On May 7, 2012, the Department of Labor released Field Assistance Bulletin 2012-02, providing additional guidance with respect to DOL’s participant-level fee disclosure regulation. We have provided a detailed outline of the fee disclosure regulations (provider-to-sponsor and participant-level) and a detailed discussion of the participant-level regulation.
The FAB, which is in Q&A form, addresses a variety of issues. Some of the new guidance will be relevant to most sponsors, some will be relevant to only a few. Some of the Q&As simply clarify how a particular rule works in a particular situation; others clarify how a rule is generally to be interpreted; and others provide detailed guidance where the regulation did not.
With respect to the latter category, we would especially draw attention to the guidance on the treatment of brokerage windows, multi-fund platforms and window-only plans. To a significant extent this guidance represents articulation of new rules for the treatment of these arrangements, and sponsors maintaining such arrangements will want to consider them closely.
Given the wide array of issues covered in the FAB, it’s impossible to summarize it briefly or, for that matter, to prioritize the different areas treated. In this article we review the FAB in detail, following (more or less) the order of the FAB Q&As, and focusing on those issues relevant to corporate plan sponsors.
Investment-related disclosure rules in the participant level disclosure regulation generally apply to plans that provide for participant-directed investments. A plan that has both participant-directed and trustee-directed investments must comply with these rules but is not required to provide the investment-related information for trustee-directed investments.
Plan-related disclosure — naming and identification of designated investment alternatives
Where plan-related and investment-related information are provided in a single document, rules requiring the identification and naming of designated investment alternatives do not apply.
Treatment of “Designated Investment Managers”
The regulation requires that any designated investment manager be identified. The FAB states:
A designated investment manager (“DIM”) is [an ERISA] section 3(38) investment manager [section 3(38) generally limits investment managers to registered advisors, banks and insurance companies] that is designated by a plan fiduciary and made available to participants and beneficiaries to manage all or a portion of the assets held in, or contributed to, their individual accounts. When participants appoint a DIM to manage all or a portion of their individual accounts, the DIM becomes responsible for investing their accounts on a participant-by-participant basis. The regulation does not impose any limitations on the investment alternatives that a DIM may use for investing participants’ and beneficiaries’ accounts. However, a plan may impose limitations by its terms or in its agreement with the DIM (e.g., the DIM may only invest in a plan’s designated investment alternatives).
As a general matter, DIMs are treated like brokerage windows. That is, benchmark and other data required for “designated investment alternatives” does not have to be provided for DIMs. With respect to DIMs, however, the plan administrator:
[M]ust identify the designated investment manager, provide plan-level information regarding fees associated with the service, and provide participants and beneficiaries with a statement, at least quarterly, of the dollar amount of fees and expenses that actually were charged against their individual accounts, along with a description of the services to which the charges relate. Further, a plan fiduciary will be responsible for the prudent selection and monitoring of the designated investment manager ….
Administrative expenses — how much detail?
The amount of detail provided with respect to fees and expenses for general plan administrative services will depend on the specific facts and circumstances. “[W]hen fees for a given service are known at the time of the disclosure, the explanation must clearly identify the service (e.g., recordkeeping), the cost of the services (e.g., 0.12% of the participant’s account balance or $25 per participant), and the plan’s allocation method (e.g., pro rata). … [W]hen services, fees, or both are not known at the time of the disclosure, the explanation … must reasonably take into account the known facts and circumstances.” DOL provides an example of disclosure, where the plan expects to incur legal expenses but does not know the amount: “If the plan incurs any legal expenses, such expenses will be paid from the plan’s assets and deducted from individual plan accounts on a pro-rata basis.”
Revenue sharing — what must be disclosed?
The requirement that, where applicable, the plan administrator state 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” (that is, paid through revenue sharing) does not require stating how much revenue sharing there was or which funds paid it.
Apparently, some individuals have interpreted the revenue sharing disclosure rule as applying “only if the plan allocates some fees or expenses to individuals’ accounts. Under this interpretation, if all administrative expenses are paid from such revenue sharing and there are no actual charges to individual plan accounts, the explanation is not required.” DOL has rejected this interpretation. If revenue sharing is used to pay administrative fees, the revenue sharing disclosure must be provided.
Revenue sharing — how much detail?
DOL then applies the foregoing principles to a revenue sharing arrangement in which the plan agrees to pay a monthly recordkeeping fee of 2 basis points of plan assets that in some, but not all, months is offset by revenue sharing. Under DOL’s approach, as articulated in the FAB, the plan administrator must disclose, in effect, what it does know. Here is DOL’s proposed disclosure in this circumstance: “The plan incurs monthly recordkeeping expenses of up to 0.02% of the plan’s assets. These expenses typically will be deducted from your account on a pro rata basis. However, these monthly expenses may be paid, in whole or in part, from revenue sharing payments that the plan receives from plan investment options. In the past, these payments have completely paid for these recordkeeping expenses in some months. If revenue sharing payments are received, the plan will pay less than 0.02% of the plan’s assets per month, and only those expenses not offset by any revenue sharing payments will be deducted from your account.”
(Non)disclosure where are fees are paid by the sponsor
Where administrative expenses are paid out of plan forfeitures or (where forfeitures are not sufficient) directly by the employer, these administrative expenses do not have to be disclosed.
Where administrative expenses are paid by liquidating fund shares from participants’ accounts, these expenses must be disclosed; they may not be treated as if they were simply part of the fund’s operating expenses (as would, in effect, be the case in a revenue sharing arrangement).
The FAB gives significant additional guidance as to required disclosures with respect to brokerage windows:
First, a plan administrator must provide a general description of any such … arrangement. … Whether a particular description is satisfactory will depend on the facts and circumstances …. At a minimum, however, this description must provide sufficient information to enable participants … to understand how the … arrangement works (e.g., how and to whom to give investment instructions; account balance requirements, if any; restrictions or limitations on trading, if any; how the … arrangement differs from the plan’s designated investment alternatives) and whom to contact with questions.
Second, a plan administrator also must provide an explanation of any fees and expenses that may be charged against the individual account … on an individual, rather than on a plan-wide, basis. This would include: (1) any fee or expense necessary for the participant … to start [or stop] such [an] … arrangement …; (2) any ongoing fee … necessary for the participant to maintain access to the window, account, or arrangement, including inactivity fees and minimum balance fees; and (3) any commissions or fees (e.g., per trade fee) charged in connection with the purchase or sale of a security, including front or back end sales loads if known; but would not include any fees or expenses of the investment selected by the participant or beneficiary (e.g., Rule 12b-1 or similar fees reflected in the investment’s total annual operating expenses). The Department understands that in some circumstances the specific amount of certain fees associated with the purchase or sale of a security through a window, account, or arrangement, such as front end sales loads for open-end management investment companies registered under the Investment Company Act of 1940, may vary across investments available through the window or may not be known by the plan administrator or provider of the … arrangement in advance of the purchase or sale of the security by a participant or beneficiary. In recognition of the foregoing, a general statement that such fees exist and that they may be charged against the individual account of a purchasing or selling participant or beneficiary, and directions as to how the participant can obtain information about such fees in connection with any particular investment, ordinarily will satisfy the [relevant] requirements of …the regulation. Further, the statement should advise participants and beneficiaries to ask the provider of the … arrangement about any fees, including any undisclosed fees, associated with the purchase or sale of a particular security through [an] … arrangement, before purchasing or selling such security.
Third, a plan administrator also must provide participants … with a statement of the dollar amount of fees and expenses that actually were charged during the preceding quarter against their individual accounts in connection with any such … arrangement. … A statement of these fees must include a description of the services to which the charge relates. … The description of the services must clearly explain the charges (e.g., $19.99 brokerage trades, $25.00 brokerage account minimum balance fee, $13.00 brokerage account wire transfer fee, $44.00 front end sales load).
Window-related disclosures must be provided to all participants, not just those who use the window.
Investment-related disclosures — closed funds
A plan administrator must provide investment-related disclosures required even for a designated investment alternative that is closed to new money.
Benchmarking balanced funds
Benchmark disclosures with respect to a balanced fund may use the fund’s target allocation (e.g., 50% stocks, 50% bonds) “if the target is representative of the actual holdings of the designated investment alternative over a reasonable period of time.”
Alternative ways to satisfy the Web site address requirement
The participant-level disclosure rule requires that the plan administrator provide a “Web site address” where certain investment-related information is available. This rule may be problematic for non-mutual fund investment alternatives (e.g., collective trusts and separate accounts). According to the FAB:
Plan administrators have multiple ways to satisfy their obligation to provide a Web site address …. For example, a plan administrator may contract with a third party administrator or recordkeeper to establish and maintain the Web site for the plan. Alternatively, a plan administrator may use the existing Web site address of the employer who sponsors the plan to make available the required supplemental investment information. The plan administrator also may use Web site addresses provided by the issuers of the designated investment alternative(s) (e.g., the family of mutual funds comprising the plan’s investment platform) as long as this address is sufficiently specific to lead the participant to the required information.
The Web site “landing page” does not itself have to include all the required Web site information. This rule only requires that “the Web site address be sufficiently specific to lead the participant to supplemental investment-related information regarding designated investment alternatives.”
The FAB provides additional guidance as to the benchmark data that must be available on the Web site:
Performance data for a plan’s designated investment alternatives … must be included in the supplemental investment-related information available on the Web site, updated on at least a quarterly basis. …
For designated investment alternatives that do not have a fixed return, the Web site address must enable the participants … to obtain the average annual total return for 1-, 5-, and 10-calendar year periods (or for the life of the alternative, if shorter) ending on the date of the most recently completed calendar year (or more current information if required by applicable law).
For designated investment alternatives with a fixed or stated return over the term of the investment, a Web site address must be sufficiently specific to provide participants … access to the current fixed or stated rate of return and the term of the investment. …
Chart requirement — multiple charts
The participant-level disclosure regulation requires that the plan administrator provide investment-related information in the form of a “comparative chart.” With respect to the question of using multiple charts to satisfy this requirement, the FAB states that:
Plan administrators may furnish multiple comparative charts or documents that are supplied by the plan’s various service providers or investment issuers, provided all of the comparative charts or documents are furnished to participants and beneficiaries at the same time in a single mailing or transmission and the comparative charts or documents are designed to facilitate a comparison among designated investment alternatives available under the plan. However, as stated in the preamble, permitting individual investment issuers, or others, to separately distribute comparative documents reflecting their particular investment alternatives would not facilitate a comparison of the core investment information and therefore would not satisfy the plan administrator’s obligations ….
Updating the chart —
The regulation does not require plan administrators to furnish more than one comparative chart annually to participants and beneficiaries. However, fee and expense information must be made available on a Web site, … and information made available on the Web site must be accurate and updated as soon as reasonably possible following a change. … Further, under extraordinary circumstances, the duties of prudence and loyalty under section 404 of ERISA may require the plan administrator to inform participants and beneficiaries of important changes to investment-related information before the next comparative chart is required under the regulation.
The chart may use average annual total return information that is more recent than the end of the most recently completed calendar year, but the same ending date for a particular period ordinarily would have to be used for all designated investment alternatives under the plan, and the associated benchmark information would have to correspond to the same time period.
While the regulation’s “Model Comparative Chart” provides performance and benchmark information with respect to funds “since inception,” “since-inception” data does not have to be provided.
Collective trust “prospectuses”
With respect to designated investment alternatives that are registered under federal securities law, the plan administrator must furnish copies of prospectuses, or at its option, a short-form or summary prospectuses. “Similar documents are required for all other designated investment alternatives under the plan.” The FAB states:
Whether a document is “similar” to a prospectus, or a short-form or a summary prospectus, would depend on the particular facts and circumstances, including the type of designated investment alternative for which investment-related information must be disclosed. For example, in connection with a bank collective investment fund, a copy of the fund’s “written plan” …would satisfy [these] requirements …. Alternatively, similar to short-form or summary prospectuses, bank fund fact sheets ordinarily may be used to satisfy this disclosure requirement ….
Form of disclosure generally —
The FAB states:
While plan administrators have the discretion to furnish the required disclosures as stand-alone documents, they also have the discretion to furnish the required disclosures along with, or as part of, other documents. … Thus, for example, disclosures that must be made before the date on which a participant … can first direct his or her investments may be furnished as part of a new employee’s enrollment packet.
A model portfolio, made up of different combinations of the plan’s designated investment alternatives, ordinarily is not itself required to be treated as a designated investment alternative “if it is clearly presented to the participants … as merely a means of allocating account assets among specific designated investment alternatives.” Thus, a plan that provides, e.g., a target date fund (TDF) that is simply a mix of other designated investment alternatives under the plan, would not have to provide a separate disclosure with respect to the TDF itself. In this case, however, “the plan administrator also must clearly explain how [the model portfolio] differs from the plan’s designated investment alternatives.” (Note that this rule does not prohibit the plan administrator from providing, e.g., performance data with respect to the model portfolio.)
If, however, the participant gets “an equity security, unit participation, or similar interest in an entity [that is, in the “model portfolio”] that, itself, invests in some combination of the plan’s designated investment alternatives,” then that security, etc. would be a designated investment alternative. And “if a plan offers only model portfolios made up of investments not separately designated under the plan, each model would have to be treated as a designated investment alternative.”
Designated investment alternatives vs. platforms vs. windows
The FAB describes a new set of rules that will apply in the (not uncommon) situation in which “[a] plan offers an investment platform consisting of a large number of registered mutual funds of multiple fund families into which participants and beneficiaries may direct the investment of assets held in or contributed to their individual accounts.” Are all these mutual funds “designated investment alternatives,” with respect to which all of the detailed disclosure rules with respect to fees, performance, etc. apply? Are they simply part of a “brokerage window,” to which many of those rules do not apply? Or are they something else?
With respect to this situation the FAB states:
A platform consisting of multiple investment alternatives would not itself be a designated investment alternative. Whether the individual investment alternatives are designated investment alternatives depends on whether they are specifically identified as available under the plan. [I]t is the view of the Department that plan fiduciaries must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses and designated investment alternatives, to make informed decisions about the management of their individual accounts. Although the regulation does not specifically require that a plan have a particular number of designated investment alternatives, the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under section 404 of ERISA. … Unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives. Designating specific investment alternatives also enables participants and beneficiaries, who often lack sufficient resources to screen investment alternatives, to compare the cost and return information for the designated investment alternatives when they are selecting and evaluating alternatives for their accounts.
Further, plan fiduciaries have a general duty of prudence to monitor a plan’s investment menu. … If, through a brokerage window or similar arrangement, non-designated investment alternatives available under a plan are selected by significant numbers of participants and beneficiaries, an affirmative obligation arises on the part of the plan fiduciary to examine these alternatives and determine whether one or more such alternatives should be treated as designated for purposes of the regulation.
Pending further guidance in this area, when a platform holds more than 25 investment alternatives, the Department, as a matter of enforcement policy, will not require that all of the investment alternatives be treated, for purposes of this regulation, as designated investment alternatives if the plan administrator —
(1) makes the required disclosures for at least three of the investment alternatives on the platform that collectively meet the “broad range” requirements in the ERISA 404(c) regulation …; 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, in the case of a plan with more than 500 participants and beneficiaries, at least one percent of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.
This is, in effect, a new rule for the treatment of investment platforms and brokerage windows. Sponsors that provide multi-fund platforms or “window-only” plans should review its application to their plan with counsel.
Funds of funds
The FAB states that a fund of funds (whether registered or unregistered) must appropriately reflect both the fees of the underlying funds and the fees of the fund of funds.
Calculating operating expenses of unregistered funds
The regulation requires that both registered and unregistered designated investment alternatives calculate total annual operating expenses. In order to calculate these expenses, a net asset value must be calculated. Generally, and to provide symmetry with calculations for registered funds, “an unregistered designated investment alternative ordinarily would be in compliance with [this requirement] if it calculated its net asset value not less frequently than monthly in order to determine the alternative’s average net asset value for the year.”
In this regard, a trust that holds a registered fund, where participants hold interests in the trust, not the underlying fund, would be an unregistered investment alternative. And, with respect to a stable value fund, expenses related to an insurance contract that is designed to smooth the rate of return of the alternative’s underlying fixed income investments must be included in the total annual operating expenses of the stable value fund.
The FAB comes at a time when, as DOL states in the FAB, many providers and sponsors have already begun implementing changes to recordkeeping, information management, and communication systems and “that, at this point in time, it may be difficult or costly for plan administrators and service providers to make further system adjustments in advance of [applicable deadlines].”
DOL apparently is not planning on further extending current deadlines. Those are: July 1, 2012 (for provider-sponsor disclosure); for a calendar year plan, August 30, 2012 (for participant-level disclosure), with the first quarterly statement disclosure due November 14, 2012.
The FAB does provide the following transition “relief:”
[I]n light of the significance of these required disclosures and the already extended delay in the implementation of the regulations, the Department does not believe further broad-based extensions are appropriate. For enforcement purposes, however, the Department will take into account whether covered service providers and plan administrators have acted in good faith based on a reasonable interpretation of the new regulations. If they have acted in good faith based on a reasonable interpretation of the new regulations, enforcement actions generally would be unnecessary if the covered service provider or plan administrator, as applicable, also establishes a plan for complying with the requirements of this Bulletin in future disclosures.
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Different areas of this guidance will be significant for different sponsors. Some of this guidance may provide helpful clarification; some may create new issues a sponsor must address. The guidance is generally heavy on detail. Where an area of guidance may affect a sponsor, advice of counsel is likely to be critical.