404c was intended to provide an opportunity to decrease the risk to you. If you’re like most people you never had any formal education regarding your fiduciary duties and the risks associated with it. According to the provisions of ERISA 404(a), retirement plan fiduciaries have the responsibility for offering investment alternatives that meet the investment needs of their participants, and for this you have personal liability.1
What is 404c?
If your retirement plan allows participants to direct their own investments, compliance with Section 404c of ERISA enhances your risk management. 404c allows you to transfer the legal responsibility to the participant for the losses resulting from a participant’s exercise of control over his or her account. This does not relieve you of your duty to monitor investments and providers. Section 404c offers you, the fiduciary a defense for losses or lack of gains realized by participants who exercise independent discretionary investment control over their individual account balances. 1
You indicate your intent to comply on your tax return. I have found many plans that have checked the box but no idea what that means. Make sure you check your tax filing to know your status.
What is required to get 404c protection?
There are three main requirements that are familiar to most. First, your plan must:
Offer a broad range of investment alternatives, which is defined as a plan having at least three “core” designated alternatives, each of which must be diversified. Each alternative must:
1) have a different risk and return characteristic,
2) enable the creation of a portfolio suitable to participant needs within a normally appropriate range,
3) allow for risk minimization through diversification when combined with the other core alternatives. Give independent investment control to participants, which means they must be given the opportunity to give investment instructions and receive confirmation and they must actually exercise control over the investments.
And finally, provide participants with certain required information as well as a list of optional information that they can obtain upon request. For example, a participant can ask for the underlying assets of each investment alternative. As the saying goes, the devil is in the details – and meeting the three main provisions above is further explained in 111 subsections. 1
404c limitations and failures
To qualify for 404C protection you must do an annual audit. It is best practice to have an ERISA attorney give a legal opinion on your compliance. Protection only comes if you complete all of the elements versus most of them.
Limitations on relief
1. Section 404c does not relieve an investment manager appointed by the participant or beneficiary to manage the assets in the participant’s individual account of its fiduciary liability under ERISA.
2. Section 404c does not relieve a fiduciary of its duty to prudently select and monitor any service provider or designated investment alternative offered under the plan.
3. Section 404c does not relieve a disqualified person from the taxes imposed for a prohibited transaction described in Section 4975(c)(1) of the Internal Revenue Code.
What are the Common 404c Compliance Failures?
The most common failures include:
- Failure to provide prospectuses to plan participants either immediately preceding or following the initial investment in a specific investment choice.
- Failure to identify a 404c fiduciary that will be responsible for providing the required information.
- Failure to give notices of the five categories of information that must be available upon request.
- Failure to notify the participants that the plan fiduciaries may be relieved of liability for losses due to the participant investment decisions.
While plans are not required to meet the provisions of ERISA section 404(c), It makes sense that you would want to manage the potential fiduciary liability for participant investment decisions and implement a process to address the provisions of ERISA Section 404(c). 1
If you think that simply checking the box reduces your personal risk, clearly your risk has been increased. By electing the box you are creating increased expectations of the Department of Labor investigators and potential litigators. 404c does not increase your risk per se, unless you are relying on it as a defense and you are not annually auditing. Now you know to annually audit. You should also look at some of the other available personal risk reducers available in the law. A retirement plan consultant that is an investment fiduciary is a great place to look.
(1) Adapted from the ERISA 404cCompliance Kit developed by Financial Service Standards, a division of fi360, Inc. and is part of The 401k Service Solution™ set of tools. The 401k Service Solution is a trademark of Financial Service Standards. The information on that fact sheet is provided for educational purposes and was developed based on current legislation. Because regulations regarding this subject change, check with your ERISA attorney for the most current facts.
(2) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(4) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IL, MI.
(5) This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.