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404(c) and Why it May be Important to Your Plan
Section 404(c) of ERISA defines the responsibilities of plan fiduciaries. Fiduciaries that control plan investments are subject to statutory standards of conduct for acting in a prudent manner, and they may be subject to personal liability if the standards are not met. If the requirements of 404(c) are met, plan fiduciaries, such as plan trustees and administrators, will be relieved of liability for investment decisions made by participants. Plans covered by 404(c) apply to any plans in which the participants direct or can control their investments.
A plan does not have to elect 404(c), it is a voluntary provision. However, it is recommended that plans to comply with 404(c) to reduce or eliminate the potential liability of the fiduciaries.
The requirements of 404(c) are:
  • Participants must have meaningful and independent control over their investments.
  • Investments from a broad range must be provided to allow diversification. At least three (3) options with different risk and returns characteristics must be provided.
  • Investment instruction must be provided. Participants must be allowed to transfer investments within any three month period. Participants must also be given the opportunity to move monies from a volatile investment to a less volatile investment.
  • Participants must obtain sufficient information to make an informed decision.
The participant must make specific investment instruction for 404(c) protection to apply. Participants who are "defaulted" to an investment selection because of lack of choice will not relieve the fiduciaries of potential liability.
Section 404(c) requires sufficient information is made available initially and ongoing to participants, so that informed decisions can be made. Following is information that must be provided:
  • An explanation that the plan intends to comply with 404(c) and the plan fiduciaries will be relieved of liability for losses that results from the participant's direction.
  • A description of the investment options. This includes the investment objectives, risk and return information, and diversification of the assets.
  • Information on the investment managers
  • Instructions on how to give investment selections, for limits and restrictions of investments, withdrawal and penalties, transfer restrictions, etc.
  • Description of fees and expenses charged to the participant accounts, must be made available on request
  • Where to receive additional information, such as name of person responsible, address and phone numbers
  • Procedures for providing confidentiality
  • Prospectus, if applicable
Plan fiduciaries are not required to provide investment advice, just provide sufficient information.
Section 404(c) does not relieve the fiduciaries from all liability. The plan fiduciaries are still responsible for choosing and monitoring the investment selections and the investment managers. The plan fiduciary is also responsible for any decision which is not the results of the participant's instructions.
An investment policy is highly recommended. DOL (Department of Labor) has emphasized the need for a written investment policy. The policy should state the goals and objectives of the plan, set the decision making process, and specifies a measuring tool for ongoing performance and assessment.
The combination of meeting the 404(c) guidelines and an investment policy provide an employer with the most protection.

 
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