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404(c) Compliance

Section 404(c) of the Employee Retirement Income Security Act (ERISA) provides a specific framework within the 401(k) industry for participant-directed individual account plans, such as 401(k) plans. This framework allows participants to exercise control over the investments in their accounts.

Here’s a breakdown of what 404(c) compliance entails:

  • Participant Control: The plan must offer a broad range of investment alternatives and give participants the opportunity to choose their own investment mix. Participants must be able to exercise control over the assets in their retirement accounts.
  • Broad Range of Investment Choices: Under the regulations, a plan must offer at least three diversified investment alternatives to allow participants to diversify investments within and across different asset classes. Each alternative must have materially different risk and return characteristics.
  • Frequency of Investment Decisions: Participants must have the opportunity to change investments with a frequency that is appropriate given the volatility of the investments. For most investments, this means at least quarterly.
  • Information to Participants: For a plan to be 404(c) compliant, it must provide participants with sufficient information to make informed investment decisions. This includes information about investment options, such as investment objectives, risk and return characteristics, and historical performance data.
  • Limitation of Liability for Plan Sponsors: One of the main benefits of being 404(c) compliant is that plan sponsors can limit their liability for the investment decisions made by participants. If a 401(k) plan complies with 404(c), the plan sponsor generally is not liable for any loss, or by reason of any breach, that is the direct and necessary result of a participant’s exercise of control over the assets in his or her account.

For plan sponsors, achieving 404(c) compliance is a way to share the responsibility for investment decision-making with the plan participants and to protect themselves from legal claims related to the plan’s investment performance, as long as the requirements are met and participants are making their own investment decisions.