Managing ERISA Fiduciary Liability in Participant-Directed Plans

By Geller, Sheldon M. | The CPA Journal, November 1998 | Go to article overview

Managing ERISA Fiduciary Liability in Participant-Directed Plans


Geller, Sheldon M., The CPA Journal


A retirement plan that provides for an individual account for each participant can be established to qualify as a section 404(c) plan, allowing participants and beneficiaries an opportunity to control the investment of assets in their accounts. Where a participant or beneficiary in fact exercises this control, fiduciaries are shielded from liability for losses that directly result from the participant's or beneficiary's exercise of control.

An employer needs to give the participant 1) the opportunity to choose from a broad range of investment alternatives, 2) the opportunity to give investment instructions with the appropriate frequency, and 3) sufficient information to make informed investment decisions.

Permissive Safe Harbor

The Employee Retirement Income Security Act (ERISA) of 1974, as amended, does not mandate that pension plans comply with the section 404(c) requirements. Rather, these rules provide employers and other fiduciaries with an opportunity for plan participants and beneficiaries to exercise control over the assets in their plan accounts and to protect plan fiduciaries from liability for certain responsibilities.

It should be noted, however, that fiduciaries must still fulfill certain responsibilities even when participants and beneficiaries exercise control over the assets in their accounts. Furthermore, fiduciaries must provide notice and meet other requirements for the participants and beneficiaries to be considered to have exercised control.

Fiduciary Responsibility

A fiduciary has no obligation under ERISA to provide investment advice to a participant or beneficiary under a section 404(c) plan. But the section 404(c) rules relieve fiduciaries of liability only with respect to participants' and beneficiaries' directions to make particular investments. Accordingly, fiduciaries must continue, subject to liability for failure, to select investment alternatives prudently, to disseminate information to participants and beneficiaries, to monitor the performance of the various investment vehicles and the market for each investment alternative, and to carry out participants' and beneficiaries' section 404(c) investment instructions prudently.

The statutory safe harbor under ERISA section 404(c) is expected to be taken into account by the courts in determining whether employers and other fiduciaries have met their fiduciary responsibility. The Department of Labor's (DOL) view of plan sponsor liability is more expansive than the courts' view. Even if a plan sponsor complies with all of the 404(c) regulatory provisions, the DOL has taken the position that the plan sponsor retains liability for choosing and monitoring the investment options in the plan. The plan sponsor must be prudent in making those investment fund choices.

Fiduciary Review

Plan sponsors need to actively manage the risk associated with participant-directed plan asset investment by conducting, at a minimum, annual fiduciary reviews and adopting a written investment policy statement evidencing prudent decisions in selecting and retaining either a type of investment option or a particular fund.

It is critical for a plan sponsor to establish procedures with a view toward satisfying their fiduciary responsibility. …

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