The Department of Labor is focusing more on reporting, disclosure and transparency for 401(k) plans.

1. WhatPlanFiduciaries
Can Expect With the 404(a)(5) Disclosures

2. January 2012
The Department of Labor (DoL) has focused on reporting, disclosure and transparency as critical
components in the operation of account-type defined contribution plans, particularly 401(k) plans. After
watching three decades of market shift from traditional defined benefit plans to participant direction-
of-investment 401(k) plans, the DoL has promulgated a series of rules and regulations aimed at its
three-legged approach to assisting its Employee Benefits Security Administration (EBSA) in enforcing
ERISA, in assisting plan fiduciaries in making proper investment structure decisions, and in assisting
participants in directing their investments. This paper focuses on the last leg, assisting participants
through disclosure, and what those working in the industry might expect when participant disclosures are
made. It concludes with suggestions on how to address the issues that might arise.
The fiduciary responsibility provisions of Title I of ERISA protect plans and participants by imposing special
duties and obligations on plan fiduciaries. Fiduciaries must act prudently and exclusively in the best
interest of the plan, its participants, and their beneficiaries1
.
The DoL, through regulations2
, addresses the perceived need for the responsible plan fiduciary to disclose
relevant cost and service information directly to the participants with the expectation that participants in
self-directed plans will have the information needed to make better investment decisions and to prevent
the fiduciary from failing to act in the best interest of the participants and their beneficiaries. There may be
both intended and unintended consequences when these disclosures are made.
Final Fiduciary Disclosure Regulations Governing Participant-Directed Plans
On October 14, 2010, the DoL released its final regulations on fiduciary requirements for disclosure to
participants and beneficiaries participating in participant-directed plans. The relevant components of these
regulations are:
The Fiduciary Burden. The basic approach of the regulations is recognition that the investment of plan
assets is a fiduciary act subject to ERISA’s prudent person standard and the requirement that fiduciaries act
solely in the interest of participants and their beneficiaries. The regulation provides that when a fiduciary
allocates investment authority to a participant or beneficiary, the plan administrator must take steps to
ensure that the participants and beneficiaries, on a regular and periodic basis, are made aware of their
rights and responsibilities through the provision of sufficient information so that they can make informed
decisions. The information that must be provided includes information regarding plan fees and expenses as
well as information regarding the designated investment alternatives available under the plan.
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3. Covered Plans. Plans subject to these requirements include all participant-directed individual account
plans other than IRAs, simplified employee pension plans (SEPs), and SIMPLE retirement accounts under
Code Sec. 408(p).
Compliance. The obligation to disclose is satisfied by disclosure of both plan-related information and
investment-related information. However, a plan administrator is not liable for the completeness and
accuracy of information used to satisfy these requirements when the plan administrator reasonably and
in good faith relies on information received from or provided by a plan service provider or the issuer of a
designated investment alternative.
Plan-Related Information. The plan-related information that must be disclosed is divided into three
categories: (a) general plan information, (b) administrative expenses information, and (c) individual
expenses information.
Timing. Plan-related information must be provided on or before the date on which a participant or benefi-
ciary can first direct the investment of his/her account and at least annually thereafter. If there is a change
in any of this information, each participant and beneficiary must be furnished a description of the change
at least 30 days, but not more than 90 days, in advance of the effective date of the change, unless the in-
ability to provide the advance notice is due to events that were unforeseeable or circumstances beyond the
control of the plan administrator. In case of the latter, notice of the change must be furnished as soon as
reasonably practicable. Plan-related information must also be provided on request.
General Plan Information. General Plan Information consists of basic information regarding the structure
and mechanics of the plan including: :
(1) an explanation of the circumstances under which participants and beneficiaries
may give investment instructions;
(2) an explanation of any specified limitations on such instructions, including any
restrictions on transfer to or from a designated investment alternative;
(3) a description of or reference to plan provisions relating to the exercise of voting,
tender, and similar rights appurtenant to an investment in a designated investment
alternative, as well as any restrictions on these rights;
(4) an identification of any designated investment alternatives offered under the plan;
(5) an identification of any designated investment managers; and
(6) a description of any brokerage windows, self-directed accounts, or similar plan
arrangements that enable participants and beneficiaries to select investments
beyond those designated by the plan.
Administrative Expenses Information. This category requires an explanation of any fees and expenses for
plan administrative services (for example, legal, accounting recordkeeping), which may be charged against
the participants’ accounts and not reflected in the total annual operating expenses of any designated
investment alternative, as well as the basis on which these changes will be allocated (for example, pro rata,
per capita) to, or affect the balance of, each individual account.
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4. In addition, at least quarterly, the plan administrator must provide a statement that includes:
(a) the dollar amount of the fees and expenses actually charged during
the preceding quarter to the participant’s or beneficiary’s account
for administrative services, (whether by liquidating shares or deducting
dollars) and
(b) a description of the services to which the charges relate (e.g., plan
administration, including recordkeeping, legal, and account services) and
(c) if applicable, an explanation that, in addition to the fees and expenses disclosed,
some of the plan’s administrative expenses for the preceding quarter were paid
from the total annual operating expenses of one or more of the plan’s designated
investment alternatives (e.g., through revenue sharing arrangements, Rule 12b-1 fees,
and sub-transfer agent fees).
Individual Expense Information. This category requires an explanation of any fees and expenses that may
be charged against the account of an individual, rather than on a plan-wide basis (e.g., fees attendant to
processing plan loans or qualified domestic relations orders, fees for investment advice, fees for brokerage
windows, commissions, front or back-end loads or sales charges, redemption fees, transfer fees and similar
expenses, and optional rider charges in annuity contracts) and which are not reflected in the total annual
operating expenses of any designated investment alternative. (Any change is subject to the same updated
disclosure requirement as discussed above).
In addition, the plan administrator must provide, at least quarterly, a statement that includes:
(a) the dollar amount actually charged during the preceding quarter to the
participant’s or beneficiary’s account for individual services, whether by
liquidating shares or deducting dollars, and
(b) a description of the services provided to the participant or beneficiary
for such amount (e.g., fees attendant to processing plan loans).
Investment-Related Information. This second category of information requires that the plan
administrator (or a person designated by the plan administrator to act on its behalf), provide several
subcategories of investment related information, based upon the latest information available to the plan,
including:
1. Identifying Information
(a) the name of the designated investment alternative; and
(b) the type or category of the investment (e.g., money market fund, balanced fund,
stocks and bonds, large-cap stock fund, employer stock fund, and employer securities).
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5. 2. Performance Data
The plan administrator must provide historical investment performance information, including 1, 5, and
10 year returns (or if shorter, the life of the investment) for each designated investment alternative. In
addition, there must be a statement indicating that an investment’s past performance is not necessarily
an indication of how the investment will perform in the future. In the case of designated investment
alternatives with respect to which the return is fixed for the term of the investment, both the fixed rate of
return and the term of the investment must be provided.
3. Benchmark Information
This requirement applies only to investments without a fixed rate of return. With respect to designated
investment alternatives where the return is not fixed and where the alternative is not administered by
an affiliate of the investment issuer, its investment adviser, or a principal underwriter, unless the index is
widely recognized and used, disclosure requires the name and returns of an appropriate broad-based
securities market index over the 1-, 5-, and 10- calendar year periods.
4. Fee and Expense Information
For designated investment alternatives without a fixed rate of return, the fiduciary must disclose the total
annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000
invested together with any shareholder-type fees or restrictions on the participant’s ability to purchase or
withdraw from the investment.
In the case of designated investment alternatives with respect to which the return is fixed for the term of
the investment, disclosure must be made of the amount and a description of any shareholder-type fees
together with 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.
Internet Web site Address. An Internet Web site address that is sufficiently specific to lead participants
and beneficiaries to supplemental information regarding the designated investment alternative must be
identified and include the name of the investment’s issuer or provider, the investment’s principal strategies
and attendant risks, the assets comprising the investment’s portfolio, the investment’s portfolio turnover,
the investment’s performance, and related fees and expenses and other information. Such Internet
Web site address must be properly maintained and provide access to the most recently-filed fund
prospectuses and other compliance documents.
Glossary. In addition, the regulations require the provision of a glossary to assist participants in
understanding the investment alternatives, or an Internet Web site address that is sufficiently specific to
provide access to such a glossary along with a general explanation of the purpose of the address.
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6. Comparative Format Requirement for Investment-Related Information. The regulations contain rules
governing the manner in which the required investment-related information must be provided. The
information must be provided in a chart or similar format that is designed to facilitate a comparison of the
information. The regulations include a Model Comparative Chart in the appendix to the regulations. It is
available for plans to use.
Effective Date. Although the final participant-level disclosure regulation was effective on December 20,
2010, its requirements begin to apply for plan years beginning on or after November 1, 2011. The DoL has
extended the effective date to conform to the time period for extension of the covered service provider
disclosures under regulations interpreting ERISA § 408(b)(2). That deadline has been extended to July 1,
2012, according to an update issued by the DoL on February 2, 2012. The participant disclosures are due to
be made no later than sixty days thereafter or August 30, 2012.
Electronic Disclosure
Recognizing that it was not possible to promulgate final regulations with respect to electronic disclosure
of participant fee and service information by the effective date described above, the DoL promulgated a
stop-gap “policy” on electronic disclosure of the information3
.
Required disclosures that are included in a pension benefit statement in accordance with ERISA
Regulations may be furnished in the same manner that the other information included in the same pension
benefit statement is furnished
4
. The DoL provides this example:
If the pension benefit statement information is furnished through a secure
continuous access Web site in accordance with the guidance provided under
FAB 2006-03
5
, then the information included as part of the pension benefit
statement in accordance with section 2550.404a-5(e)(1) or (e)(2) may also
be furnished electronically in the same manner.
Required disclosures that are not included in a pension benefit statement in accordance with ERISA
regulations may not be furnished electronically under the guidance provided by FAB 2006-03. However,
the plan administrator may use a safe harbor
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to furnish the disclosures through electronic media.
Alternatively, pending further guidance, a plan administrator may furnish such disclosures through
electronic media in accordance with a number of conditions:
Voluntary Provision of Email Address. Participants and beneficiaries entitled to receive information
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must voluntarily provide the employer, plan sponsor, or plan administrator (or its designee) with an email
address for the purpose of receiving participant disclosures. The email address must be provided
voluntarily in response to a request accompanied by an Initial Notice, as described below. If a participant is
required to provide an email address electronically in order to access a secure continuous access Web site
housing the required disclosure, the provision of the email address is considered voluntary where an Initial
Notice is provided.
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7. Initial Notice. The Initial Notice must be clear and conspicuous, provided contemporaneously and in the
same medium as the request for the email address and contain the following information:
4 A statement that providing an email address for the receipt of participant disclosures is entirely
voluntary, and that as the result of providing the email address, the required disclosures will be made
electronically.
4 Identification or a brief description of the disclosure information that will be furnished electronically and
how it can be accessed by participants and beneficiaries.
4 A statement that the participant or beneficiary has the right to request and obtain, free of charge, a
paper copy of any of the participant disclosure information provided electronically and an explanation of
how to exercise that right.
4 A statement that the participant or beneficiary has the right, at any time, to opt out of receiving the
participant disclosure information electronically and an explanation of how to exercise that right.
4 An explanation of the procedure for updating the participant’s or beneficiary’s email address.
Annual Notice. Commencing with the year beginning after the year that the participant or beneficiary
voluntarily provided his or her email address and annually thereafter, the plan administrator shall furnish an
Annual Notice to each such participant or beneficiary. “Year” means a calendar year, plan year, or any other
12-month period selected by the plan administrator.
The Annual Notice must contain the information set out in the second through fifth bullet points, above.
The Annual Notice must be furnished on paper. Alternatively, the plan may furnish the Annual Notice
electronically by sending it to the email address on file for the participant or beneficiary if there is evidence
that the participant or beneficiary interacted electronically with the plan after the date the Annual Notice
for the preceding year was furnished (or in the case of the first Annual Notice, after the date the Initial
Notice was furnished). The Technical Release provides examples of electronic interaction to include, but
not be limited to: the participant or beneficiary updating, resubmitting, or confirming his or her email
address to the plan; the participant or beneficiary sending an electronic message to the plan; logging onto
a secure continuous access Web site housing plan information; or the receipt and opening of an electronic
message sent by the plan to the participant or beneficiary.
Delivery. The plan administrator takes appropriate and necessary measures reasonably calculated to
ensure that the electronic delivery system results in actual receipt of transmitted information (e.g., using
return receipt or notice of undelivered electronic mail features, conducting periodic reviews or surveys to
confirm receipt of transmitted information, etc.).
Confidentiality. The plan administrator takes appropriate and necessary measures reasonably calculated
to ensure that the electronic delivery system protects the confidentiality of personal information.
Calculated To Be Understood. Notices furnished to participants and beneficiaries must be written in a
manner calculated to be understood by the average plan participant.
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8. Special Transition Provision. With respect to email addresses of participants and beneficiaries that are on
file with the employer, plan sponsor or plan administrator (or its designee - the “Transition Group”), the
email address requirements described above are deemed to be satisfied if a Transition Group Initial Notice,
described below, is furnished as follows:
4 The Transition Group Initial Notice must contain the information set out in all but the first bullet point
under Initial Notice above;
4 The Transition Group Initial Notice must be furnished no earlier than 90 days nor later than 30 days prior
to the date the initial disclosures are provided to the Transition Group;
4 The Transition Group Initial Notice must be furnished on paper
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. Alternatively, the plan may furnish the
Transition Group Initial Notice electronically by sending it to an email address on file for a participant
or beneficiary if there is evidence of electronic interaction with the plan, as described in Annual Notice
above, during the 12-month period preceding the date the Transition Group Initial Notice is furnished.
This Special Transition Provision is not available for an email address established or assigned by the
employer, plan sponsor or their designee unless there is evidence that the email address was used by the
participant or beneficiary for plan purposes during the 12-month period preceding the date the Transition
Group Initial Notice is furnished.
DoL Technical Release 2011-03R (Dec. 8, 2011)
In an effort to clarify the electronic disclosure provisions, the DoL recently issued a Technical Release that
does two things: (1) it states that the alternative electronic disclosure method can be used to provide
disclosures through a continuous access website, and (2) it clarifies that investment-related information
required by the disclosure rules may be furnished “as part of, or along with” pension benefit statements, but
those disclosures may not rely on FAB 2006-03. Electronic disclosures of investment-related information
will be made in accordance with the interim alternative method or the DoL’s general safe harbor (which re-
quires a participant’s affirmative consent unless a computer or other electronic system is an “integral part”
of a participant’s employment duties as described above). Unfortunately, these clarifications do not extend
the FAB 2006-03 provisions to all fee and expense information that is required to be disclosed. It remains
important to understand the more restrictive rules for electronic disclosure of participant information.
Consequences to Expect and Some Possible Surprises
Participant Reaction. No one knows for sure how participants will react when this information is
provided to them. It will be the first time for most investment-directed plan participants to have the fee
information provided to them in a direct and meaningful way. Interestingly, the rules have permitted
fiduciaries to “delegate” the investment decisions
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over several trillion dollars to participants who are
mostly financially illiterate and who are more inclined to dismiss financial information provided to them
than to analyze it. Some in the industry believe that this “illiteracy inertia” will persist even in the face of
participant disclosure, but others are no so certain.
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9. Some participants may not have appreciated the extent of the fees being charged or assessed against their
accounts. Some may have assumed that investing through an employer sponsored 401(k) plan was “free”.
Unfortunately, it is possible that highlighting the fees might result in numerous questions and even
litigation. An important ERISA principle is that a fiduciary may not mislead a participant. Doing so in most
circumstances is a breach of fiduciary duty. Concealment is tantamount to misrepresentation in many of
these same circumstances. The contention that a participant was deceived and that only now is the “whole
truth” being disclosed might spawn some lawsuits whether or not the approach is legally valid. An advisor
and consultant can assist the plan sponsor in being prepared for this possible reaction.
It is logical to assume that many participants, once presented with this information, will have a lot of
questions. Small business plan fiduciaries must be prepared to answer their questions. In large plan
environments, HR departments and those authorized to speak for the plan fiduciary must be prepared
to answer questions about fees and services correctly and fully. This will likely require some planning in
advance of the effective date. It may require assistance from the plan’s third party administrator and the
plan’s financial advisor. It may require the assistance of counsel and communications consultants
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.
Small Business Owner Reaction. Possibly more troublesome than the reaction of some participants will
be the reaction of some small business owners. It is possible that many of them will see the true cost of
investment in their 401(k) plan for the first time. This cost is in addition to the administrative cost of
sponsoring the plan. Recognizing that they are effectively “converting” long term capital gain taxed at
a 15% federal rate to ordinary income taxed at a 35% federal rate (albeit in consideration for deferral of
income recognition), many small business owners may opt to invest personally outside the plan. That could
lead some of these business owners, facing increasing difficulties in making profits in a difficult economy, to
terminate their 401(k) plans. It will be important for all advisors and consultants to be wary of this prospect
and to take steps necessary to assure these business owners that maintaining their 401(k) plans is in their
best interest in both the short term and the long term.
Participant investment-directed plans assist plan sponsors in attracting and retaining a quality workforce.
They provide participants with the most beneficial and utilized mechanism available today for saving and
especially saving for retirement. If used properly by the business owner, the benefit of deferral will outpace
the economic consequences of the tax spread between ordinary income and capital gain. Advisors and
consultants are advised to anticipate this concern and to be able make certain that their small business
owner clients appreciate the power of the 401(k) and its benefit to their business.
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10. Trusted Partners with Trusted Solutions
As long-time consultative partners for the financial services industry, Broadridge provides timely,
in-demand products and services to meet plan fiduciary fee disclosure requirements. Our extensive
industry knowledge and scale uniquely qualify us as the preferred provider to help plan fiduciaries meet
regulatory requirements effectively and efficiently while enhancing the customer experience and drive
results. Our highly configurable, transparent solutions enables clients of any size to compile the most
up-to-date data, compose documents to client-specific brand and business rules, and make critical
information available in a timely, cost-effective manner. Our best-in-class data security and processing
standards are unmatched in the industry. We are committed to providing best-in-class security practices
and technology to safeguard our clients’ valuable information. From our ISO 9001/27001 certifications,
SSAE16/CICA 5970 Type II audits and Sarbanes-Oxley reviews to our extensive technology combined with
our comprehensive information security program, you can feel confident partnering with Broadridge.
About Broadridge
Broadridge is a technology services company focused on global capital markets. Broadridge is the market
leader enabling secure and accurate processing of information for communications and securities
transactions among issuers, investors and financial intermediaries. Broadridge builds the infrastructure
that underpins proxy services for over 90% of public companies and mutual funds in North America;
processes more than $4 trillion in fixed income and equity trades per day; and saves companies billions
annually through its technology solutions. For more information about Broadridge, please
visit www.broadridge.com.
Contributors
Timothy J. Slavin, Senior Vice President-Defined Contribution, Broadridge Financial Solutions, Inc.
Cele Bryan, Senior Account Executive, Broadridge Financial Solutions, Inc.
Sheldon H. Smith, Esq., Bryan Cave LLP
1
ERISA § 404. 2
29 CFR 2550.404a-5. 3
Technical Release 2011-03. 4
ERISA Regulation 2550.404a-5(e)(1) or (e)(2). 5
In FAB 2006-03, the DoL stated that the furnishing of
required pension benefit statement information in accordance with the safe harbor of 29 CFR 2520.104b-1(c) would constitute good faith compliance with disclosure
obligations. FAB 2006-03 also states that “[f]or purposes of section 105 [disclosure requirements], the Department, pending further guidance and review of the
provisions of section 2520.104b-1(c), will view the furnishing of pension benefit statements in accordance with [Treasury regulation] section 1.401(a)-21,(2) as good
faith compliance with the requirement to furnish benefit statements to participants and beneficiaries.” In addition, with respect to secure continuous access Web-
sites, FAB 2006-03 states: With regard to pension plans that provide participants continuous access to benefit statement information through one or more secure
Websites, the Department will view the availability of pension benefit statement information through such media as good faith compliance with the requirement
to furnish benefit statement information, provided that participants and beneficiaries have been furnished notification that explains the availability of the required
pension benefit statement information and how such information can be accessed by the participants and beneficiaries. In addition, the notification must apprise
participants and beneficiaries of their right to request and obtain, free of charge, a paper version of the pension benefit statement information required under
section 105 [disclosure requirements]. Such notification should be written in a manner calculated to be understood by the average plan participant, furnished in any
manner that a pension benefit statement could be furnished under this Bulletin, and furnished both in advance of the date on which a plan is required to furnish the
first pension benefit statement. 6
See, ERISA Regulation 2520.104b-1(c). 7
See, ERISA Regulation 2550.404a-5. 8
As provided in 29 CFR 2520.104b-1(b). 9
ERISA § 404(c).
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See www.bryancave.com for information on a package available to assist TPAs and financial advisors to help their clients address these concerns.
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