Source: http://blog.ebeclaw.com/2012/06/rules-relating-to-401k-fee-disclosure.html
Timestamp: 2017-06-27 08:47:28
Document Index: 377690734

Matched Legal Cases: ['§ 2550', '§ 2550', '§ 404', '§ 2550', '§ 2550', '§ 2550', '§ 2520', '§ 408', '§ 406', '§ 408', '§ 2550', '§ 2550', '§ 2550', '§ 2550', '§ 2550', '§ 2550', '§ 2550', '§ 408', '§ 408', '§ 408', '§ 408', '§ 4975', '§ 408', '§ 4975', '§ 408', '§ 2520']

Employee Benefits and Executive Compensation Blog: RULES RELATING TO 401(K) FEE DISCLOSURE OR INVESTMENT ADVICE GUIDANCE
December 19, 2010(revised 6/25/12)
RULES RELATING TO 401(K) FEE DISCLOSURE OR INVESTMENT ADVICE GUIDANCE Recent guidance – some proposed some final, and some with effective dates that have been extended – relate to 401(k) plan fee disclosure and investment advice, as described further below:
Generally. The Department of Labor has issued regulations, DOL Reg. §§ 2550.404a-5 and 2550.404c-1, proposed in 2008, 73 Fed. Reg. 43014 (July 23, 2008) and finalized in 2010, 75 Fed. Reg. 64910 (Oct. 20, 2010), requiring fiduciaries of individual account plans to provide specific disclosures to participants concerning plan investment options including fee and expense information. The underlying concern is that participants in individual account plans be given sufficient information on investment choices including fees and expenses, as stated in the Preamble to the final regulations. The regulations provide that when a plan allocates investment responsibilities to participants under a participant directed individual account plan, ERISA's duty of prudence requires the plan administrator to make sure that participants are made aware of their rights and responsibilities with respect to the investment of assets, and that sufficient information is provided regarding the plan and the plan's investment options including fee and expense information to make informed decisions how to invest their accounts. DOL Reg. § 2550.404a-5(a). This applies to "covered individual account plans," which are participant-directed individual account plans (regardless of whether or not such plans comply with ERISA § 404(c)), but excludes IRAs, SEPs, SIMPLE accounts and other plans exempt from ERISA.
· administrative expenses information about fees and expenses for general plan administrative services that may be charged to individual accounts, such as fees and expenses for legal, accounting, and recordkeeping services; and · individual expense information including fees and expenses that may be charged to individual account of participant, such as fees for plan loans and for processing QDROs. DOL Reg. § 2550.404a-5(c)(1)(i), (c)(2)(i)(A) and (c)(3)(i)(A).
· a glossary of investment-related terms to understand the plan's investment options, or an Internet website address that provides access to such a glossary. DOL Reg. § 2550.404a-5(d)(1)(i)-(vi). Comparative Format Requirement. The above investment-related information is to be furnished in a chart or similar format, so that a comparison of the available investment alternatives is easily observed, and the data should be prominently displayed. DOL Reg. § 2550.404a-5(d)(2)(i). The regulation includes an appendix with a model comparative chart.
DOL Tech Rel. 2011-03R (issued Sept. 13, 2011 and revised Dec. 8, 2011) provides interim guidance on fee disclosure by electronic delivery. Where the disclosure is included as part of pension benefit statements or along with pension benefit statements, the guidance in FAB 2006-03 applicable to pension benefit statements can be used, which allows secure website access where certain notice requirements are met. Where the disclosure is not included as part of pension benefit statements, the safe harbor of DOL Reg. § 2520.104b-1(c) (from 2002) can be used, which allows plan administrators to use electronic delivery of notices (i) for participants who can easily access electronic documents at their place of work and the computer is an integral part of his work, or (ii) where a participant does not have effective access at work but affirmatively consents to receive the document electronically. Alternatively, DOL Tech. Rel. 2011-03R allows an email method where participants voluntarily furnish their email, an initial notice that satisfies the specific notice is provided with the request for the email address, an annual notice containing similar information must be provided (which can be electronically if the participant has interacted with the electronic delivery system), the electronic delivery is reasonably calculated to ensure actual receipt (e.g. email return-receipt), confidentiality is maintained and the notice is calculated to be understood by the average plan participant. Pursuant to DOL Tech. Rel. 2011-03R as revised, disclosure through electronic media may include a continuous access web site.
ERISA § 408(b)(2) Service Provider Exception. ERISA § 406 generally prohibits transactions between an ERISA plan and a party in interest. A service provider to a plan would be a party in interest, making the arrangement a prohibited transaction. However, under the service-provider exception, ERISA § 408(b)(2) exempts service contracts or arrangements between a plan and a party in interest if (i) the contract or arrangement is reasonable, (ii) the services are necessary for the establishment or operation of the plan, and (iii) no more than reasonable compensation is paid for the services. DOL Regulation § 2550.408b-2. DOL Regulation § 2550.408b-2, proposed December 13, 2007, 72 Fed. Reg. 70988, revised as interim regulations, July 16, 2010, 75 Fed. Reg. 41600, and finalized Feb. 3, 2012, 77 Fed. Reg. 5632, clarify the meaning of a ''reasonable'' contract or arrangement.
Disclosure. The disclosure must describe: · services to be provided (but not including non-fiduciary services to an investment contract or plan investment);
· for fiduciary service providers with respect to plan assets, any compensation that will be charged directly against the amount invested (e.g., sales charges, loads, redemption fees, surrender charges, etc.) and operating expenses; and · for certain recordkeeping and brokerage services with respect to each designated investment alternative, current accurate disclosure materials of the issuer of the designated investment alternative that includes the information in the previous bullet. DOL Reg. § 2550.408b-2(c)(1)(iv). Timing of Service Provider Disclosure. The service provider must disclose any additional information relating to compensation to the responsible plan fiduciary within the following time periods: (i) for initial disclosure reasonably in advance of the date the arrangement is executed, extended or renewed, (ii) when the investment entity does not initially hold plan assets, within 30 days of when the investment entity holds plan assets, and (iii) as soon as an investment alternative is designated. Changes in the disclosed information must be communicated no later than 60 days from the date of change, and the covered service provider must disclose at least annually any changes to the investment and recordkeeping and brokerage services described in the last two bullets above. DOL Reg. § 2550.408b-2(c)(1)(v).
Termination Without Penalty. The regulations also require that for the contract to be reasonable, it must permit termination of the contract without penalty other than for reasonable start-up costs and expenses. DOL Reg. § 2550.408b-2(c)(3). Effective Date. The regulations were to be effective July 16, 2011. DOL Reg. § 2550.408b-2(c)(1)(xii). On June 1, 2011, 76 Fed. Reg. 31545, the DOL extended the effective date to January 1, 2012. On July 19, 2011, 76 Fed. Reg. 42539, the DOL extended the effective date to April 1, 2012. On Feb. 3, 2012, 77 Fed. Reg. 5632, the DOL further extended the effective date of these service provider fee disclosure regulations to July 1, 2012 (amending DOL Reg. § 2550.408b-2(c)(1)(xii)).
Under ERISA § 408, as amended by the Pension Protection Act of 2006, a prohibited transaction statutory exemption is added for the provision of investment advice by a "fiduciary advisor" to participants of participant-directed plans through an "eligible investment advice arrangement." ERISA §§ 408(b)(14) & 408(g). ERISA § 408(b)(14) & 408(g). ERISA § 408(b)(14) and IRC § 4975(d)(17) state that the provision of investment advice regarding an investment or sale under the plan, or the receipt of fees by a fiduciary adviser or affiliate in connection with the investment advice, will be exempt from the prohibited transaction rules if the investment advice is provided under an "eligible investment advice arrangement" under ERISA § 408(g) and IRC § 4975(f)(8), which means that the arrangement must either (i) provide "level fee arrangements" that do not depend on investment, or (ii) uses a "computer model" that applies generally accepted investment theories, utilizes relevant information, utilizes objective criteria and does not favor investments offered by the fiduciary adviser. ERISA § 408(g).
5. Schedule C Service Provider Reporting – Effective for 2009 Plan Years; Good Faith Transition Rule Final guidance for revised Form 5500 Schedule C disclosure provides for expanded requirements for service providers reporting of direct and indirect compensation, and requires fiduciaries to review and approve expenses, effective for 5500s relating to plan years beginning in 2009. For Schedule C purposes, reportable compensation includes cash and any other items of value (e.g., gifts or awards) received from the plan (including fees charged as a percentage of assets and deducted from investment returns) in connection with services rendered to the plan. Indirect compensation is compensation received from sources other than the plan or plan sponsor, in connection with services rendered to the plan, and would include, for example, fees and expense reimbursement payments received from a mutual fund, account maintenance fees, 12b–1 distribution fees, etc. 72 Fed. Reg. 64710 (Nov.16, 2007), amending DOL Reg. §§ 2520.103-1 & 2520.104-46.