About ERISA Section 404
The Rule – an Overview
According to ERISA Section 404(a), plan fiduciaries for participant-directed retirement plans have the responsibility of offering investment options that meet the needs of plan participants. Even when participants have control of investment decisions, plan fiduciaries could still be held responsible for participant investment choices.
ERISA Section 404(c) allows plan fiduciaries to be relieved of liability for participants’ investment decisions, by transferring legal responsibility to the participant for any losses resulting from a participant’s exercise of control over their account. The most effective way for a plan fiduciary to manage this risk rest in Section 404(c) The Basics of Meeting Section 404(c)
At a high level, there are three main requirements to comply with ERISA Section 404(c):
- Offering a broad range of investment alternatives.
- Giving independent investment control to participants including the ability to transfer among investment options.
- Providing participants with information about the plan and each investment option so that the participant can make informed decisions.
- Many details make up these three main requirements, so it’s important to understand the details and have a process to ensure the plan meets the requirements to gain Section 404(c) protection.
The Common Compliance Failures
Meeting ERISA Section 404(c) isn’t cumbersome, but often a key piece of communication that’s missing can mean the difference between compliance and non-compliance. Four of the most common failures include:
- Failure to give the required notices to plan participants letting them know what information is available to them.
- Failure to designate someone responsible for 404(c) compliance who can provide the information upon request.
- Failure to notify the participants that the plan fiduciaries may be relieved of liability for losses due to participant investment decisions.
- Failure to provide participants access to a prospectus when required (immediately preceding or following the initial investment in a specific investment option).
ERISA Section 404(c) compliance requires an ongoing effort to monitor the steps being taken and modify them as needed (technological changes, new case law, changes to existing regulations or new regulations, etc.). For that reason, we recommend that a 404(c)-compliance review be done annually. Contact us for a comprehensive review.
NOTE: Plan sponsors are still required to select prudent options for participants to choose. Meeting the provisions of this safe harbor Section 404(c) however, is optional.
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