404(c) revisited

[Guest RJM]

Some of my associates are interested in knowing why it is so difficult to comply with 404© and if there are attorneys advising employers that the trouble and expense of attempting to comply with every minor detail of 404© may be time and money better spent on other things. Would really like to hear some positions opposed to attempting to comply with 404©.

After browsing thru 4 pages and nearly 100 threads here on the subject, [search results from "404©"] it appears that it would be very easy to demonstrate that any particular employer's plan would not comply - even though the Employer claims that they are complying.

Appreciate any comments.

[Kirk Maldonado]

Have you personally read the regs?

[MWeddell]

Inattention is one reason why plans don't comply with ERISA 404©. It's a complicated, technical legal defense and if one doesn't meet all of the requirements, one doesn't have the legal defense.

The vast majority of plan sponsors don't bother (or don't retain a provider, attorney, or consultant to bother) checking whether all of the requirements are actually met. They just assume that if they have plenty of funds and nice looking investment education that somehow that satisfies ERISA 404©.

[Guest FREE401k]

We don't tell our clients it is too difficult to comply with 404©, but we do tell them that in our opinion 404© is a shallow shield that will ultimately prove ineffective. When the first big wave of 401(k) savers enters retirement and many of them don't have enough money, they'll look around for somebody to blame (which in our society means somebody to sue!). When the courts see that many executives made nice investment returns while many lower-paids at their own company made dismal investment returns (for lots of reasons outside the scope of this posting), we think 404© will go out the window. How could the lower-paid worker have been "in control" of his account when he was doing so poorly? One basis for the suits could be the employer's actual knowledge of, and deliberate indifference to, its employees' poor decisions regarding 401(k) investments. This "actual knowledge of" and "deliberate indiffierence to" standard has already been applied by the U.S. Supreme Court against a school board in a case of student-on-student sexual harrassment (Davis v. Monroe County Bd. of Ed.). While this 1999 case doesn't deal with 401(k)s, we think it is a chilling warning about the court's view on liability issues.

All that aside, we think the best protection for a Plan is to get everybody in it (by using auto enrollment - and not at 2% into money market!) and get professional investment returns for most of the people by having a professionally-managed option and/or pre-mixed investment "strategies" managed by a professional instead of a fund menu.

[Guest Pete Swisher]

I found FREE401K's solution interesting--"negative election" 2% contributions for everyone (or mandatory...?). Interesting because the discussion is about 404c and negative elections would invalidate 404c due to the "ability to exercise control" requirement.

I totally agree that 404c is a "shallow shield." Does anyone know of even ONE lawsuit where 404c has been helpful? In Re Unisys was supposed to be the first but it just raised more questions. Virtually all of the lawsuits have to do with the selection of the investment manager or other issues, NOT the very narrow slice of liability for which the employer gets relief under 404c.

[k man]

Granted 404© is not likely to prevent anyone from being sued or even a finding of liability. Nevertheless, it seems to me to that it is sensible for employers to attempt to comply with 404©. Surely if an employer does not comply with 404©, that very non compliance is going to furnish a basis for liability. It might be just as bad in this day to not give participants the tools and information to make the appropriate decisions, particularly if there were good performing or conservative investments available. I cant imagine why a plan sponsor would not want to attempt to comply.

[IRC401]

When the 404© regs were issued, a colleague called them "a nonsolution to a nonproblem". Are any of you aware of a lawsuit filed by a participant claiming breach of fiduciary duty for letting the participant make the investment decisions?

The concern is that compliance with 404© rules will eventually become so commonplace that failure to comply will be viewed as a breach of fiduciary duty.

IMHO employers who have (or think that they have) 404© plans need to pay more attention to the matters that 404© doesn't protect them from, such as choosing crummy mutual funds or not paying any attention to plan expenses.

[Jon Chambers]

Just a couple of quick thoughts:

1) Most of the time, in a bundled service environment using publicly traded mutual funds (which is used by most but not all larger plan sponsors) 404© compliance is not that hard.

2) I agree with IRC401 that 404© is becoming a de facto standard of fiduciary conduct.

3) I agree with Pete Swisher that cases we have seen so far are claiming fiduciary breaches that 404© doesn't cover. But I disagree that 404© is necessarily a "shallow shield". Consider potential claims from participants that invested 100% of their accounts in large growth funds last year that lost 50%, when the average stock was up 28% in 2001 (yes, that is accurate, check the performance of the equally weighted Wilshire 5000). Losses are primarily attributable to a participant's bad asset allocation decision, exactly what 404© is intended to protect against.

[Kirk Maldonado]

My prediction is that if a plan permits participant directed investments with a suitable number and kind of choices and ability to change investments daily, the likelihood of any successful lawsuit is truly minimal, whether or not the plan complies with all of the literal requirements of the Section 404© regulations.

Having read the entire text or summaries of thousands of cases, one thing that I have discerned is a distaste among judges to delve into the intricacies of such an arcane area of the law. Thus, although many individuals make a lot of money in fees arguing that employers will lose all of their assets in lawsuits if they don't literally comply with every last aspect of the Section 404© regulations, that isn't borne out by the cases.

[Guest Pete Swisher]

I agree that, shallow shield or not, it's silly NOT to pursue 404c. Question: can anyone tell me what standards they use as a 404c compliance checklist? We have several sources, but I'm interested in seeing what others consider adequate internal audits/controls to ensure compliance.

[Kirk Maldonado]

I don't think that you can advise people whether or not something is sillly unless you know the cost of compliance.

If the cost of Section 404© compliance is $100 dollars, I would agree with you. On the other hand, if the cost is $100,000, I don't think that expense is justified.