DOL issues regulation on self-directed plans

October 29, 2010 by rfg

The Department of Labor (the “DOL”) issued on October 14, 2010 a final regulation laying out the obligation of administrators of participant-directed individual account plans to disclose certain information about the plan and its investment options, including performance history and related fees and expenses, to plan participants and beneficiaries at the start of their partici-pation in the plans and on an annual or quarterly basis thereafter. The DOL regards compliance with this regulation to be part of the plan administra-tor’s general fiduciary obligation to discharge its duties with respect to the plan prudently and solely in the interest of plan participants and beneficiar-ies, as provided in Section 404(a) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).    

The regulation applies to plan years beginning on or after November 1, 2011.
Applicability
The new regulation applies to administrators of individual account plans that permit partici-pants and beneficiaries to give instructions on how account assets are invested, other than a plan involving an individual retirement ar-rangement (IRA), such as a simplified employee pension (SEP) or simple retirement account (SIMPLE). The new regulation applies to administrators of plans that are intended to comply with Section 404(c) of ERISA; compli-ance with Section 404(c) does not enable the plan administrator to avoid liability for failure to comply with the new regulation.
Disclosure of Plan-Related Information
Initial and Annual Disclosure Obligations
The new regulation requires plan administrators to disclose certain plan-related information to plan participants and beneficiaries by the date on which they first becomes eligible to direct investments under the plan, and at least annually thereafter. It requires the plan administrator to identify the plan’s designated investment alternatives and describe its procedures for directing investments, its rules for exercising voting, tender and similar rights associated with such investments and its arrangements, if any, for making investments outside the plan’s designated investment alternatives. The new regulation also requires plan administrators to disclose fees and expenses (calculated as described in the regulation) chargeable against individual accounts in connection with the plan’s general administrative functions or any individual services it provides to specific plan participants or beneficiaries.
Duty to Update
The plan administrator must provide plan participants and beneficiaries notice of any change to these general plan features at least 30 days, but not more than 90 days, prior to the effective date of such change.
Quarterly Disclosure Obligations
In addition to these annual disclosure obligations, the plan administrator must provide plan participants and beneficiaries a quarterly statement of the fees and expenses actually charged against the participant’s or beneficiary’s account during the quarter, together with a description of the services to which those fees relate. This quarterly statement must also disclose whether any of the plan’s administrative expenses for the quarter were paid from the total operating expenses of a designated investment alternative (e.g., through revenue sharing arrangements, Rule 12b-1 fees, or sub-transfer agent fees).
Form of Disclosure
The plan-related information required to be disclosed annually to plan participants and beneficiaries may be provided as part of the plan’s summary plan description or pension benefit statement. The information required to be disclosed on a quarterly basis may be provided as part of the plan’s pension benefit statement.
Disclosure of Investment-Related Information
Annual Disclosure Obligation
In addition to requiring the plan administrator to indentify and categorize the plan’s designated invest-ment alternatives, the new regulation requires the plan administrator to provide performance information, such as the category of the plan’s investment options, each investment’s 1-year, 5-year and 10-year average annual total returns (the plan administrator may use a reason-able estimate of expenses for funds that are not registered investment companies) and a comparison of such performance data to benchmark performance data for a broad-based securities market index. It further requires the plan administrator to disclose the total annual operating expenses of a plan’s designated investment alternatives, both as a percentage and as a dollar amount based on a $1000 investment, and to disclose any shareholder-type fees that are not included in the investment’s total annual operating expenses, such as front-end and back-end loads and redemption fees. Where appropriate, alternative disclosure require-ments apply to investments with a fixed return (such as a guaranteed investment contract), annuity options and investments in employer securities. Several of the requirements otherwise applicable are not applicable to direct investments in employer stock, but are applicable to unitized employer stock funds.
Glossary
In order to help participants and beneficiaries better understand their investment options under the plan, the plan administrator must provide them a glossary of investment terms or direct them to an Internet-based investment glossary.
Internet-Based Disclosure
As part of its disclosure obligations under the new regulation, a plan administrator must provide the address of a website containing additional information about the plan’s designated investment alternatives. This information includes the investment’s objectives and goals, principal investment strategies and risks, turnover rate and 1-year, 5-year and 10-year average annual total returns, updated on a quarterly basis.
Form of Disclosure/Comparative Format
The plan administrator must present this information in a chart or similar format designed to let participants and beneficiaries compare the plan’s designated investment alternatives. The DOL has prepared a model disclosure chart, which, if completed fully and accu-rately, will be deemed to satisfy this formatting re-quirement. The model chart is available at: www.dol.gov/ebsa/participantfeerulemodelchart.doc.
Required Statements
In addition to disclosing the information described above, plan administrators must include certain specific statements in their communications with participants and beneficiaries under the new regulation. These include statements to the effect that past investment performance does not guarantee future results, that fees and expenses are only one of several factors to consider when making investment decisions and that expenses can substantially reduce the growth of a retirement account. In connection with this last statement, plan administrators are required to direct participants and beneficiaries to the Employee Benefit Security Admini-stration’s website for an example demonstrating the long-term effect of fees and expenses. If a plan permits participants and beneficiaries to invest in employer securities, the plan administrator must also include a statement explaining the importance of a well-balanced and diversified portfolio.
Additional Disclosure Requirements
In addition to disclosing the information provided above, plan administrators must provide participants and beneficiaries with contact information to request written copies of any Internet-based disclosure, as well as other information about the plan’s investment alternatives, including prospectuses and financial statements or reports. Further, to the extent the exercise of voting, tender and similar rights associated with a participant’s investments are passed through to the participant under the terms of the plan, the plan administrator is required to provide participants and beneficiaries with materials related to the exercise of such rights. Also, to the extent prospectuses, financial statements, shareholder reports, and other similar materials are provided to the plan administrator, the plan administrator must make such materials available to participants and beneficiaries on request.
Finally, the regulation contains a reserved section for target date funds.
Limitations on Liability
A plan administrator will not be liable for the complete-ness and accuracy of the information used to satisfy these disclosure requirements to the extent that the plan administrator reasonably and in good faith relies on information received from or provided by a plan service provider or the issuer of a designated investment alternative.
Transitional Relief
The plan administrator will have 60 days from the date the new regulation becomes applicable to a plan to first disclose any required information to participants and beneficiaries who were eligible to direct investments under the plan as of such date.
For plan years beginning before October 1, 2021, plan administrators who reasonably and in good faith determine that they do not have the expense informa-tion necessary to calculate the 5-year and 10-year average annual total returns of a designated investment alternative not registered under the Investment Com-pany Act of 1940 are permitted to use a reasonable estimate thereof or may rely on the investment’s most recently reported total annual operating expenses in determining such dat.  

The regulation applies to plan years beginning on or after November 1, 2011.

Applicability
The new regulation applies to administrators of individual account plans that permit partici-pants and beneficiaries to give instructions on how account assets are invested, other than a plan involving an individual retirement ar-rangement (IRA), such as a simplified employee pension (SEP) or simple retirement account (SIMPLE). The new regulation applies to administrators of plans that are intended to comply with Section 404(c) of ERISA; compli-ance with Section 404(c) does not enable the plan administrator to avoid liability for failure to comply with the new regulation.

Disclosure of Plan-Related Information
Initial and Annual Disclosure Obligations
The new regulation requires plan administrators to disclose certain plan-related information to plan participants and beneficiaries by the date on which they first becomes eligible to direct investments under the plan, and at least annually thereafter. It requires the plan administrator to identify the plan’s designated investment alternatives and describe its procedures for directing investments, its rules for exercising voting, tender and similar rights associated with such investments and its arrangements, if any, for making investments outside the plan’s designated investment alternatives. The new regulation also requires plan administrators to disclose fees and expenses (calculated as described in the regulation) chargeable against individual accounts in connection with the plan’s general administrative functions or any individual services it provides to specific plan participants or beneficiaries.

Duty to Update
The plan administrator must provide plan participants and beneficiaries notice of any change to these general plan features at least 30 days, but not more than 90 days, prior to the effective date of such change.

Quarterly Disclosure Obligations
In addition to these annual disclosure obligations, the plan administrator must provide plan participants and beneficiaries a quarterly statement of the fees and expenses actually charged against the participant’s or beneficiary’s account during the quarter, together with a description of the services to which those fees relate. This quarterly statement must also disclose whether any of the plan’s administrative expenses for the quarter were paid from the total operating expenses of a designated investment alternative (e.g., through revenue sharing arrangements, Rule 12b-1 fees, or sub-transfer agent fees).

Form of Disclosure
The plan-related information required to be disclosed annually to plan participants and beneficiaries may be provided as part of the plan’s summary plan description or pension benefit statement. The information required to be disclosed on a quarterly basis may be provided as part of the plan’s pension benefit statement.

Disclosure of Investment-Related Information
Annual Disclosure Obligation
In addition to requiring the plan administrator to indentify and categorize the plan’s designated invest-ment alternatives, the new regulation requires the plan administrator to provide performance information, such as the category of the plan’s investment options, each investment’s 1-year, 5-year and 10-year average annual total returns (the plan administrator may use a reason-able estimate of expenses for funds that are not registered investment companies) and a comparison of such performance data to benchmark performance data for a broad-based securities market index. It further requires the plan administrator to disclose the total annual operating expenses of a plan’s designated investment alternatives, both as a percentage and as a dollar amount based on a $1000 investment, and to disclose any shareholder-type fees that are not included in the investment’s total annual operating expenses, such as front-end and back-end loads and redemption fees. Where appropriate, alternative disclosure require-ments apply to investments with a fixed return (such as a guaranteed investment contract), annuity options and investments in employer securities. Several of the requirements otherwise applicable are not applicable to direct investments in employer stock, but are applicable to unitized employer stock funds.

Glossary
In order to help participants and beneficiaries better understand their investment options under the plan, the plan administrator must provide them a glossary of investment terms or direct them to an Internet-based investment glossary.

Internet-Based Disclosure
As part of its disclosure obligations under the new regulation, a plan administrator must provide the address of a website containing additional information about the plan’s designated investment alternatives. This information includes the investment’s objectives and goals, principal investment strategies and risks, turnover rate and 1-year, 5-year and 10-year average annual total returns, updated on a quarterly basis.

Form of Disclosure/Comparative Format
The plan administrator must present this information in a chart or similar format designed to let participants and beneficiaries compare the plan’s designated investment alternatives. The DOL has prepared a model disclosure chart, which, if completed fully and accu-rately, will be deemed to satisfy this formatting re-quirement. The model chart is available at: www.dol.gov/ebsa/participantfeerulemodelchart.doc.

Required Statements
In addition to disclosing the information described above, plan administrators must include certain specific statements in their communications with participants and beneficiaries under the new regulation. These include statements to the effect that past investment performance does not guarantee future results, that fees and expenses are only one of several factors to consider when making investment decisions and that expenses can substantially reduce the growth of a retirement account. In connection with this last statement, plan administrators are required to direct participants and beneficiaries to the Employee Benefit Security Admini-stration’s website for an example demonstrating the long-term effect of fees and expenses. If a plan permits participants and beneficiaries to invest in employer securities, the plan administrator must also include a statement explaining the importance of a well-balanced and diversified portfolio.

Additional Disclosure Requirements
In addition to disclosing the information provided above, plan administrators must provide participants and beneficiaries with contact information to request written copies of any Internet-based disclosure, as well as other information about the plan’s investment alternatives, including prospectuses and financial statements or reports. Further, to the extent the exercise of voting, tender and similar rights associated with a participant’s investments are passed through to the participant under the terms of the plan, the plan administrator is required to provide participants and beneficiaries with materials related to the exercise of such rights. Also, to the extent prospectuses, financial statements, shareholder reports, and other similar materials are provided to the plan administrator, the plan administrator must make such materials available to participants and beneficiaries on request.
Finally, the regulation contains a reserved section for target date funds.

Limitations on Liability
A plan administrator will not be liable for the complete-ness and accuracy of the information used to satisfy these disclosure requirements to the extent that the plan administrator reasonably and in good faith relies on information received from or provided by a plan service provider or the issuer of a designated investment alternative.

Transitional Relief
The plan administrator will have 60 days from the date the new regulation becomes applicable to a plan to first disclose any required information to participants and beneficiaries who were eligible to direct investments under the plan as of such date.

For plan years beginning before October 1, 2021, plan administrators who reasonably and in good faith determine that they do not have the expense informa-tion necessary to calculate the 5-year and 10-year average annual total returns of a designated investment alternative not registered under the Investment Com-pany Act of 1940 are permitted to use a reasonable estimate thereof or may rely on the investment’s most recently reported total annual operating expenses in determining such data.

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