ERISA’s Section 404(c) provides a safe harbor for plan sponsors from lawsuits that arise from direct investment decisions made by plan participants. But in order to take advantage of 404(c)’s safe harbor provisions, plan administrators must understand the provisions and follow the requirements set forth by the law. Essentially, a plan administrator must complete a checklist of items to qualify as a 404(c) plan.
404(c) provides a “safe harbor” for plan fiduciaries
Employers can protect themselves under section 404(c) by keeping accurate records, keeping minutes of all investment decisions made by the plan’s investment committee, and tracking investment education materials for plan participants. If the employer has a complicated plan, it may be helpful to find a qualified attorney to handle the legal issues involved. If the company lacks the time and resources to hire a lawyer, it can post a legal need on the UpCounsel marketplace. Among the participating attorneys are seasoned lawyers with a minimum of 14 years’ experience.
This provision was designed to protect the interests of participants and plan fiduciaries. However, employers must still comply with ERISA SS404(c) rules and requirements for investment selection, plan administration, and plan and investment disclosures. Employers that do not meet these requirements risk being sued by plan participants for poor investment choices.
Requires a fiduciary to offer a broad range of investment options
Under ERISA section 404(c), the fiduciary of a retirement plan must offer a broad range of investment options to employees. The fiduciary’s duty of care includes making sound investment decisions that protect plan participants from loss, even in down markets. Generally, a 404(c) plan is required to provide at least three investment options, including a Qualified Default Investment Alternative.
A plan must provide sufficient information and education to participants before offering investments. The information should be presented in a manner that plan participants understand. The plan must also disclose that the plan is 404(c) compliant and that the fiduciary is not liable for investment losses. Additionally, plan sponsors must explain how participants can make investment instructions.
Requires a fiduciary to levy reasonable fees
The Employee Retirement Income Security Act (ERISA) sets forth fiduciary standards for employee benefit plans. These standards require plans to provide participants with information about their rights and their financial status. They also grant plan participants the right to sue in federal court to recover benefits. In addition, ERISA creates the Pension Benefit Guaranty Corporation (PBGC), which insures promised benefits. The act also encourages employers to offer employee pension plans. Additionally, qualified retirement plans are tax-deductible for employers.
Courts have held that a fiduciary’s duty to act in accordance with the terms of the plan does not violate the duty to act in the best interests of the beneficiaries. One recent decision held that a trustee did not violate his or her duty by levying fees if they acted in good faith and after consulting with experts.
Cost of 404(c) plan
The 404(c) retirement plan is an investment option that offers a range of investment options for participants. Generally, the plan must offer at least three core investment options with materially different risk/return characteristics. These options include equity (stocks), fixed income (bonds), and capital preservation funds. It must also allow participants to move into or out of the riskiest option at least quarterly.
In addition to the investment options, the 404(c) regulation requires the plan to provide sufficient education and information to plan participants. This information must be presented in a language that participants can understand. The plan sponsor must also disclose that the plan is 404(c)-compliant, explain that fiduciaries are not responsible for investment losses, and explain how participants can give investment instructions.