Brokerage Accounts:
Is 404(c)
protection available?

by Fred Reish, Esq., Bruce Ashton, Esq., Marge Paul, MSPA, MAAA, EA

from Panel Publishers 401(k) Advisor, September, 1999
Reprinted with permission from Panel Publishers 401(k) Advisor (September 1999). Copyright 1999 Panel Publishers, a division of Aspen Publishers, Inc., 1185 Avenue of the Americas, New York, NY 10036. To order this newsletter contact Panel Publishers at 800-638-8437 or visit their web site at


Personal brokerage accounts (PBAs) are becoming more popular in 401(k) plans. A PBA allows participants to invest in virtually any publicly traded asset instead of being limited to a group of pre-selected funds. But can the plan fiduciaries get 404(c) protection on these (invest in the world" accounts, especially if the fiduciaries don't designate and monitor the investment alternatives available to the participants?

The answer is "yes," but the plan must still meet certain 404(c) requirements. (Remember that if a plan complies with Section 404(c) of ERISA, plan fiduciaries are relieved of liability for investment losses resulting from participant investment decisions. To obtain this protection, the plan must offer a broad range of investment options and provide participants with the opportunity to exercise control over the assets in their accounts. The "broad range" and "exercise of control" requirements must be satisfied for all investments, pre-selected or not.)

Broad Range Requirement
This requirement is relatively simple: the plan must offer at least three diversified investment options that allow participants to materially affect their potential return and degree of risk and minimize the risk of loss through diversification. These are called "core investments."

Exercise of Control Requirement
To meet this requirement the plan must: (1) permit participants to change their investments as frequently as dictated by asset volatility; and (2) provide prescribed information to participants. Providing information to participants is the focal point for whether fiduciaries can obtain 404(c) relief for PBAs.

The information required depends on the type of assets involved. Some of the information requirements apply only to "designated investment alternatives," which are specified investments (e.g., mutual funds) designated by a fiduciary for participant direction; and other requirements apply to all investments (both designated and other "non-designated" investments). The latter would include the investments a participant can choose through a PBA.

Certain general information must be disclosed to participants, whether or not the plan offers designated investments, PBAs, or both. This includes the fact that the plan intends to be a 404(c) plan, and that the fiduciaries will be relieved of liability; the identity of a "404(c) fiduciary"; a description of available investment alternatives, with specific information about designated alternatives; and a general disclosure regarding investment through a PBA.

More specific information is required for designated investments than for the non-designated ones. For designated alternatives the plan must disclose investment objectives; risk and return characteristics; expenses chargeable to participant accounts; plus copies of prospectuses and other materials request by the participant. The plan has no specific information requirements for the PBA investments, since they are not designated.

By offering core investments, by providing the required information, including the specific items required for designated investments, the plan will meet the 404(c) requirements and the fiduciaries will be entitled to 404(c) protection on the investments selected by the participants in their personal brokerage accounts.

Fred Reish ( and Bruce Ashton ( are attorneys at Reish & Luftman. Marge Paul ( is a consulting actuary at Reish & Luftman.