Fee Disclosure Failure -- de minimis exceptions?

We had an issue where our fees were disclosed to participants incorrectly (404(c) issue).  Revenue sharing is allocated to participants in relation to the revenue sharing produced by their investments.  Our disclosures say revenue sharing the the plan as a whole is allocated among all participants, pro rata, no matter their investments.

This is only affecting pennies per Participant.  What does this mean for us?

• Are we subject to some penalty?
• Do we need to send out corrected disclosures?
• Is there some sort of "de minimis" exception, where we don't have to worry about penalties or corrected disclosures, and we can just correct disclosures going forward?

Thank you!

For 404a-5 disclosures to directing participants, beneficiaries, and alternate payees, the plan’s administrator is responsible for its disclosures.

Whether to furnish a corrected disclosure is the plan administrator’s decision, which it should make loyally and prudently for the exclusive purpose of administering the plan and providing its benefits, incurring no more than reasonable expense.

ERISA’s 404a-5 rule includes this: “A plan administrator will not be liable for the completeness and accuracy of information used to satisfy these disclosure requirements when the plan administrator reasonably and in good faith relies on information received from or provided by a plan service provider or the issuer of a designated investment alternative.” 29 C.F.R. § 2550.404a-5(b)(1) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(b)(1).

That sentence might help an administrator when the error is about something like the past 1-, 5-, and 10-year returns of “benchmark” indexes, which the administrator contracted a service provider to retrieve and put in the disclosures. And perhaps that nonliability sentence helps if the administrator relied on a service provider’s incorrect rule 408b-2 disclosure when the circumstances are such that a prudent fiduciary would not have known or suspected the disclosure is wrong.

But it’s less clear whether an administrator relies in good faith on its misdescription of the plan’s allocation of plan-administration expenses when that allocation is something the administrator decided and so has in its knowledge (and records) without looking to anyone else.

Even if an administrator contracts a service provider to assemble 404a-5 disclosures, shouldn’t the administrator read at least the text of the form of the disclosure document the service provider will use for the function?

The consequence of a 404a-5 disclosure that is less than complete and accurate is that the administrator doesn’t get the rule’s satisfaction of the administrator’s responsibility “to ensure, consistent with section 404(a)(1)(A) and (B), that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts and are provided sufficient information regarding the plan, including fees and expenses, and regarding designated investment alternatives, including fees and expenses attendant thereto, to make informed decisions with regard to the management of their individual accounts.” 29 C.F.R. § 2550.404a-5(a) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-5#p-2550.404a-5(a).

Not having met that responsibility might be a tolerable exposure if one expects few directing individuals will suffer harm from the incorrect disclosure, and perhaps fewer will pursue one’s claim that the fiduciary breached its responsibility and caused the individual losses that the fiduciary must make good.

This is not advice to anyone.

ERISA-Bubs, you do not say how long the plan has allocated revenue sharing using a formula that is contrary to the 404(c) disclosure, nor do you indicate which method was approved by the plan administrator for use by the plan. 

If there is documentation of an approved method and the plan actually has been using that method, then you are dealing with a miscommunication in the disclosure.  Correcting the disclosure and issuing a new disclosure may be sufficient.

If there is documentation of an approved method and the plan actually has not been using that method, then there is an operational issue that could have accumulated over time to be more than only pennies per at least some participants.  It should not be too onerous to so look at participants within the funds that paid the most revenue sharing to see if how much of an impact using the incorrect method had on those participants.  If it does have an impact, then you can consider making whole the participants who were did not get the full benefit of the revenue sharing on their investments, plus a little more to bring them up to the level of other participants who improperly received revenue sharing amounts that they should not have received.

Keep in mind that if you know there is a problem and you do something reasonable to correct it, you are will be better off in the eyes of a DOL or IRS agent than if you know there is a problem and you ignore it.

If the issue truly is pennies per participant, a creative fix may be as simple as skewing some of the next revenue sharing allocations to in favor of those participants who had a shortfall.

ERISA-Bubs: I haven't looked in detail at ERISA 404(c) issues in a good while, but I'll try to give you a framework.  Last I knew, there were no penalties as such for failing to comply with the 404(c) regulations.  Keep in mind that the purpose of 404(c) is to relieve the plan's investment fiduciary of responsibility for the participant's own investment decisions.  If a plan offering participants investment options or choices (which is not required of 401(k) plans or any other types of IRC 401(a) qualified plans) wishes to have that option be legally binding, in the sense that the responsibility is passed from the investment fiduciary to the participant, then all of the ERISA 404(c) requirements, as set forth in the regs, must be satisfied.

What happens if the plan gives investment options to participants but doesn't satisfy the 404(c) regs in some respect?  Then there's no 404(c) protection.  What does that mean?  It could mean that there is a per se fiduciary failure on the part of the plan's investment fiduciary because the fiduciary is not managing the participant's investments as he should, the responsibility not having been legally passed on to the participant.  Or it could mean that the participant's investment choices will be analyzed to see if they are prudent, and if so, no harm, no foul.  There are other ways one could look at it, but to my knowledge this is a question that hasn't been expressly put to the DOL or answered in litigation.  Years ago I put that question to the DOL and they punted -- saying they'd leave it up to the courts to work out what the investment fiduciary's liability might be in such a situation (including deciding how to approach or analyze the situation).

In the meantime, why not do the common sense (and prudent) thing, which would be to correct the disclosure and get on with it.  Not to take comfort, but I'd say you are not alone.  My guess is that it is a very rare participant-directed plan that complies with the letter of the 404(c) regs because the administrative systems for such plans aren't set up that way.  You might want to go back and re-read the congressional committee reports from 1974, particularly the conference committee report, for back ground on "why 404(c) in the first place."

Finally, and to make clear, I not a lawyer and am not intending to give you advice as such, but rather I'm trying to reframe the question for you.  Also, keep in mind that there may be some changes to the law or regs or new case law that I'm not aware of, since I've been out of the business for a while.