|
|
|
|
October 2011 |
BTHR Solutions |
|
Investment Performance and Fees May Be
The U.S. Department of Labor (“DOL”) issued electronic disclosure rules on September 13th for employers with 401(k) plans or similar defined contribution plans that allow participants to direct the investment of their account balances. These participant-directed plans must disclose plan-related and investment-related information to plan participants starting on May 31, 2012. While investment vendors and TPAs (third party administrators) are currently studying the new electronic disclosure rules, employers also should become familiar with the rules in order to effectively manage their vendors (e.g., to obtain the necessary assistance from them in order to take advantage of the new electronic disclosure rules). Disclosures to Participants While the focus of this article is on the new electronic disclosure rules, familiarity with the subject of the disclosure (e.g., investment performance and fee information) is useful in order to understand how an employer would interact with its investment vendors and TPAs in taking advantage of the new electronic disclosure rules. Compliance Date. In October 2010, the DOL published final regulations on the plan-related and investment-related information that employers must disclose to participants in 401(k) plans and other defined contribution plans with participant-directed investments. These regulations were initially scheduled to apply to plan years beginning after November 1, 2011 (e.g., January 1, 2012 for calendar year plans). As noted above, however, DOL has recently extended the compliance deadline to May 31, 2012. Plan-Related Disclosures. Under the DOL's October 2010 regulations, employers must furnish participants with general information about the plan annually, including an explanation of how participants may give investment allocation instructions and information concerning the plan's investment menu. Plan participants must also receive an annual explanation of the general administrative service fees which may be charged against their accounts as well as any individual expenses charged for individualized services (e.g., plan loan processing fee). Participants must also receive certain information on a quarterly basis, including the quarterly dollar amounts actually charged to their plan accounts as general administrative service fees and as individual expenses, as well as a description of the relevant services. An employer may disclose the plan-related information electronically under the electronic disclosure rules discussed below. Investment-Related Disclosures. The October 2010 regulations also require employers to provide plan participants with investment-related performance and fee information in a comparison table annually. The comparative information that must be provided includes: (a) the name and type of investment option, (b) investment performance data, (c) benchmark performance data, (d) fee information, including both the total annual operating expenses of each investment alternative and any shareholder-type fees which are not reflected in the total annual operating expenses, such as commissions and account fees, and (e) the internet website address at which additional information is available. An employer may disclose the investment-related information electronically but under a different set of electronic disclosure rules that apply to plan-related information, as discussed below. Impact on Plan Sponsors. Although the October 2010 regulations impose the disclosure burden directly on the employer maintaining the plan, the regulations provide some relief. Under the regulations, an employer is not responsible for the completeness or accuracy of the plan-related or investment-related information delivered to the plan participants if the employer reasonably relied in good faith on information furnished by an investment vendor or TPA. Of course, the employer must still deliver the information to plan participants. This delivery obligation brings us to the electronic disclosure rules. Electronic Disclosure Rules DOL has published four sets of electronic disclosure rules, including the most recent set that apply to the delivery of investment performance and fee information. We briefly review those rules below. Safe Harbor Rules. In 2003, DOL adopted so-called “safe harbor” electronic disclosure rules. The fundamental problem with the safe harbor rules is that they restrict electronic disclosures to participants who (i) have access to the employer’s electronic information system (e.g., e-mail system or website) as an integral part of their duties as employees for the employer maintaining the plan or (ii) have affirmatively consented to receiving electronic disclosures. Thus, active employees who do not use a computer as an integral part of their job would not meet the first safe harbor. As a result, the affirmative consent requirement would apply to these active employees as well as retirees, former employees, surviving spouses, and alternate payees under qualified domestic relations orders. The affirmative consent requirement has been a significant obstacle for employers that would like to broaden the use of electronic disclosures. Field Advice Bulletin. In response to a Congressional directive, DOL published Field Advice Bulletin (FAB) 2006-03 to facilitate the electronic delivery of quarterly statements required by the Pension Protection Act of 2006. FAB 2006-03 (i) incorporates by reference the IRS electronic disclosure rules for documents required to be furnished under the Internal Revenue Code (e.g., safe harbor 401(k) plan notices) and (ii) establishes another electronic disclosure standard for posting quarterly statements on a website. IRS Electronic Disclosure Rules. In 2006, IRS had updated it electronic disclosure rules to be compatible with E-SIGN (Electronic Signatures in Global and National Commerce Act). The IRS rules allow an employer to use electronic disclosure for participants who have “effective ability to access” the employer’s electronic information system. Thus, electronic disclosure under the IRS rules depends upon a participant’s ability to access the electronic information system, not whether a participant uses the system as an integral part of his or her job, or whether the participant affirmatively consents to electronic disclosure. Under an aggressive interpretation of the IRS rules, an employer arguably could use electronic disclosure unless a participant opted out of receiving electronic disclosures. Posting on Continuous Access Website with Notice. FAB 2006-03 also established an alternative electronic disclosure standard that allows employers to post the quarterly statements on a secure website providing participants with continuous access so long as participants are initially notified before the first quarterly statement is due, and then annually, how to access their quarterly statements and how to receive quarterly statements in paper. Employers may deliver the initial and annual notices electronically in compliance with either the prior DOL or IRS electronic disclosure rules. Technical Release. As noted above, DOL published Technical Release 2011-03 on September 13th to allow employers to electronically deliver the plan-related and investment-related information required to be furnished to plan participants in participant-directed plans. In particular, DOL stated that the plan-related information that can be delivered with quarterly statements in compliance with the October 2010 regulations can be delivered electronically with those quarterly statements in accordance with FAB 2006-03’s electronic disclosure standards. However, DOL developed a new electronic disclosure standard for remaining plan-related information and for all of the investment-related information. DOL’s newest and fourth electronic disclosure standard for investment-related information is outlined below. Like FAB 2003-06, Technical Release 2011-03 accommodates posting the required information on a secure website providing continuous access to participants. With respect to the accompanying initial and annual notices, however, DOL’s newest standard attempts to strike a balance between DOL’s initial affirmative consent requirement and the benefit industry’s preference for a rule that would enable employers to require participants to affirmatively opt out of electronic disclosure. Initial Notice. The participants must receive an initial notice that includes: (i) a statement that the required disclosures will be made electronically, if the individual voluntarily provides an e-mail address; (ii) a brief description of the disclosures that will be furnished electronically and how they can be accessed; (iii) a statement that the individual has the right to receive, upon request, the required information free of charge; (iv) a statement that the participant may opt out of electronic disclosure at any time and an explanation of how to opt out; and (v) an explanation of the procedure for updating the participant’s e-mail address. Voluntarily-Provided E-Mail Address. An e-mail address will not be treated as provided voluntarily if it is provided as a condition of employment or participation in the plan. However, if a participant is required to provide an e-mail address electronically in order to access the website housing the required information, the provision of the e-mail address will be considered voluntary if an initial notice has been previously or contemporaneously provided to the participant. Transition Rule. For participants for whom the employer already has their e-mail addresses, the initial notice and voluntary requirements are deemed satisfied if the employer sends a special initial notice with most of the information described above between 90 and 30 days before the required information must first be provided. The transition rule is available only if the participant has had electronic interaction with the plan during the 12 months prior to the time the notice is sent. Similarly, the special initial notice must be in paper unless the participant has had electronic interaction with the plan during the same 12 months period. For these purposes, a participant’s electronic interaction includes opening a message sent to the participant’s e-mail address, sending a message from the e-mail address, or logging onto the website with the required information using the e-mail addresses as a user name. Annual Notice. An annual notice that contains similar information to the initial notice must be provided at the beginning of each year. This notice may only be sent electronically if the participant has electronically interacted with the plan since the initial (or last annual) notice was delivered. Conclusion To facilitate compliance with pending investment performance and fee disclosure requirements, DOL has issued the new rules for electronic disclosure. Although DOL disclaims that these new rules have broader application, they seem to be a strong indication of where DOL is likely to go in the near future. In April this year, DOL issued a formal request for information (RFI) on electronic disclosure. According to the RFI, “the DOL is reviewing the use of electronic media by employee benefit plans to furnish information to participants and beneficiaries.… The purpose of the review is to explore whether, and possibly how, to expand or modify these standards taking into account current technology, best practices and the need to protect the rights and interests of participants and beneficiaries.” The new electronic disclosure rules for investment performance and fees information are a step in the right direction.
|
|
|
|
|
