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Section 404(c) compliance requirements

Published: Wednesday, July 24, 2013 5:30 a.m. CDT

What Every Plan Sponsor Should Know About ERISA Section 404(c)

A fundamental requirement of compliance for Section 404(c) of the Employee Retirement Income Security Act is that the plan must provide for participants’ direction of their account balances. Generally, other basic 404(c) requirements are:

• The plan must offer a broad range of investment options.

• Participants must be able to change investment options in their accounts at an appropriate frequency to diversify investments to minimize risk.

• Fiduciaries must provide appropriate 404(c) disclosures.

Allowing plan participants to choose their own investments from a menu of options selected by the employer (or other plan fiduciary) has its pros and cons for the plan sponsor. On one hand, this decision may attract more employees to the plan. On the other, it can result in added fiduciary responsibilities and potential liability.

In this situation, many employers choose to comply with ERISA Section 404(c) to take advantage of the relief it may provide from some ERISA fiduciary responsibilities, including liability for losses resulting from the participant’s exercise of investment control.

In general, ERISA provides that a person who exercises authority or control over plan assets is a fiduciary and can be held liable for plan losses resulting from the fiduciary’s failure to carry out specific duties and responsibilities. However, Section 404(c) of ERISA provides limited relief with respect to individual account plans that permit a participant or beneficiary to exercise control over the asset in his/her account.

In such plans, the participant or beneficiary is not deemed to be a fiduciary, and no person who is otherwise a fiduciary will be liable for any investment loss, or by reason of any break, that results from the participant’s or beneficiary’s exercise of control over the investment decisions in their account.

Under regulations issued by the Department of Labor, a plan can provide fiduciaries with 404(c) protection if it provides an opportunity (as mentioned earlier) for a participant or beneficiary to:

• Choose from a broad range of investment alternatives.

• Exercise control over the assets in his/her individual account.

Additionally, the fiduciary must disclose to the participants that the plan is intended to be an ERISA 404(c) plan and that, as a result, plan fiduciaries may be relieved of liability for any losses that result from the participant’s investment instructions.

It is important to note that complying with 404(c) requirements does not relieve the fiduciary from the obligation to prudently select and monitor the plan’s investment options.

To satisfy a broad range of investments alternatives, a plan must offer at least three core investments. It appears a plan would comply if it offered one option from each of the following three core categories: Money market or stable value, income and growth (equity).

To satisfy opportunity to exercise control, the plan must provide participants or beneficiaries with a reasonable opportunity to give investment instructions, and the fiduciary must provide each participant or beneficiary the opportunity to obtain, sufficient information to make informed decisions.

Investment instructions: The terms of the plan must afford the participants or beneficiary a reasonable opportunity to give investment instructions in writing or otherwise (with the option to receive a written confirmation) to an identified plan fiduciary, or person designated by the plan fiduciary, who is generally obligated to comply with the instructions.

Sufficient information: A participant or beneficiary will be considered to have sufficient information if specified information is provided prior to the time the participant or beneficiary is permitted to give investment instructions.

Frequency of investment instructions: Participants or beneficiaries must be permitted to give investment instructions with a frequency that is appropriate in light of the market volatility to which the investment may reasonably be expected to be subjected. The plan must allow participants to give investment instructions no less frequently then once in every three-month period.

In conclusion, it is important to note that complying with 404(c) requirements does not relieve the fiduciary from the obligations to prudently select and monitor the plans investment options.

• Terry Maryniw and Aaron Maryniw are investment advisers with Maryniw Financial, 901 E. Oak St., Lake in the Hills. Email maryniw @ maryniw .com, call 847-658-9251 or visit www.maryniwfinancial.com.

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