The spotlight on recent mutual fund scandals is now shining on all companies who sponsor retirement programs. Across the country, plan sponsors face concerned participants who are afraid that their retirement funds might be in jeopardy. As a fiduciary, you want to fulfill your responsibilities in accordance with the exacting standards of proper fiduciary conduct, especially since you can be held personally responsible for your decisions. And few people would disagree that your employees' financial futures deserve all the protection the law can provide. But what if, despite your best efforts at plan design, communication and education, one of your employees makes a poor choice, loses money and decides to sue you? You certainly don't want to be responsible for the monetary losses of others.
Under ERISA section 404(c), plan fiduciaries may be relieved of fiduciary liability for investment losses that are the result of an employee's decision-making in a participant-directed plan. At first glance, compliance with 404(c) may sound appealing — implementing 404(c), however, can be tricky since you need to satisfy a number of requirements to obtain 404(c) relief. This article gives you a brief overview of the issues surrounding 404(c) and also outlines the steps you can take to make sure you are in compliance with 404(c) requirements.
For Whom is 404(c) Relief Available?
Keep in mind that 404(c) relief is not available to everyone — the following basic conditions must be met:
- Plan participants must be able to exercise control over their investments. This means that participants can make independent investment choices and give instructions with appropriate frequency (at least quarterly).
- The plan must offer a broad range of investment options (at least three) with material differences in their risk/return characteristics so that participants have the opportunity to diversify their accounts.
- Participants must be provided with the information necessary to make informed investment decisions. GOOD NEWS: Most plans that operate in a daily-valued, multifund environment meet the minimum conditions necessary for 404(c) compliance.
What are the benefits of 404(c)?
As mentioned earlier, plan sponsors may be relieved of fiduciary liability for investment losses that are the result of poor investment choices made by plan participants. When you operate a 404(c) plan, participants shoulder the responsibility of investment losses and cannot hold the plan fiduciaries responsible for their losses.
How Much of My Fiduciary Liability is Relieved?
Some plan sponsors may think that 404(c) relieves them of all of their fiduciary responsibility. This could not be further from the truth. For example, plan sponsors are not relieved of the responsibility for the selection of the plan's investment options or the monitoring those funds over time. It also does not exempt plan sponsors that engage in prohibited transactions or any other action that would jeopardize the qualified status of the plan.
The following steps will help you create a strategy for reducing your fiduciary responsibility. Use the following checklist and accompanying table to make sure you are performing all of the necessary steps. If you can't check off all of these items, you may not be fulfilling all of the requirements necessary for 404(c).
STEP 1: Establish an Investment Policy Statement — Adopt an investment policy statement. Review it at least annually to make sure that you are doing what it says and that it works as you intended. ADP provides each of its clients with a sample investment policy statement that is easy-to-customize for your plan.
STEP 2: Announce your plan's 404(c) Compliance to your Participants — Provide your participants with an explanation of the plan's intended compliance with 404(c), preferably in the Summary Plan Description (SPD). The SPD should explain that fiduciaries may be relieved of liability for participant investment losses.
STEP 3: Select Investments — Based upon your investment policy statement, select at least three different investment options with different risk and return characteristics. Allow participants to create their own portfolios and to transfer between investment options at least quarterly. ADP provides a universe of carefully selected and pre-screened funds. Depending on the size of your plan, you can pick and choose the funds and create your own custom portfolio.
STEP 4: Explain Plan Details and Investment Choices to Participants — Give your participants reasons to join the plan and to maximize their deferrals. Supply them with investment education tools to help them estimate their future retirement income, determine their risk tolerance levels and their time horizons to make informed asset allocation decisions. ADP provides all of the tools that you would expect from one of the largest retirement service providers in the country, from print materials to interactive online tools. In addition to on-site enrollment meetings, clients have the option of offering outside investment advisory services to their participants.
Bringing your plan into 404(c) compliance will give you the peace of mind that comes from knowing you've done everything that you can to protect yourself from liability. The law says that as a fiduciary, you share the responsibility for your employees' retirement funds, and by meeting 404(c) requirements, you will reduce some of the risk associated with being a plan fiduciary.
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Please note that neither Blue Prairie Group nor ADP can provide you with legal advice regarding your fiduciary duties under ERISA. This article and those following are not intended to constitute or be relied on as legal advice, but a description of applicable principles. Please consult with your attorney for legal advice on matters contained in these articles.
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