Come November 1, employers that offer two very popular types of retirement plans — 401(k) and 403(b) — will have to provide employees with a lot more investment information. Or will they? At this point, enforcement and penalties are unclear — could be up to $110 per participant, per day, or could be a slap on the wrist.

What is clear is that the U.S. Department of Labor (DOL) is seriously trying to make it easier for participants in self-directed retirement plans to have enough information to actually direct their investments — and to avoid excessive fees.

In recent years, the management fees charged by investment firms for retirement plans became the subject of class-action suits, and Congress and regulators grew increasingly concerned. So one goal of the new Participant Disclosure Regulation announced by DOL in October 2010 is to make fees more transparent, while another is to provide more investment information. (See box on right.)

The federal law that set up standards for pension plans is known as ERISA — the Employee Retirement Income Security Act of 1974. And the new regulation was issued under ERISA section 404(a)(1), which requires plan fiduciaries to act prudently and solely in the interest of plan participants. While compliance with earlier ERISA regs was voluntary, ERISA section 404(a)(1) is a mandatory, core fiduciary obligation. So plan administrators who don’t comply could face claims of breach of their fiduciary duties of prudence and loyalty — and possibly fines.

Even so, companies have been generally acting slowly to become compliant, says John Stiglich, vice president of Employee Benefit Services at CPA and consulting firm Clifton Gunderson LLP. One reason for the tardiness lies with the investment service providers who are supposed to be assisting employers. “Many service providers and vendors have been slow in developing the appropriate solutions and communicating that to their clients,” he says.

Another reason is that some plan sponsors just don’t see a real value to themselves or their plan’s participants.

Finally, Stiglich is aware that a lot of plans are served by financial advisors and brokers that do not specialize in qualified plans. “These advisors and brokers are not keenly aware of the requirements,” he says, “and have not initiated any discussions on the changes required.”

One area where ongoing expertise will be needed is in fulfilling the new requirements for investment information. For instance, performance data must be provided for each investment alternative, including return over 1-, 5-, and 10-year periods. The investment-related information must be provided in chart format. The chart must be dated, include contact information for the plan administrator, and provide statements concerning the availability of more information via the Web and paper copies.

Alternatives for Smaller Companies
Beginning to sound like too much trouble? There are alternatives, especially for smaller companies. Stiglich says one option for the plan sponsor is to simply not allow participants to direct the investments in their plan accounts, which probably wouldn’t be too popular. Another is to go with plans that don’t face the new regulations. For example, a typical replacement for a 401(k) plan might be a SIMPLE Plan. However, a SIMPLE Plan can only be established by companies having 100 or fewer eligible employees. Furthermore, the maximum deferral in a SIMPLE Plan is $11,500, versus $16,500 in a 401(k) plan. Also, the employer is limited to either making a set matching contribution or a set profit sharing contribution.

Rather than making a drastic change in plans, the more likely scenario for companies and governmental employers is that they will seek ways to comply with the new regulation for 401(k) and 403(b) plans — for everyone’s benefit.

“This initiative has the potential to really change the way participants view how their retirement plan is handled,” says Gisele Sutherland, associate general counsel, at BMO Institutional Trust Services (formerly M&I Institutional Trust Services) in Milwaukee. “Until now, employees have not had easy access to data as to what percentage of their assets has been used to pay for account expenses.”

Sutherland added that BMO has always had a goal of “packaging data in a format that plan sponsors find highly useable,” so the new regulation reaffirms that goal and makes it an industry standard.

The new disclosures are supposed to go into effect when a retirement plan’s year begins, which Sutherland and Stiglich agree is January 1 for about 85 percent of their clients. Time will tell if federal regulators begin to check if plans are in compliance, but employers offering 401(k) and 403(b) plans should not be in denial or try to pass the buck to their retirement plan service providers. Because as the new regulation states, the ultimate responsibility rests on the shoulders of the plan administrators — the employers themselves. 

What’s in the new retirement plan regulations?
Employers will be required to disclose detailed information to employees about their ERISA accounts — including 401(k), 403(b), profit sharing and money purchase accounts — this year. The disclosures cover all eligible participants who have a right to direct their accounts, as well as applicable beneficiaries. The Department of Labor regulations take effect for plan years beginning on or after November 1.

Under the regulations, new and existing plan participants must be provided with the following on an initial and an annual basis:
•    General information about the plan and eligibility
•    Amount of administrative expenses charged to the plan
•    Amount and types of expenses that may be charged to a participant’s account
•    A statement clarifying any revenue sharing arrangements
•    A listing of investments available under the plan
•    Any limitations on transfers within investment options

Participants must be provided with the following on a quarterly basis:
•    
The dollar amount of any plan administrative fees, individual fees and expenses charged to the participant’s account
•    A description of services related to the fees and expenses
•    The amount of related commissions charged

Employers are also required to provide a glossary of financial terms, and, upon request, copies of prospectuses, financial statements and other detailed information, to plan participants.

(Source: U.S. Department of Labor, and Clifton Gunderson LLP)

By Paul Zukowski

Paul Zukowski is a freelance writer in Madison and a former editor of Corporate Report Wisconsin.

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