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ERISA Section 404(c) FAQs

Understanding retirement plans and investments is an important part of financial management. The Employee Retirement Income Security Act of 1974 (ERISA) plays a central role in safeguarding the interests of plan participants.

ERISA Section 404(c) establishes guidelines for plan sponsors. Specifically, it offers protections related to participant-directed investment accounts. This article answers common questions about ERISA Section 404(c).

What Is ERISA Section 404(c)?

ERISA, a federal law governing private pension plans like 401(k)s and 403(b)s, encompasses Section 404(c). Section 404(c) is a specific provision granting employees the authority to make investment decisions for their retirement accounts. This empowers people to control the allocation of their savings to various types of companies.

But, the intricacies of Section 404(c) can pose challenges. The section imposes a prudent standard of care and establishes a "safe harbor" for employers or plan sponsors who enable employees to manage their plan investments. Understanding the disclosure requirements and fiduciary responsibilities outlined in Section 404(c) is important for employers and employees.

I Am an Employer Who Offers a Pension Plan to Employees. Why Do I Care About 404(C)?

As an employer offering pension plans to employees, understanding ERISA Section 404(c) holds significant importance, especially on fiduciary duties and participant-directed investments. Employers that follow 404(c) can shift responsibility for poor investment results to plan participants. In short, 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.

To qualify for this safe harbor, plan sponsors must follow the requirements for investment selection, plan administration, and plan and investment disclosures before they are exempt from fiduciary liability for losses plan participants suffer due to their directing their own investments. To qualify for relief under ERISA Section 404(c), the plan fiduciary must offer participants the chance to:

  • Make choices about their defined contribution plans, including the ability to diversify investments
  • Exercise control over assets in their accounts, particularly employer stock or securities

If you're an employer with employee pension plans, you should check your plan for ERISA 404(c) compliance.

When Is the Ability To Diversify Met?

There are no definitive answers and many different opinions on how to be compliant with diversity requirements. If your plan has guidelines on diversification, you should carefully review the information from your plan administrator. You should also seek clarification on diversifying your assets and establishing a sound investment strategy. Participants should explore various investment alternatives and exercise their investment choices wisely.

What Is the 'Prudent' Standard for Erisa?

The responsible fiduciary must monitor options provided to employees to ensure they continue to be a "prudent" choice for the participant's account. The legal requirement for prudence as defined in ERISA Section 404(a)(1)(B) is for a fiduciary to do their duties with:

"the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."

This is also known as the "prudent expert" rule. Fiduciaries aren't liable for losses suffered by employees on investment options the employee selects if the fiduciary:

  1. Prudently selects the investment options
  2. Complies with the requirements of ERISA Section 404(c)
  3. Properly monitors the investments.

What Do I Do if I Have a Problem With My Plan?

Plan administrators can make mistakes. The following signs may mean something is wrong:

  • Your retirement plan statement is often late or arrives inconsistently
  • Your account balance doesn't seem accurate
  • Your employer doesn't send your contribution to the plan promptly
  • Your plan administrator doesn't send you a copy of the Summary Plan Description
  • Your benefits are calculated incorrectly

If you have a problem, ask your employer or plan administrator about the issue. You should also review the information in your Summary Plan Description. If the issue is unresolved, you may need to take legal action. If so, consult a qualified ERISA attorney for legal advice.

Can I Sue My Plan Administrator or Fiduciary Under Erisa?

Yes. You can sue your plan administrator and its fiduciaries to enforce your rights under ERISA to:

  • Appeal a denied claim for benefits after exhausting your plan's claims review process
  • Recover benefits owed to you
  • Clarify your right to future benefits
  • Get plan documents that you requested in writing but did not receive
  • Address a plan fiduciary that breached their duties to you

What Federal Agencies Can Help Plan Participants?

The U.S. Department of Labor's Employee Benefits Security Administration (EBSA) enforces ERISA in the following areas:

  • Conduct of plan fiduciaries
  • Investment and protection of plan assets
  • Reporting and disclosure of plan information
  • Plan participants' rights and responsibilities

If you have a private pension and a problem with one of these areas, contact a benefits advisor at the Department of Labor at 1-866-444-3272 or www.askebsa.dol.go.

If you have a private pension that ended because it had insufficient money to pay benefits, contact the Pension Benefit Guaranty Corporation (PBGC). The PBGC guarantees payment of certain pension benefits in this situation. You can call PBGC at 1-800-400-7242. The IRS handles tax benefits for employees and employers related to retirement plans. It maintains a taxpayer assistance line for retirement plans at 1-877-829-5500.

If you have more questions about ERISA, contact an employment lawyer to review your case.

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