401(k) Participant Fee Disclosures

The Department of Labor issued participant fee disclosure rules for participant-directed plans which first became effective in 2012. These fee disclosures are designed to help participants understand how much they are paying for administration of their 401(k) plan. They include both plan-related and investment-related information.

The required disclosures must be provided to all employees who are eligible to participate in the plan, including new hires and those employees who are eligible but have not elected to participate in the plan. A plan sponsor should work with the plan’s 401(k) vendor to prepare the required disclosures; however, the plan sponsor may want to have the fee disclosures reviewed by legal counsel to confirm that they meet all requirements.

Quarterly Fee Disclosure

The quarterly fee disclosure provides the dollar amount actually charged to the participant’s account during the preceding quarter. The quarterly fee disclosure may be distributed as part of the quarterly participant benefit statements which are required for participant-directed plans.

Annual Fee Disclosure

There is also an annual fee disclosure of the amounts that may be charged to a participant account.  This annual disclosure must include, in a comparative chart format, certain information about the investment options under the plan. The overall objective of this disclosure is to make sure participants and beneficiaries in participant-directed individual account plans are furnished the information they need, on a regular and periodic basis, to make informed decisions about the management of their individual accounts and the investment of their retirement savings.  This information must be provided on or before the date a participant can first direct investments and at least annually thereafter.

The definition of “annually thereafter” has changed several times as the Department of Labor has considered the practical issues involved in providing the disclosure.  The first annual disclosure was required to be provided no later than August 30, 2012, which would have made a plan’s 2013 annual disclosure due no later than 12 months after the date the 2012 disclosure was provided.  However, the Department of Labor recognized the need for companies to align their disclosure deadline with the timing of other year-end disclosures, and it announced the option to make a one-time delay in providing either the 2013 or 2014 disclosure, provided that the delayed disclosure was provided no more than 18 months after the preceding year’s disclosure was provided.  Finally, in order to provide even more flexibility for the timing of the annual fee disclosure, the Department of Labor issued guidance (effective June 17, 2015) which defines “annually thereafter” to mean that future annual fee disclosures must be provided at least once in any 14-month period (instead of once in any 12-month period), without regard to whether the plan operates on a calendar or fiscal year basis.  A condition of taking advantage of this flexibility is that the plan administrator must reasonably determine that using the extended deadline will benefit participants and beneficiaries.

Example:  If the 2014 annual fee disclosure was provided on November 1, 2014, the 401(k) plan has the choice of providing its 2015 annual fee disclosure on November 1, 2015, or if the plan administrator finds that it would be beneficial to participants and beneficiaries to provide the annual fee disclosure later with other participant notices that are being distributed on December 1, 2015, the delayed distribution will comply with the more flexible “14-month” rule.

Fee Disclosure Content

The annual fee disclosure notice from plan sponsors to participants must include certain fee-related plan and investment information, including:

• A statement as to whether participants may direct their own investments, or limitations on the participant’s ability to direct investments;
• A list of all designated investment alternatives, including:
  • The type/category of the investment;
  • 1, 5 and 10-year average performance relative to benchmarks;
  • Operating expenses and loads;
  • Fixed returns, if any
  • Investment term, as applicable; and
  • Minimum guaranteed rate, as applicable;
• A description of any available participant-directed brokerage windows and applicable fees;
• An explanation of limitations on the participant’s ability make withdrawals;
• A list of all fees and expenses related to the plan’s administration and how those fees may be allocated to participant accounts;
• A list of all participant-paid transaction processing fees;
• Information regarding the effect of fees on investment returns;
• A website address that can be used to obtain additional investment information; and
• A statement that other information such as prospectuses, financial statements, valuation statements and investment portfolio asset information must be furnished to the participant or beneficiary upon request.

Certain other information must be provided upon request, including prospectuses, financial statements or reports, statements of share value, and a list of the assets comprising the portfolio of each designated investment alternative that has plan asset look-through treatment (generally, non-mutual funds).

Self-directed brokerage accounts are generally excluded from the regulations for investment-related information.

Additional Fee Disclosure Regarding Changes

If any of the participant fee disclosure information required to be disclosed on the annual notice changes, each participant (including eligible employees who choose not to participate in the plan) and beneficiary must be furnished a description of such change at least 30 days, but not more than 90 days, in advance of the effective date of such change.

An exception to the 30-day minimum advance notice requirement applies if “unforeseeable events” or “circumstances beyond the control of the plan administrator” result in the inability to provide such advance notice. In that case, the notice must be furnished as soon as reasonably practicable. The DOL has stated its intention to apply this exception very narrowly.

A good example of a mid-year event that would most likely require an additional, advance fee disclosure notice would be a change in a plan’s investment fund line-up.

ERISA Section 404(c)

For more information on fiduciary liability relief under ERISA Section 404(c), click here.