NEWSLETTERS

Is The Time Right for Your Plan to Comply with 404(c)

ERISA 404(c) is not a new topic, but is being discussed more today due to recent turbulent market performance.  ERISA 404(c) could offer relief to the fiduciary of a plan that offers participant-directed accounts. Relief could be provided if a participant were to incur losses due to their investment control.  Making your plan compliant does not guarantee it will not be found liable, but it could help if the plan were faced with a lawsuit.  ERISA 404(c) does not provide relief from other fiduciary responsibilities and compliance with it includes many requirements.  Below we’ll discuss these concepts in more detail.

Protection Provided

When participants direct the investment of their accounts, they make investment decisions.  A participant could incur losses in their retirement account due to investment decisions they made.  If a participant did incur losses due to the direct and necessary result of their decisions, they could seek recovery of the losses.  ERISA 404(c) relief is transactional.  This means each investment transaction is considered separately.  A plan failing to satisfy ERISA 404(c) for one investment transaction does not necessarily fail to meet it for a separate investment transaction.

If a participant seeks recovery of losses, the question of whether the plan fiduciary was prudent in their duties then is risen.  If the fiduciary was prudent in their duties, then the plan would not be held liable for the losses the participant incurred.  If the fiduciary was not prudent in their duties, the plan could be liable for losses the participant incurred.  ERISA 404(c) would be part of the fiduciary’s defense supporting prudence in duties.  The ERISA 404(c) requirements below clarify how ERISA 404(c) compliance reinforces and ensures fiduciary prudence. 

Protection Not Provided

ERISA 404(c) relief is provided specifically in relation to losses a participant incurs due to their investment control.  Relief is not provided for other fiduciary duties.  For example, a fiduciary is responsible for prudently selecting and monitoring investments made available to participants and would not receive relief in relation to this responsibility under ERISA 404(c).  Also, qualified default investment alternatives (QDIAs) provided by the plan are covered separately under ERISA 404(c)(5).

Compliance Requirements

For a plan to be ERISA 404(c) complaint, several requirements must be met.  The plan sponsor is responsible for a variety of requirements, from document details, investment education, to fee disclosure. These are summarized within two broad concepts:

1)  Participants must be informed of specific information in relation to their accounts in the retirement plan.  They must be informed:

             - of their rights and responsibilities in respect to the investments in their accounts

            - at least annually about plan related information

            - annually about general administrative fees

            - quarterly about fees that may be charged to their individual accounts

            - quarterly about fees actually charged to their individual accounts

            - about specific investment related information

            - through the plan Summary Plan Description (SPD) that the plan intends to satisfy

               ERISA 404(c) compliance

2)  Participants must be determined to have control over the investments in their accounts.  They must be:

            - provided all material information about the investment options

            - provided at least three diversified investment options (called “core” options) offering a

              broad range of investments with materially different risk and return

            - be able to change all investment elections at least quarterly

ERISA 404(c) offers limited relief for employer securities.  To receive limited relief the employer securities must be publicly traded, traded frequently enough for prompt execution of transactions, participants must receive the same investment information as other investors, and all voting rights must be passed through to participants.

As mentioned above, Qualified Default Investment Options (QDIA) that are offered in plans with an Automatic Contribution Arrangement are covered under ERISA 404(c)(5).

Next Steps

If you would like your plan to be ERISA 404(c) compliant, contact Administrative Retirement Services, Inc. and we will start the next steps:

            - amend the plan to reflect ERISA 404(c) compliance

            - inform the investment company and investment advisor

You will then work with the investment advisor to prepare an investment policy and review the investment options for satisfaction of the requirements.  The advisor and investment company will work together to ensure the investment company’s materials meet the compliance requirements.

back