Power Point Presentation on New Retirement Plan Fee Disclosure

Report
New Retirement Plan Fee
Disclosure Requirements:
What You Need to
Know and Do Now
Edward P. Smith
Marjorie M. Glover
David Gallai
Rachel M. Santangelo
May 23, 2012
Agenda
•
Overview of Recent DOL Fee Disclosure Initiatives
•
Service Provider Fee Disclosure Requirements
•
Participant Level Fee Disclosure Requirements
•
Electronic Delivery of Fee Disclosure
1
Recent DOL Fee Disclosure Initiatives
Form 5500, Schedule C Disclosure
Disclosure of compensation paid to service providers that
receive $5,000 or more in compensation
Effective for Plan Years Beginning On and After January 1,
2009
Service Provider Fee Disclosure
Requires service providers to disclose information to help
plan fiduciaries determine whether fees are reasonable and
whether there are any actual or potential conflicts of interest
Effective July 1, 2012
Participant Level Fee Disclosure
Requires plan fiduciaries to disclose information to plan
participants to help participants make informed investment
decisions
Initial Disclosure Required August 30, 2012
2
Service Provider Fee Disclosure
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•
•
•
•
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Purpose
Legislative History
Covered Plans
Covered Service Providers
Required Disclosure
Timing
Penalties
Corrective Action
Employer Action Required
3
Service Provider Fee Disclosure - Purpose
•
•
ERISA Section 408(b)(2)
•
Generally prohibits provision of goods and services or facilities
between parties in interest and service providers unless
arrangement and compensation for services are “reasonable”
ERISA 408(b)(2) Regulations
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Requires Service Providers to Disclose Information to Plan
Fiduciaries to Help Plan Fiduciaries –
•
•
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Assess reasonableness of compensation paid to service providers
Determine whether there are any actual or potential conflicts of
interest that affect service provider’s performance of services
Satisfy reporting and disclosure requirements under ERISA
4
Service Provider Fee Disclosure - History
Proposed
Regulations
Issued
December 2007
2007
2008
2009
Interim Final
Regulations
Issued
July 2010
2010
2011
Final
Regulations
Issued
February
2012
2012
5
Service Provider Fee Disclosure –
Covered Plans
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Which Plans Are Covered by Fee Disclosure
Requirements?
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Defined contribution and defined benefit plans
• Exceptions:
•
•
•
•
Frozen 403(b) plans (entered into, frozen and benefits fully vested before
2009)
SEPs, Simple IRAs and IRAs
Non-Employee KEOGHs and HR 10
DOL intends to issue separate regulations covering
welfare plans in future
6
Service Provider Fee Disclosure –
Covered Service Providers
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Which Service Providers Are Required to Provide
Fee Disclosure to Plan Fiduciaries?
•
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Certain service providers who reasonably expect to
receive $1,000 or more (directly or indirectly) as a result
of providing “covered services”
Entity entering into arrangement is responsible for
making service provider fee disclosures (even if entity
provides multiple services to plan)
7
Service Provider Fee Disclosure –
Covered Service Providers
Covered Service Providers (CSPs)
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Fiduciary Services Provided to Plan
Fiduciary Services Provided to Investment Contract, Product, Entity That
Holds Plan Assets and In Which Plan Has Equity Interest
Registered Investment Advisory Services
Recordkeeping or Brokerage Services Provided to Participant-Directed
Individual Account Plan (if one or more investment options are made
available in connection with such services) ( “Platform Providers”)
Accounting, Auditing, Actuarial, Appraisal, Banking, Consulting, Custodial,
Insurance, Investment Advisory, Legal, Recordkeeping, Securities or
Other Investment Brokerage, Third-Party Administration or Valuation
Services, Where Service Provider, Affiliate or Subcontractor Reasonably
Expects to Receive Indirect Compensation or Other Compensation
8
Service Provider Fee Disclosure –
Required Disclosure
General Disclosure


Services – Description of Services Provided to Plan

Compensation – Description of any “Direct Compensation” or “Indirect
Compensation” That CSP Reasonably Expects to Receive
Status – Statement That CSP Will Provide Services to Plan as Fiduciary or
Registered Investment Advisor (If Applicable)

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“Direct Compensation” is any compensation received from plan
“Indirect Compensation” is compensation received from any source other than plan, plan
sponsor, service provider, affiliate or subcontractor (for example, revenue sharing,
commissions)
Service providers who disclose indirect compensation must identify service for which
indirect compensation is received and payer of indirect compensation and describe
arrangement with payer of indirect compensation

Compensation on Termination – Description of Any Compensation Due in
Connection With Termination of Arrangement

Method of Payment – Whether Billed to Plan or Paid from Plan Assets
9
Service Provider Fee Disclosure –
Required Disclosure
Additional Disclosure for
“Bundled Services”
Additional Disclosure for
Recordkeepers
 Compensation that will be paid among service
provider, affiliate or subcontractor if paid on
transaction basis
Examples: Commissions, soft dollars,
finder’s fees and incentives
 Description of any “direct compensation” and
“indirect compensation” recordkeeper reasonably
expects to receive in connection with services
 Compensation is charged directly against plan
investment and reflected in net value of
investment
Example: 12b1 fees
 If no explicit charge for recordkeeping services, or if
charges for recordkeeping services are offset or
rebated against other compensation received by
service provider, must provide:
 Reasonable good faith estimate of cost to plan
of recordkeeping services, including
explanation of methodology and assumptions
used to prepare the estimates, estimate should
take into account rates that service provider
would charge to or be paid by third parties or
prevailing market rates for similar services for
similar plan with similar number of participants
 Detailed explanation of recordkeeping services
that would be provided
10
Service Provider Fee Disclosure –
Required Disclosure
Additional Investment Disclosure for
Fiduciary Services and
Recordkeeping or Brokerage Services for Self-Directed Accounts
 Description of any compensation that will be charged directly against an investment and which is not
included in annual operating expenses of investment contract, product or entity
Examples: Commissions, sales loads, sales charges, redemption fees, surrender charges,
exchange fees, account fees and purchase fees
 Description of annual operating expenses (e.g., expense ratio) if not fixed-return investment and any
ongoing expenses in addition to operating expenses (e.g., wrap fees, mortality and expense fees) or
for a designated investment alternative, the total annual operating expenses expressed as a % and
calculated in accordance with DOL participant fee disclosure rules
 For any designated investment alternative, or other information within the control of, or reasonably
available to, CSPs and required for plan administrator to comply with DOL fee disclosure rules
 CSP may provide current disclosure materials of unaffiliated issuer of designated investment
alternative, provided issuer is registered investment company (mutual fund), insurance company or
financial institution supervised by state or federal agency
11
Service Provider Fee Disclosure –
Form and Delivery
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Disclosure Must Be Made to Responsible Plan
Fiduciary (RPF) -
•
Plan fiduciary with authority to cause plan to enter into
services arrangement
12
Service Provider Fee Disclosure –
Form and Delivery
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Form of Disclosure
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Written
Electronic
No Prescribed Form
Guide, Summary or Similar Tool Encouraged
•
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DOL has issued model or sample guide
DOL may publish rules in future requiring use of
guide
13
Service Provider Fee Disclosure –
Form and Delivery
Required Information
Location(s)
Description of the services that ABC will provide to your Plan.
Master Service Agreement
§ 2.4, p. 1
A statement concerning the services that ABC will provide an [an ERISA fiduciary] [a registered
investment adviser].
Master Service Agreement
§ 2.4, p. 2
Compensation ABC will receive from your Plan ("direct" compensation).
Master Service Agreement
§ 2.4, p. 4
Compensation ABC will receive from other parties that are not related to ABC ("indirect"
compensation).
Master Service Agreement
§ 3.3, p. 4
Stable Value Offering Agmt
§ 3.1, p. 4
Master Service Agreement
§ 3.5, p. 6
Compensation that will be paid among ABC and related parties.
Compensation ABC will receive if you terminate this service agreement.
Master Service Agreement
§ 9.2, p. 11
The cost to your Plan of recordkeeping services.
Master Service Agreement
§ 3.4, p. 5
Fees and Expenses relating to your Plan's investment options.
(1) Capital and Income Fund
Trans. Fees: InvestCo Prospectus, Fund Summary, p. 2
TAOE:* InvestCo Prospectus, Fund Summary, p. 2
(2) International Stock Fund
Trans. Fees: www.weblink/ABCProspInv2/trans.com
TAOE: www.weblink/ABCProspInv2/taoe.com
(3) Small Cap Fund
Trans. Fees: www.weblink/ABCProspInv3/trans.com
TAOE: www.weblink/ABCProspInv3/taoe.com
(4) Bond Market Index Fund
Trans. Fees: www.weblink/ABCProspInv4/trans.com
TAOE: www.weblink/ABCProspInv4/taoe.com
(5) Stable Value Fund
Trans. Fees: Stable Value Offering Agmt, § 2.4, p. 3
TAOE: Stable Value Offering Agmt, § 2.3, p. 3
(6) Money Market Fund
Trans. Fees: www.weblink/ABCProspInv6/trans.com
TAOE: www.weblink/ABCProspInv6/taoe.com
*Total Annual Operating Expenses
14
Service Provider Fee Disclosure
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Compliance Deadlines
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Deadline for initial disclosures by current CSP is July 1,
2012
Deadline for disclosures for contracts with new CSP is
effective date of contract
•
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Must be provided reasonably in advance of entering into
contract
Ongoing Disclosure
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Changes to initial disclosure must be disclosed as soon
as CSP is informed of change
Annual disclosure of changes to investment information
required
15
Service Provider Fee Disclosure
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Service Provider - Correction of Errors
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CSP may correct error by disclosing corrected
information as soon as practicable, but not later than 30
days after CSP knows of error
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CSP must act in good faith and with reasonable diligence
16
Service Provider Fee Disclosure
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Consequences of Failing to Make Disclosure
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Prohibited transaction to both CSP and RPF
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Both parties subject to excise taxes (15% to 100% of amount
involved) and other adverse consequences
17
Service Provider Fee Disclosure –
PT Class Exemption
Prohibited Transaction Class Exemption Requirements
(Exempts RPF but not CSP from Prohibited Transaction)
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RPF did not know that CSP failed or would fail to provide disclosures and
reasonably believed required disclosures were provided
 At a minimum, DOL expects RPF to compare disclosures it receives from
service providers with requirements contained in regulations to ensure all
required information has been included
Upon discovering failure, RPF requested in writing that CSP make disclosure
If CSP fails to comply with request within 90 days or indicates earlier that it will not
supply the disclosure, RPF must notify DOL of failure
 RPF must then determine whether to terminate arrangement with CSP
consistent with duty of prudence
 If failure relates to future services and is not disclosed promptly after end of 90
day period, RPF must terminate arrangement as quickly as possible, consistent
with duty of prudence
 Must still disclose prohibited transaction on Plan’s annual Form 5500 filing
18
Service Provider Fee Disclosure
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Action Required by Employers
 Establish Team to Review and Monitor Service
Provider Fee Disclosure
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HR, Benefits, Finance
Coordinate Team with Participant Level Fee Disclosure Team
 Establish Service Provider Fee Disclosure Review
Timeline and Procedures, Including Procedures for

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Reviewing Initial, Quarterly and Annual Fee Disclosure
Monitoring Changes to Previously-Disclosed Information
Addressing Non-Compliance
Negotiating New, Extended and Renewed Contracts
Documenting Compliance with ERISA Section 408(b)(2)
19
Service Provider Fee Disclosure
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Action Required by Employers – Initial
 Identify All Covered Plans and CSPs
 Review All Service Contracts and Fee Disclosure
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Received To Date
Determine Whether Any Follow Up or Corrective Action
is Needed and Take Such Action
Contact All CSPs That Have Not Yet Provided Required
Disclosure
Maintain Records to Document Initial Review Process
and Results
20
•
Service Provider Fee Disclosure
Action Required by Employers – Ongoing
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Review Quarterly and Annual Fee Disclosure
Monitor Changes to Previously-Disclosed Information
Address Non-Compliance
 Reduce Fees, Change CSPs, DOL Report
Negotiate New, Extended and Renewed Contracts
 Incorporate Required Service Provider Fee Disclosure
 Identify Responsibility for Participant-Level Fee
Disclosure
 CSP Representations and Warranties
 CSP/RPF Indemnification
Document Ongoing Compliance with ERISA Section
408(b)(2)
21
DOL’s Participant-Level
Disclosure Regulations
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ERISA Section 404(a)(1) contains ERISA’s fiduciary obligations
•
•
•
Requires plan fiduciaries to act prudently and solely in the interest
of participants and beneficiaries
When a plan gives participants the ability to direct investments, DOL
believes that Section 404(a)(1) requires plan fiduciaries to disclose
certain information to participants to allow them to make informed
investment decisions
DOL issued regulations under Section 404(a) detailing what information
must be disclosed to plan participants and when (the “participant-level
disclosure regulations”)
•
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While this disclosure obligation overlaps with information that must
be provided to participants under ERISA Section 404(c), this
disclosure obligation is independent of Section 404(c)
In other words, this disclosure obligation may apply even if a plan is
not intended to be a “404(c) plan”
22
Who Must Provide the Disclosures?
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The plan administrator of a “covered individual account plan” is
responsible for making complete and accurate disclosures
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•
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A covered individual account plan is any participant-directed individual
account plan, but excluding IRA-based SEP plans and SIMPLE accounts
Disclosure rules apply regardless of the number of participants in the plan
– no “small plan” exception
Pursuant to FAB 2012-02, certain pre-2009, “frozen” 403(b) contracts are
exempt from the requirement to provide Investment-Related Information
If the plan administrator, in making the disclosures, relies on information
received from a plan service provider or an issuer of a designated
investment alternative, the plan administrator will not be responsible for
the completeness and accuracy of that information as long as the plan
administrator’s reliance was reasonable and in good faith
•
What is “reasonable”?
23
Who Must Receive the Disclosures?
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Each participant or beneficiary who, pursuant to
plan terms, has the right to direct the investment of
his or her plan account
•
•
Only beneficiaries who actually have the right to direct
investments must receive disclosures (for example, due
to death of participant or alternate payee under a
QDRO)
Includes employees that are eligible to participate,
even if they do not in fact participate and have no
intention of participating
24
What Types of Information
Must be Disclosed?
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General Plan-Related Information
•
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Administrative Expenses
•
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These are a mix of annual and quarterly disclosures
Individual Expenses
•
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These are annual disclosures
These are a mix of annual and quarterly disclosures
Investment-Related Information
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These are generally annual disclosures, but some
information must be updated periodically via a website and
some information must be disclosed upon request
25
General Plan-Related Information
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What must be disclosed:
•
•
•
•
•
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Explanation of circumstances under which participants and
beneficiaries can give investment instructions
Explanation of any plan limits on such instructions, including plan
limits on transferring to or from a designated investment alternative
Description of plan provisions (including restrictions) relating to
exercise of voting, tender, and similar rights related to an
investment
Identification of each designated investment alternative offered
under the plan
Identification of any investment managers
Description of any brokerage window offered under the plan
•
FAB 2012-02 – at a minimum, must explain how the window works
and whom to contact with questions
26
Administrative Expenses
What must be disclosed annually:
•
Explanation of fees and expenses for general plan administration that may be
charged against individual accounts (e.g., recordkeeping)
•
•
•
Not disclosed here if the fee/expense is included within the “total annual operating
expenses” of the investment
FAB 2012-02 – reasonable disclosure still required even if specific fees/expenses
are not known in advance (e.g., legal fees for the year)
Explanation of how these fees/expenses will be allocated among the individual
accounts (e.g., pro rata)
What must be disclosed quarterly:
•
Dollar amount of above fees/expenses actually charged against the individual
account during the preceding quarter
•
•
•
Disclosure of aggregate amount is sufficient; not required to provide service-byservice breakdown
Description of the services to which those charges relate
If applicable, statement that some or all of the plan’s administrative expenses
for the preceding quarter were (or will be) paid from the annual operating
expenses of one or more investments (i.e., revenue sharing payments)
•
FAB 2012-02 – do not need to disclose the specifics of the revenue sharing
payments for purposes of these disclosures
27
Individual Expenses
What must be disclosed annually:
•
Explanation of fees and expenses that may be charged on an
individual basis against individual accounts (e.g., plan loan fees,
brokerage window fees, commissions, investment advice fees)
•
Not disclosed here if the fee/expense is included within the “total annual
operating expenses” of the investment
•
FAB 2012-02 – guidance for disclosures for brokerage windows; general
statements with instructions about how to obtain more information may
suffice in some cases
What must be disclosed quarterly:
•
•
Dollar amount of above fees/expenses actually charged against the
individual account during the preceding quarter
Description of the services to which those charges relate
Quarterly disclosure not required if (1) fees/expenses are otherwise
disclosed during the quarter (e.g., via a confirmation statement) or (2) no
such fees/expenses incurred during the quarter
28
Investment-Related Information
What must be disclosed annually for each “designated investment alternative”:
1.
Name of each investment alternative
•
2.
Type/category of each investment alternative (e.g., large-cap stock fund)
•
3.
Inclusive of “closed” investments, but may limit provision of those disclosures about
that investment alternative to those invested in that alternative
No longer required to disclose type of management (e.g., passive); requirement was
contained in the proposed regulations but now deleted
Performance data for 1, 5, and 10 year periods (or for the life of the investment
alternative, if shorter)
•
•
Must include a statement that past performance is not necessarily indicative of future
performance
For fixed-return investments, only need to disclose the fixed rate of return and the
term of the investment in lieu of performance data
•
•
If the rate is adjustable, must disclose that fact as well as current rate of return and
minimum guaranteed rate of return
Preamble makes clear that money market mutual funds and stable value funds are
not fixed-return investments
29
Investment-Related Information (continued)
What must be disclosed annually for each “designated investment
alternative”:
4.
Name and performance data for appropriate benchmarks
•
•
•
•
“Appropriate broad-based securities market index”
Performance data must be for the same performance periods as the
comparator investment alternative
Benchmark generally cannot be “related” to the comparator investment
alternative (unless widely recognized and used)
Benchmark not required for fixed-return investments
30
Investment-Related Information (continued)
What must be disclosed annually for each “designated investment
alternative”:
5.
Fee and expense information for non-fixed-return investments
•
•
•
•
•
•
•
Amount and description of shareholder-type fees not included in total
annual operating expenses of the investment alternative
Description of restrictions applicable to purchase, transfer, or withdrawal
from the investment alternative
Total annual operating expenses of the investment alternative expressed
as a percentage (i.e., expense ratio)
Total annual operating expenses of the investment alternative expressed
as a dollar amount for a $1,000 investment over a 12-month period
Statement that fees/expenses are only one of several factors to consider
when making investment decisions
Statement that cumulative effect of fees/expenses can substantially
reduce the growth of the account and that participants can visit the EBSA
website for an example
For fixed-return investments, only need to disclose the first two subbullets above
31
Investment-Related Information (continued)
What must be disclosed annually for each “designated investment
alternative”:
6.
Website address that provides access to the following:
•
•
•
•
Name of issuer of each investment alternative
Investment alternative’s objectives/goals, principal strategies and
risks, portfolio turnover rate, performance data updated at least
quarterly, and fee and expense information
FAB 2012-02 – above information does not have to be contained on
the “landing page” of the website address, but website must be userfriendly and information easy to find
According to the preamble, DOL expects this website to be accurate
and updated “as soon as reasonably possible”
•
•
FAB 2012-02 – website should be “accurate and reasonably current”
Plan administrator/sponsor may create and maintain the website or
may contract with TPA or recordkeeper to do so
32
Investment-Related Information (continued)
What must be disclosed annually for each “designated
investment alternative”:
7. Glossary of terms to help participants and beneficiaries
understand the investment alternatives (or a website
address that that provides access to such a glossary)
•
DOL considered publishing a sample glossary but
decided against it
33
Investment-Related Information (continued)
Format: Investment-related information must be disclosed in the form of
a comparative chart
•
•
•
•
DOL has issued a model chart
Chart must also include contact information, note that additional
information is available at a website, and note about how to receive
paper copies of various items free of charge
Additional information can be added to the chart as long as not
inaccurate or misleading
FAB 2012-02 – multiple charts from service providers/issuers can be
furnished – single chart is not required – as long as furnished at the
same time and charts are designed to facilitate comparison
•
•
This relief is particularly important for 403(b) plans.
Chart need not be provided more frequently than annually, as website
will be updated more often
•
However, DOL states that, under extraordinary circumstances, ERISA
fiduciary duties may require that participants be affirmatively notified of
important changes before the next chart is to be provided
34
Investment-Related Information (continued)
Special Rules for Employer Securities
•
•
•
•
Instead of describing principal strategies and risks, need only
explain the importance of a well-balanced and diversified
investment portfolio (see DOL’s FAB 2006-03 for sample
language)
Not required to disclose portfolio turnover rate
Not required to disclose annual operating expenses unless
participants acquire units of the stock fund as opposed to
actual shares
With respect to disclosure of performance data, different
definition of “average annual total return” unless participants
acquire units of the stock fund as opposed to actual shares
35
Investment-Related Information (continued)
Special Rules for Annuity Options
•
•
•
“Annuity” defined by reference to purchase of a stream of
retirement income payments guaranteed by an insurance company
Regulations provide for alternative disclosures for the InvestmentRelated Information, including alternative requirements for the
information to be provided through website access
Comparative chart format still required
Special Rules for Fixed-Return Investments
•
Alternative requirements for the information to be provided through
website access
Special Rules for Target Date and Similar Funds – not yet;
DOL expressly reserved this for future rulemaking
36
Investment-Related Information (continued)
Additional Disclosure Obligations of Investment-Related Information
•
•
•
Modeled after obligations already in place under Section 404(c) regulations
Once a participant has invested in an investment alternative, if voting, tender,
or similar rights are passed through under the terms of the plan, then must
send to the participant any materials received by the plan regarding those
rights
Must provide the following information annually or upon request:
•
Prospectuses or similar documents (or proper summaries) for an investment
alternative
•
•
•
•
FAB 2012-02 provides further guidance as to which documents satisfy this
requirement
Financial statements/reports or similar materials for an investment alternative
provided to the plan
Value of a share/unit of an investment alternative and date of valuation
List, value, and proportion of assets in an investment alternative which constitute
“plan assets”
37
•
•
What is a
“Designated Investment Alternative”?
Generally, any investment option into which participants may direct the investment
of assets held in their plan accounts
Does not include:
•
•
•
•
•
Investment platform where the platform provider selects investment options that are
not specifically identified as available under the plan must be considered carefully
•
•
•
•
Brokerage windows
Investment management service where investment manager is selected to allocate assets
among the plan’s investment options
Model portfolios made up of the plan’s underlying investment options, unless participant acquires
an interest in that portfolio
Exception does not apply if model portfolio includes investment options not otherwise available
under the plan
Underlying investment options may be “designated investment alternatives”
FAB 2012-02 – DOL provides safe harbor if the platform holds more than 25 investment options;
will need to make disclosures for some but not all of those investment options
FAB 2012-02 – DOL cautions about giving participants who are not financially
sophisticated too many investment options (more than “a manageable number”),
particularly options about which disclosures would not be required
FAB 2012-02 – if enough participants invest in an investment option that is not
otherwise a “designated investment alternative” (e.g., via a brokerage window or
platform), may need to treat that option as a “designated investment alternative” for
disclosure purposes
•
Suggests need to monitor participant investments made through a brokerage window
38
How Must the Disclosures be Provided?
•
•
Need not be provided as stand-alone document, but best practices may
evolve this way
The annual disclosures of General Plan-Related Information,
Administrative Expenses, and Individual Expenses can be provided as
part of the SPD or the ERISA Section 105 pension benefit statement
•
•
•
•
•
Distribution of the SPD or the pension benefit statement must continue
to meet the disclosure frequency requirements of these rules
The quarterly disclosures of Administrative Expenses and Individual
Expenses can be provided as part of the ERISA Section 105 pension
benefit statement
Above examples are not exclusive means by which disclosures can be
made
Disclosures must be written in a manner calculated to be understood by
the average plan participant
DOL has issued limited relief to allow these disclosures to be made
electronically
39
When Must the Disclosures be Provided?
ANNUAL DISCLOSURES
•
Annual disclosures must be provided on or before the date on which a participant or
beneficiary can first direct his or her investments and then annually thereafter
•
•
For plans with immediate eligibility, these disclosures may need to be provided with
any enrollment forms/papers on the first day of work
If there is a change in the information in the annual disclosures for General PlanRelated Information, Administrative Expenses, or Individual Expenses, then
generally must disclose that change 30 – 90 days before the change is effective
•
•
There is an exception if such advance notice cannot be provided due to unforeseeable
circumstances or circumstances beyond the control of the plan administrator (in which case
as much notice as “reasonably practicable” must be provided)
First annual disclosures (for calendar year plans) must be provided by
August 30, 2012
QUARTERLY DISCLOSURES
•
Must be provided each quarter and must cover the prior quarter (e.g., disclosure
covering January – March provided during April – June timeframe)
•
•
“Quarter” refers to any three-consecutive-month period
First quarterly disclosures (for calendar year plans) must be provided by
November 14, 2012 (covering the July 2012 – September 2012 timeframe)
40
Takeaways
•
•
•
No automatic penalty for non-compliance, but non-compliance is a breach of
fiduciary duty
•
•
Non-compliance will result in loss of Section 404(c) protection for plan fiduciaries
•
•
•
Section 404(c) otherwise protects fiduciaries from investment losses incurred by participants as a
result of their investment decisions
Regulations expressly provide that compliance with these Section 404(a) disclosure
requirements does not relieve fiduciaries of their duty to prudently select and
monitor a plan’s investment options
•
•
Potential civil liability if damages could be tied to the lack of disclosures
Potential criminal liability for willful violations (would be reserved for rare cases)
DOL has also made clear its position that the Section 404(c) regulations do not relieve fiduciaries
of this duty to prudently select and monitor investment options – this point has been the subject
of a number conflicting court decisions in recent years
Fiduciaries should continue to monitor the plan’s investment options to determine if they are
appropriate, including brokerage windows
If not already in process, determine who will be responsible for drafting and begin
that process ASAP
•
•
Review draft disclosures with ERISA counsel before they are finalized and distributed
Who will distribute them and how will they be distributed?
Review (and renegotiate?) agreements with service providers to allocate and/or
clarify responsibilities related to these disclosures
41
•
•
•
Electronic Delivery of
Participant Fee Disclosures
Final DOL regulations on participant-level fee
disclosures reserve section on manner of disclosure
DOL has issued interim guidance on how participantlevel fee disclosures can be made electronically
DOL guidance provides two separate rules for electronic
disclosures:
IN PENSION BENEFIT STATEMENT
Rule for disclosures of planrelated information included in
pension benefit statement (e.g.,
general plan-related information,
administrative expenses and
individual expenses)
ALL DISCLOSURES
Rule for all disclosures,
including investmentrelated information and
other information not
included in pension
benefit statement
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Disclosures of Plan-Related Information
Included In Pension Benefit Statement
•
•
Disclosures of plan-related information included in
pension benefit statement may be furnished
electronically in same manner as other information
in same pension benefit statement
Three options for furnishing pension benefit
statement electronically:
 DOL electronic delivery safe harbor rule
 IRS electronic delivery rule
 FAB 2006-03 electronic delivery rule
(continuous access websites)
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DOL Electronic Delivery Safe Harbor Rule
Category of Recipient
Requirements
• Current employees with ability to
access electronic documents at
work location, if access to
employer’s electronic system is an
integral part of participant’s
employment duties
• These current employees must
receive affirmative communication
describing significance of materials
and offer to receive a paper copy
free of charge
• Others (e.g., current employees for
whom access to employer’s
electronic system is not an integral
part of employment duties, former
employees, beneficiaries, or
“alternate payees” under a QDRO),
if intended recipient affirmatively
consents to receiving disclosures
electronically
• Consent must be provided
electronically in manner that
demonstrates recipient’s ability to
access disclosures electronically
• Clear and conspicuous statement
must be provided indicating:
• types of documents consent applies to
• consent may be withdrawn at any time
• certain other information
44
IRS Electronic Delivery Rule
Rule
Requirements
• General rule requires affirmative
• Recipient must be provided with a
consent to electronic delivery,
clear and conspicuous statement
which consent must be made (or
explaining:
• right to receive paper copy free of
confirmed) electronically, in a
charge
manner that demonstrates ability to
• right to withdraw consent
access disclosures electronically
• scope of consent
• procedures to update electronic
contact information
• hardware / software requirements
• Exception for recipients who have
• For such recipients, affirmative
effective ability to access electronic
consent is not required as long as,
medium used to provide disclosure
at the time the disclosure is
provided, recipient is advised of
right to receive paper copy free of
charge
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FAB 2006-03 Electronic Delivery Rule
Pension benefit statement may be provided
through a website pursuant to this rule if:
• Plan provides participants continuous access to pension
benefit statements through one or more secure websites
(“continuous access websites”)
• Participants are provided notice that explains availability
of required pension benefit statement and how it may be
accessed
• Participants are notified they may request paper copies
free of charge, and
• Notices are written in a manner reasonably calculated to
be understood by the participants
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Disclosures Provided Separately
From Pension Benefit Statement
•
•
Disclosures that are provided separately from
pension benefit statement cannot be furnished
electronically under IRS rule or FAB 2006-03
Instead, disclosures may be made:
 Using existing DOL electronic delivery safe
harbor rule; or
 Under temporary guidance under DOL
Technical Release 2011-03R for electronic
delivery
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DOL Technical Release 2011-03R
Pending further guidance, plan administrator may furnish fee disclosures
through electronic media (including a continuous access website) in
accordance with the following conditions:

Voluntary Provision of E-Mail Address: Recipients must voluntarily
provide e-mail address for purpose of receiving disclosures

Initial Notice: Initial notice must be clear and conspicuous, provided
contemporaneously and in same medium as request for e-mail
address, and contain the following information:
•
•
•
•
•
Statement that providing e-mail address is entirely voluntary, and that as result
of providing e-mail address, required disclosures will be made electronically
Brief description of fee disclosure information that will be furnished
electronically and how it can be accessed
Statement that paper copies may be requested and will be provided free of
charge
Statement that individual may opt out of receiving electronic disclosures at any
time
Procedure for updating e-mail addresses
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DOL Technical Release 2011-03R

Annual Notice: Same information provided in initial notice must be
provided to participants annually
•
Annual notice must be furnished on paper unless there is evidence
that participant interacted electronically with plan since prior
annual notice was provided

Delivery: Plan administrator must take measures reasonably
calculated to ensure actual receipt of transmitted information (e.g.,
return receipt or notice of undelivered mail)

Confidentiality: Plan administrator must take measures reasonably
calculated to ensure that electronic delivery system protects
confidentiality of personal information

Calculated to be Understood: Notice must be written in manner
calculated to be understood by average plan participant
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DOL Technical Release 2011-03R
Special Transition Rule
•
This rule allows employer, plan sponsor or plan administrator to
deem e-mail address already on file as having been voluntarily
provided, if:
•
•
•
•
E-mail addresses of participants and beneficiaries are already on
file
Participants are provided transition initial notice between 30 and
90 days before date that initial fee disclosures must be provided,
and
Transition initial notice is provided on paper, unless there is
evidence that participant interacted with plan electronically during
preceding 12 months
Transition rule does not apply to e-mail addresses established
or assigned by employer or plan sponsor, unless there is
evidence that e-mail address was used by participant for plan
purposes during preceding 12 months
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Commentary
•
•
•
DOL has received comments (including from 15
trade associations representing the retirement plan
community) that DOL guidance does not make it
feasible to provide disclosures electronically
Comments criticize requirement to obtain
affirmative consent and dependence on paper as
default method of delivery
Survey data shows that majority of service
providers and recordkeepers will not attempt
compliance with DOL Technical Release 201103R due to cost concerns and administrative
impracticality
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Links to DOL Guidance
•
•
•
•
Final DOL Service Provider Fee Disclosure Regulations
• Available at:
http://www.chadbourne.com/files/upload/Employment408(b)(2)%20Final%20Reg
ulations%20on%20Fee%20Disclosure.pdf
Final DOL Participant-Level Fee Disclosure Regulations
• Available at:
http://www.chadbourne.com/files/upload/EmploymentFiduciary%20Requirement
s.pdf
DOL Field Assistance Bulletin No. 2012-02; Fee Disclosure
Guidance
• Available at:
http://www.chadbourne.com/files/upload/EmploymentDOLRevisedBulletin.pdf
Technical Release 2011-03R; Revised Interim Policy on
Electronic Disclosure
• Available at: http://www.chadbourne.com/files/upload/EmploymentTechnical1103r.pdf
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Thank You
********************
IRS Circular 230 Disclaimer:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax
advice contained in this document is not intended or written to be used, and cannot be used,
for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting,
marketing or recommending to another party any transaction or tax-related matter addressed
herein. For more information about why we are required to include this disclaimer, please
click here or go to http://www.chadbourne.com/files/upload/circular230.pdf.
********************
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