Yes, as a concerned parent, you are right to be concerned. But it’s important not to get hysterical. Your son isn’t a molester. He was repeating something that happened to him. Usually kids do this for at least one of two reasons: If the incident felt good, they want to feel those feelings again. If it made them uneasy, they repeat it in order to try to make sense of the experience. Both can be true.
There’s a fine line here: You need to be clear that private parts are private, but if you over-react you can make the incident far bigger than you want it to be.
Please give yourselves credit: You’ve done absolutely the correct things. You’ve talked to him. You haven’t shamed him. You let him know it was wrong. You contacted the other parent (who is in the same position you are — trying to help her son understand that it is not okay). Neither of you want to isolate your sons. Both of you have some parental work to do.
Please understand that your son liked it because sexual feelings feel good. He has been introduced to it much too early and has been overstimulated by the experience. He needs to understand that the feelings are normal but that sharing his body is for much later in his life. Meanwhile, teach him the “bathing suit rule.” Touching anything covered by a boy’s or girl’s bathing suit is entirely off limits unless it is by a doctor or a parent who is making sure he isn’t sick or injured.
His curiosity about his sister is probably normal. At his age, he understands that girls look different than boys but doesn’t know what that means. To answer his questions, try sharing this book: What’s the Big Secret?: Talking about Sex with Girls and Boys by Laurie Krasny Brown. Read it together and have some matter-of-fact discussions to satisfy his curiosity.
Let him know that he can always come to you with questions but touching others and being touched by others on his private parts is supposed to come much, much later in his life. It may be a good idea to give him some role playing practice in saying “no” if someone wants to touch him in his bathing suit area.
Then move on to other things that delight and excite your child so he has something else to think about and talk about. Do keep a watchful eye for awhile but resist the temptation to bring it up or remind him of the rules unless he gives you reason to. You want the incident to fade into the background.
If it looks to you like he can’t move on, please do get a consultation with a counselor who has experience working with kids and trauma.
I wish you well.