New Retirement Plan Disclosure Rules: What Employers Need to Know

By: Madelyn H. Hornstein, CPA
Chief Executive Offer

Employers that sponsor 401(k) and other retirement plans where participants make their own investment choices will soon need to provide more information about their plan's fees, expenses and performance. For most of the plans affected, the rules take effect in 2012.

Few employees know about their plan's fees, and even fewer understand the dramatic effect those fees can have on their retirement account's long-term performance. The new transparency these rules will provide is intended to help employees make more-informed investment choices.

Under the rules, which are being issued by the U.S. Department of Labor's Employee Benefits Security Administration and apply to plans covered by the Employee Retirement Income Security Act (ERISA), you'll need to provide the information to all eligible employees, whether or not they're enrolled in the plan, and all beneficiaries who have the right to direct the investment of their accounts.

The required annual disclosures fall into two general categories: information about the overall plan, and information about the individual investment options. 

Plan-related information
The rules will require employers to provide all eligible employees, plan participants and beneficiaries with information about:

• Investment options offered by the plan
• How plan participants may give investment instructions
• Any brokerage account options that allow participants to select investments outside those offered by the plan, if applicable
• Any fees and expenses for general plan administrative services (for example, legal, accounting and recordkeeping) that may be charged to participants' accounts
• Any expenses that may be charged for actions taken by an individual participant or beneficiary, such as for plan loans or processing divorce agreement court orders (QDROs).

Investment-related information
The following information must be provided for each investment option:

• The name of the option and its investment category (money market fund, mutual fund, etc.)
• For plan investment options that do not have a fixed rate of return, the one, five- and 10-year returns
• For fixed-rate investments, the annual rate of return and investment term
• The name and one-, five-, and 10-year returns of an appropriate broad-based securities benchmark index, to give employees a basis for evaluating fund performance
• For investment options that do not have a fixed rate of return, total annual operating expenses expressed as both a percentage of assets and as a dollar amount per $1,000 invested
• For all investments, any fees or restrictions on purchases or withdrawals
• A website that provides specific additional information about the plan's investment options for those who want additional or more current information
• A glossary of terms to help participants understand the plan's investment options, or website address where they can access such a glossary.

Investment-related information must be provided in a chart or other consistent format to help participants compare investment alternatives.

For both calendar- and noncalendar-year plans, your service provider is required to give you the necessary plan-related and investment-related information by April 1, 2012. For calendar-year plans you then have 60 days, until May 31, 2012, to provide the initial annual participant disclosures. For noncalendar-year plans, you'll have until May 31, 2012, or until 60 days from the beginning of the plan year, whichever is later.

The new rules also affect quarterly disclosures, which will have to list the fees and expenses actually deducted.

Shining a spotlight on fees and expenses should help plan participants make better choices, but it may also be a good time for you as a plan sponsor to take a closer look at those fees. Under the rules, you have a fiduciary duty to determine whether plan fees for necessary services are reasonable. The additional information this rule provides will put you in a better position to negotiate fees and expenses with service providers.

The deadline may seem like a long way off, but you'll need to coordinate with investment providers, recordkeepers and others to obtain the required information for the disclosure, then organize and prepare it according to the regulation. The requirements are fairly comprehensive and complex, so you should begin developing compliant disclosure materials as soon as possible.

The final regulation will be published later this year, but it's not expected to change significantly. What I've outlined here is just an overview of the new regulation's main requirements. There are others, so please consult your plan's service provider for full details.

The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.