404(c) is a section of the Department of Labor code that deals
with self direction of investments within the retirement plan. If followed it affords
the plan sponsor (fiduciaries) protection from liability stemming from investment
losses incurred by a participant or participants and their investment elections.
The problem is that 404(c) is very difficult to comply with. For example, say your
plan offers 15 different investment options. When a person invests in one of these
funds that they had not previously invested in 404(c) requires that person receive
a prospectus on this new fund. This may not sound difficult but when this event
happens three or five years down the road tracking who has invested in what and
when can be tricky. If the prospectus is not delivered you can lose your 404(c)
exemption.
Many of the concepts built into 404(c) make a lot of sense and so following
the path of 404(c) is a good idea. Relying on 404(c) for protection, however, is
something we do not advise. This is based on our interaction with attorneys specializing
in ERISA. Even if you can rely on 404(c) for protection from bad investment decisions
the fiduciary is still responsible for the quality of the investment options that
were selected for the plan, as well as, monitoring those investments. The fiduciary
can also be liable for “default” investments, investments made on behalf of a participant
who does not make their own investment election. Recent guidance from the DOL relating
to automatic enrollment suggest certain types of default investment options (target
maturity & lifecycle funds) may provide an exemption from liability stemming
from “default” investments.
Remember the role of fiduciary carries with it the potential
for personal financial liability. A combination of a well documented decision making
process, a documented monitoring process and fiduciary insurance is perhaps the
best way to address the liability issues stemming from the fiduciary role.
Investment policy statements and 404(c) implementation are helpful tools for fiduciaries
trying to meet the standard intended by ERISA. Trustees should not assume,
however, that just because these items are in place that they are fully shielded
from liability.