Plan Advisers Should Urge Sponsors to Prepare for 404(a)(5)

Plan advisers should not delay helping plan sponsors prepare for the 404(a)(5) regulation as the deadline looms.

Under the Department of Labor’s (DOL’s) 404(a)(5) regulation, plan sponsors must provide fee information to participants by August 30, 2012. However, with all the attention surrounding the 408(b)(2) regulation—which requires most service providers of retirement plans to disclose information about fees and services to plan sponsors by July 1, 2012—some industry experts think preparation for 404(a)(5) is falling by the wayside.

Fred Reish, chairman of the financial services ERISA team at Drinker Biddle & Reath LLP, told PLANADVISER he is concerned about plan sponsors’ lack of urgency in preparing for 404(a)(5). He said he believes plan sponsors have a misconception that the burden of participant disclosure falls on the recordkeeper. In reality, Reish explained, the recordkeeper is simply a service provider operating under a contract and does not act as the fiduciary. Reish said he thinks many plan sponsors still do not fundamentally understand that they can be liable for participants’ investment decisions.

“It’s still the plan sponsor’s responsibility,” Reish said. “What [plan sponsors] haven’t really looked at is that the legal burden is on the ERISA plan administrator.”

Reish speculated several reasons that the same urgency in complying with 408(b)(2) has not been applied to 404(a)(5).

Reasons 404(a)(5) Is Being Pushed Aside 

One possibility is the nature of the rules. The 408(b)(2) and 404(a)(5) rules have different enforcement mechanisms, he explained; 408(b)(2) is a prohibited transaction rule, in which the relationship between a plan sponsor and service provider must be terminated on July 1 if it is in violation of the rule, whereas 404(a)(5) is a fiduciary rule. If plan sponsors fail to distribute fee disclosure information to participants by the August 30, 2012, deadline, the participants first have to suffer losses from their investments in order for plan sponsors to “run into trouble.”

“The very nature of the rule doesn’t create the same sense of urgency,” Reish said.

Charlie Nelson, president of Great-West Retirement Services, echoed Reish’s concern. “Our general sense from the industry is it’s not as urgent of an issue [as 408(b)(2)], and we’re trying to raise awareness,” he said.

Plan advisers, Nelson added, can help raise this awareness. “Advisers can certainly make the plan sponsor aware of the penalties and consequences of non-compliance, which include personal liability of plan sponsor fiduciaries.”

If participant losses are suffered as a result of sponsors not following the rule, it can result in a potential penalty from the Department of Labor (DOL), as well as the inability to use ERISA 404(c) as a defense, Reish explained.

Another reason plan sponsors have been paying more attention to 408(b)(2) than 404(a)(5) is the awareness of class-action lawsuits evaluating revenue sharing, which Reish said is closely tied to 408(b)(2). He cited Tussey v. ABB, in which the court found ABB Inc. and Fidelity breached some fiduciary duties owed to participants in ABB’s retirement plans (see “Employer to Pay for Failing to Monitor RK Costs”).

Lastly, Reish said media attention has been more focused on 408(b)(2), which he speculates is because that rule applies to almost every service provider, whereas participant disclosure falls on the smaller recordkeeper population.

How to Take Action  

So how can plan advisers help sponsors prepare for the 404(a)(5) deadline? Plan sponsors must first be educated on their fiduciary responsibility, Nelson said, and then understand the information their recordkeepers need in order to meet the participant disclosure regulation. For example, small 401(k) plans often use a third-party administrator (TPA) to calculate eligibility, so the recordkeeper must acquire the information from the plan sponsor or TPA.

Advisers should review the information the recordkeeper will provide the plan sponsor for 404(a)(5) to ensure it includes everything required in the disclosure, Nelson said. “Advisers should engage in conversation with recordkeepers to review samples of all fee disclosure documents for their plan sponsors,” he explained. “While actual disclosure documents may not be available today, templates are likely available and should be reviewed, along with the timeline expected for receipt of the disclosures.”

Advisers and sponsors should discuss the timeline in which the disclosures will be distributed and who will be sending them to participants, beneficiaries and eligibles as required, Nelson added.  

Annual disclosures, initial disclosures and quarterly statements must be reviewed, Reish said. The retirement plan website must also be examined to make sure all the designated investment alternatives are represented accurately, and that all the required information under 404(a)(5) is included, according to Nelson. “Special attention should be made of challenging areas around unique investment options such as ‘custom’ models, employer stock [and] non-publicly traded investment options to assure required website information will be available,” he added.

Although it is not required by the DOL to offer the investment information on a single website, Nelson said he believes one website is the best practice to make it user-friendly.

Sponsors should determine whether the information seems complete and is also easy to understand, Reish added. “The purpose of the rule is to help participants,” Reish said. “Are [the disclosures] written in a way that participants can understand them? Are they helpful?”

Once the actual disclosures are made available, the sponsor and adviser should review them together before sending, Nelson concluded.