Managing fiduciary issues

404(c) is a section of the Department of Labor code that deals with self direction of investments within the retirement plan. If fully and correctly followed, 404(c) affords the plan sponsor (fiduciaries) protection from liability stemming from investment losses incurred by a participant or participants that are a result of their investment elections.

The problem is that section 404(c) is very difficult to comply with. Let's 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 a prospectus on this new fund be sent to the person making this new choice. This may not sound like a difficult task but when this event happens three or five years from when the fund was added to the plan tracking who has invested in what and when can be tricky. If the prospectus is not delivered you can lose your 404(c) exemption. This is an example of how easy it is to lose this exemption.

Many of the concepts built into 404(c) really do make a lot of sense and so following the path of 404(c) is a good idea. Relying solely on 404(c) for protection, however, may only provide a false sense of security. Even if you can fully comply with the requirements of 404(c) and maintain its protection from bad participant 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.

If the plan adopts automatic enrollment the fiduciary is also responsible for the selection and monitoring of “qualified default investment alternatives” (QDIA) - default investments made on behalf of a participant who does not make their own investment election. Recent guidance from the Department of Labor 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.

Subject Reference Information