ON 401(k) PLANS
by Fred Reish, Esq., Bruce Ashton, Esq., Marge Paul,
MSPA, MAAA, EA
from Panel Publishers 401(k) Advisor,
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 www.aspenpub.com.
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
Fred Reish (email@example.com) and Bruce
Ashton (firstname.lastname@example.org) are attorneys at Reish &
Luftman. Marge Paul (email@example.com) is a consulting
actuary at Reish & Luftman.