Observations on DOL's Proposed Regulations Governing Disclosure Requirements for Participant-Directed Individual Account Plans

The DOL has issued its new fiduciary disclosure requirements for participant-directed individual account plans. You can access the following regarding the regulations:

News Release
Fact Sheet
Preamble and Prop. DOL Reg. Secs. 2550.404a-5 and 2550.404c-1
Model Comparative Chart

Some brief observations:

(1) The regulations have a proposed effective date of January 1, 2009 and would apply to all participant-directed plans, regardless of whether or not they have sought to comply with ERISA section 404(c).

(2) The DOL states its legal basis for issuing the regulations in the preamble:

The Department believes, as an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose on fiduciaries of all participant-directed individual account plans a duty to furnish participants and beneficiaries information necessary to carry out their account management and investment responsibilities in an informed manner. In the case of plans that elected to comply with section 404(c) before finalization of this proposal, the requirements of section 404(a)(1)(A) and (B) typically would have been satisfied by compliance with the disclosure requirements set forth at 29 CFR § 2550.404c–1(b)(2)(i)(B). However, the Department expresses no view with respect to plans that did not comply with section 404(c) and the regulations thereunder as to the specific information that should have been furnished to participants and beneficiaries in any time period before this regulation is finalized.

(Query regarding that last statement and how it might impact current fee litigation.)

(3) The proposed regulation would amend the regulation under ERISA section 404(c), 29 CFR 2550.404c–1, to make the disclosure requirements for section 404(c) compliant plans consistent with those that would apply to all participant-directed individual account plans generally.

(4) The Department estimates that approximately 437,000 participant directed individual account plans covering 65,269,000 participants would be affected by the proposed regulation. Of these plans, 275,000 plans, covering 49,212,000 participants and beneficiaries are reported to comply with ERISA section 404(c), and the remaining 162,000 plans covering 16,057,000 participants and beneficiaries are not.

(5) The Department assumes that in the year of implementation, all 437,000 affected plans will conduct a legal review to verify their compliance with the proposed regulation and prepare the required disclosures. The Department estimates that the review would, on average, take one-half hour of a legal professional’s time at an (in-house) hourly rate of $113 resulting in a total aggregate estimate of approximately 218,000 legal hours at an equivalent cost of approximately $24,628,000.

(Doubtful that it will only take one-half hour.)

(6) Regarding the required investment-related information, it is interesting what the DOL has to say about risk:

. . . [T]he Department attempted to define the most essential information about available investment options that should be automatically furnished in a comparative format to participants and beneficiaries, and included that information in the proposal. That information includes historical and benchmark performance, and fees and expenses. In addition, the Department considered including information on risk, but believes that risk information is not easily translated into a simple uniform comparative format that can be described in a regulatory standard. The Department notes that in most cases more detailed information, including information on risk is readily available to participants and beneficiaries through Internet Web sites, should they decide to review such information in assessing the various investment options available under their plan.

(7) Written comments on the proposed regulation should be received by the Department of Labor on or before September 8, 2008. You can make your comments here. (Click on “Add Comments.”)

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