ERISA Section 404(c) FAQs
Q: What is ERISA Section 404(c)?
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that establishes the standards for private pension plans, such as 401(k)s and 403(b)s. Section 404(c) is a specific part of this law that permits employees to direct the investment of their own retirement accounts. An employee may want to direct their own retirement account so they can control how much of their savings are being invested into what types of companies. An employee may have financial management experience and believe they can earn more if they self-direct their funds. Other employees for moral or religious reasons may choose not to invest in certain types of companies, such as animal product or Israeli/Palestinian companies.
Section 404(c) may be poorly understood by some employers and employees and may be too vague to give reliable relief from plan liability for employee investment issues. The section follows a prudent standard of care requirement and offers "safe harbor" for employers or other plan sponsors who allow their employees to direct the investments of their accounts.
Q: I am an employer who provides a pension plan to employees. Why do I care about 404(c)?
Employers that comply with 404(c) can shift responsibility for poor investment results to plan participants. In short, 404(c) offers a "safe harbor" for plan fiduciaries to not be liable for investment losses suffered by plan participants who self-direct their investments. This means that employers won’t be legally responsible for their employees investment mistakes.
To qualify for this safe harbor, plan sponsors must comply with the requirements for investment selection, plan administration, and plan & investment disclosures before they are exempt from fiduciary liability for losses plan participants incur as a result of their directing their own investments.
To qualify for relief under ERISA Section 404(c), the plan fiduciary must provide participants the chance to:
- Choose, from a broad range of investments, how their accounts will be invested, which allows participants to diversify their investments
- Exercise control over assets in their individual accounts
If you’re an employer with pension plans for employees, you may want to check your plan for ERISA 404(c) compliance.
Q: When is the ability to diversify deemed to be met?
Like many areas of the law, there are no definitive answers and many different opinions on compliance with the diversity requirement exist. Your plan may or may not have defined investment diversity. If it has, read the information provided to you by your plan administrator. If it hasn’t, ask your plan administrator about clarifying and diversifying your assets for a more sound investment strategy.
Q: What is the “prudent” standard for ERISA?
The responsible fiduciary must monitor options provided to employees to ensure they continue to be a "prudent" choice for the plan. The legal requirement for prudence as defined in ERISA Section 404(a)(1)(B) is for a fiduciary to discharge his or her duties with:
“the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."
This is also known as the "prudent expert" rule as the fiduciary is acing with prudence of someone who is an expert, or at least familiar, with these matters. Fiduciaries should avoid liability for losses suffered by employees on investment options the employee selects if the following steps were taking:
- Prudent selection of the investment options by the fiduciary,
- Compliance with the requirements of ERISA Section 404(c), and
- Proper monitoring of the investments.
Q: What do you do if you have a problem with your plan?
Plan administrators can make mistakes. The signs something may be wrong include:
- Your retirement plan statement is often late or arrives inconsistently;
- Your account balance doesn’t seem accurate;
- Your employer doesn’t send your contribution to the plan in a timely manner;
- Your plan administrator doesn’t send you a copy of the Summary Plan Description; or
- Your benefit is calculated incorrectly.
If you have a problem, you can start by asking your employer or plan administrator about the issue. You should also review the information in your Summary Plan Description. If the issue is still not resolved you may need to take legal action. If so, consult with a qualified ERISA attorney in your area.
Q: Can I sue my plan administrator or fiduciary under ERISA?
Yes. You can sue your plan and its fiduciaries to enforce your rights under ERISA and your plan, for example, to:
- Appeal a denied claim for benefits after exhausting your plan's claims review process
- Recover benefits owed to you
- Clarify your right to future benefits
- Get plan documents that you requested in writing, but didn’t receive
- Address a plan fiduciary breaching his or her duties to you
Q: What federal agencies can help plan participants?
The US Department of Labor's Employee Benefits Security Administration (EBSA) is responsible for enforcing ERISA in the areas of:
- Conduct of plan fiduciaries,
- Investment and protection of plan assets,
- Reporting and disclosure of plan information, and
- Plan participants' rights and responsibilities.
If you have a private pension and a problem with one of these areas, contact a benefits advisor at the Department of Labor at 1-866-444-3272 or www.askebsa.dol.gov.
If you have a private pension that ended because it had insufficient money to pay benefits, contact the Pension Benefit Guaranty Corporation (PBGC), which guarantees payment of certain pension benefits in this situation. You can call PBGC at 1-800-400-7242.