Plan Sponsors Should Not Delay Preparing for 404(a)(5)

April 6, 2012 ( - With all the attention surrounding the 408(b)(2) regulation, some industry experts think preparation for 404(a)(5) is falling by the wayside.

Under the Department of Labor’s (DOL’s) 408(b)(2) regulation, covered service providers have until July 1, 2012, to be in compliance by disclosing information about fees and services to plan sponsors of Employee Retirement Income Security Act (ERISA) plans (see “DOL Issues Final Rule on 401(k) Fee Disclosure”). Under 404(a)(5), plan sponsors have 60 days from the effective date of the 408(b)(2) plan provider disclosure rules to provide fee information to participants.  

Fred Reish, chairman of the financial services ERISA team at Drinker Biddle & Reath LLP, told PLANSPONSOR 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, whereas404(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 sponsors should be informed of the possible consequences of not following 404(a)(5). If participant losses are suffered as a result of plan 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 does a plan sponsor prepare for the 404(a)(5) deadline? Plan sponsors must first recognize 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.

Plan sponsors, recordkeepers and TPAs must maintain frequent communication to ensure all the necessary information is provided to the recordkeeper in order to compile the participant fee disclosure, Nelson said.

Reish emphasized that plan sponsors should immediately take action by contacting their service providers and recordkeepers to request samples of the information that will be provided to participants. Plan sponsors should review the annual disclosures, initial disclosures and what the quarterly statements will look like under the new rule, Reish said.

Plan sponsors also need to review their retirement plan website to make sure all the designated investment alternatives are represented accurately, and that all the required information under 404(a)(5) is included, Nelson said. Plan sponsors must pay special attention to unique investment options such as employer stock and custom asset allocation models, as they are most likely to have compliance issues, 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?”

Should the plan sponsor notice anything problematic, it is important to work with plan providers to correct any deficiencies, Reish concluded.