ERISA Section 404(c) Protection? the Employee Income Security Act (ERISA) imposes personal liability on the fiduciaries of 401k accounts when breaches in responsibilities result in losses to participants, relief from this liability is possible—but only if the requirements of Section 404(c) Protection are met. Experts offer a summary of these requirements
Investment Losses
Market volatility is nerve wracking for everyone. Perhaps the only thing even more anxiety producing for retirement plan sponsors is confronting allegations of a related fiduciary breach and learning that 404(c) Protection requirements have not been met. As ERISA expert Kenneth Ginder of Verrill explains, four requirements are necessary for 404(c) Protection; the first two are:
Opportunity to Control Assets. Participants and beneficiaries must be provided the opportunity to exercise control over assets in their individual accounts. This requirement is met only if:
the participant or beneficiary has a reasonable opportunity to give investment instructions to a plan fiduciary who is obligated to comply with the instructions (subject to certain reasonable restrictions); and the participant or beneficiary has the opportunity to obtain sufficient information to make informed investment decisions with respect to investment alternatives….
Exercise of Independent Control….Whether a participant or beneficiary has exercised independent control will be judged based on the facts and circumstances of the situation; however, the regulations make clear there will be no finding of independent exercise of control if the participant or beneficiary is subject to improper influence by the fiduciary or plan sponsor, the fiduciary has concealed material non-public facts, or the participant or beneficiary is legally incompetent.
Given the specificity of requirements for 404(c) Protection, experts “recommend that fiduciaries periodically review their plan operations to ensure that they are in compliance with all aspects of Section 404(c) and document their review.” It’s also increasingly important for plan sponsors to obtain fiduciary liability insurance, since it is the only coverage that offers protection in the event of mistakes under the high standards of ERISA law. Without coverage, even a mere allegation of a fiduciary breach can be ruinous. Colonial Surety offers an affordable Fiduciary-Cyber Liability Pack for plan sponsors. Armed with this protection, you’ll have:
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Additional Requirements for 404(c) Protection
Ginder notes that the remaining two requirements for securing 404(c) Protection relate to ensuring a “broad range of investment alternatives,” and “disclosure of information”:
The plan must offer a broad range of investment alternatives. This requirement is satisfied if the investment alternatives provide participants and beneficiaries with a reasonable opportunity to:
materially affect the potential return on amounts in their accounts and the degree of risk to which those amounts are subject; choose from at least three diversified investment alternatives, each of which has materially different risk and return characteristics; and diversify investments to minimize the risk of large losses.
When it comes to meeting the disclosure of information standard, Ginder cautions that it “raises the greatest risk of non-compliance” for plan sponsors, because it involves an ongoing requirement to provide significant amounts of information to participants and beneficiaries, and many fiduciaries rely on third parties to comply with some or all the required disclosures.” Plan sponsors can review Ginder’s specific pointers on disclosing information here. Note additionally that experts: “caution against simply assuming the required information is being disclosed. Fiduciaries should confirm it is being disclosed and monitor applicable service providers. In addition, fiduciaries should review service agreements to ensure they outline the service provider’s obligations with respect to disclosures.”
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