ERISA section 404(c)

What ERISA section 404(c) is

A plan that wants this protection has to meet Department of Labor conditions. It must offer at least three diversified investment options with materially different risk and return. Participants must be able to change investments at least quarterly, and more often for volatile options. They must receive enough information to make informed decisions, including the plan’s fee and investment disclosures, and be told the plan intends to comply with section 404(c). A related rule covers default investments placed in a QDIA.

Why it matters to employers

Compliance is voluntary, and the protection is narrow. It covers what a participant does with the options, not which options the plan offers. Fiduciaries are still responsible for selecting and monitoring the investment menu and the providers. A plan that misses a condition loses the protection, so fiduciaries could be held responsible for a participant’s poor allocation.

Example

A participant moves her whole balance into a single stock fund and loses 40%. If the plan met the 404(c) conditions, the fiduciaries are not liable for her choice. They could still be liable if the fund was an imprudent option to offer.

Common mistakes

• Assuming the protection is automatic.

• Missing the required disclosures or the notice to participants.

• Assuming it covers default investments when the plan has no QDIA.

• Treating it as a reason to stop monitoring the menu.