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DOL Releases Participant Fee Disclosure Regs (Oct 2010)

Instant Insights (Oct. 14, 2010)

Department of Labor Released Participant Fee Disclosure Regulations
On Oct. 14, 2010, the Department of Labor (DOL) released final regulations regarding a plan fiduciary’s fee disclosure responsibilities to participants in individual account plans where the participant has the ability to direct investments. The regulations were issued in final form under Section 404(a) of ERISA. The DOL views these disclosures as necessary to make certain that participants have the information necessary to make informed decisions, and that providing this information is part of the plan fiduciaries’ requirement to act prudently and solely in the participants’ best interests.

The regulations require disclosures in four broad areas:

1. General Plan Information. This category includes information regarding the participant’s ability to give investment instruction, how those instructions are made, any restrictions on instructions, how voting, tender or similar rights are exercised, a listing of all designated investment options, identification of designated investment managers and a description of any brokerage windows available under the plan. This disclosure must be provided on or before the date on which participants can first direct their investments and annually thereafter. The disclosure requirement may be made part of the summary plan description (SPD) assuming the applicable timing requirements are met.
2. Plan Administrative Expenses. The plan must provide an explanation of any fees or expenses for administrative services (e.g., accounting, legal, recordkeeping) that are not included in investment-related fees and are charged to the participant’s account. The disclosure must describe how the fees are allocated to participant’s account, and the disclosure must be delivered on or before the date on which participants can first direct their investments and annually thereafter. In addition, at least quarterly the participant must receive a statement showing the actual amount charged to the participant’s account during the preceding quarter. The statement must also indicate whether any administrative expenses for the preceding quarter were paid from one or more of the plan’s designated investment options (e.g., revenue sharing or 12b-1 fees).  This is a general statement that administrative expenses may be paid by investment alternatives and not a requirement that actual dollar amounts be disclosed.
3. Individual Participant Expenses. The plan must provide an explanation of any fees or expenses that are assessed for services rendered on an individual participant basis (e.g., loan fees, QDRO fees, investment advice services). Once again, this disclosure must be delivered on or before the date on which participants can first direct their investments and annually thereafter, and at least quarterly the participant must receive a statement showing the actual amount charged to the participant’s account during the preceding quarter.
4. Investment Related Information. On or before the date on which participants can first direct their investments and annually thereafter, the plan must provide the following information in a comparative format for each of the plan’s designated investment options:
   
   a. Name and category of the fund (e.g., money market, equity fund)
   b. A Web site where additional information may be found
   c. For investment options that have a fixed return, the annual rate of return and term of the investment (this category does not include money market or stable value funds).
   d. For investments with a variable rate of return, performance data, including 1-year, 5-year and 10-year returns (or for the life of the designated investment option, if shorter) and comparison to appropriate benchmark.
   e. A description of fees charged directly to the participant account (e.g., sales loads, redemption fees).
   f. A description of any restriction or limitation on the ability to purchase, transfer or withdraw from an investment option.
   g. The fund’s expense ratio expressed as a percentage.
   h. An example illustrating the total annual operating expense of the investment options expressed as a dollar amount for a $1,000 investment.
   i. Special rules are provided for disclosures relating to employer securities and annuities.
   j. The DOL provided a model guide for disclosure of investment-related information (DOL model PDF).
   k. A statement that fees and expenses are only one of several factors a participant should consider when making investment decisions, and that fees and expenses can substantially reduce the growth of a retirement account.
   l. A general glossary of terms to assist participants in understanding designated investment options (this requirement may be satisfied by including a Web site address where a glossary may be found).

The plan administrator is responsible for complying with the regulations, but may rely on information received from plan service providers and investment providers. The disclosures must be provided to all employees eligible to participate, not just those actively participating. The DOL has reserved a portion of the final regulation for future guidance regarding the extent to which disclosures may be made through electronic disclosure. The DOL notes that they intend to request public comments on electronic disclosure and anticipate resolution on this issue prior to the compliance date for this regulation. Additional information must be available on request including copies of prospectuses and annual reports.

These regulations will become effective for the first plan year beginning on or after Nov. 1, 2011 (Jan. 1, 2012, for calendar-year plans).

We will discuss these regulations in more detail on our next legislative Webcast on Nov. 18, 2010, at 2 p.m. Central time. Look for more information about this Webcast in the future.

IRS Circular 230 Disclosure: This communication was written in connection with the potential promotion or marketing, to the extent permitted by applicable law, of the transaction(s) or matter(s) addressed herein by persons unaffiliated with JPMorgan Chase & Co. However, JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, to the extent this communication contains any discussion of tax matters, such communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties. Any recipient of this communication should seek advice from an independent tax advisor based on the recipient's particular circumstances.