404a5 Fee Disclosures

[CLE401kGuy]

Quick post to see if people agree with my viewpoint here:

1) The plan sponsor wishes to replace 3 funds in the 401k plan because a new share class with lower expenses is available

2) The plan has 6000 total participants but only 550 have balances

3) 404a5 requires that the 6000 participants receive the 30 day notice indicating the change

4) Once the change occurs no follow up with a fully updated 404a5 disclosure is required (outside of when the 12 month period ends from when we last sent a full disclosure to all 6000 people)

So - to minimize the cost of providing all these notices and disclosures would we want to time the fund change and 30 day notice to when the 12 month period is up to resend the full 404a5 disclosures (which will actually not reference the change in the 30 day notice because it hasn't happened yet). We are also tying to when we send the Summary Annual Report which goes to the same audience. 3 Birds, 1 Stone - Right?

The quandary, you have a fund that should be replaced for a better fund immediately, but the cost of providing the 30 day notice is prohibitive on a plan with many more total participants than participants with balances. Seems like taking the risk of not sending the 30 day notice to all 6000, outweighs waiting to make the change.

[Lou S.]

Just thinking out loud but what is the penalty of not providing the notice when you replace the XYZ mutual fund class N with XYZ mutual fund class M where the ONLY difference between class N and class M is that class M expense ratio is lower than class N?

This seems like a place where the DOL rules inadvertently hurt the the participants they are trying to help.

[BG5150]

How much would it cost to send those notices?

A case of paper is 25 bucks. Another ream or two is another $5 say.

Envelopes. $200-300?

Stamps: $2,940.

Administrative cost? [insert figure]

Round it all up to $4,000.

For a company that has 6,000 participants, is that cost relevant?

What about the cost if the DoL comes asking? Greater or less than $4,000?

[shERPA]

How much money is in the affected funds and what is the delta on the fund expense? Calculate the potential fee savings during the proposed delay period compared to the cost of the additional notices and distribution. Seems to me if the fee savings over X months is less than the cost of the notices then the fiduciaries can prudently decide to delay the change.

[BG5150]

^ I would say this is a relevant argument if the costs of mailing was to be borne by the participants.

[GMK]

I like following the rules, but I wonder who is going to complain if they have access to the same funds but now at a lower expense ratio even though they didn't receive a piece of paper announcing the decrease in cost to them 30 days earlier. As Lou S. asked, what is the penalty the DOL would invoke?

Does the fund company notify anyone 30 days before they increase an expense ratio?

[Peter Gulia]

I have advised clients in situations that involve questions about whether the benefit likely to be obtained from an improved investment menu outweighs the plan's expense for communications that the plan's administrator finds necessary. These evaluations are fact-sensitive, and also often turn on the intellectual rigor of the fiduciaries' assumptions about the probabilities of uncertain events.

But here's a point that I suggest as worthwhile to add to a cost-benefit analysis: if the investment alternatives that ought to be replaced were a result of the fiduciary's breach - for example, the fiduciary carelessly failed to evaluate investment alternatives, and could have selected superior investment alternatives at a relevant earlier time - the expense side of the cost-benefit analysis should be offset by the breaching plan fiduciary's liability to restore the plan's losses that result from the fiduciary's breach.

A fiduciary should not charge to the plan the expenses of unraveling a bad situation that the fiduciary by its imprudence made.

[KJohnson]

There is this language in the preamble and then there is the debate about what "practicable" means...

The final rule, however, also recognizes that there may be circumstances when changes must be made within a time frame that precludes compliance with the 30-day advance notice requirement, such as the immediate elimination of an investment option when it is determined to be no longer a prudent investment alternative. In such cases, the rule requires that information be furnished as soon as reasonably practicable.

[AKconsult]

Be aware that we have run into situations where the vendor has made the plan sponsor confirm that they have given a 30-day notice to employees before changing funds, adding a provision (like loans, which will have a participant fee), etc. So they have effectively forced the plan sponsor to wait for 30-days before they can implement any changes, because the alternative is that if the sponsor wants to go ahead and make the change prior to 30-days, they have to lie to the vendor by telling them they gave a 30-day notice, when in fact they did not.

[BG5150]

I would counter to the vendor the 30 days is not mandatory, but merely a safe harbor date. It's 30 or what's reasonable under the circumstances.