Heads Up

Plan advisers who have not already done so should hustle to help plan sponsors prepare for 404(a)(5).

Plan sponsors must provide fee information to participants by August 30, 2012, under the Department of Labor’s (DOL) Employee Retirement Income Security Act (ERISA) regulation 404(a)(5). 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—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, is concerned about plan sponsors’ lack of urgency in 404(a)(5) preparation. Sponsors have the misconception that the burden of participant disclosure falls on the recordkeeper, when, in reality, the recordkeeper is simply a service provider operating under a contract and does not act as the fiduciary, Reish explains.

Many plan sponsors still do not fundamentally understand that they can be liable for participants’ investment decisions, he says. “It’s still the plan sponsor’s responsibility. What [they] have not really looked at is that the legal burden is on the ERISA plan administrator.”

Why Is 404(a)(5) Pushed Aside?  

One possible reason the same urgency in complying with 408(b)(2) has not been applied to 404(a)(5) is the nature of the rules. The 408(b)(2) and 404(a)(5) rules have different enforcement mechanisms, Reish notes: 408(b)(2) is a prohibited transaction rule, in which the relationship between a plan sponsor and service provider, if in violation of the rule, must be terminated on July 1, whereas 404(a)(5) is a fiduciary rule. If plan sponsors fail to distribute fee disclosure information to participants by the August 30 deadline, they remain safe—until participants suffer losses from their investments.

“The very nature of the rule does not create the same sense of urgency,” Reish says.

Charlie Nelson, president of Great-West Retirement Services, echoes 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 says.

However, plan advisers are able to heighten this awareness. “Advisers can certainly make the plan sponsor aware of the penalties and consequences of noncompliance, which include personal liability of plan sponsor fiduciaries,” Nelson says.

If participant losses result from sponsors ignoring the rule, sponsors can incur a penalty from the DOL and forfeit the ability to use ERISA 404(c) as a defense, Reish explains.

An awareness of litigation claiming excessive fees for retirement plan investments is another reason plan sponsors have been paying more attention to provider-fee than participant-fee disclosure rules. Provider fee disclosure will help plan sponsors evaluate and monitor the fees their plans are paying. Reish cited Tussey v. ABB, Inc., in which the court found ABB Inc. and Fidelity breached some fiduciary duties owed to participants in ABB’s retirement plans (see “Pay Check,” page 20). 

Lastly, the media has been more focused on 408(b)(2), perhaps because the rule applies to almost every service provider, while participant disclosure falls on the smaller, recordkeeper population, Reish speculates.

How to Take Action  

So how can plan advisers help sponsors prepare for the 404(a)(5) deadline? Plan sponsors must first be educated about their fiduciary responsibility, and then understand what information their ­recordkeepers need in order to meet the participant disclosure regulation, Nelson suggests. 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.

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

Advisers and sponsors should discuss the time line in which the disclosures will be distributed and who will send them to participants, beneficiaries and eligibles, as required, Nelson adds.

Annual disclosures, initial disclosures and quarterly statements must be reviewed, according to Reish. The retirement plan website must also be examined, to ensure all designated investment alternatives are represented accurately and that the required information under 404(a)(5) is present, Nelson says. “Special attention should be [paid to] 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 adds.

Although the DOL does not require all investment information to appear on a single website, Nelson believes consolidation helps for user-friendliness. Sponsors should determine whether the information seems complete and is easy to understand, Reish says. “The purpose of the rule is to help participants. Are [the disclosures] written in a way that participants can understand? Are they helpful?”

Nelson says once the actual disclosures are made available, the sponsor and adviser should review them together before sending them out.

Participant Education Needed Before 404(a)(5) Deadline

If retirement plan participants are uneducated about 404(a)(5), they may be surprised by their first quarterly statement under this new regulation.

Employee Retirement Income Security Act (ERISA) regulation 404(a)(5) requires plan sponsors to provide fee information to participants by August 30. Jim Sampson, managing principal at Cornerstone Retirement Advisors LLC, says plan sponsors could face strong reactions from participants if they are caught off guard about 404(a)(5) and its purpose.

“If a company is not prepared for this, poor HR is about to get swamped,” he says.

Plan advisers should schedule educational meetings with participants and sponsors alike before the 404(a)(5) compliance deadline, he counsels. Participants must be made aware that the fees they see in their quarterly statements have always existed but were not visible until this regulation.

The adviser should communicate that displaying these fees is a positive change for participants and plan sponsors. Sampson explains the benefits of participant fee disclosure by saying, “When is the last time you bought something and had no idea what it cost? We do it every week in our 401(k) plan.”

Plan advisers should also schedule a meeting with participants to teach them how to read their quarterly statements, Sampson says.