prototype not 404(c) compliant

[jlea]

Working with TPA using McKay Hochman prototype plan to help client establish a new 401(k) plan. They didn't mark plan to be a 404© plan and when I requested the change, I was told that they "never" mark the plans to be 404© plans.

Anyone ever encountered?

[QDROphile]

What about a plan document makes the plan a "404© plan" or contributes to compliance with the 404© regulations?

[jlea]

The plan COULD be 404© compliant, and we can certainly assist the client in making it so. The issue, though, is that the Adoption Agreement has a spot for whether the plan is INTENDED to comply with 404© and they want to mark it no.

[jpod]

If "yes" is checked in the Adoption Agreement, will the vendor provide an SPD and/or other materials and assistance that reflects the employer's intent to comply with 404c and facilitates compliance therewith, whereas if it checks "no" the vendor won't do all that stuff?

[J Simmons]

Could an indication of "no" on the adoption agreement dispel 404c relief, assuming compliance otherwise, as an indication of the plan sponsor's intent that the plan not be a 404c plan, when challenged by an employee?

[jpod]

What does the basic plan document say happens/applies if the employer answers "yes" as opposed to "no," or doesn't answer at all? Putting aside my question in my previous post and the answer to it, perhaps the employer can simply cross-out the entire section of the adoption agreement. There's no way that would have any effect on the employer's ability to rely on the opinion letter or otherwise affect the plan's tax-qualified status. And, unless the basic plan document says otherwise, it shouldn't have any impact on whether any investment transaction is eligible for 404c relief.

[Guest Sieve]

A 404© Plan needs to give notice of such status to participants. (DOL Reg. Section 2550.404c-1(b)(2)(i)(B)(1)(i).) Without that notice, the plan cannot be considered to be providing the participants an opportunity to exercise control over assets in their accounts, 1 of the 2 requirements for a 404© plan. (DOL Reg. Section 2550.404c-1(b)(1).)

Assuming that the check mark (re: 404© status) in the prototype's Adoption Agreement causes the appropriate language to appear (or not appear) in the SPD, I'd say that this plan cannot meet 404© requirements if the AA has 404© status checked as "no".

[jlea]

Sieve has addressed one of my largest concerns: the generation of the SPD. It seems to me that a primary purpose of having the AA contain this question is (a) what language goes into the SPD regarding intention to be a 404© plan and (b) potentially what types of information, etc. are provided to the participants regarding the investment options, risk and return characteristics thereof, etc., etc.

[QDROphile]

Right. It has nothing to to with the plan document. The provision should not be in the Adoption Agreement. The question should be adressed in the services contract with the person who is going to be responsible for the 404© disclosure materials. Nothing has to be in the SPD, either, but the SPD is an appropriate place to have some of the 404© disclosure.

Next question: Since when do TPAs get to decide how an Adoption Agreement is marked?

[Guest Sieve]

-phile --

To the uninitiated small employer, the only entity that has any inut into the plan document is the TPA (when they draft the AA based on the default provisions that are convenient to its own administrative practices)). Do I sound bitter?? I'm not. Some of my best friends are TPAs . . .

And, I often think that saying you're a 404© plan is an extreme form of denial, anyway, since I would argue that perhaps 1 plan in a hundred--tops!!--would, under the test of litigation, be found to have complied with the myriad of 404© requirements anyway. You may be more likely to be struck by lightning than actually be a 404© plan--no matter what the AA, or SPD or other administrative documents might say!!

[J Simmons]

I agree with QDROphile that the question is not a good one for inclusion in an adoption agreement. DoL Reg § 2550.404c-1(b)(2)(i)(B)(1)(i) requires that the identified fiduciary provide participants and beneficiaries

an explanation that the plan is intended to constitute a plan described in section 404©

. Seems to me that it would be very difficult for the identified fiduciary to meet this requirement if the plan documents, such as the adoption agreement, indicates that the plan is not intended to be a 404c plan. Particularly difficult given that a fiduciary is to operate the plan as written, to the extent consistent with ERISA. ERISA § 404(a)(1)(D.

I don't know if not answering the question on the adoption agreement, or crossing it out, would jeopardize any prototype reliance otherwise allowed for tax-qualification purposes.

[K2retire]

It is one of the questions on the Corbel prototype document, but it appears in an employer administrative elections appendix, not the main document. I'm not sure if it can be left blank. By the way, I believe the provision reads that the plan is INTENDED to be a 404© plan, not that it actually meets that definition. (Since we all know that an effective litigator can change the reality to be different from the intention.)

TPAs who write their own documents get to decide what type of provisions they are willing to support. Clients who want different provisions can either negotiate that with the TPA or go elsewhere. That is not an unusual way to do business. I can't imagine why the TPA is taking the position that it must be marked as a non-404© plan, but it probably has something to do with how they operate their business.

[jlea]

It is very odd and frustrating. The individual with whom I am working acknowledges that it has no affect upon the prototype sponsor (as they are a nondiscretionary trustee and participants direct investments) -- instead, its effect is upon the sponsoring employer. She indicated that they were told in training that none of "their" plans should be marked "yes" (and, yes, that is for INTENDING to be a 404© plan.) The contact also confirmed that the answer to this item dictates whether the 404© language appears in the SPD.

(Once again, I've got to agree with Sieve that although most 401(k) plans with participant-directed investments intend to be 404© compliant, actual compliance is FAR more difficult. And the worst is that no matter what anyone thinks now, it's only going to matter once the investments have gone sour -- at which point in time, courts are much more likely to find that more should have been done to comply . . . Of course, if we go down that road, all of us will be crying into something or another.)

[J Simmons]

404c compliance is a lofty, nearly unattainable goal. But indicating in the plan's governing documents that the plan is not INTENDED to be a 404c plan would present a high hurdle to even the best of litigators trying to defend the employee's case for investment under performance, while you are crying into something or another.

[Guest mjb]

404c compliance is a lofty, nearly unattainable goal. But indicating in the plan's governing documents that the plan is not INTENDED to be a 404c plan would present a high hurdle to even the best of litigators trying to defend the employee's case for investment under performance, while you are crying into something or another.

I thought there were cases where the courts have held that under ERISA a 401k plan does not have to meet the requirements of 404c in order to provide the employer with protection from employee investment decisions. Some employers refuse to comply with 404c because of administrative $ expenses necessary to meet the 25 or so requirements. What protection does 404c offer for investment performance?

[J Simmons]

ERISA § 404©(1)(B) provides a statutory defense:

no ... fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control.

ERISA § 404© is not the only defense that fiduciaries may have to claims related to investment underperformance. DoL Reg § 1.404c-1(a)(2) explains that

Such standards, therefore, are not intended to be applied in determining whether, or to what extent, a plan which does not meet the requirements for an ERISA section 404© plan or a fiduciary with respect to such a plan satisfies the fiduciary responsibility or other provisions of Title I of the Act.

However, one of the requirements for the ERISA § 404© defense is that the 'identified fiduciary' provide participants and beneficiaries "an explanation that the plan is intended to constitute a plan described in section 404©". DoL Reg § 2550.404c-1(b)(2)(i)(B)(1)(i). Without the explanation of 404c plan intent provided, there would be no ERISA § 404© defense, just whatever other, nonstatutory defenses can be mustered.

[Guest mjb]

ERISA § 404©(1)(B) provides a statutory defense:

no ... fiduciary shall be liable under this part for any loss, or by reason of any breach, which results from such participant's or beneficiary's exercise of control.

ERISA § 404© is not the only defense that fiduciaries may have to claims related to investment underperformance. DoL Reg § 1.404c-1(a)(2) explains that

Such standards, therefore, are not intended to be applied in determining whether, or to what extent, a plan which does not meet the requirements for an ERISA section 404© plan or a fiduciary with respect to such a plan satisfies the fiduciary responsibility or other provisions of Title I of the Act.

However, one of the requirements for the ERISA § 404© defense is that the 'identified fiduciary' provide participants and beneficiaries "an explanation that the plan is intended to constitute a plan described in section 404©". DoL Reg § 2550.404c-1(b)(2)(i)(B)(1)(i). Without the explanation of 404c plan intent provided, there would be no ERISA § 404© defense, just whatever other, nonstatutory defenses can be mustered.

The fiduciary rules for selecting prudent investments applies to funds chosen under a 401k plan that complies with 404c. Are you saying that the fiduciary is not liable for selecting an impudent investment if an under performing fund is not removed from the plan (e.g., bottom 10% of funds in its class for 5 consecutive years) because the decision to invest in the fund was made soley by the participant?

Reg 1.404c-1(d)(2) states that "no .... fiduciary with respect to such plan shall be liable for any loss with respect to any breach of part 4 of Title I of the Act that is the direct and necessary result of that participant's exercise of control." In other words the plan fiduciary is only protected for those acts which are soley within the descretion of the participant, e.g., allocation of assets. It does not prevent the fiduciary from liability if the participant invests in an asset that is an impurdent investment under ERISA. See examples -1(f) 10 and 11 in the 404c regs.

[J Simmons]

The fiduciary rules for selecting prudent investments applies to funds chosen under a 401k plan that complies with 404c. Are you saying that the fiduciary is not liable for selecting an impudent investment if an under performing fund is not removed from the plan (e.g., bottom 10% of funds in its class for 5 consecutive years) because the decision to invest in the fund was made soley by the participant?

No, I'm not saying that. I quoted the statute, which provides that no fiduciary shall be liable for any loss "which results from such participant's or beneficiary's exercise of control". If the fiduciary limits the 'menu' of investments from which the employees may choose, the fiduciary may be held liable for imprudence in what it includes, and what it excludes. It is only as to a loss that results from the employee's exercise of control that ERISA § 404© gives plan fiduciaries a defense, not losses that result from the fiduciary's choices in what investment options are included on the limited investment menu and what is excluded from that menu.

Reg 1.404c-1(d)(2) states that "no .... fiduciary with respect to such plan shall be liable for any loss with respect to any breach of part 4 of Title I of the Act that is the direct and necessary result of that participant's exercise of control." In other words the plan fiduciary is only protected for those acts which are soley within the descretion of the participant, e.g., allocation of assets. It does not prevent the fiduciary from liability if the participant invests in an asset that is an impurdent investment under ERISA. See examples -1(f) 10 and 11 in the 404c regs.

That is the position taken by the employee class and the DoL per amicus in the Hecker v Deere appeal now pending before the 7th Circuit Court of Appeals. The employer (Deere) and the federal district court for the Western District of Wisconsin take a less paternalistic view, that the plan fiduciaries are not liable if the employee chooses an imprudent investment so long as the employee had prudent choices available to him under the plan. In that case, the federal district judge noted that employees had 2600+ investment options, some of which no doubt had lower fees than those 18 or 19 suggested by the fiduciaries for employee consideration. The appeal is pending, as yet no decision has been handed down.

[Guest mjb]

The fiduciary rules for selecting prudent investments applies to funds chosen under a 401k plan that complies with 404c. Are you saying that the fiduciary is not liable for selecting an impudent investment if an under performing fund is not removed from the plan (e.g., bottom 10% of funds in its class for 5 consecutive years) because the decision to invest in the fund was made soley by the participant?

No, I'm not saying that. I quoted the statute, which provides that no fiduciary shall be liable for any loss "which results from such participant's or beneficiary's exercise of control". If the fiduciary limits the 'menu' of investments from which the employees may choose, the fiduciary may be held liable for imprudence in what it includes, and what it excludes. It is only as to a loss that results from the employee's exercise of control that ERISA § 404© gives plan fiduciaries a defense, not losses that result from the fiduciary's choices in what investment options are included on the limited investment menu and what is excluded from that menu.

Reg 1.404c-1(d)(2) states that "no .... fiduciary with respect to such plan shall be liable for any loss with respect to any breach of part 4 of Title I of the Act that is the direct and necessary result of that participant's exercise of control." In other words the plan fiduciary is only protected for those acts which are soley within the descretion of the participant, e.g., allocation of assets. It does not prevent the fiduciary from liability if the participant invests in an asset that is an impurdent investment under ERISA. See examples -1(f) 10 and 11 in the 404c regs.

That is the position taken by the employee class and the DoL per amicus in the Hecker v Deere appeal now pending before 7th Circuit Court of Appeals. The employer (Deere) and the federal district court for the Western District of Wisconsin take a less paternalistic view, that the plan fiduciaries are not liable if the employee chooses an imprudent investment so long as the employee had prudent choices available to him under the plan. In that case, the federal district judge noted that employees had 2600+ investment options, some of which no doubt had lower fees than those 18 or 19 suggested by the fiduciaries for employee consideration. The appeal is pending, as yet no decision has been handed down.

I thought it issue was over the reasonableness of fees because some of the 2500 investments had high charges. Are you saying that an employer could offer 20 imprudent investments as long as it offered some prudent investments. Could a plan allow employees to invest in short sales or hedge funds as long as it offered other prudent investment choices without violating the prudent investing rules?

[J Simmons]

I'm saying that the 7th Circuit's pending decision will answer, at least in part, some of your questions.