404(c) Protection of Fiduciaries: DOL Viewpoint
by: George M. Morrison, Esquire
www.cbginc.com

Plans which permit employee investment direction generally are designed to comply with section 404(c) of the Employee Retirement Income Security Act of 1974 ("ERISA"). Under ERISA, a fiduciary of a plan is required to prudently invest plan assets. Failure to do so can result in fiduciary liability for damages to the plan. Section 404(c), however, provides that, if certain requirements are satisfied, fiduciaries are not responsible for employees' investment directions.

In the ERISA lawsuit concerning Enron, the DOL submitted a brief outlining the DOL's opinion with respect to several fiduciary issues that are part of that lawsuit. One such issue involved the applicability of section 404(c). The legal arguments included in the DOL's brief provide significant guidance to all employers seeking the protection of section 404(c).

In the DOL's words, "the only circumstances in which ERISA relieves the fiduciary of responsibility for a participant-directed investment is when the plan qualifies as a 404(c) plan." Further, DOL states that its regulations "set forth the circumstances under which a plan qualifies as a 404(c) plan."

A review of the DOL's 404(c) regulations reveals a list of about 20 requirements necessary to qualify as a 404(c) plan. Included in that list is a requirement that participants be provided: (i) an explanation that the plan is intended to constitute a 404(c) plan; and (ii) notice that the fiduciaries of the plan may be relieved of liability for any losses which are the direct and necessary result of employee investment directions.

In the DOL's opinion, the fiduciaries of the Enron plan failed to distribute the notice of intent to satisfy 404(c), failed to disclose that fiduciaries would be relieved of liability and failed to meet other specified requirements. Thus, the plan failed to constitute a 404(c) plan. Therefore, the fiduciaries retained full fiduciary responsibility for the plan's investments, even those specifically directed by employees.

The conclusion to be drawn from the DOL's brief is that compliance with the specific requirements set forth in the DOL's regulations is necessary to constitute a 404(c) plan so as to qualify for 404(c) protection. The requirements set forth in the DOL's regulation are numerous but can be summarized as follows:

• The participant has an opportunity to obtain written confirmation of his investment instructions;
• The person to whom the instructions are given is an identified plan fiduciary who is obligated to comply with the instructions;
• The participant is provided by an identified plan fiduciary with:

• an explanation that the plan is intended to be a 404(c) plan;
• an explanation that the fiduciaries of the plan may be relieved of liability for losses:
• a description of the investment alternatives available under the plan;
• a general description of the investment objective of each designated alternative;

• identification of any designated investment managers;
• an explanation about giving investment instructions;
• a description of any transaction fees and expenses which affect the participant's account balance;
• the name, address, and phone number of the plan fiduciary responsible for providing information;
• specified information regarding employer securities;
• a copy of the most recent prospectus provided to the plan for investment alternatives subject to the Securities Act of 1933;
• any materials provided to the plan relating to the exercise of voting, tender or similar rights.

• The participant is able to obtain upon request:

• A description of the annual operating expenses of each designated investment alternative;
• Copies of any prospectuses, financial statements and reports provided to the plan;
• A list of the assets comprising the portfolio of each designated investment alternative;
• Information concerning the value of shares or units in designated investment alternatives;
• Information concerning the value of shares or units in designated investment lternatives held in the account of the participant.

• Plan permits participants to give investment instructions with a frequency which is appropriate in light to market volatility.
• The core investment alternatives, constituting a broad range, permit instructions at least one within any three-month period.

Audits we completed for several of our clients plans illustrated that plans intended to qualify for section 404(c) protection complied with several but not all of those requirements. It appears from the DOL's brief that section 404(c) will not apply in the event of a participant lawsuit since not all of the requirements for 404(c) protection are satisfied.

We encourage all fiduciaries to review compliance with the requirements of section 404(c). The full text of the DOL's brief can be found on our website. In addition to the discussion regarding 404(c) protection, the brief provides an interesting viewpoint on several other fiduciary liability issues.