Technology Team Newsletter: Minding Your 401(k) Plan Duties While Minding the Store

Michelle Capezza

The concept of 401(k) plans is relatively simple. These plans allow participants to save money for retirement by making pre-tax deferrals of compensation up to certain limits, and employers may also choose to make matching contributions on these deferrals. Often these plans are participant-directed, which allows the participants to direct the investment of these contributions to a broad range of investment alternatives. However, while the concept of 401(k) plans may appear to be simple, there are numerous compliance rules and administrative tasks associated with these plans, and increasing fiduciary responsibilities. Plan sponsors and fiduciaries of participant-directed 401(k) plans should be aware of the following recent developments that will affect plan duties and fiduciary responsibilities:

1. Participant-Level Fee Disclosures

The Department of Labor published final regulations on October 20, 2010, that will require enhanced fee disclosures to eligible participants and beneficiaries in participant-directed individual account plans, such as 401(k) plans. These enhanced disclosures are required whether or not the plan is designed to comply with Section 404(c) of the Employee Retirement Income Security Act ("ERISA") (i.e., to limit the liability of plan fiduciaries where participants direct and control the investment of their accounts). Additionally, the enhanced disclosures are required for plan years on or after November 1, 2011 (i.e., January 1, 2012, for calendar year plans).

The purpose of these enhanced disclosure rules is to provide eligible participants with information that will enable them to make informed decisions with respect to the investment of their accounts. Under these rules, the plan administrator has a fiduciary responsibility to disclose numerous types of plan-related and investment-related information, as well as specific information regarding administrative and individual expenses charged to an account. If the plan passes voting rights through to the participants, then any materials relating to the exercise of voting, tender, or similar rights for an investment must be disclosed to the participants. In addition, a detailed chart to aid in the comparison of investment options must be provided. This chart must highlight performance data, benchmarks, fees, and expenses, and provide detailed descriptions of any annuity options and their related fees.

These disclosures will need to be provided in connection with initial plan eligibility as well as on an annual basis. In addition, there will be an ongoing requirement to communicate any changes to plan-related information at least 30 days in advance of the change (or as soon as reasonably practicable under the terms of these rules). Moreover, the plan administrator must provide plan participants with a quarterly statement that includes enhanced disclosures, such as the dollar amount of fees and expenses charged against the participant's account during the preceding quarter and a description of the services to which these charges relate. Participants will also be able to request additional investment-related information (such as prospectuses and financial statements).

Plan administrators must begin planning now for compliance with these rules. Failure to do so can expose plan administrators to claims of breach of their fiduciary duties under ERISA. It will take a lot of effort to become familiar with all of the requirements, coordinate with service providers, and organize this information in the designated manner. The Department of Labor is also expected to issue further guidance prior to the effective date of these rules that may impact electronic distribution of these disclosures. Also, keep in mind that final regulations issued in July 2010 regarding fee disclosures between service providers and plan sponsors are effective July 16, 2011. Plan sponsors and fiduciaries must ensure that they have obtained the necessary fee information from their service providers in compliance with those rules in order to determine that the costs of their contracts or arrangements are reasonable. Thus, careful planning and incorporation of these tasks into current administrative practice is necessary.

2. Disclosures for Target-Date Funds

Proposed regulations were issued on November 30, 2010, regarding enhanced disclosures for target-date funds. These regulations would add further requirements to the participant-level disclosures previously mentioned and require additional provisions in initial and annual notices for qualified default investment alternatives. Examples of these increased disclosures include providing more detailed information regarding the fund's investment objectives, fees, and expenses, and clarifications on how the fund's asset allocation will change over time and at what point in time it will reach its most conservative position (the "glide path" phenomenon). Public comment on these proposed regulations closed on January 14, 2011. It will be important to monitor any final rules that are issued with respect to target-date fund disclosures so that the required information can be organized and disseminated to plan participants.

3. Additional Developments to Watch

Plan sponsors and fiduciaries should also be aware that government agencies have been analyzing whether and, if so, how they could enhance retirement security of plan participants by facilitating access to, and the use of, lifetime income investment options or similar arrangements that are designed to provide a lifetime stream of income after retirement. They have also been considering whether to require annuities as distribution options in 401(k) plans. Any plan sponsors interested in offering such options to participants today should be mindful of their duties to: (i) prudently select and monitor these investments and the providers; (ii) assess fees, expenses, and surrender charges; and (iii) effectively disclose and communicate information related to these investments to participants. Hearings were held last September to address these types of issues, including fiduciary duties and potential safe harbors related to these investments. More guidance is anticipated.

In addition, the Department of Labor has recently proposed a regulation that would expand the definition of "fiduciary" under ERISA to clarify the circumstances in which persons who provide investment advice for a fee to a plan or participants are fiduciaries. This proposed regulation would revise a five-part test that has existed since 1975 and eliminate the requirement that, in order for a person who provides investment advice for a fee to be a fiduciary, advice has to be given on a regular basis and must serve as a primary basis for the investment decisions. One element of the new proposed definition would provide that a fiduciary can include a person who provides investment advice for a fee that "may be considered" in connection with the investment decisions. A hearing on these proposed changes is scheduled for March 1, 2011. It will be important for plan sponsors to follow the outcome of these developments and consider how any revised definition of "fiduciary" may impact current service arrangements and co-fiduciary liabilities.

Plan sponsors and fiduciaries must be mindful of the current trends and increasing responsibilities associated with 401(k) plan management and oversight. It is becoming increasingly more important to determine how to provide required information to participants in a manner that not only complies with the regulations, but also makes sense from an overall company communications standpoint. It is imperative that plan participants are able to understand and process the onslaught of information that they will receive. Plan sponsors should work with their service providers to ensure that necessary information is obtained and organized in the required formats and that the impact on applicable service agreements is evaluated. Regular monitoring of marketplace changes and trends is essential in order to maintain plans, as well as ongoing dialogue with service providers. Proper project planning should be undertaken well in advance of mandated due dates.

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MICHELLE CAPEZZA is a Member of the Firm in the New York office, where she practices in the area of Employee Benefits and Executive Compensation. As a member of the Technology Team, she counsels both public and private technology-based companies on a variety of benefits and compensation matters. If you have any questions regarding the issues discussed in this article, or would like to discuss other benefits-related issues, please contact Michelle at [email protected] or call her direct dial number: 212-351-4774.  

News from the Technology Team

Technology Team Members at the National Press Club
On January 26, 2011, Pierre Bonnefil, Michelle Capezza, and Betsy Johnson spoke at the National Press Club in Washington, D.C., as part of Epstein Becker Green's program entitled "Obama, Tea Party, Health Care, Jobs: A Mid-Term Review of the Impact on Labor and Employment Law."

Michelle Capezza
On March 9, 2011, Michelle Capezza will speak on the topic "Health Care Reform for Employers: Where Are We Now?" in Washington, D.C., at Epstein Becker Green's program entitled "Labor and Employment Law Briefings for Human Resources Executives."

What is the Technology Team?

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