Preparing for 2012

As 2011 now comes to a close, significant changes are in store for the retirement plan industry. By 2012, U.S. Department of Labor (DoL) regulations regarding investment advice to plan participants and beneficiaries will be effective. In addition, the DoL is expected to re-propose its rule on the definition of a fiduciary in early 2012. Finally, in the upcoming year, plan sponsors will need to comply with new participant fee disclosure rules.

These changes encompass broad fiduciary considerations, potentially adding to your responsibilities as a retirement plan sponsor. This month, DCAdvisors recaps what they mean for you and your plan participants. Don’t hesitate to call us with questions as you prepare for these changes in the year ahead.

Investment Advice for 401(k) Plans

The DoL’s new participant advice rules, effective December 27, 2011, provide a framework to address potential conflicts of interest with service providers. Previously, employers and plan sponsors were reluctant to make certain types of investment advice available to plan participants as there was insufficient clarification around the rules that governed these arrangements. The regulation implements a prohibited transaction exemption that was part of the Pension Protection Act of 2006.

Under the new rules, investment advisers can give fiduciary investment advice to those investing in the plan—even if those advisers receive fees from the companies providing the investments—as long as long as that advice is given through one of two arrangements:

• A computer modeling arrangement, in which investment advice provided is based on a computer model certified as unbiased by an independent expert, or
• A level-fee arrangement, in which the adviser is compensated on a “level fee” basis, where fees don’t vary based on the investments selected.

Currently, many investment advice arrangements are being provided under DoL Advisory Opinion 2001-091A, also known as The SunAmerica Opinion. Investment advice arrangements that operate under this opinion utilize a computer model developed by an independent third-party and also satisfy other requirements. The new advice regulations implemented as part of the Pension Protection Act of 2006 do not affect investment advice arrangements that operate under this advisory opinion.

Investment advice can be a strong tool to improve participant efforts for retirement. Fiduciaries need to evaluate and monitor advice products offered to participants, ensuring consistency with plan goals and regulations. We routinely work with our clients to evaluate advice options, supporting the best tools and resources available for retirement plan participants.

Read the DoL Press Release to learn more.

Fiduciary Definition Rule

On September 19, 2011, the DoL announced its intention to re-propose its rule that would have broadened the definition of a “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA).

In October 2010, the DoL issued a proposed rule to expand the scope of who is considered an ERISA fiduciary. Fiduciaries could, under new rules, potentially include plan service providers, registered investment advisers, broker-dealers and valuation firms. As such, they would have a duty to act solely in the interest of plan participants and their beneficiaries.

The DoL has been evaluating the definition of retirement plan fiduciary for years in an attempt to prevent potential conflicts of interest from compromising the quality of investment advice provided to plan participants. The DoL’s decision to re-propose the rule is in response to criticism that its October 2010 proposal was too broad. It is also in response to requests from the public and Congress that more time be allowed for input.

The new proposed rule is expected to be issued in early 2012.

Read the DoL Press Release to learn more.

Participant Fee Disclosure Rules

Regulations requiring certain fee disclosures by plan sponsors will take effect in 2012. Under the new regulations, plan fiduciaries are required to disclose plan- and investment-related fee and expense information to individuals participating in 401(k), 403(b) and other defined contribution plans that have participant-directed investments. The DoL’s goal is to help ensure eligible plan participants have sufficient information to make informed investment decisions.

Under the new regulations, plan participants must receive an explanation of general administrative service fees and individual expenses on an annual basis. They also must receive information about the dollar amount of fees and expenses charged to participant accounts on a quarterly basis.

On September 13, 2011, the DoL’s Employee Benefits Security Administration issued an interim policy regarding the use of electronic media to satisfy participant disclosure requirements. The policy was issued in response to requests by plan sponsors and service providers.

The final disclosure rules apply to plan years beginning on or after November 1, 2011, and contain a 60-day transition rule that works in conjunction with the new service provider fee disclosure rules (408(b)(2) Regulation).

Read the DoL Press Release to learn more.