Almost all 401(k) and other defined contribution plans allow participants to direct the investment of their accounts. Even though participants control the investment, plan fiduciaries (and there are many fiduciaries for a plan) remain legally responsible under ERISA’s fiduciary rules for the participants’ investment decisions unless the plan complies with the requirements of section 404(c) of ERISA. Unfortunately, it is difficult to sustain ongoing compliance with the many requirements of section 404(c). The potential responsibility for participant decisions should be a cause of great concern to fiduciaries and plan sponsors. The money invested by participants, often millions of dollars, may be a source of significant liability for plan sponsors and other fiduciaries.

Section 404(c) Requirements

In the most general terms, compliance with section 404(c) requires the following:

  • Investments. Participants must be able to choose from a broad range of investment alternatives.
  • Direction. Participants must be able to give investment directions with appropriate frequency.
  • Information. Participants must be able to obtain sufficient information to make informed decisions.

The regulations under section 404(c) divide these requirements into dozens of specific requirements. Additional rules apply if one of the investment alternatives is company stock.

Reasons to Review Your Compliance with Section 404(c)

  • Compliance has great potential benefits. If a plan permits participants to direct the investment of their accounts, then section 404(c) relieves the plan’s fiduciaries of liability for the investment results due to the participants’ direction of their investments. Recent cases demonstrate that the relief available under section 404(c), although limited, can be valuable in winning fiduciary breach litigation, settling fiduciary breach litigation (and threatened litigation) on favorable terms and deterring fiduciary breach litigation.
  • Compliance is not simple. Applying the dozens of requirements under the section 404(c) regulations to the variety of plan investment structures, communications and administrative practices defies simple statements about what is required for compliance. A careful, thorough analysis of the plan’s circumstances is required.
  • Compliance is not static. Compliance changes with new decisions and rulings and as "best practice" standards evolve. What was acceptable compliance a few years ago may no longer be sufficient.
  • Aplan sponsor’s situation is not static. As a plan sponsor changes administrative routines, issues new communications, adopts technological developments, changes personnel and modifies plan design, what once complied with section 404(c) may no longer comply.
  • Compliance requires periodic, careful review. As the law and a plan sponsor’s situation evolve, to preserve the benefits of section 404(c) a plan sponsor should periodically perform an internal audit and review the legal requirements. If legal counsel (either internal or external) performs the review for the plan sponsor as part of monitoring the plan’s design or in certain other contexts, the plan sponsor may be in a better position to argue the results are protected by the attorney client privilege. Plan sponsors should note, however, that the scope of the privilege in this context has not been established by the courts.

Managing the Risk

Dorsey & Whitney LLP has significant experience in evaluating and documenting section 404(c) compliance. We would appreciate the opportunity to explain this to you and, if you are interested, to undertake a review for you. While this is not a simple process, the risks of not doing it are substantial and, accordingly, the potential rewards for the plan sponsor are also significant. If you have questions relating to section 404(c), please contact the attorney with whom you work for assistance.