4158 / What disclosures must be made with respect to investment-related information under the 404(a)(5) disclosure regulations?

Editor’s Note: Note that the SECURE Act mandated new disclosure requirements with respect to lifetime income options for qualified plan participants. See Q .

Automatic Disclosures

On or before the date on which a participant or beneficiary can first direct their investments, and on an annual basis thereafter, the plan administrator must disclose certain investment-related information concerning each designated investment alternative offered under the plan.

For each designated investment alternative offered (see Q 4129), the plan administrator must disclose the following items in a comparative chart format designed to facilitate a comparison of such information for each designated investment:

(1)     The name of the investment,

(2)     The type or category of the investment (e.g., money market fund, balanced fund (stocks and bonds), large-cap stock fund, employer stock fund, employer securities), and

(3)     Performance data.

For designated investment alternatives with a variable rate of return, the plan administrator must disclose the average annual total return of the investment for one, five, and 10-year calendar periods ending on the date of the most recently ended calendar year. The plan administrator must also disclose that an investment’s performance is not necessarily an indication of how the investment will perform.

For designated investment alternatives with a fixed rate of return, the plan administrator must disclose both the fixed or stated annual rate of return and the term of the investment. If the issuer of the fixed rate of return investment reserves the right to adjust the fixed or stated rate of return prospectively during the term of the contract, the disclosure must include the current rate of return, the minimum guaranteed rate under the contract, and a statement advising participants and beneficiaries that the issuer may adjust the rate of return prospectively along with information on how to obtain the most recent rate of return.

(1)     Benchmarks. For each designated investment alternative with a variable rate of return, the plan administrator must disclose the name and return of an appropriate broad-based security market indexed over the one, five, and 10-year periods comparable to the performance data of the designated investment alternative. The broad-based index fund used as a benchmark must not be administered by an affiliate of the designated investment alternative issuer, its investment advisor, or a principal underwriter, unless the index is widely recognized and used. If the designated investment alternative is a balanced fund that blends multiple appropriate broad-based securities market indexes, the plan administrator may use benchmark returns that are also a blend of index funds, provided they match the target blend of the designated investment alternative if the target blend of the investment is representative of the investment’s actual holdings.

Note that there are no benchmarking requirements for designated investment alternatives that have fixed rates of return.

(2)     Fee and expense information. For each designated investment alternative with a variable rate of return, the plan administrator must disclose: (a) the amount and a description of each shareholder-type fee (fees charged directly against a participant’s or beneficiary’s investment, such as commissions, sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, and purchase fees, which are not included in the total annual operating expenses of any designated investment alternative) and a description of any restriction or limitation that may be applicable to a purchase, transfer, or withdrawal of the investment in whole or in part (such as round trip, equity wash, or other restrictions); (b) the total annual operating expenses of the investment expressed as a percentage (expense ratio); (c) the total annual operating expenses of the investment for a one-year period expressed as a dollar amount per $1,000 investment; (d) a statement indicating that the fees and expenses are only one of several factors that participants and beneficiaries should consider when making investment decisions; and (e) a statement that the cumulative effect of fees and expenses can substantially reduce the growth of a participant’s or beneficiary’s retirement account, and that participants and beneficiaries can visit the Employee Benefit Security Administration’s website for an example demonstrating the long-term effect of fees and expenses.

(3)     Internet website address. The plan administrator must disclose an Internet website address that is sufficiently specific to provide participants and beneficiaries access to (a) the name of the designated investment alternative’s issuer; (b) the investment alternative’s objectives or goals, (c) the alternative’s principal strategies and principal risks; (d) the alternative’s portfolio turnover rate; (e) the alternative’s performance data updated on a quarterly or more frequent basis; and (f) the alternative’s fee and expense information.

(4)     Glossary. The glossary must include terms that assist the participants and beneficiaries in understanding the designated investment alternatives. The glossary may be provided at an internet web address if the address contains information that is sufficiently specific to provide access to such a glossary as well as a general explanation of the purpose of the address.

(5)     Annuity Options. If the designated investment alternative is part of a contract, fund, or product that permits participants or beneficiaries to allocate contributions toward the future purchase of a stream of retirement income payments guaranteed by an insurance company, the information provided must include the (a) name of the annuity contract, fund or product; (b) the annuity’s objectives or goals (e.g., to provide a stream of fixed retirement income payments for life); (c) the benefits and factors that determine the price of the guaranteed income payments; (d) limitations placed upon the participant or beneficiary’s ability to withdraw or transfer amounts allocated to the option, as well as a description of any fees or charges applicable to such withdrawal or transfers; (e) fees that will reduce the value of amounts allocated by participants or beneficiaries to the option (e.g. surrender charges, market value adjustments, administrative fees); (f) a statement that the guarantees of an insurance company are subject to its long-term financial strength and claims-paying ability; and (g) a website address sufficiently specific to provide the information contained in items (a) through (f) above.

Information to be Provided Subsequent to Investment

Subsequent to investment in any designated investment alternative, to the extent that voting, tender and similar rights are passed through to a participant or beneficiary of the plan, the plan administrator must furnish to the participant and beneficiary any materials provided to the plan relating to the exercise of voting, tender and similar rights.

Information to be Provided upon Request

Upon request of the participant or beneficiary, the plan administrator must provide a copy of any prospectuses (or short-form or summary prospectus), a copy of any financial statement or report relating to the designated investment alternative to the extent they were provided to the plan as well as a statement of the value of a share or unit of each designated investment alternative on the date of valuation.