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Good News, 401(k) Fiduciaries! DOL Fee Disclosure Rules Make ERISA 404(c) Compliance Simple

Eric Droblyen

January 25, 2023

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During the 4th quarter of each year, most 401(k) sponsors are distributing notices to participants that disclose certain plan information about the upcoming year – the safe harbor 401(k) notice is an example. Most sponsors try to coordinate the distribution of these notices with their plan’s annual fee disclosure notice, which is required under ERISA 404a-5 (“404a-5 notice”).

The 404a-5 notice discloses certain plan expenses (administration, individual and investment-related) to 401k participants. First required in 2012, its purpose is to help 401(k) participants make informed plan choices.

While the 404a-5 notice is primarily intended to benefit participants, it can also benefit 401(k) plan sponsors. How? By making it easier for the plan to meet ERISA section 404(c) compliance requirements.

What is ERISA section 404(c)?

ERISA section 404(c) is a powerful tool for mitigating fiduciary liability. When a 401(k) plan satisfies 404(c) compliance requirements, fiduciaries can shield themselves from liability due to poor investment decision-making by participants. While 404(c) does not protect 401(k) fiduciaries from making imprudent investment choices at the plan-level, it does provide protection when participants select plan investments for their personal account and lose money.

To take advantage of ERISA section 404(c), a plan must satisfy three categories of requirements:

  1. Investment menu requirements – a broad range of investment alternatives with differing potential for investment risk and return must be offered to participants.
  2. Plan design and administrative requirements – participants must have the right to timely direct the investment of their account.
  3. Information and disclosure requirements – participants must receive certain information automatically in advance of their first plan investment or upon request.

These requirements are explained in further detail in this ERISA section 404(c) checklist.

404a-5 notices to the rescue!

Meeting the first two 404(c) requirements has never been particularly difficult.

  • To meet 404(c) investment menu requirements, a plan must offer at least three “core” investment options, with materially different risk and return characteristics, which enable participants to achieve any prudent point on the risk/return spectrum. These 3 options are most commonly equity (stocks), fixed income (bonds), and capital preservation (money market or stable value) funds.
  • To meet 404(c) plan design and administrative requirements, a plan must permit participants to transfer into core investment options at least as frequently as they are permitted to transfer out of the most volatile investment option available, but no less frequently than quarterly.

Meeting the information and disclosure requirements of 404(c) was a different story. The government gave no clear guidance for disclosing this information, which made compliance confusing – not a good thing for 401k fiduciaries seeking liability relief.

This changed when the 404a-5 regulation became effective. The annual notice required under this regulation disclosed almost all of the required 404(c) information. In fact, the only 404(c) disclosure requirement not covered by a 404a-5 notice is the simple statement explaining a plan intends to comply with 404(c). Today, this statement is most commonly made in a Summary Plan Description (SPD).

More regulation leading to less fiduciary liability?

If you sponsor a 401(k) plan that allows participants to direct the investment of their account, you want the fiduciary protection provided by ERISA section 404(c) - participants make bad investment choices, even when expert advice is easily accessible. When they do, you don’t want to be found responsible for their losses.

Fortunately, the 404a-5 notice makes 404(c) compliance easier than ever.   A point worth noting as you distribute 401(k) notices this year.

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