New 401(k) Plan Disclosure Rules

You may have heard about new disclosure rules that will soon apply to 401(k) plans. Before describing what’s ahead, however, a look back may be helpful. (While we’ll refer to 401(k) plans in this article, the new rules also apply to other employer-sponsored plans that allow participants to direct their own investments, commonly referred to as “self-directed plans.”)




Most 401(k) plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA)  governmental plans, owner-only plans, certain 403(b) plans, and certain church plans are not). One of the  primary reasons Congress enacted ERISA was to protect retirement plan assets, and one of the important ways ERISA does so is through its rules governing the conduct of plan fiduciaries.

In general, plan fiduciaries include the plan administrator, anyone providing investment advice for a fee, and anyone who exercises discretionary authority or control over the plan or the plan’s assets. Plan fiduciaries must discharge their duties with respect to the plan prudently, and solely in the interest of participants and beneficiaries.

A fiduciary who breaches his or her duty to the plan may be personally liable for any losses that occur as a result of that breach. The investment of plan assets is a fiduciary act governed by ERISA’s fiduciary standards.


Section 404(c) plans


But who is responsible for losses in a self-directed plan, where the participants themselves, and not the plan sponsor or an investment manager, select the investments for their retirement accounts? To answer this question, in 1992 the Department of Labor (DOL) issued regulations that allow 401(k) plan fiduciaries to avoid  responsibility for losses in self-directed plans that occur as a result of a participant’s exercise of investment control over his or her own account, if specific requirements are satisfied.

To avoid liability, self-directed plans must provide participants with a diversified choice of investments, and must disclose very specific information about the plan and its investments (and comply with certain other  reuirements). While these rules are voluntary, many (if not most) 401(k) plans choose to comply, in order to shift  liability for losses away from the plan’s fiduciaries.

A 401(k) plan that complies with these rules is known as a “Section 404(c) plan,” after the section of ERISA that governs self-directed plans. A plan’s summary plan description (SPD) should indicate if the plan intends to be a Section 404(c) plan.


What’s changing?


As self-directed plans have grown more popular, the DOL has become increasingly concerned that participants might not have access to, or might not be considering, information critical to making informed decisions about the management of their accounts–particularly information about investment choices, fees, and expenses.

As a result, in October 2010, the DOL issued new regulations that require all self-directed 401(k) plans–both those that choose to comply with Section 404(c) and those that do not–to provide the same detailed information to participants about the plan and its investments, on a regular and periodic basis, so that participants can make informed decisions with regard to the management of their individual accounts.

Some information must be provided on an annual basis, and some information must be provided quarterly. For calendar year plans, the initial annual disclosure must be furnished no later than August 30, 2012. The first quarterly statement must be furnished no later than November 14, 2012 (for July through September 2012).

Participants in 401(k) plans that comply with ERISA Section 404(c) are already receiving most of the information required by the new regulations. In general, more detailed information about investment fees and expenses must now be disclosed to participants.

Another change is that plan investment information must now be provided in chart form, so that participants are better able to compare investment alternatives. And plans will no longer be required to automatically provide a prospectus to participants, although one must be provided upon request.


Which plans must comply with the new rules?


These new disclosure rules apply to 401(k) plans and other plans that allow participants to direct their own  investments, but they don’t apply to IRAs, SEPs, or SIMPLE IRA plans. They also don’t apply to plans that aren’t covered by ERISA.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012