Getting from Here to There

If plan sponsors were asked to identify their primary concern related to their defined contribution plans, it would come as no surprise if a majority of responses involve fiduciary exposure, particularly with respect to the investment of plan assets. For this reason, many plan sponsors administer their plans with the intent to comply with the Employee Retirement Income Security Act (ERISA) Section 404(c). 

In connection with the condition that participants be permitted to exercise “control” over their retirement assets, recurrent concern has been expressed as to the continued availability of Section 404(c) relief in situations where an existing plan investment, which has been the subject of previous participant direction, is replaced by a new investment. For example, this could happen where an existing fund is replaced by a new fund or, in the context of a corporate acquisition, where the assets of the seller’s plan are mapped into the buyer’s plan and a blackout period (which would otherwise require another type of notice) can be avoided (i.e., the temporary investment suspension period associated with the plan conversion does not take more than three consecutive business days). Again, in both of these examples, participant accounts are simply mapped from an existing investment into a replacement investment.

Prior to the Pension Protection Act of 2006 (PPA), if a plan sponsor mapped participant investments in such situations, ERISA 404(c) protections would be suspended. However, here’s the good news: Under PPA and generally for plan years beginning after December 31, 2007, Section 404(c) relief can continue even without a formal blackout period when an investment is replaced by a new investment if the change constitutes a “qualified change in investment options,” provided that certain requirements are met.

Under PPA, a “qualified change in investment options” occurs when there is a change in the plan’s investment options if:

(i) the participant’s or beneficiary’s account is reallocated among one or more remaining or new investment options that are offered in lieu of one or more investment options offered immediately before the effective date of the change, and

(ii) the stated characteristics of the remaining or new investment options provided under (i) above (including characteristics relating to risk and rate of return) are, immediately after the change, reasonably similar to the characteristics of the investment options existing immediately before the change.

As with all good news in the retirement area, plans must satisfy certain conditions for PPA’s relief to apply. More specifically, if the plan has a “qualified change in investment options,” for Section 404(c) relief to continue to apply, then a written notice of the investment change must be distributed to participants and beneficiaries. The notice must meet the following timing and content requirements:

(i) the notice must be distributed no more than 60 days and no less than 30 days prior to the effective date of the “qualified change in investment options”;

(ii) the notice must contain information comparing the existing and new investment options; and

(iii) the notice must provide that, in the absence of affirmative investment instructions to the contrary from a participant or beneficiary, the participant’s or beneficiary’s account will be invested according to the reallocation described as part of the qualified change in investment options.

In addition to the notice requirements, the participant or beneficiary must not have provided to the plan administrator, in advance of the effective date of the change, affirmative investment instructions that are contrary to the change, and the participant’s or beneficiary’s plan investments immediately prior to the effective date of the change must, in fact, have been the result of his exercise of control over the assets of the account.

Given the potentially complex information associated with comparing investment characteristics, plan advisers are well-suited to assist plan sponsors in developing the necessary information to meet PPA’s requirements to ensure continuing Section 404(c) relief. Compliance with the above rules in connection with a change in investments allows the plan to demonstrate that participants continue to have “control” over their retirement assets and, thus, allows the plan’s fiduciaries to enjoy continued fiduciary relief.

Quana C. Jew is a partner at the law firm of Arent Fox LLP, focusing on ERISA, employee benefits, and executive compensation. Quana frequently serves as a guest lecturer in these areas for various law schools, bar seminars, and employee benefits-related organizations. Washingtonian magazine has repeatedly named Quana as one of Washington’s best tax lawyers.