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Shielding Plan Fiduciaries from Participants’ Investment Losses


Fiduciaries in Focus:


Shielding Plan Fiduciaries from Participants’ Investment Losses


2012 is the year of a regulatory tsunami affecting plan sponsors at many different levels. As the dust settles, plan sponsors and consultants should refocus on the main issues at hand regarding defined contribution retirement plans: process and protection.

ERISA section 404(c) relieves the plan sponsor and other fiduciaries of defined contribution plans from liability for losses resulting from participants’ direction of their investments if certain conditions are met. Specifically, if the DOL 404(c) regulation is followed, an ERISA plan fiduciary will not be liable for the investment elections made by plan participants but will still be responsible for exercising prudence in the selection and monitoring of the investment products offered under the plan.


Compliance with ERISA section 404(c) regulation is voluntary. However, I have not met a plan sponsor, when properly explained the protection afforded under this section that did not want to take advantage of it.


Let me put it differently; if a company chooses not to be a 404(c) protected retirement plan, plan fiduciaries could be held professionally and personally liable for every investment decision and all the losses each employee makes in his or her 403(b), 401(k) or other defined contribution plan. When viewed from that perspective, I can’t imagine any retirement plan sponsor willing to subject him or herself to potential liability by voluntarily opting out of such protection. Most plan sponsors don’t voluntarily decline protection but essentially opt out unknowingly by violating the required procedures and notifications.


404(c) Requirements


To take advantage of ERISA section 404(c) protection, the plan must satisfy three categories of requirements:


  1. Investment menu requirements
  2. Plan design and administrative requirements
  3. Information and disclosure requirements

There are more than 20 duties included in these three requirements and, unfortunately, many plan sponsors and plan consultants violate several including the “holy grail” of requirements – participant notification.

A statement the plan is intended to be an ERISA 404(c) plan, with an explanation that this will relieve plan fiduciaries of liability for losses resulting from the participant’s investment directions is required to be given to all participants.   This notification puts the employees “on notice” that they bear the consequences of their own investment decisions while relieving the fiduciaries.


Plans Fall Short


I recently conducted an informal survey of 20 plan sponsors asking them if:


  1. They are a 404(c) plan and
  2. Do they comply with the requirements?

Of the twenty, seven did not even elect to receive this protection and none of the remaining thirteen ever provided the required participant notification. Without the required notification, compliance with all the other requirements is insignificant. Although, this is a small sample, I believe it is representative of the misinformation provided by many plan vendors and retirement plan consultants on this subject.


Next Steps


Here are a few suggestions on best practices in complying with ERISA Section 404(c):


  1. Indicate this properly on form 5500 - this puts the DOL on notice that your plan intends to comply and receive the safe harbor protection.
  2. Maintain documented proof of your participant notification requirements – you must put the participants on notice. If you have not done so, there are ways to remedy this.
  3. Follow a prudent process and checklist for monitoring and documenting your approach to satisfying the three categories of requirements noted above.
  4. If you are using the services of a third party consultant, make sure your consultant is a retirement plan specialist and not an investment generalist.  Many common problems in meeting regulatory requirements can be traced to a lack of expertise in this area.
  5. Don't Rely on your service provider to fulfill your duty.  Since service providers do not act as fiduciaries in this capacity, it is your duty to comply with the required notifications.

If you have any questions or would like a 404c checklist or sample notification language, please contact Anthony Agbay.

Anthony Agbay is president of The Agbay Group, an independent retirement plan consultant specializing in fiduciary oversight strategies and retirement plan services.



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