On May 7, 2012, the DOL published Field Assistance Bulletin 2012-02 (the “FAB”) providing additional guidance and clarification for employers and other plan fiduciaries regarding the participant-level fee disclosure regulation (29 CFR 2550.404a-5) applicable to participant-directed individual account plans (e.g., 401(k) and 403(b) plans; see our earlier article regarding these regulations).  The FAB is also relevant to covered service providers who must comply with the disclosure requirements under the 408(b)(2) regulations as covered service providers must furnish specified information to plan administrators so that they can properly disclose information to participants.

The FAB provides substantive information that will be useful in assisting plan administrators and covered services providers in their compliance efforts. We recommend that plan administrators and covered service providers take another look at their disclosures to ensure compliance with the clarifications made by the FAB.

Although the FAB does not provide further broad-based extensions in the compliance deadlines for the disclosures, for enforcement purposes, the DOL will take into account whether covered service providers and plan administrators have acted in good faith based on a reasonable interpretation of the new regulations. Thus, if disclosures have already been distributed that are consistent with the new regulations, the disclosures do not necessarily need to be revised and redistributed based on the clarifications made in the FAB, but future disclosures must be consistent with the FAB and any future guidance issued by the DOL.

Below are some of the clarification “highlights” made in the FAB:

  • If a plan has both participant-directed and trustee-directed investments, the plan is a “covered individual account plan” covered by the regulation and plan administrator must comply with the plan-related disclosures and investment-related disclosures required by the regulation.   However, the plan administrator is not required to provide the investment-related information for the trustee-directed investments.
  • The same information does not need to be disclosed twice when plan-related and investment-related disclosures are furnished in a single document.
  • With respect to the disclosure of fees and expenses, when services, fees, or both are not known at the time of the disclosure, the explanation of fees must reasonably take into account the known facts and circumstances. For example, if a plan administrator reasonably expects the plan to incur legal fees in the upcoming year, such as for legal compliance services, but does not know the precise amount of such fees at the time of the disclosure, the disclosure should include an identification of the services that are expected to be performed and the allocation method ordinarily used.
  • Administrative expenses that are not charged against participant and beneficiary individual accounts and also are not reflected in the total annual operating expenses of designated investment alternatives are not required to be disclosed.
  • Similarly, where administrative expenses could be charged against individual accounts if the employer fails to pay them, but the employer has undertaken the obligation to pay the expenses, the administrative expenses do not need to be disclosed.
  • A plan administrator may not include the cost of a recordkeeping expense in the total annual operating expenses of a plan’s designated investment alternatives, unless the fee is actually paid in such a way (e.g., through revenue sharing) as to reduce the rate of return of the designated investment alternatives.
  • Where all of a plan’s administrative expenses are paid from revenue sharing received by the plan from one or more of the plan’s designated investment alternatives and no fees or expenses are charged to individual accounts in any given quarter, the plan administrator must still furnish to participants and beneficiaries, at least quarterly, the revenue sharing explanation (“[in addition to the fees and expenses disclosed . . ., some of the plan’s administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan’s designated investment alternatives . . .]”).
  • With respect to the description of brokerage windows, at a minimum, the description must provide sufficient information to enable participants and beneficiaries to understand how the window, account, or arrangement works and whom to contact with questions.  The plan administrator also must provide an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis in connection with any such window, account, or arrangement and the plan administrator must provide participants and beneficiaries with a statement of the dollar amount of fees and expenses that actually were charged during the preceding quarter against their individual accounts in connection with any such window, account, or arrangement.
  • Plan administrators have multiple ways to satisfy their obligation to provide a Web site address under the regulations. For example, a plan administrator may contract with a third party administrator or recordkeeper to establish and maintain the Web site for the plan. Alternatively, a plan administrator may use the existing Web site address of the employer who sponsors the plan to make available the required supplemental investment information. The plan administrator also may use Web site addresses provided by the issuers of the designated investment alternative(s) as long as this address is sufficiently specific to lead the participant to the required information.
  • While plan administrators have the discretion to furnish the required disclosures as stand-alone documents, they also have the discretion to furnish the required disclosures along with, or as part of, other documents.  Thus, for example, disclosures that must be made before the date on which a participant or beneficiary can first direct his or her investments may be furnished as part of a new employee’s enrollment packet.
  • A model portfolio ordinarily is not required to be treated as a designated investment alternative under the regulation if it is clearly presented to the participants and beneficiaries as merely a means of allocating account assets among specific designated investment alternatives.

Where a fund (“acquiring fund”) is an open-end management investment company registered under the Investment Company Act of 1940, the acquiring fund’s total annual operating expenses must reflect the operating expenses of the acquired funds.