On May 7, 2012 (and updated May 17), the Department of Labor issued Field Assistance Bulletin 2012-02, consisting of 38 questions and answers that clarify some of the issues raised since the issuance of the final regulations on participant fee disclosures with respect to designated investment alternatives in individual account plans. The Q&As cover a range of issues, including:
Brokerage Windows. The participant fee disclosure regulations (§2550.404a-5(h)(4)) provide that brokerage windows are not “designated investment alternatives,” but do not provide specific guidance on how the regulation applies to brokerage windows and what disclosures are required. The FAB clarifies that brokerage windows are covered by the regulations, but that they are subject only to plan-related disclosures of administrative fees and expenses under §2550.404a-5(c). The disclosures include (1) a description of the window (how and to whom to give investment directions, account balance requirements, limitations or restrictions on trading, how the window differs from the plan’s designated investment alternatives) and whom to contact with questions; (2) a general statement that there may be investment fees and charges associated with the participant’s investment selections (such as fees and expenses for opening, accessing, maintaining, and terminating the window, commissions and fees for trading) and directions on how to obtain information on those fees for any particular investment; and (3) the fees actually charged against a participant’s account in connection with the window during the preceding quarter.
Broad-Based Investment Platforms. Some plans provide an investment platform comprised of a large number of registered mutual funds, but the plan fiduciary has not designated any funds as designated investment alternatives. The Department observed that there is a question whether the plan’s fiduciary has satisfied its obligations under section 404. It observed that, if through a brokerage window or other alternative, non-designated investment alternatives are selected by a significant number of participants, the plan fiduciaries have an affirmative obligation to review the alternatives and determine whether any of them should be treated as designated for purposes of the fee disclosure regulation. As a matter of enforcement policy, until the Department issues further guidance, the FAB provides that where a platform (including a brokerage window) holds more than 25 investment alternatives, the Department will not require that all of the available alternatives be treated as designated investment alternatives if the plan administrator
- Makes the required disclosures for 3 of the alternatives that satisfy the “broad range” requirements of §404(c), and
- Makes the required disclosures for all other alternatives on the platform in which at least 5 participants (or if the plan has more than 500 participants, at least 1%) are invested on a date that is not more than 90 days preceding each annual disclosure.
Revenue Sharing. Where some or all of the plan’s administrative expenses are paid through revenue sharing, the disclosure need not identify the specific expenses that are paid through revenue sharing or the designated investment alternative making the payment. Even if all of the plan’s administrative expenses are paid through revenue sharing so that no expenses are charged to participants’ accounts, the plan-level fee disclosure must still include a statement that the administrative fees were paid from revenue sharing from the plan’s investment alternatives to avoid giving participants the misleading impression that there were few or no administrative expenses.
Expenses Paid from Forfeitures and General Assets. If the plan document requires that administrative expenses be paid from forfeitures or the employer’s general assets, and does not require them to be charged against participants’ accounts, those expenses need not be disclosed. Even if the plan administrator has the discretion to pay administrative expenses from participants’ accounts, but it does not intend to do so and the employer obligates itself to pay administrative expenses not covered by forfeitures, disclosure is not required.
Comparative Return Charts. The regulations require that investment performance over 1-, 5- and 10-year periods be furnished in a chart or similar format to facilitate comparisons. The plan administrator may furnish more than one chart (for example, where there are multiple issuers of designated investment alternatives) so long as the charts are provided at the same time and in consistent formats so that participants can make meaningful comparisons. Separate distribution of the charts by the issuers or service providers will not satisfy this requirement. Performance data can be reported as of the end of the most current month or quarter, but the data for all designated investment alternatives and associated benchmarks must use the same time period to permit participants to compare. Only one chart need be provided per year, although updated information on expenses must be available on a Web site as soon as reasonably possible following a change, and in extraordinary circumstances ERISA’s prudence rule may require a notice of mid-year changes.
403(b) Plans. Generally, the regulations cover 403(b) plans. The Department will not take enforcement action against a plan administrator that does not make the disclosures for annuity contracts or custodial accounts issued before January 1, 2009 to which the employer made no contributions on or after January 1, 2009, that are fully vested and fully enforceable by the employee with no employer involvement. This follows the guidance in FABs 2009-2 and 2010-01 and §2550.408b-2(c)(1)(ii).
Early Disclosures. Although the participant-level fee disclosures are not due until August 30, 2012, some plan administrators and service providers have already begun providing participant disclosures. The Department observed that some of these disclosures may not be consistent with the advice in the FAB. The Department acknowledged that it may be difficult or expensive for them to make further adjustments to their systems before the August 30 deadline and the July 1, 2012 deadline for service provider disclosures to plan fiduciaries. Although the Department is not extending the deadlines, it stated that, for enforcement purposes, it will consider whether service providers and plan fiduciaries have “acted in good faith based on a reasonable interpretation” of the regulations. If so, then the Department stated that enforcement action would be unnecessary if the service provider or plan administrator establishes a plan for complying with the FAB for future disclosures. The Department did not clarify how quickly the plan should be in place.