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THE FOUR THINGS YOU NEED TO DO NOW! TO EXEMPT EMPLOYERS FROM LIABILITY FOR LOSSES PLAN PARTICIPANTS INCUR DUE TO THEIR INVESTMENT CHOICES

The Employee Retirement Income Security Act of 1974 (ERISA), the federal law establishing standards for 401(k)s and 403(b), some employers may poorly 

By full compliance with 404(c), companies can have no liability for poor investment results, losses to plan participants, or not having enough money to retire. However, full compliance is a vague term subject to much interpretation and lawsuits.

ERISA set forth rules to exempt employers from liability understand plan requirements. for losses plan participants incur due to their investment choices.

To qualify for relief under ERISA Section 404(c), the plan fiduciary must provide participants the chance to:

Choose, from a broad range of investments, how their accounts will be invested, which allows participants to diversify their investments and have the ability to make frequent changes among them. 

This sounds simple enough. However, the regulation clearly specifies that participants also must have sufficient information to make informed investment choices. If not, the Department of Labor can revoke     companies’ 404(c) protection. Four specific categories of participant communication that do not constitute investment advice:

  1. Plan information 
  2. General financial and investment information 
  3. Asset allocation models 

The objective is not to lead the employee in choosing any investments—the critical question to ask to comply with 404(c) fully and sadly, where most legal challenges arise:

When using employee education, is it on generally accepted investment theories? 

Do they clearly disclose the “What if assumptions on which they are based?

Is the plan surveying participants to determine their level of investment knowledge? 

Are plan communications written so that participants can clearly understand them? 

The above four lead to so many problems and legal challenges for companies. Most of these problems can be avoided by providing employee education through a Personal Financial Proficiency (PFP) course. This course gives the employees all the tools they need to understand, prepare and adequately save for retirement. More can also be found in my July 2022 Linkedin paper: An HR guide to: Financial Literacy vs. Financial Proficiency.

Kris Miller
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