Self-directed retirement programs, in the form of 401(k) and other individual account balance plans, now fund retirement income security for 72 million Americans, based on the Employee Benefits Security Administration (EBSA) within the U.S. Department of Labor (DOL). An estimated 483,000 participant-directed individual account plans hold almost $3 trillion in assets. Most, but not totally all individual account balance plans are self-directed by the participants. Recent government regulations are made to provide greater disclosure of plan fees, expenses, and comparative performance data.
Effective Date for 401(k) Expense Disclosure Compliance
EBSA published new regulations titled “Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans” in the Federal Register on October 10, 2010. The rules took effect on December 20, 2010, and apply to plan years beginning on or after November 1, 2011 for many covered plans no matter size.
Goal of Informed Investment Decisions Drive New ERISA Rules
A good quantity of choices – such as the kinds of assets, level of risk, length of holding period, and country of origin – allow it to be difficult for many investors to create informed decisions about the most effective investment vehicles for their retirement funds. With choices which range from stocks, What are ERISA Bonds? bonds or mutual funds to derivatives or emerging marketing options, many investors might be making significantly less than optimum investment decisions because of lack of understandable data on fees, expenses, and fund performance.
Rules Extend Fiduciary Responsibilities to Increased Disclosure
A key provision of the Employee Retirement Income Security Act (ERISA) is that fiduciaries act prudently and “solely in the interest of the plan’s participants and beneficiaries.” Because the responsibility for investment decisions is increasingly transferred to the in-patient participant, the new rules follow the reasoning that the program administrators must also provide participants with clear disclosure of fees, expenses, and comparative performance data that enable the participant to create fully informed decisions.
General Operational and Identification Disclosure Requirements
The newest rules require that plan participants and beneficiaries be given certain new operational informative data on or ahead of the date of plan eligibility, and at the least annually thereafter. Such information includes:
- The capability of plan participants and beneficiaries to provide investment instructions
- Any plan limitations on investment instructions, including any restrictions on transfer to or from a designated investment alternative
- Rights (or restrictions) of the program participant in regards to the exercise of voting, tender and similar rights associated by having an investment
- Identification of any designated investment alternatives offered under the plan
- Identification of any designated investment managers
- A description of any “brokerage windows,” “self-directed brokerage accounts,” or similar plan arrangements that offer additional investment options
Legal, accounting, and other recordkeeping expenses of an administrative nature which can be charged to an idea must now be disclosed under the new rules. The way the expenses are paid must be revealed (such as by deducting dollars or liquidating shares), in addition to allocation techniques used (e.g., pro rata or per capita). Revenue sharing arrangements, Rule 12b-1 fees, and sub-transfer agents are also addressed.
The newest rules stipulate that expenses that might apply to an individual’s account rather than on a plan-wide basis should be disclosed. Samples of such fees include:
- Fees related to the processing of plan loans or qualified domestic relations orders
- Fees for investment advice
- Front or back-end loads or sales charge
- Redemption fees
- Individual account investment management fees (for example, certain unregistered designated investment alternatives such as bank collective investment funds)
Individual expense fee information should be disclosed to the participant at the least quarterly.
Model Comparative Chart
Investment-related information should be provided to plan participants in a way that supports comparisons for investment alternatives. A “model comparative chart” is included in an appendix to the principles because of this purpose.
ERISA Plan Administrators Hold Compliance Responsibility
The “Plan Administrator,” as defined in ERISA, not the third party administrator or recordkeeper, has got the responsibility for compliance with the new expense disclosure requirements.
Exceptions to Expense Disclosure Requirements
There are some exceptions to the ruling, based on feedback received during the general public comment period. These exceptions include:
- IRA based plans under the Internal Revenue Code (IRC) of 1986, including
- Simplified employee pensions (SEPs) as defined under IRC § 408(k)
- Simple retirement accounts (SIMPLEs) as defined under IRC § 408(p)