I’m sure by now you have had heard of the 401(k) plan available to you through your membership with the Utah Trucking Association. Hopefully you had a chance to read about the benefits of this plan in one of the UTA publications, or visit with a member of our team at the UTA Convention over the last couple of years.
In an effort to help all the Utah Trucking Association member businesses, those utilizing the UTA 401(k) and those that are not, we will be providing periodic insight on best practices when sponsoring a 401(k) plan and pertinent retirement industry updates.
Our first addition will focus on Section 404(c) compliance. In our experience, the liability of offering a benefit such as a 401(k) plan is top of mind for most business owners. The below article will review Section 404(c), the effect it has on plan liability, and how to properly maintain compliance. To be clear, this topic will be relevant to those not utilizing the UTA 401(k). Members using the UTA plan do not need to worry about 404(c) compliance as the UTA has taken on that responsibility for them.
Common Error in Section 404(c) Compliance
situation: Company’s officers believe they are avoiding all liability for Company’s retirement plan investments because their 401(k) plan permits participants to control the investment of their own accounts, as specified under ERISA Section 404(c).
question: Is making participants responsible for their own 401(k) plan investment decisions sufficient by itself to transfer Company’s legal responsibility for those decisions to the plan participants?
answer: Gaining the liability protection that Section 404(c) offers requires more than simply meeting the primary requirement that employees control the investment of their plan accounts. Moreover, fully complying with Section 404(c) does not completely eliminate a plan sponsor’s liability.
discussion: The regulations that the Department of Labor (DOL) has issued for ERISA Section 404(c) include at least 20 requirements that must be satisfied in order to give participants “control” of their accounts. These requirements cover three main categories:
• Notification to participants that the plan intends to comply with Section 404(c) and that the liability for investment decisions is being transferred to participants
• Sufficient investment options and opportunity to choose and to switch investments
• Information about the plan’s various investment options
While a plan provider often helps a plan sponsor meet many of the 404(c) requirements, several responsibilities remain in the hands of the plan sponsor. A mistake can be very serious, since failing to satisfy one or more of the DOL requirements can result in loss of the Section 404(c) liability protection.
Among the common Section 404(c) compliance mistakes that sponsors may make are the following:
• Neglecting the named fiduciary requirement. A plan sponsor must designate a fiduciary to be responsible for providing investment information to the plan’s participants and must also notify them of the fiduciary’s identity and contact information.
• Not notifying participants of their information rights. Participants have a right to request additional information, and a sponsor is obligated to inform them of that right.
• Not distributing investment information. A sponsor is required to distribute — in a timely manner — certain information about the plan’s investment options.
Some information must be provided automatically (e.g., risk and return characteristics and type and diversification of each investment, identification of investment managers) and some upon request by a participant (e.g., fund operating expenses, prospectuses that are provided to the plan).
Fully complying with Section 404(c) eliminates a sponsor’s liability for losses resulting from participants’ imprudent exercise of control over their plan accounts. However, Section 404(c) compliance does not eliminate all fiduciary liability for plan investments. A sponsor is always responsible for providing prudent investment choices. To demonstrate it has properly chosen investment options, the sponsor should:
• Create an investment policy for the plan
• Select options using the criteria stated in that policy
• Monitor the options’ performance and continuing suitability for the plan and its participants
When a plan satisfies all compliance conditions for Section 404(c), the plan sponsor (among the other fiduciaries) escapes liability for losses due to the participants’ investment decisions. Section 404(c) does not protect the sponsor if participants’ losses are due to the imprudent selection or retention of investment choices by the plan sponsor.
comment: Making the effort to fully comply with Section 404(c) is essential because compliance provides a way for plan sponsors to avoid responsibility for losses on investments that plan participants imprudently direct. No sponsor should allow the protection that Section 404(c) offers to lapse through avoidable error.
Should you have additional questions on the above article or would like to learn more about the UTA 401(k) plan, please reach out to Corby Dall. Corby and his team at 401(k) Advisors Intermountain are based locally and are nationally recognized thought leaders in the 401(k) industry. He would be more than happy to schedule a phone call or an in-person consultation with you. Corby’s contact information is below.
President & Practice Leader
401(k) Investment Advisory | Vendor Benchmarking | Employee Education | Regulatory Compliance
O: 801-990-3434 | M: 801-631-1988 | F: 801-942-6396
2825 E Cottonwood Pkwy #500 | Salt Lake, UT 84121