By Linda A. Cahill, CLU, ChFC, RPA
Since the Department of Labor (DOL) first issued proposed regulations requiring the disclosure of information to participants in self-directed individual account plans, including 401(k) plans, plan administrators and third party vendors have been wrestling with the implications of the new requirements. Now that final regulations have been released and will apply to plan years beginning on or after November 1, 2011 (January 1, 2012 for calendar year plans), it is clear that all parties – especially plan administrators – have increased responsibilities and fiduciary risks.
What the Final Regulations Require
Under the final regulations, plan administrators for any ERISA participant-directed individual account plan (excluding IRA’s, SEP’s and SIMPLE’s) must make disclosures in two main categories: plan-related information and investment-related information.
Click here to view a summary chart of the plan disclosure requirements.
Most of the disclosures must be made before participants first become eligible to make an investment election under the plan, and then annually thereafter. However, there are some specific fee disclosures that must be communicated quarterly.
More Fiduciary Responsibilities and Risks
The new regulations require plan administrators to regularly disclose information to participants and beneficiaries far beyond what most are disclosing today. Several provisions of the new rules create a significant burden, and added fiduciary risk, for plan administrators.
For example, the regulations define "participants" to include all eligible employees, not just those who are currently participating in the plan. Because most plan administrators do not typically distribute disclosures to eligible non-participants, the new regulation places an increased administrative burden – and potential costs – on plan administrators.
In addition, plan administrators must provide advance notice of all plan-related changes, not just those that are deemed "material". The "material" requirement was in the proposed regulations, but dropped in the final regulations based on the DOL’s assessment that all changes are "material". The volume and frequency of communication required to comply with this requirement could overwhelm both plan administrators and participants.
The DOL does provide some flexibility, allowing information to generally be distributed either by paper or electronically. However, the requirement to provide information in a format that allows participants to compare investment options is cumbersome, to say the least. The DOL has provided a
model comparison chart to assist plan administrators and their vendors with this requirement but, depending on the number and variety of investment options offered, preparation will be a challenge.Ensuring Your Investments and Vendors are Competitive
While the new regulations allow plan administrators to delegate some responsibilities to other individuals and entities, failure to meet the requirements could be considered a breach of fiduciary duty, exposing the plan administrators to remedies under ERISA. More than ever, plan administrators must carefully evaluate, select and monitor their third party vendors. Not only is their ability to accurately comply with the new disclosure requirements critical, but their fees and expenses will be more visible than ever before.
Please let us know if we can assist you in preparing for compliance with the new regulations, or in evaluating third party vendors for your plan. Your choice of partners can have an enormous impact on your ability to comply and your potential fiduciary risk.
Linda Cahill is a Principal with BRG. You can contact Linda by phone at 216-393-1812 or by email at
lcahill@benefitsrg.com.Securities and Investment Advisory Services Offered through M Holdings Securities, Inc., A Registered Broker/Dealer, Member FINRA/SIPC; BRG is independently owned and operated; This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor; Product guarantees are subject to the claims paying ability of the issuing insurance company; Variable life insurance products are long-term investments and may not be suitable for all investors. An investment in variable life insurance is subject to fluctuating values of the underlying investment options and entails risk, including the possible loss of principal. The performance of your account will vary and you may receive more or less than the amount invested.
