404(c) Default

[Guest PALAWYER]

What happens when participants in a self directed 401(k) Plan do not make investment elections. Can the Plan provide for a default election, and will this affect the protection 404© provides? What happens if the Plan does not have a default and the fiduciaries put the money in an FDIC insured money market account?

[LCARUSI]

If the participant has not given an investment election, the burden and responsibility of investing the funds in a prudent manner falls on the Sponsor.

The Sponsor, therefore, must specify a default investment election. Many sponsors automatically use the most conservative investment option as the default. I disagree with this approach.

The default should be an investment election which would be prudent for the long term investment of retirement funds. I don't think 100% money market (or GIC) is appropriate.

I work with a Sponsor who recently selected this default from among their six investment options:

30% corporate bond

30% large cap equity

40% balanced fund

This sponsor will also periodically review the default and adjust it if appropriate.

[Guest ESOPwizard]

The solution is to refuse to accept the 401(k) election unless

it is accompanied by an investment election.

[LCARUSI]

ESOPwizard -

I agree with you that the Employer should do everything possible to avoid being in this situation - such as rejecting enrollment forms without investment elections.

But you will still have this problem in 401(k) plans with automatic enrollment or money purchase plans or similar type plans where contributions (of one type or another) are going into the participant's even without an enrollment form.