MightyRecruiterSmall business owners who want to offer health, retirement and other employee benefits soon find out that there is a lot more involved than simply signing up for a plan. One detail that retirement plan sponsors often have questions about is ERISA section 404(c), which potentially limits an employer’s liability in certain circumstances.
1. Question: What Is ERISA?
ERISA, the Employee Retirement Income Security Act of 1974, is a federal law intended to protect individuals in matters relating to their healthcare and pension plans. It has many sections, provisions and amendments to this end, including the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Health Insurance Portability and Accountability Act (HIPAA).
2. Question: What Is 404(c)?
Section 404(c) of ERISA protects the plan sponsor from liability under certain circumstances when employees are allowed to direct their own investments within a retirement plan. Understanding 404(c) and its requirements and complying with them is a must if you wish to take advantage of its safe harbor provisions. Simply declaring that your plan is intended to be 404(c) compliant is not enough. A number of checklist items must be completed before your plan qualifies.
3. Question: Are Plan Administrators Required to Provide Participant-Directed Options?
No. Allowing plan participants to direct their own investments is optional. You can choose to offer only professionally managed investments if you wish. However, some employees appreciate the opportunity because they feel they would be able to make more profitable investment decisions than a professionally managed plan would allow, or they may have some political or religious objection to a particular asset included in an available portfolio.
4. Question: How Can a Plan Administrator Ensure 404(c) Compliance?
To avoid liability for losses incurred by a program participant who has elected to choose his or her own retirement investments, you must structure your plan to be compliant with ERISA section 404(c). Although you should always check the latest documentation from the U.S. Department of Labor and consult your attorney when setting up a plan, the following points apply:
- Be sure to declare somewhere in your plan documentation that your plan is intended to be 404(c) compliant.
- Offer a broad range of investment options. If you allow your employees to choose investments but do not provide enough diversity, you may be found liable for poor investments. Provide at least three different investment choices, and include options from capital preservation, fixed income and equity asset classes. Offer investment choices that provide mixed or substantially varying levels of risk and return.
- Allow participants easy access to their accounts, including sufficient plan and investment information and the ability to change investments when desired, at least once per quarter.
- Comply with information distribution requirements, including legally required disclosures and alternative investment options.
5. Question: Is 404(c) Compliance Worth the Trouble?
It may be. Depending on what kind of retirement plan options you currently offer, you may already be very close to 404(c) compliance. In that case, you may decide to become fully compliant and then allow plan members to direct their own investments. If you can demonstrate that you have met all the requirements of 404(c), there is a reasonable chance you will be found not liable in the case of a lawsuit related to retirement account losses. From a human resources perspective, the perceived benefits of being able to direct one’s own investments may be very significant for some prospective employees.
The bottom line is, as a retirement plan sponsor, you must thoroughly understand your obligations, no matter which type of plan you choose to offer. Every investment-based plan has specific requirements that you must comply with, and the best way to avoid liability is by showing that you have acted responsibly and have followed a prudent process in structuring your plan.
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