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Werewolves of Pension

Adam C. Pozek 03/17/11

I was recently asked to write an article on ERISA Section 404(c).  As I contemplated how to approach the article, I recalled many situations in which I have heard 404(c) pitched as the mythical silver bullet to save plan fiduciaries from the specter of liability associated with participant-directed investments.

Despite the heading for the post, this is more a 401(k) issue than a pension issue; but “silver bullet” led me to werewolves which led me to this classic song from the late Warren Zevon.  Werewolves of 401(k) just didn’t have the same ring to it.  But, I digress.

In short, 404(c) provides a safe harbor for fiduciaries who prudently select and monitor the menu of funds offered to participants.  Fiduciaries who jump through 404(c)’s 20+ hoops are entitled to claim an affirmative defense against claims from participants who suffer losses due to their investment decisions.

Unfortunately, there is a great deal of misinformation about what 404(c) does.  I have witnessed many sales presentations in which 404(c) was touted as the way to guarantee fiduciaries won’t get sued.  Or, in reverse, I have heard, “If you are not 404(c) compliant, you are guaranteed to get sued.”  Both ends of the spectrum are absolutely false.

Compliance with 404(c) is not mandatory; it is one option plan fiduciaries may pursue to minimize their liability.  Nonetheless, they can still be sued.  If they are, it’s not as simple as waving the 404(c) “get out of jail free” card.  The accused fiduciaries must still go to court to actually prove they jumped through all the hoops at the time the alleged breach took place.

Therein lies one of the challenges of 404(c)…it is all or nothing.  Miss a single hoop and the defense is out the window.  Another challenge is that some fiduciaries mistake the safe harbor as a “set it and forget about it” arrangement.  However, 404(c) relief is predicated on the fund menu having been prudently selected in the first place and monitored on an ongoing basis.

The good news is that losing reliance on 404(c) is not the end of the world.  No one has a crystal ball, and ERISA does not require plan fiduciaries to make perfect decisions every time.  Rather, one of the over-arching themes of ERISA’s fiduciary rules is that plan fiduciaries must follow a prudent process to arrive at decisions.

Instead of taking the silver bullet approach, plan fiduciaries would be well-served to focus on creating, following and documenting a prudent process.  404(c) may be a part of that process, but it shouldn't be the only part.  By making prudence the primary concern and jumping through hoops secondary, missing a hoop isn’t quite as detrimental.

Anyone know where the nearest Trader Vic’s is?  I could really go for a pina colada.  Ah-oooo. 

Topics: 401(k) Plan, ERISA, Fiduciary Responsibility, Defined Contribution, Qualified Plan, Retirement Plan, Safe Harbor, DWC


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The views expressed in this blog are those of the authors and do not necessarily represent the views of any other person or organization. All content is provided for informational purposes only and is not intended to be tax or legal advice.