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Understanding ERISA Section 404(c) Part 5

If you’re not familiar with ERISA Section 404(c), here are some things you need to know.

ERISA Section 404(c) allows you to be relieved from liability for the investment decisions made by plan participants. As a plan sponsor, you want this – you don’t want to retain liability for the decisions that participants make within their plan. Section 404(c) of ERISA gives each participant responsibility for his or her investment selections among the options offered (you are still responsible for choosing and monitoring the options within the plan, but they are given responsibility for how they choose to allocate and invest their personal account within the given options). By offering a participant-directed plan (404(c) compliant plan), you relinquish or mitigate the responsibility to the participant.

There are three main requirements that a plan sponsor must meet in order to obtain the benefit ERISA Section 404(c) provides. These include: 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, and 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.

You should evaluate compliance at least annually, and possibly on a quarterly basis, depending on plan demographics, complexity of plan design, and the support of service providers. By monitoring compliance with this safe harbor provision, you can help ensure that breaches can be identified, and action can be taken quickly so you don’t lose the relief from liability that this section affords.

This article is just one in a series on Best Practices for Investment Fiduciaries.


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