Where am I at risk?

As the plan fiduciary you can be held liable for poor investment decisions made by plan participants. For example, a participant nearing retirement decides to transfer all of the funds in his 401(k) plan into a highly volatile mutual fund. After a sharp decline in the market over the next year, he has lost 30% of his retirement savings. You may be held responsible for those losses if you have not acted with prudence to ensure that your plan participants had the ability to make informed investment decisions.

What can I do to improve?

Since a fiduciary that makes imprudent investments can be liable for resulting losses, employers can protect themselves from liability for employees’ investment decisions by formally declaring their compliance with ERISA 404(c). Employers that comply with 404(c) are able to shift responsibility for investment results to plan participants. Compliance with 404(c) is optional, but only full compliance offers employers the assurance that they will avoid liability for any losses resulting from an employee’s investment decision. 

What does this mean to my officers and me?

The voluntary compliance with ERISA 404(c) has four primary components:

  1. The employer must inform plan participants that they have control over their investments and that the plan intends to comply with ERISA 404(c). 

  2. The plan must offer at least three “core” investment options, each with distinctly different risks and return characteristics (such as a stock fund, bond fund and money market fund).

  3. Participants must be able to transfer money between options at least quarterly.

  4. The employer must give participants sufficient information about their options so they can make informed investment decisions. An employer who does not supply adequate information will remain liable, even if the participant actually makes the investment decisions. 

These obligations may require additional work from the plan sponsor and senior management. We believe that it makes far more sense to build 404(c) compliance into your plan design, hire a competent Third Party Administrator to ensure the administrative requirements are met, and engage a qualified investment advisor to fulfill the education requirement.