about retirement plan and investment costs to workers who direct their own investments in ERISA-covered 401(k) plans and other individual account retirement plans. This rule applies to all “participant-directed plans.” A participant-directed plan is a plan that provides for the allocation of investment responsibilities to participants or beneficiaries.

According to the DOL, the rule will ensure that workers in this type of plan are given, or have access to, the information they need to make informed decisions, including information about fees and expenses. Its goals are to also provide workers with the delivery of investment-related information in a format that enables workers to meaningfully compare investment options, as well as a new level of fee and expense transparency.

What and when must this Information be reported?

The new rule requires both quarterly and annual disclosures to participants. It also requires disclosure to participants on or before the day they can first direct their investments (first time).

More specifically, the annual and first-time disclosure must include certain plan-related and investment-related information as prescribed by the DOL. Plan-related information includes general, administrative expense and individual expense information. The investment-related information includes performance data, benchmark information, fee and expense information, Internet website addresses and a glossary. In the new regulation, the DOL provides an example in chart format of how this information could be presented to the participant.

The quarterly disclosure rules require plan sponsors to provide participant statements that show the dollar amount of plan-related fees and expenses actually charged to or deducted from their individual accounts. A description of the services for which the charge or deduction was made must also be disclosed on the statement.

The regulation goes into effect for plan years starting November 1, 2011. A plan sponsor of calendar year plans must provide the annual disclosure to participants no later than May 31, 2012. Calendar year plan sponsors must provide the quarterly disclosure to participants no later than August 14, 2012.

Help is on the way

Your plan’s service provider(s) are also subject to the new regulations. Because of this, any service provider that receives compensation in relation to your plan must provide you with the information necessary to complete these disclosures. In many cases, your service provider may complete and distribute the entire annual and quarterly disclosures. Service providers must provide you with the necessary disclosure information by April 1, 2012 for a calendar year plan.

Action Items

As a first step, plan sponsors should contact their service provider or plan administrator to learn what information they will provide for the disclosures when they will provide it and any associated cost to prepare these disclosures. Many service providers already provide much of this information as part of their normal practice. For service providers that have not provided this information previously or for unbundled arrangements, start discussions with your service providers now. You may consider asking your primary provider or plan administrator to supply a draft of the new disclosure using currently available information.

Next, consider possible participant reaction to the new information introduced with this disclosure. Consider developing some questions and answers in anticipation of employee reaction to the new information. A good communication strategy may include an explanation and example of the disclosure in a regular plan newsletter to participants. Should you need any disclosure or communication assistance, ORBA can assist you with your needs.

* The new fee disclosure regulations are termed “interim final regulations.” Final regulations are expected to be issued soon. The final regulations may include some minor changes to the interim final regulations. They will also likely include guidance on target date funds, which were not part of the interim final regulations.