Retirement plan advisers wear multiple hats when it comes to assisting their clients; one hat involves conducting provider searches to find the “right” plan vendors.
If that shows the need to change vendors, typically, this change also involves some alteration in the current plan investment menu. A common approach is to match or “map” the current investment(s) to the fund(s) in the new lineup that most closely approximates each existing style/type. The recurrent question in this case is whether ERISA Section 404(c) protection applies to the resulting choices, assuming that participants are notified in advance of the mapping and that the plan otherwise complies with Section 404(c).
Assume for the moment that the plan does comply with Section 404(c) prior to a change in fund menu. Under current law, the fund choices that result from the elimination and replacement of an investment fund, or the mapping of funds as part of a plan conversion, are not protected by Section 404(c). The reason? The employees did not direct the investment of their funds into the replacement vehicles affirmatively, but had those investment choices made for them as part of the mapping process. This is true even when the plan participant selected the original investment that is subsequently mapped to a like investment.
When assisting a plan in this situation, advisers should avoid a course of action that precludes that protection without good cause. So, what should an adviser recommend?
One option is to require all participants to complete new investment elections prior to the implementation of the change in the investment fund or plan conversion. If the number of participants in the plan is relatively small, this may be a viable avenue. Under this option, participants who do not return an election form would have their funds invested in the plan’s Section 404(c) default fund.
Another option (in the plan conversion context) is to liquidate all investments prior to the conversion and to place the proceeds from those liquidated investments in the plan's Section 404(c) default fund while the conversion is taking place. As soon as the assets have been transferred, the plan sponsor could advise and encourage all participants to direct their investments among the new alternatives. Of course, the investments of any participant who chose not to direct his/her investments would remain in the default investment fund. Obviously, great care must be exercised in ensuring that the selected default investment is prudent under the circumstances, since the plan fiduciaries would remain responsible for those investment decisions.
A third option is to map the funds to like investments and to encourage all participants to file elections that direct new contributions and confirm the transfer of existing contributions to the targeted funds. Once the participant has re-exercised control, assuming all other requirements of Section 404(c) are met, the plan sponsor once again will enjoy protection under Section 404(c), at least as to future contributions for which elections are received.
Of course, a plan fiduciary simply could choose to accept the "breakage" in Section 404(c) protection. While this may not be as palatable to plan sponsors as the other options, the reasons to change investment funds may be more compelling than the perceived protections. After all, Section 404(c) protects only against the investment choices a participant makes, not against an imprudent investment menu.
If the options above do not seem appealing, there may be some good news just ahead. Effective for plan years beginning after December 31, 2007, the Pension Protection Act affords certain protections to fiduciaries under Section 404(c) during a blackout period where participants have exercised control over the investments in their accounts before a change in the plan's investment options, provided certain requirements relating to investment characteristics and participant notices are met. Additionally, the DoL has been directed by Congress to craft guidance on appropriate default investment options, guidance that would seem to provide Section 404(c)-level protection, at least prospectively, to plan fiduciaries that choose funds consistent with those directions—a solution that might prove to be the most workable of all.
Quana C Jew is a partner at the law firm of Arent Fox, focusing on ERISA, employee benefits, and executive compensation. Quana has served as a guest lecturer in the employee benefits area for various law school, bar seminar, and employee benefits-related organizations. She also serves on the Advisory Board of the Women's Pension Exchange. Most recently, Washingtonian magazine named Quana as one of Washington's best tax lawyers.