On November 30, 2010, the Department of Labor (DOL) proposed new regulations requiring plan fiduciaries to provide enhanced disclosures about target date funds to retirement plan participants directing their own investments. The proposal would also amplify the investment information that must be disclosed about a plan's qualified default investment alternative (QDIA), even if it is not a target date fund. DOL proposes that these amendments would be effective 90 days following publication of the final rule in the Federal Register. Comments on the proposed regulations must be received no later than January 14, 2011.
This new development represents the intersection of two different DOL regulatory initiatives. DOL has for several years been in the process of considering and then requiring enhanced disclosures for participants who direct the investment of their own retirement plan accounts.
Simultaneously, DOL and the Securities and Exchange Commission (SEC) have jointly been considering issues raised by the performance of target date funds in late 2008 and early 2009.
The agencies have announced that they also intend to (i) jointly publish a target date fund compliance checklist for retirement plan fiduciaries and (ii) continue to examine how target date funds are marketed.
In the disclosure to all participants in participant-directed plans under DOL's October 2010 regulation, DOL's new proposal would require the following additional information for a designated investment option that is a target date, life-cycle or similar fund:
This information would be provided as an appendix to the chart comparing the plan's investment alternatives (including the target date fund), which is already required under the October 2010 regulation.
Where a target date fund or portfolio is the plan's QDIA, the proposal would require this additional information be included in the initial and annual QDIA notices to participants specified in the October 2007 QDIA regulation.
These requirements generally do not apply by their terms to individual retirement accounts (IRAs).
The SEC's June 2010 proposal is similar in concept to the DOL proposal but differs in certain details. Funds subject to both proposals would need to meet the DOL and SEC requirements cumulatively.
For the initial and annual QDIA notices, DOL's October 2007 QDIA regulation currently requires only the following investment-related information: "a description of the qualified default investment alternative, including a description of the investment objectives, risk and return characteristics (if applicable), and fees and expenses attendant to the investment alternative." To better conform the QDIA disclosure to the October 2010 participant disclosure requirement, DOL's proposal would clarify that investment-related information for any QDIA must include all of the following:
DOL specifically requested comments on the extent to which these requirements should conform to the October 2010 regulation and whether they should incorporate by reference the participant disclosure regulation's more specific standards for investment-related information. For instance, under the rules as currently proposed, a QDIA notice would not be required to reference a broad-based securities index as a benchmark for the QDIA, while such information generally would be required under the participant disclosure regulation.
Additional proposed amendments would further align the QDIA disclosure requirements with the participant disclosure regulation. For instance, the current requirement under the QDIA regulation that participants be provided with information regarding voting rights, as well as annual prospectuses, would remain, but the requirement would cross-reference the participant disclosure regulation. Thus, as a condition for QDIA relief, prospectuses would be required to be furnished upon request to a participant invested in a QDIA, as would copies of financial statements, statements of share valuations, and a list of the assets comprising the QDIA. Additionally, the QDIA notice would be required to alert participants to the availability of additional information about both the QDIA and the plan's other investment alternatives. Currently the QDIA regulation only requires the plan to make available comprehensive information about the plan's investment alternatives other than the QDIA.
Since 1981, Mark Smith, a member of Sutherland's Tax Practice Group, has
advised clients on tax, ERISA and other issues related to retirement,
executive compensation, insurance, cafeteria and other employee benefit
plans. He is engaged on behalf of insurance companies, broker-dealers,
investment advisers and managers, banks, consulting firms, other service
providers and plan sponsors for a range of consulting, transactional,
regulatory and litigation matters.Jamey Medlin is a member of Sutherland's Tax Practice Group. Her
practice focuses on employee benefits and executive compensation.
If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.
© 2010 Sutherland Asbill & Brennan LLP. All Rights Reserved.This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.