Even when participants have full control of investment decisions, plan fiduciaries could still be responsible for participant investment choices. Fortunately, plan fiduciaries do have an option that offers certain protections.
An effective method of managing this risk rests in Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). This provision generally allows fiduciaries to be relieved of liability for participants' investment decisions. The specific requirements to obtain Section 404(c) protection are set forth in a comprehensive final regulation issued in 1992 and amended in 2010 as part of the Department of Labor's efforts to improve disclosure to plan participants.
TABLE OF CONTENTS
Part 1: Fiduciary Rules
Part 2: Strategies to limit your liability
Part 3: Managing your fiduciary responsibilities
Briefly, the requirements:
- Offer a broad range of investments, including at least three options, each of which is diversified and has materially different risk and return characteristics that in the aggregate enable the participant or beneficiary, by choosing among them, to achieve a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the participant or beneficiary. Each of these, when combined with investments in other alternatives, tends to minimize through diversification the overall risk of a participant's or beneficiary's portfolio.
- Provide participants with the ability to transfer among investment options with a frequency appropriate for each investment's market volatility, and the ability to transfer among three investment options, described above, at least once in any three-month period.
- Deliver information to participants about the plan, its investment options, and its operations before participants make investment decisions.
- Provide additional information about each investment option to participants upon request, so they can make informed investment decisions.
Key elements of Section 404(c) compliance: Section 404a-5 participant disclosure
In addition to requirements regarding the range of investment options and participants' control of their investments, complying with the Section 404(c) regulation requires plans to disclose certain information to plan participants about the plan's investment options. Some information must be provided automatically before participants exercise control and make investment elections, and other information must be provided upon request. All the information provided, whether automatically or upon request, is intended to provide plan participants with sufficient information to make investment decisions.
The required information pursuant to Section 404(c) is virtually identical to the information that must be disclosed to all participants, including eligible participants not enrolled in the plan, under the DOL's mandatory Section 404a-5 Participant Disclosure Regulation. When a plan complies with the Section 404a-5 Regulation, unless the plan offers employer securities, the only additional disclosure requirement are:
- for the plan to notify participants that the plan intends to comply with ERISA Section 404(c) and;
- that plan fiduciaries may be relieved of liability for any losses resulting from a participant's investment decisions.
It is important to ensure you are disclosing to your participants plan information and related fees as required by Section 404a-5. The disclosures under 404a-5 and 404(c) may be provided in print or electronically in accordance with DOL rules regarding electronic delivery.
Section 404(c) protection for employer stock investment options
When employer stock is offered in the plan, there are additional requirements that need to be met in order for plan fiduciaries to obtain 404(c) protection for participant investment decisions related to the employer stock investment.
- Employer securities must be publicly traded on a generally recognized exchange with sufficient frequency and volume to enable prompt trades.
- Participants must be provided with the same information as other shareholders.
- Voting, tender, and other rights must be passed through to participants.
- Confidentiality of the purchase, holding, or sale of employer securities, as well as the exercise of voting, tender, or other shareholder rights, must be maintained.
- A description of the procedures for maintaining confidentiality must be provided, and a plan fiduciary must be designated to monitor compliance with the procedures.
- An independent fiduciary must be appointed in situations where there is the potential for undue employer influence on participants, such as a tender offer.
Also, a plan may determine that additional information needs to be provided to participants so they have a reasonable opportunity to provide investment instructions regarding certain forms of company stock investments. Keep in mind that these are not requirements of the Section 404a-5 participant disclosure regulation.
Participants who don't provide investment direction
ERISA Section 404(c) may offer plan fiduciaries a measure of protection against litigation related to qualified workplace retirement savings plans, even in instances where a participant fails to provide investment direction. Section 404(c) contains what are commonly referred to as a "QDIA" provision and a "Mapping" provision that allow 404(c) protection even if the participant fails to provide investment direction, as long as certain requirements are met.