Investment Management/Employee Benefits
ERISA Fiduciary Alert
October 2010
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
New ERISA Rule on Participant-Level Fee
Disclosure
As part of its initiative on fee transparency, the U.S. Department of Labor (“DOL”)
has issued a new rule that requires plan administrators to provide enhanced
disclosure of fees and expenses paid by their 401(k) plans or other participantdirected individual account plans (“Participant Disclosure Rule”).1 The new rule
imposes a fiduciary obligation on plan administrators to provide detailed information
to participants about their plan’s investment options and fees and expenses paid by
participants and the plan for the investment of their accounts and administration of
the plan. The new requirements apply to plan years beginning on or after November
1, 2011, and are intended to establish a basic, uniform fiduciary standard for
disclosure to participants in plans that permit participant investment direction.
Additionally, the Participant Disclosure Rule essentially eviscerates the distinction
between “404(c) Plans” (that is, plans that are intended to qualify under Section
404(c) of the Employee Retirement Income Security Act (“ERISA”)2) and all other
participant-directed individual account plans by amending existing DOL regulations
governing 404(c) Plans to conform to the Participant Disclosure Rule and requiring
all participant-directed individual account plans to provide the disclosures required
by the Participant Disclosure Rule.
The Participant Disclosure Rule clearly places responsibility for providing the
required disclosures on the plan administrator (usually the employer sponsoring the
plan), and plan administrators that do not comply with the Participant Disclosure
Rule risk claims of breach of their fiduciary duties of prudence and loyalty under
ERISA. As a practical matter, however, plan administrators are likely to rely on plan
service providers or investment product providers for the information needed to
comply with the requirements of the new rule. Significantly, the Participant
Disclosure Rule provides a safe harbor that protects plan administrators from liability
for incomplete or inaccurate information if they rely reasonably and in good faith on
information received from or provided by a plan service provider or the issuer of a
designated investment alternative.3 But the Participant Disclosure Rule also states
that compliance with the rule does not relieve the plan administrator (or other
1
75 Fed. Reg. 64910 (Oct. 20, 2010). The Participant Disclosure Rule constitutes the third prong in
the DOL’s three-part initiative on fee transparency. See our previous alerts on the amendment to the
regulations under Section 408(b)(2) of ERISA (click here) and the expanded reporting requirement
under Schedule C to the Form 5500 (click here and here) for more information on the other two parts
of the DOL initiative.
2
Section 404(c) of ERISA provides that, if a plan offers a broad range of appropriately selected
investment alternatives and gives participants control over the investment of their accounts, the plan
fiduciary will not be held liable for losses incurred as a result of the participants’ choices.
3
“Designated investment alternative” means any investment alternative designated by the plan into
which a participant may direct investment of his or her account’s assets. The term “designated
investment alternative” excludes “brokerage windows” and “self-directed brokerage accounts” or
similar arrangements that enable participants to select investments beyond those designated by the
plan.
Investment Management/Employee Benefits
ERISA Fiduciary Alert
applicable plan fiduciaries) from their duty to
prudently select and monitor service providers to the
plan or designated investment alternatives offered
under the plan.
The Participant Disclosure Rule also reflects the
influence of the disclosure regime applicable to
SEC-registered investment vehicles, particularly
mutual funds. Although the DOL modified the final
version of the rule to exclude certain types of
investment alternatives from particular disclosure
requirements (or modified the required disclosures
for these investment alternatives), the Participant
Disclosure Rule remains rather “mutual fundcentric” in its approach to disclosure of investmentrelated information. Therefore, it is likely that plans
using other commingled investment vehicles or
separate accounts may encounter more unresolved
interpretive issues in implementing the requirements
of the Participant Disclosure Rule.
Covered Plans
In general, all ERISA-covered participant-directed
“individual account plans,”4 such as 401(k) plans
and certain 403(b) plans, are covered under the
Participant Disclosure Rule. There are no
exceptions based on plan size. However, the
Participant Disclosure Rule does not apply to
simplified employee pension plans (SEP plans) and
plans involving simple retirement accounts
(SIMPLE plans), which are essentially
amalgamations of individual retirement accounts
under an employer-sponsored arrangement.
Disclosure Requirements under the
Participant Disclosure Rule
Content
The required disclosures are divided into two broad
categories, and fees and expenses feature
prominently in both categories:
plan-related information, which includes
general operational information about
participants’ rights to manage the investment of
their accounts, general plan administrative
expenses that can be charged to their accounts,
and individual participant account expenses that
can be charged to a participant’s account; and
investment-related information for each
designated investment alternative.
I.
Plan-Related Information
The plan administrator (or its designee) must
provide the following information to each
participant on or before the date on which the
participant can first direct his or her investments and
at least annually thereafter. The plan administrator
must also notify participants of any changes to this
information at least 30 days, but not more than 90
days, in advance of the effective date of such
change, unless the plan administrator cannot
provide such advance notice due to events that were
unforeseeable or circumstances beyond the control
of the plan administrator, in which case notice of a
change must be furnished as soon as reasonably
practicable.
A. General operational information includes:
1) An explanation of the circumstances under
which participants may give investment
instructions.
2) An explanation of any specified limitations
on those instructions, including any transfer
restrictions to or from a designated
investment alternative.
3) A description of, or reference to, plan
provisions relating to the exercise of, and
any restrictions regarding, voting, tender
and similar rights connected to an
investment in a designated investment
alternative.
4
As defined in ERISA Section 3(34), an individual account
plan is a pension plan that provides for an individual account
for each participant and for benefits based solely upon the
amount contributed to the participant’s account, and any
income, expenses, gains and losses, and any forfeitures of
accounts of other participants that may be allocated to such
participant’s account.
4) Identification of any designated investment
alternatives offered under the plan.
5) Identification of designated investment
managers.
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Investment Management/Employee Benefits
ERISA Fiduciary Alert
6) A description of any “brokerage windows,”
“self-directed brokerage accounts,” or
similar plan arrangements that enable
participants to select investments beyond
designated investment alternatives.
C. Performance Data (If the designated investment
alternative’s return is not fixed):
(i.)
the average total return, for the 1-year,
5-year, and 10-year periods (or for the
life of the alternative, if shorter) ending
on the date of the most recently
completed calendar year,
(ii.)
a statement that past performance is not
necessarily indicative of future results,
(iii.)
the name and returns of an appropriate
broad-based securities market index
over the same 1-year, 5-year, and 10year periods (or for the life of the
alternative, if shorter),5
(iv.)
the amount and description of any
“shareholder-type fee,” such as sales
loads and charges, and redemption or
surrender fees, charged directly against
a participant’s investment and not
included in the total annual operating
expenses of any designated investment
alternative,
(v.)
total annual operating expenses of the
investment, expressed as a percentage
(previously, 404(c) required disclosure
only upon request),
(vi.)
total annual operating expenses for a
one-year period expressed as a dollar
amount for a $1,000 investment
(assuming no returns and based on the
percentage in (v) above),
(vii.)
a statement that fees and expenses are
only one of several factors that
participants should consider when
making investment decisions, and
B. General plan administrative expense disclosure
includes:
1) An explanation of any fees and expenses for
plan administrative services (e.g., legal,
accounting, recordkeeping) that may be
charged to the plan, to the extent such fees
are not already included in other
investment-related fees.
2) The basis on which such charges are
allocated to each participant’s account.
C. Individual participant account expense
disclosure requires:
An explanation of any fees and expenses that
may be charged to a participant’s individual
account for individual participant-based (rather
than plan-based) services and that are not
reflected in the total annual operating expenses
of any designated investment alternative. These
may include processing fees for loans or
qualified domestic relations orders, fees for
investment advice, sales charges, redemption or
transfer fees, and similar expenses.
II. Investment-Related Information for Each
Designated Investment Alternative
The plan administrator (or its designee) must
provide the following information to each
participant for each designated investment
alternative under the plan, on or before the date on
which the participant can first direct his or her
investments and at least annually thereafter (items in
italics are new requirements for 404(c) Plans):
A. The name of the designated investment
alternative.
B. The type or category of the investment (e.g.,
money market fund, balanced fund, large-cap
fund, etc.).
5
The benchmark index cannot be administered by an affiliate
of the investment issuer, its investment adviser, or a principal
underwriter, unless the index is widely recognized and used.
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Investment Management/Employee Benefits
ERISA Fiduciary Alert
(viii.) a statement that the cumulative effect of
fees and expenses can substantially
reduce the growth of a participant’s
retirement account and that participants
can visit the website of the DOL’s
Employee Benefit Security
Administration for an example
demonstrating the long-term effect of
fees and expenses.
information regarding the designated
investment alternative:6
D. If the designated investment alternative’s return
is fixed or stated for the term of the investment
(and for this purpose, a stable value fund is not
fixed):
(i.)
the fixed or stated annual rate of return,
(ii.)
the term of the investment,
(iii.)
the amount and description of any
shareholder-type fee (as described
above), and
(iv.)
a description of any restriction or
limitation that may be applicable to a
purchase, transfer, or withdrawal of the
investment in whole or in part.
If the issuer of the designated investment
alternative reserves the right to prospectively
adjust the fixed or stated rate during the term of
the contract, the plan administrator must
provide the following additional information:
(i.)
the current rate of return,
(ii.)
the minimum guaranteed rate (if any),
(iii.)
a statement that the issuer may
prospectively adjust the rate of return,
and
(iv.)
how to obtain (e.g., by phone or website)
the most recent rate of return.
(i.)
the name of its issuer,
(ii.)
its objectives or goals,
(iii.)
its principal strategies (including a
general description of the types of assets
held) and principal risks,
(iv.)
its portfolio turnover rate,
(v.)
its performance data updated at least on
a quarterly basis, and
(vi.)
its fee and expense information.
If the designated investment alternative has a
fixed return for the term of the investment, the
website may exclude information about the
alternative’s principal strategies and principal
risks and its portfolio turnover rate.
F. A glossary of terms to assist participants in
understanding the designated investment
alternatives, or a website address that provides
access to such a glossary.
G. If the designated investment alternative is
designed to invest in, or primarily in, qualifying
employer securities (an “employer stock
fund”):7
(i.)
The information provided pursuant to
the website described in (E) above:
(A) may exclude principal strategies
and risks and must provide an
explanation of the importance of a
well-balanced and diversified
investment portfolio,
6
E. An internet website address that is sufficiently
specific to provide access to the following
The information in (ii), (iii), and (iv) is to be provided in a
manner consistent with Securities and Exchange Commission
Form N-1A or N-3, as appropriate.
7
Distinctions regarding the application of certain definitions
under the Participant Disclosure Rule also apply to employer
stock funds.
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Investment Management/Employee Benefits
ERISA Fiduciary Alert
(B) may exclude portfolio turnover rate,
and
(C) may exclude fee and expense
information, unless the employer
stock fund is a fund with respect to
which participants acquire units of
participation, rather than actual
shares, in exchange for their
investments.
(ii.)
The plan administrator does not need to
provide the following disclosures, unless
the employer stock fund is a fund with
respect to which participants acquire
units of participation rather than actual
shares:
(A) total annual operating expenses
expressed as a percentage, and
(B) total annual operating expenses
expressed as a dollar amount per
$1,000 invested.
H. If the designated investment alternative is an
“annuity option,” (i.e., part of a contract, fund
or product that permits participants to allocate
contributions toward the future purchase of a
stream of retirement income payments
guaranteed by an insurance company), in lieu of
the information listed in (A) through (E) above,
the plan administrator must provide:
(i.)
the name of the contract, fund, or
product,
(ii.)
the option’s objectives or goals,
(iii.)
the benefits and factors that determine
the price of the guaranteed income
payments (e.g., age, interest rates, or
form of distribution),
(iv.)
any limitation on the ability of a
participant to withdraw or transfer
amounts allocated to the option and any
related fees,
(v.)
any fees that will reduce the value of
amounts allocated by participants to the
option, such as surrender charges,
(vi.)
a statement that guarantees of an
insurance company are subject to its
long-term financial strength and claimspaying ability, and
(vii.)
a website address that is sufficiently
specific to provide access to the
information in (i) – (vi) and other
specified information.
Use of Annual Disclosure
Once the plan administrator has satisfied its initial
and annual disclosure obligations for existing
participants, it may satisfy its initial disclosure
obligations for any newly eligible employee, with
regard to plan-related information, by furnishing the
new participant with the most recent annual
disclosure and any updates previously furnished to
existing participants. For purposes of the
Participant Disclosure Rule, “annual” disclosure
means at least once in any twelve-month period,
without regard to the actual plan year.
Quarterly Disclosures
In addition to the annual disclosures, at least
quarterly (i.e., once in any three-month period
without regard to the actual plan year), the plan
administrator must provide each participant with a
statement that includes:
(1) The actual dollar amount charged to the
participant’s account during the preceding
quarter for plan-level administrative services
and for individual services with respect to the
account.
(2) A general description of the services to which
the charges relate.
(3) If applicable, an explanation that some of the
plan’s administrative expenses were paid from
the total annual operating expenses of one or
more of the plan’s designated investment
alternatives (e.g., through revenue sharing
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Investment Management/Employee Benefits
ERISA Fiduciary Alert
arrangements, Rule 12b-1 fees, or sub-transfer
agent fees).
Additional Disclosures on Request
The plan administrator must provide a participant
with the following information upon request:
(1) Copies of prospectuses (or any short-form or
summary prospectus whose form has been
approved by the SEC) or any similar documents.
(2) Copies of financial statements or reports, such
as statements of additional information or
shareholder reports, and any other similar
materials related to the plan’s designated
investment alternatives, if such materials are
provided to the plan.
(3) A statement of the value of a share or unit of an
investment, and the date of such valuation.
(4) A list of the assets comprising the portfolio of
each designated investment alternative which
constitute plan assets and the value of each such
asset (or the proportion of the investment which
it comprises).
The plan administrator must also provide each
participant any materials provided to the plan related
to voting, tender, and similar rights, to the extent
those rights are passed through to the participant.
Presentation of Disclosures
The DOL included in the Participant Disclosure
Rule a “Model Comparative Chart,” which is
designed to facilitate comparison of the plan’s
investment options. The investment-related
information described in category II above should be
disclosed in that type of chart or similar format and
written in a manner calculated to be understood by
the average participant.
The plan administrator should include with the chart:
its (or its designee’s) name, address, and telephone
number; a statement directing participants to the
listed websites for additional investment-related
information (including more current performance
information); and instructions on how to obtain, free
of charge, paper copies of the information required
by the Participant Disclosure Rule to be made
available on a website (see II.E above). The plan
administrator may include any additional
information that it deems appropriate for
comparative purposes, as long as the information is
accurate and not misleading.
The annual disclosures, except for the specified
investment-related information, may be provided as
part of the plan’s summary plan description or as
part of a pension benefit statement, if such
disclosures are furnished at least annually. The
quarterly disclosures may also be included as part of
a pension benefit statement.
Fees and expenses may be expressed in terms of a
monetary amount, formula, percentage of assets, or
per capita charge, unless otherwise explicitly
provided by the Participant Disclosure Rule (such as
for the specific dollar amounts required to be
disclosed for individual and administrative services
charged to particular accounts).
Plan administrators are only required to provide
information for the investment alternatives
specifically selected to be part of the plan – and are
not required to include information related to
investment options through “brokerage windows”
that allow participants to select beyond those
designated alternatives.
The DOL has currently reserved for further
consideration the exact “manner of furnishing”
required disclosures. The Participant Disclosure
Rule as initially proposed would have allowed the
required disclosures to be furnished in any manner
consistent with the requirements of the DOL’s
general disclosure rules, including the rules
governing electronic disclosure. A number of
commenters recommended broadening the
permissible forms of electronic disclosure, while
others cautioned against it. The DOL anticipates
resolving this issue before the compliance date of
the Participant Disclosure Rule.
Transitional Rules
No later than 60 days after the Participant
Disclosure Rule becomes applicable (as stated
above, the rule applies to plan years beginning on or
after November 1, 2011), plan administrators must
provide individuals currently participating in
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Investment Management/Employee Benefits
ERISA Fiduciary Alert
covered plans with all of the “initial” disclosures
required by the Participant Disclosure Rule.
For plan years beginning before October 1, 2021, if
a plan administrator reasonably determines that it
does not have the information on expenses
attributable to the plan that is necessary to calculate
5-year and 10-year average annual total returns for a
designated investment alternative other than a
mutual fund (or other registered investment
company), a plan administrator can use a reasonable
estimate of expenses or the most recently reported
total annual operating expenses as a substitute. If
the plan administrator uses a substitute in this
fashion, it must inform participants of the basis on
which the returns were determined.
ERISA Section 404(c)
As noted above, the DOL also amended its
regulation under Section 404(c) of ERISA (which
provides relief to fiduciaries for participants’
investment decisions in plans complying with that
section). The amendment conforms the disclosure
requirements in that regulation to the disclosure
requirements in the Participant Disclosure Rule.
Administrators of 404(c) Plans and service providers
to such plans should note that the Participant
Disclosure Rule makes significant changes to the
existing DOL 404(c) regulation, as detailed in the
discussion above.
*
*
*
October 2010
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Investment Management/Employee Benefits
ERISA Fiduciary Alert
Please contact any member of the ERISA Fiduciary
Group listed below if you have further questions.
Catherine S. Bardsley
catherine.bardsley@klgates.com
202-778-9289
Lee W. Movius
lee.movius@klgates.com
704-331-7435
Mark J. Duggan
mark.duggan@klgates.com
617-261-3156
John J. Nestico
john.nestico@klgates.com
704-331-7529
Michael A. Hart
michael.hart@klgates.com
412-355-6211
David E. Pickle
david.pickle@klgates.com
202-778-9887
Marcia C. Kelson
marcia.kelson@klgates.com
412-355-8229
William A. Schmidt
william.schmidt@klgates.com
202-778-9373
Douglas M. Love
doug.love@klgates.com
206-370-7592
Charles R. Smith
charles.smith@kgates.com
412-355-6536
Norman S. Milks
norm.milks@klgates.com
206-370-7601
William P. Wade
william.wade@klgates.com
310-552-5071
David E. Morse
david.morse@klgates.com
212-536-3998
Kristina M. Zanotti
kristina.zanotti@klgates.com
202-778-9171
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K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous
GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
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maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in
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entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2010 K&L Gates LLP. All Rights Reserved.
October 2010
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