404a5 Fee Disclosures

[CLE401kGuy]

Now that we're somewhat down the road in 404a5 fee disclosure requirements is anyone aware of any push from ASPPA or any other organization to question or otherwise confront the requirements of this rule? It's becoming a bear to live with especially as an investment provider that is seeking to maintain a strong core menu for the 401k plans it manages. Anytime there's a change to the menu, there are 30 day notices to provide and 404a5 disclosures to update going to an audience that is just not reading or understanding the material. I'm all for full disclosure to participants but the time and cost here don't seem to equal up to the benefit of making these disclosures.

Any comments or chiming in appreciated!

[Peter Gulia]

If a plan's menu of diversified investment funds was prudently selected (and at least annually monitored), how does it happen that a fund becomes so inferior so quickly that, instead of waiting for the next cycle, the fiduciary must replace the fund immediately?

[GMK]

As you know, FGC, it's usually not a snap decision, but one taken after a few to several months of reviewing fund options and watching the performance of the plan's fund and possible replacement funds. Sometimes, a change in the fund manager triggers the watching. Market changes may trigger the review as well. For example, when the bond market got jumpy recently, a plan that had all medium term bond funds may decide it's a good time to add a short term bond fund.

In any case and for whatever reason, if the fiduciaries decide it's time to add, remove, or replace a fund, waiting until the next cycle of fee disclosures to make the change may (or may not) be as prudent as acting immediately. The fiduciary has to decide, based on what is best for the participants and their beneficiaries, as usual.

In general, this happens infrequently for plans that maintain a strong core menu, and IMHO disclosure of why the change is being made is a good idea and not such a burden (other than maybe the sitting around for 30 more days).

[CLE401kGuy]

Agree with GMK - these changes are not snap decisions - I'm actually somewhat shocked by Peter's response - a fund needs to be changed when it needs to be changed - an array of circumstances can lead to a fund change - style drift, manager change, less expensive share class, performance issues - I imagine, like our firm, most firms rely on some kind of watch & alert system that triggers when a fund should be changed - changes occur when they need to occur -when I see a plan that has had no fund changes for many years, I'd wonder if anyone was even keeping an eye on the investment menu at all... As for these disclosures, my point is the cost and the audience - these disclosures and notices get sent to all eligible so hundreds or sometimes thousands receive a communication about which they themselves have no vested interest and they ignore it... Also, bear in mind, the plan sponsor is permitted to pay the cost of making the disclosure from the plan - so when a plan's fund needs to be changed, the benefit for changing could end up being nullified by the cost to the plan.. just saying from my own personal 404a5 experience, these rules need some tweaking from what they are today...

[GMK]

Just to say that I think Peter asks a reasonable question. And the answer is that sometimes things happen mid-cycle.

Participants need to be informed about fund changes, because they make investment decisions based on what's available in the plan. Fiduciaries decide when to make changes based on all the factors that apply. Same as it ever was, except now with a prescribed format for informing participants.

[Peter Gulia]

While I'm all for carefully monitoring and changing investment alternatives, I also can see reasons why a fiduciary might in the right circumstances slightly delay implementing an investment-menu change. And by delay, I mean a couple of months (or, for a small plan, a few months). Thinking through all the facts, circumstances, and interests is something for the plan's fiduciary to consider.

Just to pick one example, I recently saw a situation in which sending an off-cycle notice would spend an incremental $33,000 of participants' retirement savings. Waiting a couple of months for the next quarterly account mailing spent a more modest $3,000. While recognizing that the replacement fund is better than the to-be-replaced fund, the fiduciaries estimated that the difference likely would not be $30,000 in investment improvement, not in a couple of months' time, recognizing that only a small portion of the plan's participants use the asset class involved and use it only for a small portion of the participant's account. Also, the fiduciaries were concerned about whether it would be fair for all participants to bear expenses that relate to an asset class used only by a distinct subset of participants.

Conversely, if a fund has gone seriously wrong and the fiduciary decides that a change can't wait, those circumstances suggest that the fiduciary also can find that it's proper to spend the plan's money on a prompt communication. If a fund has gone bad, shouldn't we want to tell participants about it?