ERISA Advisory

The Department of Labor will be publishing proposed regulations tomorrow interpreting both section 404 of ERISA, relating to fiduciary responsibility for participant-directed plans, and section 404(c) of ERISA, relating to participant-directed plans where fiduciaries are relieved of liability for participant decisions.  Because not every participant-directed plan chooses or is able to meet the requirements of section 404(c), the Department proposes to issue the regulations under the general fiduciary responsibility provisions to ensure that participants in all participant-directed plans receive adequate information regarding their investment alternatives.

General Plan Information

The proposed regulations require that a plan fiduciary provide each participant the following general information on or before the date of first eligibility and at least annually thereafter:

1. An explanation of the circumstances under which the participant can direct investments;
2. Any limitation on transfers;
3. Instructions on voting and tenders;
4. Identification of designated investment alternatives; and
5. Identification of designated investment managers.

This information must be updated within 30 days after any significant change.

Plan Administrative Expenses

On or before the date of first eligibility and at least annually thereafter, the plan fiduciary must provide the following information on administrative expenses:

1. Fees and expenses for administrative services that are not included in the net asset value of the investment alternative and the basis on which they will be charged; and
2. Individualized fees, such as QDRO or advice fees.

Quarterly, the plan fiduciary must notify participants of the actual amounts charged, as well as a description of the services provided. 

Investment Alternatives

For each investment alternative, the fiduciary must supply the name of the alternative and an internet address for additional information, including (i) name of the issuer, (ii) strategies, (iii) assets held in the alternative, (iv) investment performance and (v) fees and expenses.  The website must also disclose the asset class of the alternative and whether the alternative is actively or passively managed.

The plan fiduciary must supply the 1, 5 and 10 year return of the investment, if available, and the benchmark for the alternative, along with a cautionary statement that past returns are not predictive of future performance.  In addition, the plan fiduciary must supply the type and description of shareholder service-type fees, including (i) sales charges, (ii) deferred charges, (iii) surrender charges, (iv) redemption fees and (v) mortality and expense fees.  Also required is disclosure of the total operating cost, expressed as a percentage, with a caution that fees are only one factor to consider in choosing an investment option.  The proposed regulations require a comparative chart for all alternatives but it is unclear how to reflect brokerage windows and unlimited options.  A sample comparative chart is included in the proposed regulations. 

Upon request, a participant is entitled to prospectuses or similar material, financial statements of the alternative, the value per share of the fund, and a list of assets comprising the portfolio.  This last requirement is one of the few missteps in the regulation, since most managers do not provide real time asset lists to any clients.  In informal conversations with the DOL this morning, the Department was sympathetic to this concern. 

Analogous changes were proposed for the section 404(c) regulation. Click here to access a copy of the proposed regulations. Written comments on the proposed regulation must be submitted on or before September 8, 2008.

If you have questions, do not hesitate to contact any of us at 202.429.3000:

• Paul Ondrasik
• Edward Mackiewicz
• Melanie Franco Nussdorf
• Eric Serron
• Patrick Menasco