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How to Remain ERISA Section 404(c) Compliant

How to Remain ERISA Section 404(c) CompliantERISA Section 404(c) allows for 401(k) and profit sharing plans to be set up to make participants or beneficiaries responsible for selecting their investment elections. Plans are not required to comply with ERISA Section 404(c), but by doing so, it substantially reduces fiduciary’s liability for the performance of the investments selected by the participants and beneficiaries.

Although fiduciary liability is reduced, complying with ERISA Section 404(c) does not eliminate responsibility for choosing and monitoring the investment options available to participants and the investment managers selected to manage the accounts.

Is My Plan ERISA Section 404(c) Compliant?

To determine whether your plan operates in compliance with ERISA 404(c), review your Adoption Agreement. Look for keywords such as “ERISA Section 404(c), Investment Direction, or Directed Investments.”

The plan must take certain steps to alert and educate participants and beneficiaries about their investment responsibilities and options.  This includes disclosing in writing that the participants and beneficiaries that they will be responsible for selecting their own investments.

To help evaluate your plan’s compliance with the major requirements of ERISA Section 404(c), your plan should answer “yes” to all the following questions:

  • Does your plan permit participants and beneficiaries to direct the investment of all or a portion of their retirement plan dollars?
  • May participants and beneficiaries choose from at least three “core” investments, each of which has materially different risk and return characteristics?
  • Is each of the core investments themselves diversified?
  • Do the core investments allow participants and beneficiaries to create an investment portfolio that meets their personal needs and minimizes the risk of large losses?
  • Do you permit participants and beneficiaries to give investment instructions with respect to core alternatives at least quarterly (or more frequently if the volatility of an investment warrants more frequent changes)?
  • Is a plan fiduciary generally obligated to comply with participants’ and beneficiaries’ investment instructions?
  • Have you informed participants and beneficiaries that the plan is intended to meet the requirements of ERISA Section 404(c)?
  • Do you provide participants and beneficiaries the information necessary to allow them to make informed investment decisions?
  • Do you update the information given to participants and beneficiaries when significant changes regarding their investment alternatives occur?

Your service provider will typically provide the resources to maintain compliance with ERISA 404(c). You are responsible for distributing the notices to your participants and beneficiaries.

For More Information

This is not an all-encompassing list. For more information about ERISA Section 404(c), check out the following resources: