Plan Sponsors Can Limit Investment Liability With ERISA Section 404(c).
An employer sponsoring a participant-directed retirement plan, such as a 401(k), is considered a “fiduciary.” Among other duties, that means the sponsor is responsible for managing the plan’s assets. More and more, employees are assuming the responsibility for selecting appropriate investments for their investment accounts. Often plan sponsors mistakenly believe this relieves them of their liability for supervision of the plan’s investment decisions.
By meeting its requirements, ERISA Section 404 (c) provides protection for plan sponsors by reducing their liability by shifting much of the responsibility for account investment performance back to each employee. The regulations under Section 404 (c) are quite specific and require strict compliance.
To take advantage of Section 404 (c), three categories of requirements must be satisfied:
Conclusion
This brief outline is for informational purposes only, and does not constitute legal advice. You should consult your attorney or other professional advisor for guidance concerning your specific situation.
Securities products involve investment risk, are subject to market fluctuations and the possible loss of principal.
An employer sponsoring a participant-directed retirement plan, such as a 401(k), is considered a “fiduciary.” Among other duties, that means the sponsor is responsible for managing the plan’s assets. More and more, employees are assuming the responsibility for selecting appropriate investments for their investment accounts. Often plan sponsors mistakenly believe this relieves them of their liability for supervision of the plan’s investment decisions.
By meeting its requirements, ERISA Section 404 (c) provides protection for plan sponsors by reducing their liability by shifting much of the responsibility for account investment performance back to each employee. The regulations under Section 404 (c) are quite specific and require strict compliance.
To take advantage of Section 404 (c), three categories of requirements must be satisfied:
- Choices — plans must offer a “broad range of investment alternatives.” To satisfy this requirement, a plan must have enough investment options available to allow a participant to materially affect their potential return of their account and the degree of risk to which it is subject. The plan must offer at least three alternatives that:
- are diversified;
- have materially different risk and return characteristics;
- collectively make it possible for the participant to create a portfolio with a suitable range of risk and return characteristics through diversification.
- Changes — participants must have the ability to change investments with a frequency appropriate with the volatility of the investments. This requires at least quarterly changes, but some circumstances will require the ability to make changes more frequently than that.
- Communication — an often overlooked, but critical requirement is providing participants with certain disclosure information and investment education. Some items must be provided automatically and other provided upon request.
Conclusion
This brief outline is for informational purposes only, and does not constitute legal advice. You should consult your attorney or other professional advisor for guidance concerning your specific situation.
Securities products involve investment risk, are subject to market fluctuations and the possible loss of principal.