ERISA 404(c) - Investment Information: Make Available vs. Actually De

[Guest EMC]

Under DOL Regs, to get ERISA 404© fiduciary protection, a participant must be provided with the opportunity to "exercise control" over his account assets. The DOL Regs further state that a participant "exercises control" over his account assets only if he is "provided" or "has the opportunity to obtain" sufficient information to make informed decisions with regard to investment alternatives available under the plan.

Unfortunately, after setting forth this seemingly *alternative* criteria ("provide" vs. "has the opportunity to obtain"), the Regs go on to state that a participant is NOT considered to have sufficient investment information unless a whole laudry list of items are "provided" to him by a plan fiduciary. This latter criteria seems to take away the "opportunity to obtain" (make available) concept. (There are other specific items listed elsewhere in the Regs that must be made available upon request, but that is not part of my question).

Question: Must the investment information to be provided to a participant under DOL Regs. 404c-1(B)(2)(i)(B)(1) be *directly* "provided" (e.g. individually hand delivered or mailed), or does giving a participant the "opportunity to obtain" such information suffice (e.g. Notice + posting it on the company's intranet site and making it available at each work location via a branch benefits contact)?

Thanks for sharing any thoughts.

[k man]

Review the following article:

http://www.benefitslink.com/reish/articles..._checklist.html

you might find it helpful

[Guest EMC]

Thanks k man. I've seen that article, but the question I asked is still the same -- does "provided" mean *directly* provided (mailed, hand delivered) or does it mean that the info can be *made available* (on intranet site and with benefits contact at each location)? The Regs I set forth above seem to waffle on the concept and I was hoping someone else had some experience doing it one way or the other.

[Jon Chambers]

In my humble opinion, "provided" means "provided". I think you can satisfy all the required disclosure relatively easily by providing participants with prospectuses, and including the other disclosure (e.g., plan is a 404© plan, named fiduciary for providing investment info, etc.) in the SPD. This is what we do for clients. If there is any definitive opinion that less disclosure is required, I'd love to hear it.

[Guest EMC]

Good point, Jon. I think that was our initial feeling as well. If that's the case, though, what does giving the participant the "opportunity to obtain" investment information mean? According to the DOL Regs, a participant must be "provided" OR "ha[ve] the opportunity to obtain" sufficient investment infoormation. The fact that there are 2 alternatives must mean that each has its own separate meaning.

Going back to your point, though, there are 2 classes of information that must be given to participants in a 404© plan in order for the plan to be considered to be providing sufficient investment information under 404© -- (1) a class that must be made available on request, and (2) another class (that I am talking about here) that a participant is "provided" or "has the opportunity to obtain". It is the "given the opportunity to obtain" language of the Reg with regard to the 2nd class that makes me wonder if there is a way of complying short of *direct* providing of the required information.

[MWeddell]

The fact that the second list of disclosure items must be provided "upon request" has led me to interpret the first list of items that must be "provided" as really having to be provided, not just on request. That means that plan sponsors who wish to comply with ERISA 404© should make sure that prospectuses are given to participants immediately before or after they first invest in any registered fund.

Keep in mind that the only time this will be relavant is in a lawsuit against an employer after things have already gone so sour that a plaintiff has hired a lawyer and filed suit. A judge is likely to interpret the 404© defense fairly narrowly in that context and try to let the case be decided on its merits. So if an employer thinks this 404© legal defense is worth having, I'd advise that it better make sure the prospectuses are provided, not just made available. IMO, there are an awful lot who think they are complying with ERISA 404© who are not meeting all the regulatory requirements.

[k man]

It should definately be no problem "actually providing" prospectuses and other information at the time of enrollment or during the annual enrollment meeting but what about in the case of a daily valuation plan where the participant trades into a fund that he does not have or has not yet received a prospectus?

[Jon Chambers]

Most bundled providers will mail the prospectus in this scenario. From memory, the regs provide that it's ok to provide info within a reasonable time following initial investment.

[QDROphile]

You cannot satisfy all of the required 404© information requirements by providing a prospectus. For example, if the shareholder materials, such as proxy voting materials, are not given to participants and then followed according to participant directions, you fail. I know of many plans that don't pass through shareholder materials on mutual fund to participants. That's OK, but triggers disclosures that are not covered by a prospectus. A propectus won't tell you anything about plan fiduciaries either. A prospectus won't provide the 404© disclaimer. And more.

[Guest EMC]

So, it looks like the consensus here is that the Regs' expressly stated alternative 404© investment information disclosure requirement (i.e., giving a participant the "opportunity to obtain" such information) means exactly the same thing as the its alternative -- i.e. *directly* "providing" it to the participant. This seems contrary to rules of construction, but several of you also make valid points. Its not the clearest regulation on this issue...

[Jon Chambers]

QDROphile makes a good point that prospectuses don't represent the only required information for 404© protection, but I think this point is consistent with my second post, above. I indicated that in addition to distributing prospectuses, you need the additional 404© disclosure, which is normally part of the Summary Plan Description.

With regard to proxy pass through, I've never worked with a plan that passed through proxies on mutual funds. On this topic, the Reish & Luftman article cited earlier in the thread states: "After investment, participants must be provided with plan materials related to the exercise of voting, tender, or similar rights. If there are plan provisions regarding the exercise of such rights, participants must receive a description of or reference to such provisions. While the plan is not required to pass through such rights, Section 404© relief is not available to the extent that plan fiduciaries exercise the rights." I take this to mean that plan fiduciaries that vote proxies are responsible for how they vote proxies. Frankly, I don't see this as a big deal.

My general point is that there seems to be some conventional wisdom that states that 404© protection is extremely difficult to get, consequently, the protection is limited. It seems to me that for a daily valued/daily traded plan invested in appropriately selected mutual funds, you really only need to do three things to get 404© protection:

1) Include an appropriate 404© disclaimer in the SPD or elsewhere.

2) Distribute prospectuses on a timely basis.

3) Have a named fiduciary that will provide the optional/on request information.

Certainly, compliance gets tougher if there is company stock, funds other than mutual funds, etc. But the three step approach described above seems like a reasonable course of action for the vast majority of plans out there.

Does anyone disagree?

[k man]

what about providing updated/new prospectuses on an ongoing basis. every year the prospectus is changes. the regs dont seem to contemplate this.

[Jon Chambers]

In the list of information needed to be provided automatically, note a clause (paraphrased) "...if investment funds are subject to SEC registration rquirements, a copy of the MOST RECENT prospectus provided to the plan must be provided immediately beforme or after a participant's initial investment in the fund.." In the list of information needed to be provided on request "Copies of any prospectuses...provided to the plan."

In practice, we recommend sending updated prospectuses to participants. The cost is low, who knows or really cares whether the prospectus gets read, and the information dissemination requirement is satisfied definitively.

[John A]

Jon,

Just to clarify:

You recommend sending prospectuses to all participants every time a prospectus is updated?

[Jon Chambers]

I recommend sending updated prospectuses to all participants IN THE FUND FOR WHICH THE PROSPECTUS HAS BEEN UPDATED. Participants transferring into the fund for the first time should also get the updated prospectus. In my opinion, this gets pretty solid 404© protection. I'm assuming that this procedure can be done in a reasonably automated manner, and that it doesn't introduce large costs or an unreasonable administrative burden. If it does, other methods could be considered.

[k man]

it definately creates a large adminstrative burden. the fund companies dont have participant identity. we as record keepers have the identity but then must order the correct amount of prospectuses and either send to the client (trustees) or to the individual participants. either is still a large burden.

[Jon Chambers]

I understand the operational difference between a TPA recordkept plan and a bundled plan directly with the investment provider. In my experience, the bundled investment provider typically follows the procedure I described above for prospectus distribution, which, in my opinion, provides for better 404© compliance. Thus (sorry k man), an advantage for the bundled investment provider. Of course, the TPA offers other advantages. This is just one of the many factors that needs to be considered by the sponsor during the vendor selection process.

[Bill Berke]

If I may I'd like to continue this discussion and add more controversy to a controversial issue: What is "excercises control" (in the law) and "informed decision" (in the reg's)? All that I have read in this thread focuses on what I call the "mechanical portion" of the reg's - that is; what do you deliver, to whom and when? And look at the differing opinions. And 404© is not a compliance reg it is a disclosure defense claim that the fiduciaries can raise regarding the results of an individual's investment choices turning out poorly. As you all know, the fiduciary always maintains the liability for, among other chores, selecting/reviewing "appropriate investment choices made available to the participants". So to get back to my question -what is excercises control/informed decision? Is it merely the fiduciary's complying with the disclosure/delivery requirements of the 404© reg's? Does it imply that the employer must take extra actions to educate the participants? Or does it mean the the employer must assess each participant to see if it is appropriate to let that person have a choice? Or something else altogether? And what if the employee on the witness stand is a legally competent, mentally retarded mail room clerk (they exist!!)? Or the more common situation of an employee who has no investment knowledge or experience? Can either of these participants excercise control or make an informed decision? If not, what are the implications for the sponsor? Any thoughts would be welcomed

[Jon Chambers]

The answers to Bill's questions are actually pretty clear, at least from a regulatory (i.e., DOL) perspective. The judiciary (i.e., courts) could interpret the facts differently in any potential litigation. But from the DOL's perspective, 404© represents the only exception to the general prudent investment standards under ERISA 404(a). So if a participant makes investment decisions in a participant directed plan that cause the account to be invested imprudently or inappropriately, and consequently the participant incurs losses, if the plan does not satisfy 404©, plan fiduciaries are responsible for making the participant whole.

It's hard to conceive of a participant directed plan where it would be impossible for a participant to make an imprudent decision. Even a decision to invest 100% of the account in a money market fund could be imprudent for a young participant. Consequently, as a practical matter, this means plan fiduciaries that don't want liability for poor participant investment decisionmaking need to take one of three positions with respect to 404© compliance:

1) Review all participant investment decisions, and overturn any decisions that are deemed to be imprudent (I've never seen anyone actually do this);

2) Only offer investment choices that satisfy ERISA 404(a) prudence requirements (this is an argument for only offering lifestyle type funds, or diversified portfolios); or

3) Satisfy the 404© standards.

Note that satisfying the 404© standards is simply an investment structure and information dissemination issue. It has nothing to do with whether or not participants understand the implications of their decisions. DOL has gone on record that while investment education is highly encouraged, it is not required for 404© purposes or otherwise. Thus, Bill's mentally retarded mail room clerk could incur significant losses in a 404© plan, and the fiduciaries would face no liability (assuming other responsibilities were met.

Hope this helps clarify the discussion,

[Guest Jeff V]

For the daily trading issue, we have language on the VRU which automatically speaks the basic investment disclosures and recent fund performance, and "suggests" the participant request a prospectus by mail before trading into the fund.

We think that "provides" the basics, and it certainly makes the prospectus readily available. If the participant chooses to trade into a fund before receiving the prospectus by mail, we think we're covered since a prudent man wouldn't choose an investment without being well informed.

[Bob R]

The comments in this thread clarify that no one knows what protection 404© will provide.

Jon Chambers left out one alternative where an employer is concerned about potential liability due to investment direction. That alternative is don't provide for participant directed investments. I know that's easier said than done. It's like plan loans to participants -- most people think it's a bad idea for participants but we have to offer them because everyone else offers them. Likewise for directed investments. Most people don't think it's such a good thing for the majority of plan participants.

Daily systems are certainly the way to go these days. But, look at the "educational" material handed out. "This is a great system because you can change your investments at any time. By the way, you really don't want to use this system. Market timing is baaaaad -- but in case you want to try it, we've given you the tool to do it."

I like the mentally restarded competent mail clerk example. This is great for the "sympathetic plaintiff" example. This mail clerk brings an action against the plan for investment losses. The court goes through the laudary list of items needed to fall within 404© protection. OOps - the plan only complied with 4 out of 6 -- sorry trustees, you loose.

Jeff V mentioned that the voice unit suggests that participants obtain a prospectus. I don't think that complies with 404© where a participant is first investing in a fund. Is that a material factor that can blow 404© protection? We won't know until the litigation starts. But, add a sympathetic plaintiff to the equation and who knows what a court will do.

[k man]

jeff v seems to do something different with regard to providing prospectusses. i think his is a bit more lax interpretation than john chambers' or some of the others. am i reading this correct?