Maximizing Effectiveness of Participant-Level Fee Disclosures By: Yelena Gray

Since August 2012, retirement plan fiduciaries have been providing participants annually with detailed disclosures of their 401(k) plan fees, expenses and investment options.  Quarterly, participants also receive a statement of actual charges to their accounts.  Plan committees must provide these disclosures to meet their fiduciary obligations under Section 404(a) of ERISA.

Concerned with high plan fees, the DOL crystallized its thinking on the fiduciaries’ disclosure obligations in the final regulations issued in October 2010.  Most plans blasted out the first round of disclosures by August 30, 2012.  While well-intentioned, the disclosures neither made a splash when they first came out nor proved to be effective over the years in drawing participants’ attention to plan investments and expenses.  Vendors were quick to offer complimentary (and often rudimentary) disclosures to plan sponsors as a path to compliance.  The disclosures are often confusing, bland and incomprehensible for an average participant.  Although the disclosures are often available on a plan’s website, they are lost among other pieces of information.

While the whole exercise might or might not have been worth the effort, the requirement is here to stay for the foreseeable future.  Plan committees might as well make the best of it.  Participant-level disclosures should be an instrumental part of a more holistic effort to educate participants on their plan investments.  Plan committees would be well-advised to take a fresh look at the disclosures and find innovative ways of effectively sharing that information with participants.  As a refresher, let’s take a look at the disclosures’ components and then ponder the possibilities.

The first component is plan-related information.  Participants must receive this information by the time they can first give investment directions and then annually (or more precisely, every 14 months).  In this part, the fiduciaries explain the circumstances under which participants can direct investments in their accounts and any limitations on those directions; describe any voting or tender rights; identify investment options available under the plan and investment managers (e.g., vendors for a managed account option); and inform of the availability of any brokerage window options.  

With the same frequency, the disclosures must inform participants about any administrative expenses of the plan that are not included in the funds’ operating expenses (e.g., recordkeeping or legal expenses) and that are charged to the participant’s account, as well as the basis for the allocation of the expenses (pro rata or per capita).  This part also explains the fees paid out of the operating expenses of the investment alternatives (e.g., through revenue sharing).  Finally, the disclosures must explain individual expenses a participant may incur, such as loan or transaction-based fees.  All these explanations set the stage for quarterly statements of actual expenses charged to the participants’ accounts in the preceding quarter.

Plan-level disclosures must be periodically updated to reflect any changes in the underlying plan terms.

The focal point of the disclosures is investment-related information.  In a comparative format, the disclosures must provide for each “designated investment alternative” the name and type of the investment (e.g., money market), the average annual total return on investment for the last 1-, 5- and 10-year periods (or from the inception if in existence for less than 10 years), for fixed return investments, the current and minimum guaranteed return, the amount and description of shareholder-type fees (e.g., commissions or sales loads), any restrictions on transfer and purchase, total annual operating expenses expressed as a percentage (i.e., expense ratio) and as a dollar amount for $1,000 of investments, and certain other information.  The comparative chart must identify for each investment performance benchmarks based on an independent, broad-based index with their requisite 1-, 5- and 10-year returns.

A plan must also provide access to a website with the most current supplemental information about each alternative’s issuer, objectives and goals, principal strategies and risks, portfolio turnover rate, performance data, and fees and expense information. 

To aid participants in understanding complex investment and financial concepts, the plan must provide participants a glossary of the relevant terms.

Participants must receive certain additional information after they make an initial investment (e.g., those related to voting and tender rights).  Additional information must be provided upon request, including prospectuses or similar documents, any reports or financial statements (if provided to the plan), and the value of underlying assets that are plan assets.

This virtual treasure trove of information, however, may become too overwhelming and complex to be helpful to the average participant.  Plan committees struggle to draw participants’ attention to this information.  Another layer of challenges lies in the outdated information delivery model.  The DOL regulations still have not quite embraced electronic media and require snail mail or participant consent in many instances.  Even so, plan committees could take additional steps to promote investment literacy using participant disclosures, among other tools.

The first goal should be to get participants to pay attention.  Perhaps committees could take a page out of the on-line advertisers’ book.  The ubiquitous internet ads may be annoying, but they do catch the eye.  Readers can’t help but notice snippets like, “25 celebrities that aged badly.  Number 17 will shock you.”  If an employer has a marketing or media department, the committee can engage its services to launch (and sustain) an effective retirement education campaign.  Using animation, interactive pop-ups, social networks and apps (Facebook, Twitter, Pinterest and maybe even Snapchat, to name a few) may also trigger participants’ attention.  This could particularly appeal to millennials.

The next step is delivering information.  Given participants’ short attention span and the barrage of information they face daily, plan committees might embrace something of a bite-size approach.  Plan committees can broadcast (through various media) each segment of the disclosures more frequently than annually.  Each broadcast might also include related information, such as investment tips and tricks.  

Finally, committees could develop ways to solicit and process feedback on the provided information. 

With a little creativity, plan sponsors can convert dry and ineffective disclosures into meaningful communications with participants.  In so doing, they might necessarily minimize their risk of fiduciary liability.

Yelena Gray, Esq., is a member of Nixon Peabody LLP’s Labor & Employment practice group and a member of its Employee Benefits Team.

She can be reached at or 312-977-4158.

Yelena F. Gray

Yelena Gray is a member of Nixon Peabody’s Labor & Employment practice group and a member of their Employee Benefits team. She advises employers of all types and sizes on issues related to employee benefit plan design, implementation, administration, and regulatory compliance. Yelena also assists clients...

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