ERISA 404(c) serves as the linchpin of retirement plan success, providing vital protection to plan sponsors while granting participants the opportunity to take control of their investment decisions. It’s an important section of ERISA, yet many are unaware of its significance to their retirement plans. In fact, a Wells Fargo white paper notes, “Section 404(c) of ERISA dates all the way back to 1974, but plan sponsors… are still trying to figure out what it means for their defined contribution plans.” Let’s unravel 404(c) together so you can fully understand its implications for your retirement plan.
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What is ERISA Section 404(c)?
404(c) is a section of Employee Retirement Income Security Act (ERISA) that provides liability protection to fiduciaries who allow plan participants to control their own retirement investment choices.
Compliance with this section provides critical protections and benefits to both plan sponsors and participants. For participants, it creates more freedom in their investment decisions and gives them more control over their financial futures. For sponsors, it reduces the likelihood of becoming involved in claims of fiduciary negligence filed by participants. As FindLaw summarizes it, “404(c) offers a “safe harbor” for plan fiduciaries not to be liable for investment losses suffered by plan participants who self-direct their investments.”
404(c) Requirements
To be protected under Section 404(c), plan sponsors must meet certain compliance requirements.
First, plan sponsors need to provide a diverse set of investment options to participants. This means offering at least three options, each with distinct risk and return characteristics, providing participants with a range of choices to align with their individual investment preferences and goals.
Plan sponsors must also allow participants the ability to transfer among these investment options with a frequency appropriate for each option’s market volatility. This way, participants can make changes to their investments at least once in any three-month period. For investments with higher volatility, more frequent opportunities to change investments may be necessary to comply with Section 404(c) guidelines.
Lastly, it’s essential that participants must have comprehensive information about the plan, its investment options, and overall operations. They should receive clear disclosures including details such as annual operating expenses expressed as a percentage of average net assets for each investment option.
Knowing how to maintain plan compliancy is an important aspect of being a plan sponsor.
Tips for Plan Sponsors to Maintain Compliance
The following best practices can help plan sponsors maintain compliance with ERISA section 404(c):
- Regularly review investment options and plan features to confirm all funds are consistent with participant expectations and mandatory guidelines.
- Provide educational resources to plan participants on investment decisions
- Keep exhaustive records of compliance efforts, including disclosures, participant notices, and other essential documents.
- Engage with qualified professionals like the Third-Party Administrators at California Pensions for assistance in maintaining 404(c) compliance.
California Pensions: Helping You Stay 404(c) Compliant
ERISA section 404(c) is a crucial part of retirement plans, offering fiduciary protections and legal liability shields to plan sponsors and fiduciaries. As plan sponsors and fiduciaries continue to offer retirement plans to their employees, it is crucial to navigate the legal requirements seamlessly to avoid exposure to financial risk. Adherence to this section’s regulations can bring many benefits for both plan sponsors and participants, enhancing the value and overall satisfaction of a retirement plan package.
At California Pensions, we specialize in providing expert advice on ERISA Section 404(c) to ensure plan sponsors and trustees maintain full compliance with mandatory regulations. Contact us today to learn more about how we can help you ensure your retirement plan meets these critical requirements.
