Retirement Plan Disclosure Deadline Looms

Date: May 3, 2012

Nonprofit organizations and associations may be feeling a little more loved by the custodians of their retirement plan assets and third party administrators lately, if “love” means how many communications you’re getting about the upcoming deadline for fee and investment disclosures. 

The deadline for retirement plan sponsors to issue the required information to participants is August 30, 2012.  At some point in the near future, individuals charged with responsibility for retirement plan communications should move this issue to the top of their inbox.  The disclosure requirements will require distributing a substantial amount of information and the penalties for failing to comply with the rules are meaningful.

Penalties for Compliance Failures

Failure to provide timely and appropriate fee disclosures to retirement plan participants and beneficiaries will result in a breach of fiduciary duty to those individuals.  Accordingly, the named “plan administrator” (typically a committee of employees or the organization’s or association’s officers – not the outside advisor to the plan) may have personal liability to the participants and beneficiaries of the retirement plan.  In addition, the Department of Labor is empowered to assess excise taxes on fiduciaries who breach their duties.  Failing to give timely and appropriate fee disclosure may also result in the loss of a defense to plan sponsors sued by participants who inappropriately select the investment choices for their accounts.

What Plans are Subject to the Disclosure Rules?

The disclosure rule applies to all retirement plans in which the participants can designate how their individual accounts will be invested.  Virtually all 401(k) plans and 403(b) plans allow participants to designate how their account balances will be invested. 

If you understand the philosophy behind the fee disclosure rules the rules will make more sense.

The U.S. Department of Labor - the government agency overseeing and enforcing the fee disclosure requirements - believes that participants can’t choose among the various investment options in their retirement plans unless they know the true cost of each investment.  Furthermore, participants should be aware of all expenses charged to their accounts.

To Whom Must Disclosure Be Made?

The disclosures must be made to anyone who has the right to designate the investment of accounts in a retirement plan.  Therefore, an organization’s or association’s current employees who have met the eligibility requirements for participation in the plan must receive the materials.  In addition, a former employee who continues to maintain an account balance in the plan must receive the information, as should the beneficiary of a deceased employee who continues to maintain an account, and the former spouse of a divorced participant to whom all or a portion of an employee’s account was assigned pursuant to a qualified domestic relations order. 

What Must Be Disclosed? 

The disclosures pertain to administrative expenses that may be charged to a participant’s account as well as individual expenses that may be paid from the account, for example, the fee to process a loan from the plan.  Investment results for the plan’s investment lineup must be set forth in a comparative chart, calculated to be understandable to the average plan participant.  The comparative chart must include performance results for one, five and ten years, the benchmark for the comparison, the total annual operating expense or expense ratio expressed as both a percentage and a dollar amount for each $1,000 invested, and investment transfer restrictions and fees.  Special disclosure rules may also apply for “target date” funds and model asset allocations. 

The disclosure should also include a website address that will enable the participants and beneficiaries to obtain detailed information regarding the investment alternatives (fund style, strategies, portfolio turnover, and performance data) and a glossary of terms to assist participants and beneficiaries with understanding the designated investment alternatives. 

Your plan advisor should understand all these requirements, do the necessary analysis and prepare the disclosure forms.  However, the named plan administrator is ultimately responsible for the accuracy of the disclosures.

When Must Disclosures Be Made?

If your plan operates on a calendar year, the first disclosure must be made to all current participants and beneficiaries by August 30, 2012.  This deadline also applies to plans with a plan year beginning between November 1, 2011 and July 1, 2012.  Disclosure to new participants or beneficiaries is due at the time of their enrollment in the plan or at the time of the establishment of an account in their name (for example, upon the entry of a qualified domestic relations order and segregation of the participant’s account for the ex-spouse).  Thereafter, annual and quarterly disclosures are required.

How is the Disclosure Delivered?

The disclosure is generally required to be made by paper mail or hand delivery of the information to participants.  Quarterly disclosure requirements may be satisfied via the quarterly benefit statements provided to account owners.  Electronic delivery is allowed provided a number of specific requirements are met, although the Department of Labor has stated that it is exploring alternatives to enable plan sponsors to utilize electronic disclosure more readily. 

What is the Responsibility of My Custodian/Third Party Administrator?

Service providers for retirement plans are also subject to new rules requiring the disclosure of information to the retirement plans they serve.  Essentially, disclosure of the compensation received by the service provider is required to be provided to the plan sponsors by July 1, 2012.  If the service provider refuses to provide the information, the plan sponsor is required to terminate its contract with the provider.

Important Takeaways

  • The plan sponsor is ultimately responsible for complying with the new disclosure rules.  Failure to comply with the disclosure requirements is a breach of the fiduciary duty owed to plan participants and beneficiaries. 
  • Reach out to your service provider now to ensure that you will be prepared to meet the disclosure obligations at the end of the summer.
  • Be prepared for questions from participants who will be receiving a large amount of information regarding their retirement plan, some of which may be unfamiliar.
  • Now may be an ideal time to identify those individuals with account balances who are not active employees and alert these individuals to the fact that they may roll over their account balances to another retirement vehicle.  This exercise may reduce the number of people to whom disclosure must be made.