As a fiduciary, you’re required to disclose certain information about the plan to your participants and beneficiaries, as well as educate them about the plan’s saving and retirement investment opportunities. Some of this information is mandated by ERISA and/or the IRS. And some relies on your judgment concerning what your participants need to make informed retirement planning decisions. All of it becomes a critical part of a communication and education program that ensures your employees are aware of their options, informed to make appropriate decisions, and encouraged to actively participate in the plan.
Because participant disclosures are so vitally important to fulfilling your fiduciary responsibilities, be sure to watch for these potential mistakes:
Under the fiduciary reporting and disclosure provisions of the Employee Retirement Income Security Act of 1974 (ERISA), you must keep your participants and beneficiaries apprised of your plan’s provisions – and any changes – by providing them with certain documents and notices.
Failure to furnish these documents could subject your plan’s fiduciaries to liability and penalties under ERISA, as amended.
Some notices are required annually while others are specific to elements in your plan. These disclosures fall broadly into three categories:
In the first issue of the Fiduciary Responsibility Series we introduced ten “common fiduciary mistakes” — obstacles to fiduciary responsibility that may have damaging consequences. In this and other installments, we take a deeper look at these fiduciary missteps, grouped in four categories:
Plan documents: Plan document failures and failing to understand and follow restrictions in the plan’s funding vehicles
Disclosures to participants: Failing to disclose plan changes to participants and providing inadequate investment education and fee disclosure (this issue)
Investments: Improper selection and improper monitoring of plan investment alternatives
Fiduciary governance: Selection of plan fiduciaries; improper delegation of fiduciary functions; undue reliance on an “expert;” fidelity bonds and fiduciary liability insurance
1) Plan terms and changes. A Summary Plan Description (SPD) explaining the plan’s material provisions in simple language must be furnished to participants (and beneficiaries) within 90 days after becoming a participant or beneficiary. You are also required to disclose the plan’s terms to participants through an updated SPD every five years. Further, if you modify any of the plan’s material provisions, you must also provide either a revised SPD or a separate Summary of Material Modifications (SMM) within 210 days of the end of the plan year in which the plan was amended.
2) Plan finances. You must provide participants with a Summary Annual Report (SAR), which summarizes the financial information in the plan’s annual report (Form 5500). The SAR must be provided to participants by the end of the ninth month following the end of your plan year, taking into account extensions for the ERISA 5500 filing. For instance, if your ERISA 5500 filing, with extensions, is required by October 15, then you must provide the SAR to participants and beneficiaries receiving benefits by December 15 of that same year.
3) Statutory notices. You must provide initial Qualified Default Investment Alternative (QDIA) and auto-enroll notices (if applicable to your plan). Detail on QDIA notices is provided below with other investment disclosure and notice requirements. Initial auto-enroll notices must be provided at least 30 days prior to plan participation or, with respect to certain automatic enrollment plans, no later than an employee’s date of hire or as soon as practicable before his/her first automatic contribution to the plan.
Annual auto-enroll notices are required 30 to 90 days prior to the beginning of each plan year (see below for QDIA time frame). Finally, if you offer a 403(b) elective deferral plan, although this is not an ERISA fiduciary requirement, you should provide a universal availability notice that lets employees know the plan is available to them and describes eligibility requirements and contribution limits. There is no guidance expressed in the final 403(b) regulations governing the content for or timing of issuing the universal availability notice to participants, but you might want to provide it to new employees upon hire and to existing employees at least once a year.
Avoiding ERISA disclosure requirement failures
Being aware of your required participant disclosures is certainly a first step, but you must also implement processes for creating and disseminating this information in a timely manner and for documenting that you’ve done so. That’s where a trusted plan provider with a robust offering of communication, education and notification services can be of tremendous help.
Plan sponsors who choose to distribute disclosures electronically, are given a safe harbor under DOL regulations to do so if participants have regular access to their employer’s electronic system or website in the course of their job. Distributing disclosures electronically outside the workplace generally requires a written consent from the participant. Note that the DOL is soliciting comments on whether to expand or modify electronic disclosure provisions.
Given your fiduciary responsibility to provide participants with education concerning the plan and its investments, the quality of your communications and education program is vitally important. To motivate employees to join the plan and help participants become fully engaged in keeping their retirement savings on track, you must show them how the plan works, the benefits of participating, how to enroll (at least every 12 months) and information on how to invest their money.
Again, some of this information will come in the form of required disclosures, while the rest will depend on the support you provide through your communication, education and advice program. Note that the more continuous and relevant your communication to participants is, the more likely they are to remain engaged with the plan and focused on retirement readiness.
Investment disclosure and notice requirements
The increased attention being given to fee transparency due to new disclosure regulations presents plan sponsors with a valuable opportunity to help participants make more educated decisions about their retirement plans. And it’s clear that the spirit of the disclosure requirements puts the best interests of participants at the forefront of a sponsor’s concerns. Importantly, failure to provide these disclosures could result in a breach of fiduciary duty. Further, it could expose your plan fiduciaries to both professional and personal liability if a participant can show losses related to your failure to disclose required information. Your required participant investment disclosures include:
QDIA notices. If your plan offers a Qualified Default Investment Alternative, you must provide both initial and annual notices detailing the circumstances in which default investments will be made on participants’ behalf, their right to direct the investment, a description of the QDIA, transfer rights to other plan investment options and where to get information on the plan’s other investment options.
Investment option changes. Many plan sponsors are simplifying their plan investment menus, consolidating vendors, and considering the addition of lifetime income options. These types of changes can help make your plan run more efficiently and be easier for employees to understand. You are also required to give your participants advance notice (at least 30 days) of any changes to the plan’s investment lineup and/or any blackout periods that may limit their ability to execute transactions in their accounts.
Quarterly benefit statements. These must include all transaction activity within participant accounts (e.g., deferrals, fees, withdrawals, etc.) as well as the allocation of their account balance and future deferrals by asset class and other relevant information.
Annual vesting disclosure. You must let your participants know the vesting schedule of any employer contributions and what percentage of their workplace savings plan is currently vested.
At a minimum, you must provide your participants with educational materials that help them understand the investments available through your plan, including the risks, transfer policies and liquidity restrictions, as well as objectives and fees. Ongoing, a best practice would be to provide educational materials and tools that help them learn basic investment concepts such as risk and return as well as the importance of asset allocation and diversification. Whether you provide this education through newsletters, fact sheets, seminars, or electronic and print publications, remember the end goal is to help your employees take control of their investment decisions.
Keep in mind that it makes good sense to provide information that is appropriate to the different life stages of your participant population. How people think about their finances changes at every stage of their financial journey. The more you know about your participants, the easier it will be to provide the personalized, objective guidance they need to achieve financial well-being.
Remember to document the communications you’ve provided, the results of any campaigns, and attendance at any group meetings or individual appointments.
Although plan sponsors have always been obligated to monitor the reasonableness of plan fees, under the DOL’s new 408(b)(2) disclosure requirements, you now face new challenges to ensure that you’re not spending more than you should. Here are some ways to make sure you pay a fair and competitive price for the retirement plan services you receive:
For a comprehensive discussion of plan sponsor requirements under the new fee disclosure rules — and for access to articles, calendars and tools designed to make compliance easier — visit the TIAA-CREF Fee Disclosure Center at tiaa-cref.org/plansponsors.
In general terms, the new rules are designed to help participants make more informed investment decisions. The rules also require that you provide your participants with sufficient information about the plan and its investment options by August 30, 2012 (for calendar year and most other plans) and annually thereafter. Specifically, you must distribute the following information to your participants initially and on an ongoing basis:
Plan-related disclosure – information about your plan structure (i.e., investment options including brokerage windows), administrative fees and individual transaction expenses.
Investment-related disclosure – information about your plan’s investment options, including historical performance information, benchmark performance and expense information in a comparative chart that makes it easy for participants to compare their choices.
The plan and investment information must be provided on or before the date an employee or beneficiary can direct an investment under the plan. Note too that participants must receive information each quarter that describes any fees that were charged directly to their accounts. If any items listed in the disclosure are changed, participants must receive notification at least 30 days in advance.
Additionally, you must make available an investment website to provide supplemental investment information. Again, more information, guidance and tools about these important new regulations can be found in our Fee Disclosure Center at tiaa-cref.org/plansponsors.
In the next issue of our Fiduciary Responsibility Series, we will address fiduciary mistakes related to investments.
Visit tiaa-cref.org for more in our Fiduciary Responsibility Series and how fiduciaries can address the challenges they face.
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TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.