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Required Disclosures to Retirement Plan Participants

August 21, 2012

Plan administrators for most defined contribution retirement plans have just a few more weeks to begin complying with a U.S. Department of Labor (DOL) regulation that requires disclosure of detailed plan expense and investment information to participants. In most cases, administrators should have received at least some of the information from covered service providers before July 1, 2012 (see our prior alert here).

Covered Plans and Participants
The regulation covers participant-directed individual account retirement plans other than those funded with IRAs and some 403(b) plans frozen before 2009. If participants direct the investment of some, but not all, plan assets, the plan administrator does not have to provide the prescribed information about investments directed by a plan fiduciary. The required information must be provided to all plan participants, including former employees with account balances and current employees who are eligible to participate but not enrolled.

Initial/Annual Disclosures
In most cases, the regulation requires disclosure of three types of information.

Plan Information includes a summary of the rules governing participant investment directions, identification of any "designated investment alternatives" and "designated investment managers" available to participants under the plan, and a description of any "brokerage window" or similar arrangement that enables participants to select investments other than those designated by the plan. This information can be furnished in the plan's summary plan description (SPD) or quarterly benefit statements. Any change in required plan information must be communicated at least 30 days, but not more than 90 days, in advance. However, there is an exception for unforeseeable events and circumstances beyond the control of the plan administrator, in which case the notice must be furnished as soon as possible.

Expense Information includes explanations of any general plan administration fees which may be charged against participant accounts and the bases for their allocation. It also includes any individual expenses that can be charged against a participant's account, such as a fee for originating a participant loan. As with plan information, this expense information can be supplied in an SPD or quarterly statement, and changes are to be communicated at least 30 days, but not more than 90 days, before they take effect.

Investment-Related Information must be provided for each designated investment alternative, but not for investments directed by a plan fiduciary. It includes the name and type of each designated investment alternative and any shareholder-type fees charged directly against the investment, such as commissions, sales loads and surrender charges. In the case of a designated investment alternative with no fixed return, the disclosure must provide specified historical investment returns, corresponding investment benchmarks and total annual operating expenses expressed as a percentage and as a dollar amount for a $1,000 investment. To facilitate analysis, all of this information must be provided in a comparative format. DOL has posted a sample chart here, but variations are permitted.

Special rules determine the investment-related information that must be supplied for participant-directed investments in employer securities and annuities.

In addition, participants must receive a statement that fees and expenses are just some of the factors which should be considered, a statement that the cumulative effect of fees and expenses can substantially reduce a retirement account, a general glossary of investment terms relevant to the plan's designated investment alternatives and an Internet website address through which participants can obtain additional information about each designated investment alternative, including the issuer's name, goals, principal strategies and portfolio turnover rate.

The general rules are that a participant must be provided the most recent full disclosure statement on or before the first day on which he or she can direct investments and that updated disclosures must be provided at least annually thereafter. However, the initial deadline for furnishing all of the required disclosures is August 30, 2012 or, if later, the 61st day of the first plan year beginning on or after November 1, 2011 (see table below).

Quarterly Disclosures
The annual disclosure provides an explanation of general plan administration and individual expenses that can be charged against a participant's account, but actual charges will have to be reported at least once each quarter, most likely on the participant's account statement. The regulation requires disclosure of the dollar amount of fees and expenses charged during the preceding quarter with descriptions of the services. If applicable, the quarterly disclosure must explain that some of the plan's administrative expenses were paid from total annual operating expenses of one or more of the plan's designated investment alternatives through a revenue sharing arrangement.

The first quarterly fee disclosure is due within 45 days after the end of the plan year quarter in which the initial disclosure of plan information is required to be furnished. The interaction of the two deadlines can be confusing, so please refer to the table at the end of this article. Other summaries focus on calendar year plans that must comply by November 14, 2012, but the table shows that plans with plan years which began last December, March or June face an earlier deadline -- October 15, 2012.

Disclosures Upon Request
Participants also have the right to request the following information about designated investment alternatives: copies of prospectuses for registered investments or similar documents for unregistered investments; financial statements and reports provided to the plan; a statement of the value of a share or unit and the date of the valuation; and if the assets of a designated investment alternative vehicle constitute plan assets under ERISA, a list of such assets and the value of each asset or the proportion of the investment it represents.

Responsible Party
The plan administrator (usually the plan sponsor or a committee of its employees) is responsible for compliance with these requirements. Most participant-directed plans utilize the services of third party administrators (TPAs) that will provide compliance assistance, but ultimate responsibility remains with the plan administrator. Care should be taken to identify possible gaps and to assure the TPA has access to all of the information required to be disclosed. If the TPA will not have contact information for new participants or eligible employees with zero account balances, the plan administrator must either supply the TPA with the necessary data or make its own arrangements to distribute the required disclosures and change notices to such participants.

Most TPAs have been planning for these disclosure requirements, and some have already distributed initial disclosures for the plans they serve, often with quarterly benefit statements. When initial disclosures are lacking, it is usually because the preparer has not received all of the necessary information. As the responsible party, the plan administrator should check the disclosure for compliance and arrange for the correction of any deficiencies.

Relying on an SPD to provide required plan information may be appealing, but it would necessitate annual distribution of a plan's SPD.

It remains to be seen whether many participants will take the time to study the additional information being provided to them. Questions are most likely to arise after quarterly expense reporting begins later this year, but companies that have developed solid, cost-effective retirement plans for their employees should have little trouble responding to participant inquiries.

Finally, the DOL's extension of the initial disclosure deadline made it more difficult to determine when some plans are required to begin reporting expenses actually charged to participants' accounts. The following table shows how the initial deadlines for expense reports range from October 15, 2012 to February 14, 2013.

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