404(c)

[Guest cabenefits]

What are the pros and cons of having a plan decare in their docs that they are 404© compliant?

[ccassetty]

Here is my take on it.

The pros of declaring 404© compliance are that 404© protects the fiduciaries from liability for market losses to plan assets that are a direct result of participant directed investments. With the recent market losses, we may have some court cases illustrating this protection (or lack thereof) in the near future. Of course this protection hinges upon all 404© requirements being met. 404© does not protect against liability for the fiduciary responsibility of choosing the investment options from which the participants may choose.

Some say that brockerage accounts that allow the participant to choose virtually any investment even eliminates the potential liability for choosing investment options. I'm not necessarily disagreeing with that, but I believe there are issues with full compliance as far as required information that must be provided under 404© when there is a brokerage account situation.

Some say that declaring compliance with 404© and then not managing to fully comply can lead to plan problems with the DOL for not following the document fully. Yes, this is a valid concern and full compliance is not easy to attain. However, my guess is, there is hardly a plan out there that has declared 404© that is actually in 100% compliance with it and I have yet to hear of a plan getting into trouble on that issue. I believe the DOL has bigger fish to fry.

The pros of not declaring 404© is avoidance of the above non-compliance issue. In my opinion, the biggest problem with non-compliance is the loss of the protection afforded by 404©.

Some have advocated trying to comply with the requirements of 404© while not actually declaring 404© in order to avoid the as yet theoretical DOL actions for non-compliance. The problem with this is, that compliance without declaring 404© will not provide any protection. One of the requirements of gaining the protection of 404© is declaring 404© compliance and providing the required notice to employees. Without this step, there is no protection.

Let me hasten to add that, whether or not the plan decides to declare 404© compliance, any plan that allows participant direction is well served to comply with many of the 404© provisions simply because it's good policy to provide participants with as much information as possible to assist them in their investment decisions.

[mbozek]

Self directed account plans are not in compliance with the 404© regs if they do not provide the participant with a reasonable opportunity to give investment instructions to a plan fiduciary. Since most plans provide for the participant to give instructions directly to the fund provider or broker by phone or electronically there is no compliance with with 404© regs. Financial providers and mutual funds usually refuse to be designated as an agent of the fid for 404© because of the attendent liability risk under ERISA. The best case for compliance is for copies of the instructions and confirmations to be sent to the Plan fid. There is no advantage to declaring that a plan is in compliance with 404©.

[mal]

We have struggled with 404© issues on some

of our plans. A small number of participants

seem to make ridiculous choices regarding their investments.

The biggest problem seems to be with diversification.

Too many participants put all their eggs in one

volitile or ultraconservative basket.

Is there any guidance to suggest fiduciaries who

have not fully complied with 404© are immune

from participants who sue over their own stupid

choices? In other words, if a plan is not compilant,

it seems there is a good argument to be made

that the fiduciaries are responsible for issues

such as diversification. Could participant A state

a case that the fiduciaries are responsible for

his poor decisions?

[E as in ERISA]

Yes. If 404© doesn't apply, then the fiduciary is responsible for compliance with the general rules of 404.

[david rigby]

Oh boy. In order to be compliant, all I have to do is declare it?

[E as in ERISA]

No. 404© is a legal defense to a claim of liability for loss. If you do not declare 404©, then participants get summary judgment and you can't submit evidence of compliance with 404© at trial. You have to prove you meet 404 standards. If you declare 404©, then you can submit evidence of compliance with 404© at trial. Whether you win depends on whether you actually complied or not.

[mbozek]

K: I dont understand what you mean by " Participants get summary judgment if the plan does not declare that is 404© compliant". I thought a plan is 404© compliant if it meets the requirements of the 404© reg. See 2550.404c-1 (b). Most plans do not provide the participant with the opportunity to give investment instructions to an identified plan fiduciary (instead of the fund sponsor or broker) and therefore are not 404© compliant regardless of the label that is put on the plan. Only those plans that provide for the fiduciary to receive investment instructions from the participant can meet the 404© requirements.

[four01kman]

It seems to me the issue is two-fold. First, whether the plan complies with 404©; and second, if there is an aggrieved participant who sues, whether the plan can prove 404© compliance. It is not enough to simply declare that a plan is a 404© plan.

[g8r]

I sort of think of those 2 as one item. If a participant sues, the first step is to attempt to prove 404© compliance. If you have complied and satisfied your other duties (such as monitoring the investment choices that were made available), then the fiduciary has protection from loses attributed to a participant's direction of investments. If there is no 404© protection (either the fiduciaries don't claim it or they fail to prove that have complied), then you go to the next step whic is attempting to determine whether there was a breach of fiduciary duty. That depends on the usual standards of diversification and prudency.

Some plans contain language that the fiduciaries "intend" to comply with 404©. That would presumably be a defense if the IRS or DOL were to claim you failed to comply.

I guess there is no harm including such a statement in a plan. However, it's also not clear that it helps.

[E as in ERISA]

Section 404© is relevant solely as a defense in a lawsuit for losses caused by breach of fiduciary responsibility. Each and every requirement of Section 404© must be complied with in order for it to be a valid defense; if any one requirement is not met, then by its terms Section 404© does not apply. Then Section 404(a) applies and the fiduciary will be legally responsible for the participants' poor investment choices. So anyone who ever plans on using the defense better clearly comply with all the requirements -- to at least some extent.

Some of the requirements or parts requirements are very simple and straightforward. If there is no attempt at compliance with them, then the 404© defense will be invalid and should not be offered and/or it should be summarily dismissed prior to going to trial. I would refuse to be a fiduciary of any plan that did not remotely comply with these straightforward requirements. I include within this category the requirement under Reg. Sec. 2550.404c-1(b)(2)(i)(B)(1)(i) to provide an explanation that the plan is a Section 404©) plan, which is the subject of this post. I also include the requirements to provide three investment options, to allow quarterly changes, etc. If its very clear that you have made no attempt to comply with these requirements, then you have no chance with a Section 404© defense. If you lose the 404© defense prior to trial, your chances at a good settlement are probably reduced considerably.

In other cases, it is a question of the sufficiency of the attempt to comply. If you put an explanation in writing, was it clear enough to satisfy the requirement? Were the three investment options materially different enough? Etc. These questions should go to the jury. If you're allowed to proceed with the defense, your chances at a favorable settlement (or a favorable jury verdict) are better than they otherwise would be. It all depends on the evidence.

[mbozek]

K: Under the 404© regs a self directed plan cannot be 404© complaint if the participant does not have the opportunity to give investment instructions to an identified fiduciary (instead of the mutual fund provider or broker). As you stated each requirement of 404© must be met. There are very few plans that require the participant give the investment instructions to the fiduciary. (It is up to counsel to decide whether providing a copy of the investment instructions to the fiduciary for the plan is compliance with the requirements of the regulations.) Also the 404© defense is limited to losses which are caused by the exercise of investment control by the participant, e.g., the fid is still liable for the selection of individual investment options.

By the way there are no jury trials in ERISA because it is a court of equity. All claims are heard by a judge without a jury.

[g8r]

I guess I assumed the initial question related to whether the plan document should include a statement that it complies. And I based my response on that assumption.

As Katherine pointed out, you do have to explain that you intend to comply with 404©. But, that's for the participants. Thus, while my comments relate to the actual plan document, there are clearly certain explanations and disclosures that must be made to participants - either in an SPD or other material.

I'll leave my comments to that. No... I guess I can't. I agree that the regulations state that all the requirements must be satsified to have compliance. But, that doesn't necessarily mean a court can't disagree with the DOL regulations. While we know bad facts make bad law, every once in a while good facts make good law.

Personally, I'd be happy if the only item not satisfied in the list of requirements is that directions went to a nonfiduciary agent of the fiduciary (based on instructions provided by that fiduciary). Of course it would be better to ensure I satisfy that requirement as well. But, some say that it's impossible to have total compliance with 404©.

I guess now that I've started...I like directing my 401(k) account, but I wouldn't lose any sleep if my employer eliminated that option. Personally, I think participant direction is bad for participants and potentially increases employer liability. But, our industry has evolved into what it is so it's here to stay... at least until we start getting some good litigation.