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On October 14, 2010, the U.S. Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) announced a final rule to give the estimated 72 million participants covered by 401(k)-type retirement plans greater information regarding the fees and expenses associated with their plans in order to better manage their retirement savings.
Many 401(k)-type plans allow workers to make their own investment decisions. Current law does not require that all workers be given the information they need to make informed investment decisions or, when information is given, that it is furnished in a user-friendly format. This rule will ensure that all workers who direct their plan investments have access to the information they need to make informed decisions regarding the investment of their retirement savings, including fee and expense information. Under the rule, workers will receive this information in a format that enables them to meaningfully compare the investment options under their plans.
"This rule provides uniform disclosure to workers about what they pay for investment options in their retirement plans," said Secretary of Labor Hilda L. Solis. "For the first time, workers will have at their fingertips important and accessible investment-related information to comparison-shop among the plan options available to them."
The final regulation requires plan fiduciaries to:
• Give workers quarterly statements of plan fees and expenses deducted from their accounts.
• Give workers core information about investments available under their plan including the cost of these investments.
• Use standard methodologies when calculating and disclosing expense and return information to achieve uniformity across the spectrum of investments that exist in plans.
• Present the information in a format that makes it easier for workers to comparison shop among the plan's investment options.
• Give workers access to supplemental investment information in addition to the basic information required under the final rule.
"We are giving workers the tools they need to make the best possible decision about investing the nearly $3 trillion held in their 401(k)-type plans. Now they will have information about different investment options to help them make wise decisions," said Assistant Secretary of Labor for EBSA Phyllis C. Borzi.
For a copy of the fact sheet and sample investment chart, visit: http://www.dol.gov/ebsa/participantfeerulemodelchart.doc
On October 22, 2010, the DOL's Employee Benefits Security Administration (EBSA) released proposed regulations that would revise the circumstances under which a person who gives investment advice to an employee benefit plan or a plan's participants is considered to be a "fiduciary" under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
The proposed regulations are intended to update and expand the existing rule to reflect the changes in the financial industry, and the expectations of plan officials and participants who receive investment advice. According to EBSA, the new rule will better protect participants from conflicts of interest and self-dealing, by giving a broader and clearer understanding of when persons providing investment advice are ERISA fiduciaries, subject to duties of loyalty and prudence. Any breach of these duties may result in personal liability for advisors.
Overview of Proposed Rule
A person gives fiduciary investment advice if, for a direct or indirect fee, he or she:
Provides the requisite type of advice:
• Appraisals or fairness opinions about the value of securities or other property;
• Recommendations on investing in, purchasing, holding, or selling securities; or
• Recommendations as to the management of securities or other property;
And meets one of the following conditions:
• Represents to a plan, participant or beneficiary that the individual is acting as an ERISA fiduciary;
• Is already an ERISA fiduciary to the plan by virtue of having any control over the management or disposition of plan assets, or by having discretionary authority over the administration of the plan;
• Is an investment adviser under the Investment Advisers Act of 1940; or
• Provides the advice pursuant to an agreement or understanding that the advice may be considered in connection with investment or management decisions with respect to plan assets and will be individualized to the needs of the plan.
Limitations recognizing that certain activities should not result in fiduciary status:
• Persons who do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are acting for a purchaser/ seller on the opposite side of the transaction from the plan rather than providing impartial advice.
• Employers who provide general financial/ investment information, such as recommendations on asset allocation to 401(k) participants under existing DOL guidance on investment education.
• Persons who market investment option platforms to 401(k) plan fiduciaries on a non-individualized basis and disclose in writing that they are not providing impartial advice.
• Appraisers who provide investment values to plans to use only for reporting their assets to the DOL and IRS.
"Our actions will benefit America's businesses and their employees nationwide. The proposed rule would hold financial professionals who present themselves as expert purveyors of investment advice more accountable for that advice, allowing plan sponsors to be secure in the knowledge that outside advisers are giving them the best possible guidance. Shouldn't advisers who provide such crucial advice be held to the same standard of care as those who are paying them for it?" (Assistant Secretary, Department of Labor, Phyllis C. Borzi, Pension & Investments, April 18, 2011)
The DOL recently reaffirmed its long-standing position that ERISA plan administrators cannot satisfy their obligation to "furnish" summary plan descriptions (SPDs) simply by making them available to participants. The DOL's informal guidance was issued in response to the question whether SPDs could be furnished by mailing a letter or postcard to all participants to let them know a new SPD is available and they can obtain a free copy by calling a telephone number and requesting one. The question stipulates that all participants have access to a telephone. Here is the DOL's answer:
"ERISA section 104(b)(1) provides that the plan administrator shall "furnish" an SPD automatically to each participant within 90 days of receiving benefits and, generally, every 5 years thereafter. With respect to the furnishing of SPDs, the general disclosure standards set forth in 29 C.F.R. § 2520.104b-1(b) require that the plan administrator use measures reasonably calculated to ensure actual receipt of the material by participants and beneficiaries. In addition, regulation section 2520.104b-1(b) requires that the SPD must be sent by a method or methods of delivery likely to result in full distribution.
The Department has long held the view that, where documents are required to be furnished to participants, it is not acceptable merely to make the documents available in a location frequented by participants. (See Preamble to regulation section 2520.104b-1(b)). Staff believes that the facts presented above are analogous to posting required disclosure materials in a location frequented by participants. Similar to posting an SPD, requiring participants to affirmatively seek out an SPD by placing a phone call is not a method likely to result in actual and full distribution of the SPD".
The DOL went on to explain that its rules relating to electronic distribution of SPDs and other plan materials do not apply in this situation because the SPD is not being distributed via electronic media.