What Does It Mean for a Retirement Plan to be 404(c)?

When it comes to managing a retirement plan, the concept of a 404(c) plan is crucial for both employers and employees to understand. Named after Section 404(c) of the Employee Retirement Income Security Act (ERISA), this provision allows fiduciaries—the individuals or entities responsible for overseeing the plan—to pass the responsibility of investment decisions to the plan participants themselves [1]. In other words, if your retirement plan is 404(c) compliant, the employees who are investing their retirement savings make their own investment choices, and the plan fiduciaries are protected from liability for those decisions [2].

To achieve 404(c) status, a plan must meet several specific requirements. First and foremost, the plan must offer a diversified range of investment options, usually at least three, each with varying risk and return characteristics [3]. This variety allows participants to construct portfolios that match their individual financial goals and risk tolerance.

But offering a selection of investments isn't enough. The plan must also provide participants with enough information to make informed choices. This includes details on each investment option, such as the risks, returns, and fees associated with them [4]. Additionally, participants should be able to change their investment selections with sufficient frequency, typically on a quarterly basis, to respond to market fluctuations and personal financial situations [5].

"Section 404(c) of ERISA relieves fiduciaries from liability for participants' and beneficiaries' investment decisions in participant-directed individual account plans if certain requirements are met."

Beyond these fundamental requirements, the 404(c) provision emphasizes communication. Participants must be made aware that the plan intends to comply with Section 404(c) and that this compliance shifts the responsibility for investment decisions to them [1]. This is typically done through clear, written notices and educational materials provided by the plan.

It's important to note that 404(c) protection is not automatic. Fiduciaries must actively ensure that the plan adheres to these guidelines. If the plan fails to meet the criteria—for example, by not providing adequate information or by limiting the range of investment choices—the fiduciaries could be held liable for participants' poor investment outcomes [2].

For employers, adopting 404(c) compliance offers a dual benefit. It encourages employees to take control of their retirement planning while also providing fiduciaries with a layer of protection from lawsuits related to investment losses [4]. However, it also requires diligence in maintaining compliance and ensuring that participants have the tools and information they need to make sound investment decisions.

"Complying with Section 404(c) is optional, and non-compliance does not automatically trigger liability for investment losses. Instead, non-compliance eliminates the broad relief available and raises the possibility that a fiduciary could be held liable for investment losses in participants' and beneficiaries' accounts."

In summary, a 404(c) plan is one where participants call the shots when it comes to investments, and the fiduciaries are shielded from blame for those decisions, as long as the plan meets ERISA's 404(c) requirements [5]. It's a win-win, but only if the rules are followed to the letter.

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References:

 [1] Verrill Law. (2022, October 19). ERISA Section 404(c) Protection: A Refresher for Fiduciaries. Retrieved from https://www.verrill-law.com/benefits-law-update/erisa-section-404c-protection-a-refresher-for-fiduciaries 

 [2] Webb, M. A. (2014, November 21). The Top Five Things You Need to Know About ERISA 404(c). National Tax-Deferred Savings Association. Retrieved from https://www.ntsa-net.org/top-five-things-you-need-know-about-erisa-404c 

 [3] Fidelity Investments. (n.d.). Compliance with ERISA Section 404(c). Retrieved from https://sponsor.fidelity.com/pspublic/pca/psw/public/library/manageplans/compliance_erisa_404c.html 

 [4] IRMI. (n.d.). Employee Retirement Income Security Act Section 404(c). Retrieved from https://www.irmi.com/term/insurance-definitions/employee-retirement-income-security-act-section-404%28c%29 

 [5] FindLaw. (2024, February 16). ERISA Section 404(c) FAQs. Retrieved from https://www.findlaw.com/employment/wages-and-benefits/erisa-section-404c-faqs-.html