Fiduciary Liability for Participant-Directed Plans
In this issue:
It seems that every month there are new stories in the financial press about participants suing their employers for mismanagement of the company 401(k) plan. While most of these suits have been directed at larger companies, the increasing frequency has employers of all sizes looking for ways to minimize their liability. One way to do that is to comply with a set of "safe-harbor" rules found in section 404(c) of ERISA.
ERISA (the Employee Retirement Income Security Act) was passed in 1974, more than a decade before 401(k) plans came along. Since participant-directed plans were not the norm that they are now, many of ERISA's fiduciary rules focus on plans in which the trustees and their advisors are responsible for making the investment decisions and don't necessarily translate well into the era of the modern 401(k).
One of the core principles of ERISA is that plan fiduciaries are required to follow a prudent process in the selection and monitoring of plan investments. They must carry out that duty just as an expert would. If plan sponsors and/or trustees do not have that expertise, they must hire someone who does. But how does that change when investment decisions are turned over to plan participants? The short answer is "not much." Fiduciaries generally retain the same level of responsibility for the investment decisions made by the participants.
However, section 404(c) of ERISA creates a framework that provides an alternative method of managing that responsibility. In short, plan fiduciaries that follow the checklist of requirements can achieve a measure of protection from liability arising from participants' imprudent investment decisions.
First, we will take a look at the basic requirements of 404(c) and then consider some of the factors to be weighed in choosing to pursue this safe harbor.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.