404(c) in the Modern World

Current regulations and the current plan administration landscape make it more likely plan sponsors are complying with Employee Retirement Income Security Act (ERISA) Section 404(c).

By Rebecca Moore | March 07, 2014
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Section 404(c) follows the Section 404(a) “prudent man standard of care” requirements and offers a type of “safe harbor” for plan sponsors who allow participants to direct the investments of their accounts. However, plan sponsors must meet requirements for investment selection, plan administration, and plan and investment disclosures before they are exempt from any fiduciary liability for losses participants incur as a result of their direction of investments.

“We’ve said for a long time that plan sponsors just blindly assume the requirements are satisfied,” Scott A. Webster, and attorney with Goodwin Procter LLP in Boston, tells PLANADVISER. He says it is still a valid question whether plan sponsors are complying with 404(c), but due to changes to the plan administrative landscape and more recent regulations, he believes most plan sponsors are complying.

“Before 404(a)(5) [participant disclosure requirements] it was all over the place what information plan sponsors provided. Some parts of the statute were not clearly written, and there was not much case law to guide them,” Webster adds.

He contends that most 404(c) requirements are not relevant to today’s environment. For example, the regulations require participants to have a choice to change investments at least once per quarter, but that is not relevant in today’s daily-valuation environment. In addition, information about investments is more available and easily accessible, especially online, making it easier to comply with the requirement that participants have all information available to them to make proper investment choices.