ERISA Section 404(c) Best Practices: Separating Myths from Facts

September 2007 marks twenty years since the first preamble to Section 404(c) of ERISA was released to the public, and October 2007 fifteen years since the issuance of the final preamble and regulation. Between that time and the release of the Pension Protection Act of 2006, we have witnessed a lackluster effort to comply with the regulatory requirements.

Why Comply With Section 404(c)?

According to Larkspur Data Resources, approximately 27 percent of defined contribution plans that permit participant direction chose not to comply with 404(c). After fifteen years, one must wonder why not all participant-directed plans have elected to meet the conditions of 404(c).

At its core, Section 404(c) offers a plan sponsor and its fiduciaries a defense for losses or lack of gains realized by participants who exercise independent discretionary investment control over their individual account balances.

Key Benefits of 404(c) Compliance

• There is no guesswork with 404(c) - the regulations provide details of every action required to secure the defense
• The fiduciary relief provided is adopted by plan sponsors on a voluntary basis
• Complying with 404(c) is clearly a safer bet when considering the choice between a known and an unknown

Compliance Requirements

For those that intend to comply with 404(c), there are esoteric compliance requirements that plans often fail to address in order to establish a proper defense. Plan sponsors should obtain a legal opinion supporting their decision for the record.