(b)lines Ask the Experts – Participant Disclosure for Provider’s Entire Platform
“One provider offers about 20 investments, but the other two are large mutual fund providers who offer their entire suite of proprietary mutual funds to our plan participants. Each mutual fund array exceeds 100 investments, though many of the funds contain little in the way of participant assets. Since participants in our plan are free to choose among the three vendors in our plan, must the participant disclosure include the hundreds of investments that are available to our participants? If so, the disclosure will run into the tens of pages, and will be an expensive proposition to deliver to all of our participants.”
Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:
The short answer is, no, it may not be necessary to provide the require disclosure for all the investments in your plan; however, there is a larger fiduciary concern with the approach you are taking to manage your participant investments that the Experts should address as well.
Fortunately, the DOL recently released FAB 2012-02 (see “Fee Disclosure Guidance Provides 403(b) Comfort”) which addresses both issues. In Q&A #30 of the FAB, the DOL states that the required disclosure information must be provided for all “designated investment alternatives” under a plan. However, strictly as a matter of enforcement of the final fee disclosure regulation, the DOL will not require that ALL of the investment alternatives in a plan with more than 25 investments be treated as “designated investment alternatives” (and thus be required to disclose specific investment information) if the plan administrator:
- makes the required disclosures for at least three of the investment alternatives on the platform that collectively meet the “broad range” requirements in the ERISA 404(c) regulation, 29 CFR § 2550.404c-1(b)(3)(i)(B); and
- makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries, or, in the case of a plan with more than 500 participants and beneficiaries, at least one percent of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.
So, if I simply designate three investment alternatives for disclosure as required under the existing 404(c) rules, I only need to disclose those remaining investments in which more than five participants (or 1% of participants, if the plan has more than 500 participants) participate and I am off the hook, correct? Unfortunately, as the DOL also states in this Q&A, the answer is "No."
If you simply take this approach without further action, you have an issue related to what exactly are the "designated investment alternatives" under the plan. Though there are no stipulations as to any specific number of investment alternatives in the regulations that must be designated, the Q&A states that "the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under section 404 of ERISA." So simply allowing participants to choose among hundreds of investment alternatives without specifying a more limited number of "designated investment alternatives" does not appear to be prudent fiduciary practice.
Furthermore, even if a more limited number of "designated investment alternatives" is specified, if additional investments are offered that are utilized by significant numbers of participants, those investment should be evaluated as well for possible inclusion as "designated investment alternatives."
Thus, even if a plan offers "designated investment alternatives" among an available array of hundreds of mutual funds, such a list of "designated investment alternatives" may need to be continuously adjusted to reflect actual participant usage. It is for this reason that many plan sponsors have, in recent years, reduced the number of investment offerings made available to participants, to the extent that their agreements with the investment providers permit them to do so.
You may wish to consider working with consultants and counsel well versed in such issues to determine whether offering hundreds of investments remains a prudent strategy from a fiduciary perspective.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
« Segal Announces New York Regional Manager