Gateway Financial Partners

Using Erisa Section 404(c) To Limit Fiduciary Liability

Did you know that as a plan sponsor, you could be held personally liable for the poor investment and allocation decisions employees make inside their 401(k) plans?

Don’t worry though – there is a provision inside ERISA (the Employee Retirement Income Security Act) that allows you to be relieved from liability, provided you follow some basic requirements outlined in Section 404(c) of ERISA.

The Rule – An Overview

According to ERISA Section 404(a), plan fiduciaries have the responsibility of offering investment options that meet the needs of plan participants – and for this they have personal liability.

ERISA Section 404(c) provides an exception to that rule and allows plan fiduciaries to transfer legal responsibility to the participant for any losses resulting from a participant’s exercise of control over their account.

404(c) offers a “safe harbor” or defense for losses or lack of gains realized by participants who exercise independent, discretionary investment control over their individual accounts.

NOTE: Plan sponsors are still required to select prudent options for participants to choose from – a requirement under ERISA. Meeting the provisions of this safe harbor Section 404(c) however, is optional.

The Basics of Meeting Section 404(c)

At a high level, there are three main requirements to meeting ERISA Section 404(c) that include:

  1. Offering a broad range of investment alternatives.
  2. Giving independent investment control to participants.
  3. Providing participants with certain required information (and optional information upon request).

There are a lot of details that make up these three main requirements (as explained in 111 subsections of the regulation) so it’s important to understand the details and have a process to ensure the plan is meeting the requirements in order to gain the benefit this safe harbor provides.

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 identify someone at the plan 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 prospectuses to participants when required (immediately preceding or following the initial investment in a specific investment option).

We have a checklist that goes over the key points you must meet in order to comply with the provisions of ERISA Section 404(c) and we’d be happy to provide you with a copy – simply contact us and let us know you’d like a copy, and we’ll email it right over to you.

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 – and can be done simply with our 404(c) checklist. Contact us for your free copy of this checklist.

This information 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.

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