General Information About 404(c)
Click here to view the Department of Labor Regulation 2550.404c-1 / ERISA Section 404(c) Plans.
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| The Department
of Labor recently issued final regulations regarding participant-directed individual
account plans. These types of plans are frequently referred to as 404(c) plans.
Participant-directed plans are commonly used in Section 401(k) plans and
defined-contribution retirement plans as a means of avoiding fiduciary liability on the
part of the plan sponsor by shifting responsibility for the investment decisions to the
individual participant. The Department of Labor Section 404(c) provides that if a participant or beneficiary exercises investment control over the plan's assets, the plan fiduciary (sponsor) is not liable for any investment losses. Participant-directed plans are very common in Section 401(k) programs because by increasing a participants involvement, that participant is more likely to contribute his or her own money to the plan. The final regulations under Section 404(c) go into effect on January 1, 1994. The provisions of Section 404(c) ARE NOT MANDATORY but are an option available to plans that wish to minimize fiduciary liability. According to the Department of Labor, if a plan allows participants to select investments, but does not comply with the regulations, the plan fiduciary (sponsor) will be responsible for the investment performance. This creates the possibility that a participant could sue the fiduciary for losses incurred with respect to investments selected by the participant. The final regulations establish two requirements that must be complied with if the plan is to come under the protection of Section 404(c). The first is that the plan must provide an opportunity for the participant to exercise control over the assets in the participants account. The second is that the plan must provide an opportunity to choose from a broad range of investment alternatives. With respect to the first requirement, the regulation specifies that a participant must have the opportunity to direct investments at least once every three months and obtain a written confirmation of the investment. The participant must also have the opportunity to obtain information sufficient to make informed investment decisions. This requirement mandates the fiduciary to give participants a disclosure statement that provides a description of the investment alternatives, together with a statement setting forth the risks and returns of each alternative as well as a list of the assets in the investment portfolio. Participants must also receive a statement describing the annual operating expenses of each investment alternative. The second requirement is that participants have the opportunity to invest in a broad range of investment alternatives. The regulation mandates a minimum of three investment alternatives, each of which has materially different risk and return characteristics. The regulation further mandates the plan to enable the participant to diversify one investment. If the requirements of this regulation are met, the plan's fiduciaries may be protected against liability for investment losses incurred by participants. |