Disclosure Requirements

March 13, 2024

4160 / What is a designated investment alternative?

<div class="Section1"> A designated investment alternative is any investment alternative designated by the plan into which participants and beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts. Designated investment alternatives do not include "brokerage windows," "self-directed brokerage accounts," or similar plan arrangements that permit plan participants and beneficiaries to select investments beyond those designated by the plans. Generally, a model portfolio is not considered a designated investment alternative if it is clearly presented to the participants and beneficiaries as merely a means of allocating account assets among specific designated investment alternatives. However, if in choosing a model portfolio, the plan participant acquires an equity security, unit participation, or similar interest in an entity that invests in some combination of the plan's designated investment alternatives, the model portfolio would then be considered a designated investment alternative. </div>

March 13, 2024

4158 / What disclosures must be made with respect to investment-related information under the 404(a)(5) disclosure regulations?

<div class="Section1"> Editor’s Note: Note that the SECURE Act mandated new disclosure requirements with respect to lifetime income options for qualified plan participants. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>. Automatic Disclosures On or before the date on which a participant or beneficiary can first direct their investments, and on an annual basis thereafter, the plan administrator must disclose certain investment-related information concerning each designated investment alternative offered under the plan. For each designated investment alternative offered (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4129">4129</a>), the plan administrator must disclose the following items in a comparative chart format designed to facilitate a comparison of such information for each designated investment: (1)     The name of the investment, (2)     The type or category of the investment (e.g., money market fund, balanced fund (stocks and bonds), large-cap stock fund, employer stock fund, employer securities), and (3)     Performance data. For designated investment alternatives with a variable rate of return, the plan administrator must disclose the average annual total return of the investment for one, five, and 10-year calendar periods ending on the date of the most recently ended calendar year. The plan administrator must also disclose that an investment’s performance is not necessarily an indication of how the investment will perform. For designated investment alternatives with a fixed rate of return, the plan administrator must disclose both the fixed or stated annual rate of return and the term of the investment. If the issuer of the fixed rate of return investment reserves the right to adjust the fixed or stated rate of return prospectively during the term of the contract, the disclosure must include the current rate of return, the minimum guaranteed rate under the contract, and a statement advising participants and beneficiaries that the issuer may adjust the rate of return prospectively along with information on how to obtain the most recent rate of return. (1)     Benchmarks. For each designated investment alternative with a variable rate of return, the plan administrator must disclose the name and return of an appropriate broad-based security market indexed over the one, five, and 10-year periods comparable to the performance data of the designated investment alternative. The broad-based index fund used as a benchmark must not be administered by an affiliate of the designated investment alternative issuer, its investment advisor, or a principal underwriter, unless the index is widely recognized and used. If the designated investment alternative is a balanced fund that blends multiple appropriate broad-based securities market indexes, the plan administrator may use benchmark returns that are also a blend of index funds, provided they match the target blend of the designated investment alternative if the target blend of the investment is representative of the investment’s actual holdings. Note that there are no benchmarking requirements for designated investment alternatives that have fixed rates of return. (2)     Fee and expense information. For each designated investment alternative with a variable rate of return, the plan administrator must disclose: (a) the amount and a description of each shareholder-type fee (fees charged directly against a participant’s or beneficiary’s investment, such as commissions, sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, and purchase fees, which are not included in the total annual operating expenses of any designated investment alternative) and 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 (such as round trip, equity wash, or other restrictions); (b) the total annual operating expenses of the investment expressed as a percentage (expense ratio); (c) the total annual operating expenses of the investment for a one-year period expressed as a dollar amount per $1,000 investment; (d) a statement indicating that the fees and expenses are only one of several factors that participants and beneficiaries should consider when making investment decisions; and (e) a statement that the cumulative effect of fees and expenses can substantially reduce the growth of a participant’s or beneficiary’s retirement account, and that participants and beneficiaries can visit the Employee Benefit Security Administration’s website for an example demonstrating the long-term effect of fees and expenses. (3)     Internet website address. The plan administrator must disclose an Internet website address that is sufficiently specific to provide participants and beneficiaries access to (a) the name of the designated investment alternative’s issuer; (b) the investment alternative’s objectives or goals, (c) the alternative’s principal strategies and principal risks; (d) the alternative’s portfolio turnover rate; (e) the alternative’s performance data updated on a quarterly or more frequent basis; and (f) the alternative’s fee and expense information. (4)     Glossary. The glossary must include terms that assist the participants and beneficiaries in understanding the designated investment alternatives. The glossary may be provided at an internet web address if the address contains information that is sufficiently specific to provide access to such a glossary as well as a general explanation of the purpose of the address. (5)     Annuity Options. If the designated investment alternative is part of a contract, fund, or product that permits participants or beneficiaries to allocate contributions toward the future purchase of a stream of retirement income payments guaranteed by an insurance company, the information provided must include the (a) name of the annuity contract, fund or product; (b) the annuity’s objectives or goals (e.g., to provide a stream of fixed retirement income payments for life); (c) the benefits and factors that determine the price of the guaranteed income payments; (d) limitations placed upon the participant or beneficiary’s ability to withdraw or transfer amounts allocated to the option, as well as a description of any fees or charges applicable to such withdrawal or transfers; (e) fees that will reduce the value of amounts allocated by participants or beneficiaries to the option (e.g. surrender charges, market value adjustments, administrative fees); (f) a statement that the guarantees of an insurance company are subject to its long-term financial strength and claims-paying ability; and (g) a website address sufficiently specific to provide the information contained in items (a) through (f) above. Information to be Provided Subsequent to Investment Subsequent to investment in any designated investment alternative, to the extent that voting, tender and similar rights are passed through to a participant or beneficiary of the plan, the plan administrator must furnish to the participant and beneficiary any materials provided to the plan relating to the exercise of voting, tender and similar rights. Information to be Provided upon Request Upon request of the participant or beneficiary, the plan administrator must provide a copy of any prospectuses (or short-form or summary prospectus), a copy of any financial statement or report relating to the designated investment alternative to the extent they were provided to the plan as well as a statement of the value of a share or unit of each designated investment alternative on the date of valuation. </div>

March 13, 2024

4157 / What information must be disclosed relating to individual expenses under the 404(a)(5) disclosure regulations?

<div class="section1"> On or before the date on which a participant or beneficiary can first direct plan investments, and annually thereafter, the plan administrator must disclose any fees and expenses that can be charged against the participant's investment account for services provided on an individual basis. Examples for which this disclosure would apply include loan fees, QDRO processing, or distribution fees. On a quarterly basis, the plan administrator must provide the participants or beneficiaries an accounting of the dollar amount of the fees and expenses charged against the account for individual services deducted in the preceding quarter, as well as a description of the services provided. If there are any changes to the disclosed information, the participant or beneficiary must be given notice of the change at least 30 but no more than 90 days before the effective date of the change. However, if circumstances present themselves to prevent disclosing changes to this information within the appropriate time frame, the plan administrator must issue a notice describing the changes as soon as practicable. </div>

March 13, 2024

4156 / What information relating to administrative expenses must be included in a 404(a)(5) disclosure?

On or before the date on which a participant or beneficiary can first direct their investments, and on an annual basis thereafter, the administrative expenses of the plan that may be charged against a participant or beneficiary's account must be disclosed to the extent that the charge is not included in the annual operating expense of any designated investment alternative. Recordkeeping, accounting, or legal services are examples of expenses that may need to be disclosed relating to administrative expenses. The plan administrator must also disclose the method in which the amount for services will be deducted from the participants' account balance, whether it is on a pro-rata, per capita, or a flat dollar basis. The disclosures must be written in such a manner as to be understood by the average plan participant. If the fees for a service are known at the time of the disclosure, the plan administrator must identify the service provided, the cost of the services, and the allocation method used. In DOL Field Assistance Bulletin 2012-02R, the following examples of fee disclosures were found to be consistent with the DOL's disclosure requirements: <blockquote>Example 1: The plan divides total recordkeeping costs equally among all individual accounts so that each participant or beneficiary with a plan account will pay $25.00 per year. One fourth of this amount is subtracted from each individual plan account each quarter. Example 2: An annual recordkeeping fee of .12 percent of the account balance will be charged to each individual plan account. Each month, an amount equal to .01 percent of the account's ending balance for the month will be deducted from your individual account. Example 3: An annual recordkeeping fee of .12 percent of the account balance will be charged to each individual plan account. Each month, an amount equal to .01 percent of the account's ending balance for the month will be deducted from your individual account. For example, if your ending account balance for a month is $55,000, then $5.50 will be deducted for that month.</blockquote> If the actual fees or services are not known at the time of disclosure, and the plan administration reasonably expects the fees for services to be incurred and paid out of plan assets, the disclosures must describe the services that it expects to be provided and how the charges will be allocated to each participant's account. As an example, "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" would be an appropriate disclosure for this scenario. On a quarterly basis, the plan administrator must provide the plan participant or beneficiary with the actual dollar amount of the fees and expenses deducted from the participant's account for the provision of administrative services for the prior quarter, as well as a description of the services to which the charges relate. If applicable, the plan administrator must also disclose whether some of the plan's administrative expenses from the preceding quarter were paid from the total annual operating expenses of one or more of the plan's designated investment alternatives (e.g. revenue sharing arrangements, 12b-1 fees, subtransfer agent fees). If there are any changes to the disclosed information, the participant or beneficiary must be given notice of the change at least 30 but no more than 90 days before the effective date of the change. However, if circumstances present themselves to prevent disclosing changes to this information within the appropriate time frame, the plan administrator must issue a notice describing the changes as soon as practicable.

March 13, 2024

4153 / To what plans do the 404(a)(5) participant fee disclosures apply?

To meet their fiduciary duties, the plan administrator of "covered individual account plans" must comply with the disclosure requirements of Section 404(a)(5). Covered individual account plans include any defined contribution plan (as defined by Section 3(34) of ERISA) which permits plan participants or beneficiaries to direct investment of their plan assets. If a plan participant or beneficiary is permitted to direct only a portion of their account balance, while another portion of the account balance is trustee directed, the plan fiduciary need only comply with the disclosure requirements with respect to the assets that the plan participant has the right to direct. SEPs, SIMPLEs, and defined benefit plans are not subject to these disclosure requirements. The disclosures must be made to the plan participants or beneficiaries who have the right to direct their investments under the plan.

March 13, 2024

4155 / What information must be included in the "general disclosures" section of a 404(a)(5) disclosure?

<div class="Section1"> On or before the date that a plan participant or beneficiary can first direct their investments, and annually thereafter, the plan administrator must provide them with "General Disclosures" describing: (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 under the terms of the plan, 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 such 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 brokerage accounts," or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan. If there are any changes to the disclosed information, the participant or beneficiary must be given notice of the change at least 30, but no more than 90 days, before the effective date of the change. However, if circumstances present themselves to prevent disclosing changes to this information within the appropriate time frame, the plan administrator must issue a notice describing the changes as soon as practicable. </div>

March 13, 2024

4148 / What 408(b)(2) disclosures are required of a broker who sells a security to a defined benefit pension plan?

<div class="Section1">Whether a disclosure is required in any factual situation will be based on whether a plan is a covered plan and whether brokerage services fall into one of the covered categories of services. If a broker is selling a security to a covered plan with no participant direction, such as a defined benefit pension plan, and the broker or an affiliate is not receiving any indirect compensation, then the broker’s services do not fall into any of the five categories identified in the regulations. So long as a broker is not acting as a fiduciary to a plan, no disclosure is required.<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> If a broker also provides assistance on enrollments, distributions, and participant loans, then the broker could be providing a service classified as recordkeeping services. There still are no disclosures assuming the factors above and that the plan is a defined benefit pension plan. The triggering event for disclosure of recordkeeping services occurs when a plan has a designated investment alternative or a broker, affiliate, or subcontractor of a broker receives indirect income. The same results would apply if a plan was a profit sharing plan without participant directed investment, so long as there is no payment of indirect income to a broker, affiliate, or subcontractor. If a broker instead sells a mutual fund to a defined benefit pension plan and the mutual fund pays indirect compensation to the broker or the brokerage firm, then the broker falls into the category triggered by receipt of indirect compensation and certain disclosures relating to the indirect compensation are required. If a broker also provides recordkeeping services, then the broker must provide the disclosures for recordkeeping services. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. § 2550.408b(c)(1)(ii). </div></div>

March 13, 2024

4150 / What disclosures are required of a CPA who reconciles a plan's participant records under the DOL 408(b)(2) regulations?

No disclosures are required if the plan does not allow for investment direction by participants, the CPA is paid by the employer, and the CPA does not have a subcontractor or affiliate who receives indirect compensation from the plan. If this CPA makes a referral to a payroll provider that provides 401(k) recordkeeping services, and the payroll provider that then handles the 401(k) plan pays a referral fee or a disguised consulting fee to the CPA, then the CPA will need to report as a service provider who receives indirect compensation. If a plan has participant direction and has at least one designated investment alternative or a QDIA, a CPA will be treated as providing recordkeeping services. Then, the general disclosures are required under the covered service classification of recordkeeper. A CPA also may need to provide certain other disclosures based on how it gets paid and the services provided. Some CPAs have staff that are investment advisors and are registered under state law or the Investment Advisor's Act of 1940. If these advisors provide services to a plan, then they must provide both the general disclosures and certain additional disclosures based on the type of services that are provided to the plan and the structure of the plan. If a CPA firm has an affiliate such as an investment advisory group that receives indirect compensation from the plan, then the general disclosures will be required.

March 13, 2024

4152 / What is the purpose of the Department of Labor ("DOL") Section 404(a)(5) participant disclosure regulations?

<div class="Section1"> With the proliferation of 401(k) and profit sharing plans that permit plan participants to individually direct their retirement plan assets, the DOL has grown exceedingly concerned about plan participants being required to make investment decisions without having access to information concerning the account fees and expenses. When a plan permits participants to direct their investments, the regulations require that the plan administrator take action to inform the plan participants of the rights and responsibilities afforded to each participant with the ability to direct their investments. These disclosures must be provided prior to the date on which a participant or beneficiary can first direct the investments in their account and on a regular and periodic basis thereafter. Information required includes, but is not limited to, fees and expenses, voting rights, and rights associated with the direction of investments. For calendar year plans, the initial participant disclosures were required to be distributed by August 30, 2012, and at least annually thereafter. In addition, the first quarterly disclosures under these regulations were required to be distributed by November 14, 2012, as well as quarterly thereafter. In contrast to the 408(b)(2) covered service provider disclosures, a plan that does not comply with the plan participant disclosure requirements does not run the risk of violating the prohibited transaction rules, but may be found to be in breach of its fiduciary duty. Since the plan participant disclosure requirements do not run up against the prohibited transaction rules, the participants will first need to suffer losses before liability for failure to comply accrues. </div>

March 13, 2024

4154 / What information must be disclosed to plan participants under the 404(a)(5) regulations?

The disclosures required under these regulations can be broken down into two over-arching categories: plan-related information and investment-related information. Plan-related information must include disclosures describing: (1)     “General Information” consisting of information concerning the structure and mechanics of the plan;(2)     “Administrative Expenses” consisting of any fees and expenses for general plan administrative services that may be charged against all individual accounts; and(3)     “Individual Expense Information” consisting of any fees and expenses that may be charged to each individual participant’s account due to actions taken by that participant. The plan-related information disclosures must be provided to plan participants on or before the date they are first eligible to direct their investments, and then annually thereafter. On a quarterly basis, plan participants must receive notice of the actual charges relating to these plan-related fees and expenses charged to their account in the preceding quarter. Investment-related information must include disclosures regarding any default investment option under the plan and describing: (1)     performance data concerning historical investment performance for one, five, and 10-year returns for investment options that do not have fixed rates of return;(2)     benchmarking against an appropriate broad-based securities index over one, five, and 10 years for investment options without a fixed rate of return.(3)     fee and expense information for investments without a fixed rate of return must be expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, as well as fees and restrictions on the ability to purchase or withdraw from the investments. For fixed rate of return investments, only shareholder-type fees or restrictions on the purchase or withdrawal from the investment need be disclosed;(4)     a website address where participants can access information that is sufficiently specific to provide participants with additional information about the investments; and(5)     a glossary of terms that will assist participants in understanding the plan’s investment options. Plan administrators can provide this information in the form of a website address that is sufficiently specific to provide access to such a glossary. Investment-related return information must be furnished to participants in a chart or similar format designed to encourage a comparison of each investment option available under the plan. The information that must be disclosed pursuant to these disclosure requirements is discussed in detail in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4158">4158</a>.