The Department of Labor (DOL) has issued the long-awaited Field Assistance Bulletin (FAB) 2012-02, which concerns fee disclosure guidance. The FAB sheds light on uncertainties in the impending final DOL regulations on disclosure by service providers to plans and by certain plan administrators to participants. The new guidance will help service providers and plan administrators meet their disclosure obligations.
The deadline for disclosure by covered service providers is July 1, 2012. The initial deadline for annual participant-level disclosure for most plans is August 30, 2012. The first quarterly participant disclosures are required by November 14, 2012.
The FAB contains 38 questions and answers relating primarily to participant-level disclosure but also addressing service provider disclosure. It includes many helpful and practical solutions to uncertainties in the final disclosure regulations.
It is clear from the text of the FAB that the DOL has no intention of extending either of disclosure deadlines. However, in Q&A 37, the DOL recognizes that many service providers and plan administrators may have initiated or even made disclosures prior to publication of the FAB based on interpretation of the regulations and may be unable to modify their disclosures by the deadlines without unreasonable difficulty or cost.
The FAB states that the DOL will take into account whether service providers and plan administrators acted in good faith based on a reasonable interpretation of the regulations and, if so, will refrain from enforcement actions as long as the service provider or plan administrator has a transition plan for conforming to the requirements of the FAB.
The full text of FAB 2012-02 is
here. Additional articles and other information on the final disclosure regulations may be found on our web site,
here.
Covered Plans (Q&A 1-2)
The FAB clarifies that if an individual account plan has both fiduciary and participant-directed investments it is subject to the participant-level disclosure requirements but only for the investment alternatives available for participant direction. It also provides additional detail and clarification concerning disclosure for ERISA-covered Section 403(b) plans.
Plan and Investment-Related Information – General (Q&A 3-4, 27)
In terms of plan-related and investment-related information, the FAB makes clear that if both are provided in a single document it is not necessary to duplicate identifying information about the designated investment alternatives. However, if separate disclosures are provided, descriptions of the investment alternatives must be included in each. The FAB distinguishes how the disclosure requirements apply to designated investment alternatives (DIAs) and designated investment managers (DIMs). A DIM is not a DIA and is therefore not subject to the investment-related disclosure requirements. Nevertheless, the plan administrator must identify each designated investment manager and provide plan-level information concerning fees for their services.
Participants and beneficiaries also must be provided, at least quarterly, with the dollar amounts of fees and expenses actually charged against their accounts for these services together with a description of the services to which the charges relate.In general, a plan fiduciary must be responsible for the prudent selection and monitoring of each designated investment manager.
Administrative Expenses (Q&A 5-12)
The FAB also provides detail and clarification concerning the explanation of administrative expenses that must be included in the annual disclosure of plan-related information. The FAB also makes clear that administrative expenses need not be disclosed, even if payment from plan assets is authorized, if payment is made historically and exclusively from forfeitures and the general assets of the employer.
In another question on disclosure of administrative expenses, the DOL gives an example of payment of recordkeeping expenses of 10 basis points of the plan’s total assets through liquidating shares from participant’s accounts and says that this expense must be disclosed separately and cannot be included in the operating expenses of the designated investment alternatives unless it occurs in a way that reduces the rate of return of the designated alternative.
Another question states that required disclosure of payment of administrative expenses through revenue sharing from one or more investment alternatives must be disclosed but need not itemize specific expenses paid in that manner. Another response from the DOL confirms that this is true even if all plan expenses are paid from revenue sharing and none are actually allocated to participants’ accounts. The FAB also explains how to handle disclosure when administrative expenses accrue monthly but are paid from revenue sharing that occurs on a less frequent basis.
Brokerage Windows (Q&A 13-15, 29-30)
The FAB addresses the frequent question of what must be disclosed about brokerage windows, self-directed brokerage accounts and other similar arrangements. First, there must be a general description sufficient to enable understanding of how the arrangement works, including how and to whom to give instructions; account balance requirements, if any; restrictions or limitations on trading, if any; how the arrangement differs from other designated investment alternatives and how to get questions answered. In addition, there must be an explanation of fees and expenses that may be charged to an individual account. If this information is unknown, it may be described in a general statement accompanied by directions on how to obtain specific information in connection with a specific investment. Detailed information on the investment securities available through one of these arrangements is not required and in fact is discouraged. Participants, however, should be advised to seek fee and expense information associated with any particular investment before purchase or sale.
Finally, there must be disclosure of fees and expenses actually charged to the participant’s account during the preceding quarter along with a description of the services to which the charges relate. Even if utilization of a brokerage window or other arrangement is very low, the required annual fee and expense information must be provided to all participants and beneficiaries.
The FAB also addresses investment platforms consisting of a large number of unrelated mutual fund families and concludes that, like a brokerage window or similar arrangement, it would not be a designated investment unless the individual investment alternatives are specifically identified as available under the plan. Nevertheless, the FAB cautions that failure to designate a manageable number of investment alternatives raises questions whether the plan fiduciary has satisfied its obligations, given that most participants and beneficiaries are not financially sophisticated and need guidance in choosing investments from a large number of alternatives. Designating a reasonable number of specific alternatives also enables participants and beneficiaries to compare costs and return information.
Furthermore, the FAB reminds us that plan fiduciaries have a general duty of prudence to monitor a plan’s investments, noting that if through a brokerage window or similar arrangement investments that are not designated alternatives are selected by significant numbers of participants and beneficiaries, then an affirmative obligation would arise for the fiduciary to examine these alternatives and determine whether one or more should be treated as designated for disclosure purposes.
Pending further guidance, the FAB imposes a rule of thumb that if a platform offers more than 25 investment alternatives, the DOL will not require that all investment alternatives be treated as designated alternatives if the plan administrator (1) makes the required disclosures for at least three alternatives that collectively meet the “broad range” requirements in the ERISA 404(c) regulations, and (2) makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries or, if there are more than 500 participants and beneficiaries, at least 1 percent of all participants and beneficiaries are invested on a date that is not more than 90 days prior to each annual disclosure.
Another question directs that investment-related information must be provided for investment alternatives that are closed to new investments since that information is as relevant to decisions to transfer out of a fund as to decisions to invest.
There is additional information about creating and weighing a benchmark for a balanced fund by blending more than one appropriate securities market index.
Several questions provide detail about alternate ways for complying with the website requirement. The same is true for providing a glossary or link to a glossary.
Comparative Format (Q&A 21, 23-24)
Investment-related information may be provided in a single unified comparative chart or through multiple charts from various service providers or investment issuers provided that all are furnished at the same time and the charts are designed to facilitate a comparison. Having investment issuers separately provide comparative information at different times does not comply.
For investment alternatives with variable rates of return, the comparative information may be provided as of a date more recent than the end of the prior calendar year, but the same date must be used for all investment alternatives and the associated benchmark information would also have to correspond. In addition, the requirement to furnish performance data “since inception” applies only to investment alternatives that have been in existence for less than 10 years.
Updates of Investment-Related Information (Q&A 22)
In a very important clarification and coordination with the service provider disclosure requirements, the FAB states that fee and expense information for investment alternatives provided on the annual comparative chart is not required to be updated if it changes before the next annual disclosure. Changes that do occur, however, must be available on the applicable website. The website must indicate the date of the most recent update. The FAB also states that under extraordinary circumstances, duties of prudence and loyalty may require a plan administrator to inform participants and beneficiaries of important changes to investment-related information before the next annual disclosure.
Information on Request (Q&A 25)
The FAB amplifies the requirement of furnishing additional information to participants on request in the form of a prospectus, or a short-form or summary prospectus or “similar” document.
Methods of Disclosure (Q&A 26)
The FAB confirms that required disclosures are not mandated to be stand-alone documents. For example, some of the disclosures may be provided through a summary plan description or a pension benefit statement. This guidance emphasizes, however, that the applicable timing requirements in the final regulations must be met.
Disclosure for Model Portfolios (Q&A 28, 31)
In response to one of the most frequently asked questions, the FAB explains how the disclosure requirements apply to so-called model portfolios (often with labels such as “conservative,” “moderate” and “growth”) that are made up of different combinations of the plan’s investment alternatives. The response states that a model portfolio ordinarily is not treated as a separate investment alternative if it is clearly presented as merely a means of allocating account assets among designated investment alternatives. On the other hand, if the portfolio is constructed so that each participant acquires an equity security, unitized participation or similar interest in a fund that invests in some combination of the designated alternatives, that model portfolio ordinarily would be a separate designated alternative.
In either case, the disclosure should clearly explain how the model portfolio functions and how it differs from the designated alternatives, if it is not an alternative. Moreover if the plan offers only model portfolios, then each must be treated as a designated investment alternative. Finally, to the extent that disclosure information can be ascertained and provided with respect to model portfolios, providing that information in the disclosure is allowed if it is not inaccurate or misleading.
In contrast to the model portfolio guidance, the FAB requires that an open end fund-of-funds that invests totally in other mutual funds must reflect the annual operating expenses of its component funds in disclosing the total annual operating expenses for the fund-of-funds.
Unregistered Funds (Q&A 32-34)
The FAB also provides guidance on the frequency with which designated investment alternatives that are not registered under the Investment Company Act of 1940 must calculate their total annual operating expenses. It also states that investment in units of a trust or similar arrangement that invests exclusively in registered mutual funds is considered unregistered for purposes of the disclosure regulation. In another miscellaneous Q&A, the DOL states that if the manager of a stable value fund purchases an insurance contract designed to smooth the rate of return of underlying fixed income investments, the cost of the insurance must be included in the total annual operating expenses of that investment alternative.
Initial Quarterly Disclosure (Q&A 36)
The FAB also states that the initial quarterly disclosure of fees and expenses is only required to provide information for the most recently ended quarter and is not required to include any previous expense information.
ERISA 404(c) Compliance (Q&A 38)
In closing, the FAB makes clear that for plans complying with ERISA Section 404(c), the participant-level disclosures are not required to be provided earlier than the date required in the final regulations for general participant-level disclosure purposes.
The Deadlines are Imminent - Take Action Now
Plan sponsors need help to be sure they are in compliance with the service provider disclosure requirements and to prepare for timely compliance with the participant disclosure requirements. The Employee Benefits and Executive Compensation Practice Group at Warner Norcross & Judd LLP is ready to provide advice and assistance. Please contact George L. Whitfield (616.752.2102 or
gwhitfield@wnj.com), Justin Stemple (616.752.2375 or
jstemple@wnj.com), or any other member of the practice group.