Self-directed retirement programs, in the shape of 401(k) and other individual account balance plans, now fund retirement income security for 72 million Americans, in line with the Employee Benefits Security Administration (EBSA) within the U.S. Department of Labor (DOL). An estimated 483,000 participant-directed individual account plans hold almost $3 trillion in assets. What are ERISA Bonds? Most, but not totally all individual account balance plans are self-directed by the participants. Recent government regulations are made to provide greater disclosure of plan fees, expenses, and comparative performance data.
Effective Date for 401(k) Expense Disclosure Compliance
EBSA published new regulations titled “Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans” in the Federal Register on October 10, 2010. The guidelines took influence on December 20, 2010, and affect plan years beginning on or after November 1, 2011 for many covered plans no matter size.
Goal of Informed Investment Decisions Drive New ERISA Rules
A good number of choices – such as the forms of assets, level of risk, period of holding period, and country of origin – allow it to be problematic for many investors to create informed decisions about the best investment vehicles for their retirement funds. With choices which range from stocks, bonds or mutual funds to derivatives or emerging marketing options, many investors might be making less than optimum investment decisions because of not enough understandable data on fees, expenses, and fund performance.
Rules Extend Fiduciary Responsibilities to Increased Disclosure
An integral provision of the Employee Retirement Income Security Act (ERISA) is that fiduciaries act prudently and “solely in the interest of the plan’s participants and beneficiaries.” As the responsibility for investment decisions is increasingly used in the individual participant, the newest rules follow the reasoning that the master plan administrators must provide participants with clear disclosure of fees, expenses, and comparative performance data that enable the participant to create fully informed decisions.
General Operational and Identification Disclosure Requirements
The new rules require that plan participants and beneficiaries be given certain new operational informative data on or prior to the date of plan eligibility, and at the least annually thereafter. Such information includes:
- The capability of plan participants and beneficiaries to provide investment instructions
- Any plan limitations on investment instructions, including any restrictions on transfer to or from the designated investment alternative
- Rights (or restrictions) of the master plan participant regarding the exercise of voting, tender and similar rights associated with an investment
- Identification of any designated investment alternatives offered beneath the plan
- Identification of any designated investment managers
- An outline of any “brokerage windows,” “self-directed brokerage accounts,” or similar plan arrangements that offer additional investment options
Legal, accounting, and other recordkeeping expenses of an administrative nature that may be charged to an idea must now be disclosed beneath the new rules. How a expenses are paid should also be revealed (such as by deducting dollars or liquidating shares), along with allocation techniques used (e.g., pro rata or per capita). Revenue sharing arrangements, Rule 12b-1 fees, and sub-transfer agents will also be addressed.
The new rules stipulate that expenses that might affect an individual’s account as opposed to on a plan-wide basis should be disclosed. Types of such fees include:
- Fees connected with the processing of plan loans or qualified domestic relations orders
- Fees for investment advice
- Front or back-end loads or sales charge
- Redemption fees
- Individual account investment management fees (for example, certain unregistered designated investment alternatives such as for instance bank collective investment funds)
Individual expense fee information should be disclosed to the participant at the least quarterly.
Model Comparative Chart
Investment-related information should be provided to plan participants in a way that supports comparisons for investment alternatives. A “model comparative chart” is a part of an appendix to the rules because of this purpose.
ERISA Plan Administrators Hold Compliance Responsibility
The “Plan Administrator,” as defined in ERISA, not the 3rd party administrator or recordkeeper, has got the responsibility for compliance with the newest expense disclosure requirements.
Exceptions to Expense Disclosure Requirements
There are a few exceptions to the ruling, predicated on feedback received during people comment period. These exceptions include:
- IRA based plans beneath the Internal Revenue Code (IRC) of 1986, including
- Simplified employee pensions (SEPs) as defined under IRC § 408(k)
- Simple retirement accounts (SIMPLEs) as defined under IRC § 408(p)