Is Your 401(k) Plan Really Meeting the Requirements of ERISA 404(c)?
For many 401(k) plan sponsors, “we have a participant-directed plan” sounds like the end of the conversation.
Participants choose their investments while the plan offers multiple funds. Then, employees can change their elections. Investment information is available online for their convenience.
So the plan must qualify for ERISA 404(c) protection, right?
Well, not necessarily.
ERISA Section 404(c) can provide important protection for fiduciaries of participant-directed individual account plans when a participant independently exercises control over the investment of assets in their account. However, that protection is tied to specific requirements.
The U.S. Department of Labor explains that a properly structured participant-directed plan can limit fiduciary liability for losses resulting from participants’ investment decisions. At the same time, fiduciaries remain responsible for selecting and monitoring the investment options made available under the plan.
A plan can offer participant-directed investing without automatically satisfying every condition associated with ERISA 404(c). And when a plan sponsor cannot clearly demonstrate how those requirements are being met, the question becomes more complicated than simply checking a box that says “404(c).”
So, is your 401(k) plan really meeting the ERISA 404(c) requirements?
What Are the ERISA 404(c) Requirements?
ERISA Section 404(c) applies to individual account plans that give participants or beneficiaries an opportunity to exercise control over assets in their accounts and choose from a broad range of investment alternatives. The Department of Labor’s regulation at 29 CFR § 2550.404c-1 lays out detailed conditions for that protection.
At a high level, a plan seeking 404(c) protection needs to address several critical areas such as; participant control, investment alternatives, diversification, investment information, investment direction procedures, and actual participant control.
These requirements work together.
Having a large investment menu does not, by itself, establish 404(c) protection. Neither does giving participants the ability to change their elections online.
The real question is whether the plan’s structure and operation satisfy the applicable requirements.
1. Do Participants Actually Have Control Over Their Investments?
The foundation of ERISA 404(c) is participant control.
Participants must have a reasonable opportunity to give investment instructions to an identified plan fiduciary who is generally obligated to follow those instructions. The regulations also contemplate the frequency and mechanics through which participants can direct their investments.
That means a plan sponsor should be able to answer questions such as:
- Can participants direct how their account is invested?
- Can they change their investment elections?
- How frequently can they make changes?
- Are there restrictions that could prevent participants from exercising meaningful control?
- What happens when a participant submits an investment instruction?
- Who is responsible for carrying out that instruction?
These operational details matter because 404(c) is not simply about whether the plan document or investment policy says “participant-directed.”
Have your participants actually have the opportunity to exercise control in the way the regulation contemplates?
The regulation also provides that 404(c) relief is available only when a participant or beneficiary has exercised independent control in fact over the investment of the assets involved.
2. Does Your Investment Menu Meet the “Broad Range” Requirement?
A second major component is the plan’s investment lineup.
ERISA 404(c) does not simply require “several investment options.”
The regulation establishes standards for what constitutes a broad range of investment alternatives. Among other things, participants must have a reasonable opportunity to choose from at least three investment alternatives that are diversified, have materially different risk and return characteristics, and collectively allow participants to construct a portfolio with a range of risk and return characteristics appropriate for them.
That raises a practical question:
When was the last time your committee evaluated whether your investment lineup actually satisfies those standards?
A plan’s investment menu should be selected and monitored through a prudent fiduciary process regardless of whether the plan intends to rely on 404(c). The Department of Labor specifically emphasizes that fiduciaries retain responsibility for selecting and monitoring the investment alternatives offered to participants.
In other words, participant choice does not outsource the fiduciary’s responsibility for the menu.
3. Can Participants Diversify Their Accounts?
The 404(c) framework requires participants to have a reasonable opportunity to diversify the portion of their accounts over which they exercise control. The broad-range requirements also incorporate diversification concepts designed to help participants manage investment risk.
That means a committee should look beyond simply counting investment options.
Ask:
Can participants actually create diversified portfolios from the available options?
A lineup with numerous funds may still deserve scrutiny if the available alternatives do not provide meaningful differences in risk and return or do not collectively provide an appropriate range of investment characteristics.
This is one reason an investment menu review should be more than a performance report.
The committee should understand how the investment alternatives work together, not just how each fund performs individually.
4. Are Participants Getting Enough Information to Make Informed Decisions?
This is one of the areas where 404(c) and participant communications come together.
Participants need sufficient information to make informed investment decisions regarding the alternatives available under the plan. The Department of Labor also requires participant-level investment and fee information under its separate disclosure rules.
That creates another practical checkpoint for plan sponsors:
Could a participant reasonably understand the investment choices available to them?
Participants need access to information about the plan’s investment alternatives, including information that helps them evaluate and compare their choices.
That includes investment-related information and applicable fees and expenses. The DOL notes that participant-directed plans should provide plan and investment information that participants need to make informed decisions about their individual accounts.
5. Can Participants Give Investment Instructions Frequently Enough?
Another requirement that can be easy to overlook is the opportunity to give investment instructions with appropriate frequency.
Under the DOL’s 404(c) regulation, participants generally must have an opportunity to provide investment instructions at least once within a three-month period, with greater frequency potentially required depending on the volatility of the investment alternatives.
For most modern 401(k) plans, online account access makes this seem straightforward, but fiduciaries should still understand the underlying process.
What happens when a participant changes an election?
How quickly is the transaction processed?
Are there limitations on certain investment options?
Are those restrictions consistent with the requirements applicable to the plan?
Who monitors these processes?
Again, whether the plan’s actual procedures support the participant control contemplated by 404(c).
6. Is Your Plan Actually Providing Participant Investment Education?
This is another area where plan sponsors can easily oversimplify the analysis.
Investment education can be an important part of helping participants understand their choices. The DOL has recognized that general investment education can include information about the plan, general financial and investment concepts, asset allocation models, and interactive investment materials.
A plan sponsor should understand what its service providers are actually delivering. Is the provider giving participants general education? Is it providing individualized recommendations? What does the service agreement say? Who is responsible for the service? What fiduciary role, if any, does the provider assume?
Is the committee monitoring the service rather than simply assuming someone else is handling it?
The DOL emphasizes that selecting and monitoring service providers is itself part of the fiduciary process.
So even when education is delegated to a provider, fiduciaries should understand what is being provided and how that service fits into the plan’s overall governance.
7. Are You Monitoring the Investment Menu?
This is where one of the biggest misconceptions about 404(c) comes into play.
404(c) does not eliminate fiduciary responsibility for the investment lineup.
The Department of Labor specifically states that fiduciaries retain responsibility for selecting and monitoring the investment alternatives available under a participant-directed plan.
Imagine a participant chooses a fund from the plan’s menu and that fund subsequently performs poorly.
That does not automatically mean the fiduciary is responsible for the participant’s investment loss.
But what if the investment option was imprudently selected, or if the committee failed to monitor it?
What if the investment was retained despite information indicating that a change should be considered?
404(c) can address liability for losses resulting from a participant’s exercise of control. It does not turn the investment menu into a fiduciary-free zone.
8. Can You Demonstrate That the Requirements Are Being Met?
A plan sponsor should not have to reconstruct its 404(c) process from memory after a problem arises.
The Department of Labor has repeatedly emphasized the value of documenting fiduciary processes and how fiduciary decisions were made.
It should be possible to identify:
What the plan is doing to support participant control.
Who is responsible for each piece.
How investment alternatives are selected and monitored.
When participant information and disclosures are provided.
Where the applicable procedures and documentation are maintained.
And why the fiduciaries believe the plan’s processes are appropriate.
That documentation can become especially valuable when responsibilities are divided among a recordkeeper, investment advisor, TPA, plan administrator, committee, and other service providers.
The 404(c) Review Should Be More Than a Checkbox
One of the biggest risks with ERISA 404(c) is treating it like a designation the plan simply “has.”
Instead, think of 404(c) as a framework that should be incorporated into your ongoing fiduciary governance.
During an annual review, ask:
Participant Control: Do participants have a meaningful opportunity to direct their investments?
Investment Menu: Does the lineup satisfy the broad-range requirements?
Diversification: Can participants reasonably diversify their accounts?
Information: Are participants receiving the information they need to make informed decisions?
Investment Directions: Can participants provide instructions with the required frequency and through appropriate procedures?
Education: Are participant education and advice being clearly distinguished?
Monitoring: Are fiduciaries continuing to prudently monitor the investment alternatives?
Documentation: Can the committee demonstrate how these requirements are being addressed?
These questions do not replace a legal review of the applicable regulation. Instead, they provide a practical framework for identifying where a plan’s governance process may need closer attention.
What Happens If Your Plan Falls Short?
A plan sponsor should not assume that discovering a potential gap means 404(c) protection has suddenly disappeared across the entire plan.
The analysis can be more nuanced.
The regulation ties relief to specific requirements and to whether a participant actually exercised independent control over the transaction at issue.
If the committee discovers that participant information is inconsistent, investment instructions are subject to an unexpected restriction, an investment option no longer fits the plan’s strategy, or responsibilities between providers are unclear, the appropriate response is to investigate the issue, understand the applicable requirements, and document the corrective process.
A fiduciary review should create a path toward better governance.
ERISA 404(c) Is Part of Fiduciary Governance
A participant-directed 401(k) plan can give employees significant control over their retirement investments.
But participant control creates a different allocation of responsibility.
Participants make decisions within the investment framework the plan provides. Fiduciaries are still responsible for establishing and monitoring that framework, including the investment alternatives and processes that support participant decision-making.
That is why an ERISA 404(c) review belongs alongside the plan’s broader fiduciary governance process.
If your committee has not reviewed its 404(c) processes recently, now is a good time to look beyond the investment menu and examine the entire system.
Can you demonstrate that your plan is operating in accordance with the requirements that support 404(c) protection?
The Fiduciary Wise Take
ERISA 404(c) can provide meaningful protection for participant-directed 401(k) plans, but the protection is tied to specific requirements and actual participant control.
For plan sponsors and retirement plan committees, that makes 404(c) worth reviewing as part of the plan’s regular fiduciary process.
Review:
- investment menu.
- participant control.
- diversification.
- investment information.
- education.
- service-provider responsibilities.
And, just as importantly, document the process.
A strong 404(c) process should be something your committee can explain—not simply something your recordkeeper says your plan has.
Frequently Asked Questions About ERISA 404(c) Requirements
What are the main ERISA 404(c) requirements?
The requirements generally address participant control, the availability of a broad range of investment alternatives, diversification, investment direction procedures, and sufficient information for participants to make informed investment decisions. The specific requirements are detailed in 29 CFR § 2550.404c-1.
Does every participant-directed 401(k) automatically qualify for 404(c) protection?
No. A plan being participant-directed does not automatically establish that all conditions for 404(c) relief have been satisfied. The plan must meet the applicable regulatory requirements, and the participant must exercise independent control in fact for the relief to apply to the transaction at issue.
Does ERISA 404(c) eliminate fiduciary liability?
No. 404(c) can limit fiduciary liability for losses resulting directly from a participant’s exercise of control, but fiduciaries retain responsibility for matters such as prudently selecting and monitoring the investment alternatives offered under the plan.
How many investment options does a 401(k) need for 404(c)?
The regulation’s broad-range requirements include an opportunity to choose from at least three investment alternatives meeting specified diversification and risk-and-return characteristics. Simply offering three funds, however, is not the entire analysis.
Does a 404(c) plan have to provide investment education?
Plan sponsors should distinguish between the regulatory requirements concerning information participants need to make informed investment decisions and the separate concept of general investment education. The DOL has provided guidance describing forms of general investment education that can be provided without becoming individualized investment advice.
How often should a plan review its 404(c) process?
There is not a single universal annual “404(c) review” requirement that replaces the underlying regulatory standards. However, incorporating 404(c) into the plan’s regular fiduciary review process can help the committee identify changes in the investment menu, participant procedures, disclosures, service-provider responsibilities, and documentation.
Who is responsible for ERISA 404(c) compliance?
Responsibility depends on the plan’s structure and delegation arrangements. A plan may rely on recordkeepers, investment advisors, TPAs, or other providers for particular functions, but fiduciaries need to understand the responsibilities they retain and monitor the services being provided. The DOL emphasizes that fiduciaries have ongoing responsibilities for selecting and monitoring service providers and investment options.
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