What information will participants receive in these disclosures?

 404a5 requires plan sponsors to give participants two types of information by May 31, and annually thereafter. The first type of information includes details on plan-level costs, including administrative expenses. The second type relates to each investment choice offered by the plan and includes the relevant investment category, performance data, benchmark performance, fees and expenses – plus a Web site address for obtaining more information.

At least quarterly, participants must be given a statement showing the dollar amount of fees and expenses charged to their own accounts, with a description of services related to each charge.

Why did DOL adopt 404a5?

DOL believes self-directed plan participants are entitled to the information needed to make "informed decisions" including sufficient information regarding the plan, its expense and investment choices. Even if some of this information is currently available, DOL believes it is not easy for participants to access and understand. Over the 10-year period from 2012-21, DOL estimates that the rule will save participants about $15 billion in fees, in aggregate.

You can view the final rule, as published in the Federal Register on 7/19/11.

What types of plans are not covered?

The rule does not cover defined contribution plans, fully insured plans, IRAs, SEPs, SIMPLEs, 457s, single-participant 401(k) plans and non-ERISA 403(b)s.

Who is entitled to receive the disclosures?

DOL's final rule clarifies that the disclosures must be made to all participants who are eligible to participate in the plan, whether or not they have actually enrolled. DOL believes: "…with regard to employees that have not enrolled in their plan, the annual notice will serve as an important reminder of their eligibility to participate in the plan." The first disclosures to new eligible participants must be made before they can start directing their own investments. Retired (non-active) participants also are entitled to receive disclosures, as long as they can still direct investments. 

Beneficiaries with the right to direct plan investments also are entitled to receive the disclosures – e.g., after the death of the participant or pursuant to a qualified domestic relations order (QDRO). 

How timely must disclosures be?

The information contained in the annual disclosures must be provided at least once per calendar year. In addition, any changes in the plan's information must be disclosed at least 30 days (but not more than 90 days) in advance of the effective date of the changes. The first quarterly disclosures must be made 45 days after the end of the quarter for which the initial disclosure is provided, and subsequent quarterly disclosures must be made once per three-month period.

What information do participants find most confusing about retirement plan fees?

In 2007, AARP published results of a national survey of 1,584 plan participants, and the eye-opening results influenced DOL's adoption of 404a5. When asked whether they pay any fees in 401(k)s, 65% of survey participants said they pay no fees. Another 18% said they did not know whether they paid fees. Only 17% of 401(k) plan participants confidently knew how much they were paying in fees and expenses. More than half (54%) said they do not feel knowledgeable about the effect fees can have on their total retirement savings in the long term. 

What are the most significant new disclosure formats mandated by the rule?

DOL adopted the rule after conducting consumer focus groups, which revealed massive confusion among participants about investment choices, costs and performance. As a direct result of this feedback, DOL adopted: 1) a Model Comparative Chart for arraying plan investment choices and their returns and fees; 2) a requirement that each quarterly participant statement show the dollar amount of plan-related costs actually charged to or deducted from individual accounts; and 3) a required glossary of retirement plan terms. 

How will disclosures be delivered?

In September of 2011, DOL released an interim policy, creating a safe harbor for plan sponsors that wish to deliver required disclosures electronically over the Internet or via e-mail. It is available here:

Participants must have the ability to access disclosures from a location where they perform employment duties, via an electronic information system integral to those duties. If e-mail delivery is used, the address must be voluntarily submitted by each participant. Initial and annual e-delivery notice requirements must be met.

It will be beneficial for most participants to receive disclosures electronically because this will make them easier to share with advisors and archive electronically. It also will reduce paperwork filing and retention burdens.

How can a financial advisor help clients (or prospects) anticipate and interpret the disclosures?

Financial advisors are an important part of DOL's goal of increasing participant education. You should offer to meet with each client (or prospect) and walk through the first annual and quarterly disclosures. Here are three key points you should emphasize: 

1. "You now have the ability to evaluate and compare all costs you are paying in your retirement plan. Over time, these costs can have a significant impact on plan performance and retirement security.
2. I would like to meet with you at least annually to review your plan's performance and cost, as detailed on your annual disclosure statement. This process will increase your confidence that you have chosen the best plan investments for your objectives.
3. Even if your plan results are disappointing or your costs are high, don't give up your retirement discipline. If you don't like what your 401(k) offers, I can help you evaluate alternatives for maintaining your discipline." 

Does offering this service make me an ERISA fiduciary?

Not necessarily, but you should consult your company's compliance guidelines. Separately, DOL is in the process of re-proposing a rule which will clearly define when a provider of investment advice to a retirement plan is considered an ERISA fiduciary. In October of 2011, Phyllis Borzi, a top DOL executive, indicated in published comments that DOL is especially concerned about "the level of protection in the IRA marketplace." She added that DOL's re-proposed rule could include new requirements for financial professionals who offer advice on IRA rollovers and transfers, or otherwise help clients make IRA investment decisions. DOL is expected to hold new hearings on the re-proposal in 2012.

Until new rules are adopted, you generally are not considered a fiduciary to a plan covered under 404a5 unless you provide services or investments to the plan or fee-based advice to its participants.  Educating your clients objectively about their plans' features and choices normally does not make you a fiduciary. Nor does providing advice on IRA transfers/rollovers.