As a financial advisor, you are likely familiar with jargon and abbreviations. Our industry can be complex and confounding, which is precisely why it’s our responsibility to make sense of potentially confusing information and present it to clients in a digestible way.
Regarding retirement plans, clear communication with plan sponsors and plan participants is paramount to success and ERISA 404a-5 regulations, which are designed to protect plan participants, provide advisors with a key opportunity to educate participants and help them make informed decisions.
The overarching goal, of course, is to help participants reach better retirement outcomes.
Here is an overview of ERISA’s plan participant disclosure requirements:
What is participant disclosure?
Under the ERISA 404a-5 regulations, if a retirement plan delegates investment responsibility to plan participants, the plan must inform participants of their rights and responsibilities for selecting plan investments. The plan must also explain how plan administration and investment expenses are paid.
Who must receive fee disclosure?
All eligible employees and all plan participants in plans subject to the disclosure regulations must receive the participant-level fee disclosures. Recipients include:
- Current plan participants
- Employees who meet the eligibility requirements but have not yet enrolled in the plan, or have chosen to opt out of participating in the plan
- Former employees who have an account balance in the plan
- Beneficiaries of deceased participants
What needs to be disclosed?
Participants must receive disclosures that fall into two buckets: plan-related disclosures and investment information disclosures. Those disclosures must be received before the date they can first direct their investments, and at least annually thereafter.
The disclosure must include “general plan information” to explain how the plan operates. This includes a list of investments available under the plan, identifying any designated investment alternatives and designated investment managers; instructions on how to make an investment election; information on the exercise of voting, tender, and other shareholder rights; and a description of any “brokerage window” available within the plan.
The disclosure must also explain fees and expenses for plan administration, such as record keeping fees, legal expenses, and accounting expenses. The disclosure must explain how the fees are assessed (for example, as a flat dollar amount for all participants or pro rata based on a participant’s percentage of overall assets in the plan).
In addition to the administrative fees that cover services common to all participants in the plan, the disclosure must list other fees that might be charged to a specific participant’s plan account, rather than allocated across all plan participants’ accounts. These fees relate to optional services that the participant selects or specific transactions the participant initiates. Common examples include fees for taking a loan or a distribution, using investment advice services, submitting a qualified domestic relations order, or accessing a brokerage window.
Investment-related information also must be included in the annual fee disclosures to participants. Participants must receive this information in a comparative format, such as a chart, listing each designated investment alternative offered under the plan. Most participant fee disclosures are designed to incorporate the DOL Model Comparative Chart that was included in the fee regulations.
If all of this sounds overwhelming, don’t fret. It isn’t uncommon for plan sponsors to rely on record keepers or other service providers to help compile the fee information and deliver the disclosures to participants.
Nonetheless, this is good information to review, as plan sponsors and ERISA plan administrators have a fiduciary responsibility to ensure that plan participants receive the information required under the participant-level fee disclosure requirements.
Victory Capital Management, Inc. is a Registered Investment Advisor. The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations in this report are subject to change without notice and are not intended as individual investment advice. Not to be used as legal or tax advice.
This material is for information and illustrative purposes only and is not intended to be viewed or construed as a recommendation or suggestion that you take a particular course of action with regard to investments. In providing this material, we are not undertaking to give advice in a fiduciary capacity, to you, or to any retirement account(s) for which you act as a fiduciary.
©2018 Victory Capital Management Inc.