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ERISA Tips: Timing of Participant Disclosure

Editor’s Note: ERISA Tips is a feature provided with you in mind — to make the newsletter more useful to you! If you have any content for ERISA Tips or the 403(b) Advisor that you would like to contribute or suggest, please contact John Iekel, editor of the 403(b) Advisor, at [email protected].

The following information concerning timing of participant disclosure is derived from information contained in the publication, “The Fiduciary Duty of Participant Disclosures,” by Kevin Wiggins of Thorpe Reed & Armstrong.

The participant disclosure requirements the Department of Labor (DOL) issued require that the following general plan-related information be disclosed:

  • an explanation of the circumstances under which participants and beneficiaries may give investment instructions, and of any specified limitations the plan sets for investment instructions, including any restrictions on transfer to, or from, a designated investment alternative;

  • a description of, or reference to, plan provisions relating to the exercise of voting, tender and similar rights concerning an investment in a designated investment alternative as well as any restrictions on those rights;

  • an identification of any designated investment alternatives offered under the plan and any designated investment managers; and

  • a description of any brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to coose investments other than those the plan specifies.

This information must be disclosed to each participant and each beneficiary on or before the date he or she can first direct his or her investments, and at least annually after that.

It may not always be feasible to do so on or before the date the plan says a participant or beneficiary has the legal right to direct the investment of his or her account. “The average plan administrator will generally not have the skills necessary to foresee a participant’s death. Requiring that disclosures be made prior to a participant’s death would require the administrator to acquire the skills of a psychic, oracle, or even a holy prophet or a saint,” says Wiggins.

Wiggins argues that that is not the DOL’s intention. Rather, he says, “it appears then that the better interpretation is disclosures are not required until the participant or beneficiary has the right, as a factual matter, to direct investments.”

In addition, says Wiggins, a participant or beneficiary could have the legal right to direct investments, but not have actual access on the same date, in the following situations:

  • participant death

  • participant hire date

  • the date a QDRO is approved

It can be helpful if administrators send out the required disclosures with the plan’s early communications to an individual who has a legal right to direct investments, Wiggins says. “The earlier the better, and the plan’s first communication would be best,” he adds. Another thing that can be done, Wiggins suggests, is for disclosures to be sent with the first communications mailed to the beneficiary when a participant dies.

“Administrators should review their plan documents to determine when participants and beneficiaries first have a legal right to direct investments, and then review the plan’s operations to determine how and when, as a factual matter, participants and beneficiaries obtain access to the plan’s systems that enable them to direct their investments,” says Wiggins. “Logically there must be some communication with participants and beneficiaries for them to access their accounts. The disclosures should be sent with that communication,” he adds.

Wiggins adds a caveat: a court or the DOL could rule that under the participant disclosure requirements, disclosure may be required on or before the date the participant or beneficiary has the legal right to direct the investment of his or her account.