Dol Rules For Erisa Section 404 Compliance
ERISA requires plan fiduciaries to diversify plan investments and to select investments in a prudent manner. Compliance with the requirements of ERISA section 404 may relieve plan fiduciaries of liability for investment losses resulting from a plan participant’s or beneficiary’s exercise of control over assets in his individual account and other requirements are met. This is an overview of ERISA section 404 compliance.
This presentation reviews the following points: Overview of 404 fiduciary relief Basic requirements to obtain relief Mapping relief Default Investment Options/”QDIA” safe harbors Participant fee disclosure regulations Scope of relief and, Case law developments and implications.
This ERISA section 404 checklist provides a handy tool for you to compare your plan against best practices. Completing the checklist may highlight areas where additional steps are needed to improve ERISA section 404 compliance.
Clearer Regulations Could Help 401k Plan Sponsors Choose Investments For Participants
DOL created a regulatory “safe harbor” in 2007 to limit plan sponsor liability for investing contributions on behalf of employees. In addition, the DOL identified three default investments that would qualify a plan for safe harbor protection. This GAO report examines: which options plan sponsors selected as default investments and why how plan sponsors monitor their default investment selections and what challenges, if any, plan sponsors report facing when adopting a default investment for their plan.
Fund Facts Sheets Fail Under 404
While the full prospectus must still be available on request, having to automatically provide only the summary may help simplify 404 compliance. However, plan sponsors should be careful. What you think is a summary prospectus may not be one at all.
In September 2009, the DOL issued Field Assistance Bulletin 2009-03, permitting the use of summary prospectuses to satisfy the prospectus requirement of ERISA Section 404.
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Pros And Cons Of 414 Plans
From a tax perspective, contributing to a 414 plan can make your tax filing easier. You dont have to report your contributions to the plan on your tax return your employer handles that on their return. All you have to do is enter in your taxable income for the year, as listed on your W-2.
Any taxable income reductions from 414 plan contributions can work to your advantage if youre in a higher income range. The more you earn, the higher your tax bracket may be and the more you may owe in taxes. Having less taxable income could reduce your tax liability and result in a lower tax bill or a bigger refund.
You may realize another benefit if you anticipate being in a lower tax bracket when you retire. If thats the case, then taking taxable withdrawals may not have as much of an impact on your tax liability. Also note that contributing to a 414 plan doesnt bar you from contributing to an after-tax savings plan such as a Roth IRA. Youd need to be within the adjusted gross income guidelines to contribute to a Roth IRA, but doing so could give you a tax-free source of retirement income to balance out any taxable withdrawals from a 414.
Illuminating The Broad Range Requirement Of 404
This column helps illuminate the “broad range” requirement of ERISA Section 404 with the language of modern portfolio theory and other nations of financial economics that is found in the Uniform Prudent Investor act and the Restatement 3rd of Trusts .
401khelpcenter.com, LLC is not the author of the material referenced in this digest unless specifically noted. The material referenced was created, published, maintained, or otherwise posted by institutions or organizations independent of 401khelpcenter.com, LLC. 401khelpcenter.com, LLC does not endorse, approve, certify, or control this material and does not guarantee or assume responsibility for the accuracy, completeness, efficacy, or timeliness of the material. Use of any information obtained from this material is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. Reference to any specific commercial product, process, or service by trade name, trademark, service mark, manufacturer, or otherwise does not constitute or imply endorsement, recommendation, or favoring by 401khelpcenter.com, LLC.
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Maintain A Prudent Process For Selecting And Monitoring Investments Options And Document The Process
Being able to prove that an organization has followed a prudent process for selecting and monitoring investment options is critical in the event of an audit or inquiry. Thats why its so important to document as much as possible. If you have an investment committee, the committee charter statement, meeting minutes and/or notes, and other materials provide documentation of this prudent process. As part of your prudent process, you should also review the reasonableness of fees and expenses related to the investment options and services provided.
A Step Beyond Erisa Section 404
The increased attention on daily market activity, trading of individual stocks and the ability to trade participant accounts on a daily basis have all worked to frustrate what the authors believe should be the fundamental, underlying objective of a participant-directed 401k plan: to provide those conditions that allow plan participants the best opportunity for a successful investment experience so that they can retire comfortably.
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The Main Distinction Involves The Kinds Of Employers Who Offer Them
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
The two primary types of defined-contribution retirement savings plans offered by employers are 401 plans and 401 plans. They take their names from Section 401 of the United States Internal Revenue Code, which defines them.
General Rules And Applicability
Contributions an employer makes to a qualified pension or profit-sharing plan are deductible, if they are otherwise deductible under Chapter 1 of the Code, subject, however, to the IRC 404 limits for the amounts deductible in any year.
This IRMs subsections specific guidance:
IRM 184.108.40.206.1, General Conditions and IRM 220.127.116.11.2, Employer Contribution – general conditions for deductibility of amounts under IRC 404.
IRM 18.104.22.168.3, Timing of Deductions – timing of deductions for amounts under IRC 404.
IRM 22.214.171.124, Deductions for Defined Benefit Plans – deduction limits for DB plans.
IRM 126.96.36.199, Deductions for Defined Contribution Plans – deduction limits for DC plans.
IRM 188.8.131.52, Combined Limitation on Deductions – combined limitation applicable when an employer sponsors both a DB plan and a DC plan.
IRM 184.108.40.206, Additional Rules and Exceptions – additional rules and exceptions.
IRM 220.127.116.11, Excise Tax on Nondeductible Contributions – excise tax on nondeductible contributions.
Employer contributions must otherwise be deductible under Chapter 1 of the Code, and 26 CFR 1.404-1).
The plan to which the employer contribution is made must be a qualified plan under IRC 401 in the taxable year in which the contribution is made.
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The Secure Act And Annuities In 401 Plans
However, with the Setting Every Community Up for Retirement Enhancement Act, employees may see more annuity options offered in their 401 plans. This is because the SECURE Act eliminates many of the barriers that previously discouraged employers from offering annuities as part of their retirement plan options.
Additionally, under Section 109 of the SECURE Act, annuity plans offered in a 401 are now portable. This means that if the annuity plan is discontinued as an investment option, participants can transfer their annuity to another employer-sponsored retirement plan or IRA, thereby eliminating the need to liquidate the annuity and pay surrender charges and fees.
Know Your Erisa Duties
As a plan sponsor, youre required to provide a change notice to reflect changes to plan-related information, including administrative expenses and individual expenses, as described in this article. Generally, other changes just need to be captured on the plans website as soon as administratively practicable and updated in the annual 404a-5 disclosure.
Due to the nuances of the different plan events that trigger a change notice and to avoid a breach of fiduciary duty, its wise to confer with your ERISA counsel, plan consultant, or other retirement plan professional to ensure youre meeting your 404a-5 change notice and overall disclosure obligations.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice . Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
MGTS-P44704-GE 04/21 44704 MGR0419211610271
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Establish A Retirement Plan Committee Charter
A retirement plan committee charter is a good best practice. The committee can help reduce your fiduciary risk by providing a formal, central framework for making plan decisions. A committee and charter can also help outline duties and actions.
Your retirement plan committee can bring a diverse set of skills and experience, which may lead to better decisions for the plan. Members should be carefully selected and must be capable of performing the necessary duties. Common roles to include among the committee membership are finance, human resources, and legal, though the size and structure of your organization may benefit from a different committee makeup.
Switching To A Regular 401 Plan
In general, SIMPLE plans are meant for companies with 100 or fewer employees. But as your workforce grows, it becomes increasingly important to reconsider the pros and cons of switching to a regular 401 plan. The higher contribution limits and greater potential for employer matching are reasons that your employees will be just as eager to make the change.
First things first: You cant have a SIMPLE IRA and a 401 plan within the same yearmeaning you cant switch to a new plan before the next January 1. It also means that you need to evaluate your plan design options well in advance of year-end.
Once youve decided to take the leap, youll need to let employees know by . You should also inform your payroll provider so it can cancel employee contributions to your soon-to-be defunct SIMPLE IRA going into the new year.
Thats what you need to consider when switching off of a SIMPLE IRA. Switching from a SIMPLE 401 to traditional plan tends to be an easier proposition. Why? Think of your SIMPLE 401 as a traditional plan with a special provisions attached.
While you still cant switch until January, changing the plan to a regular 401 plan requires adopting an amendment on or before the last day of the current year and providing a restated summary plan description to all employees. Work with your retirement provider or financial advisor to make these adjustments.
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Responsibilities Under Erisa 404 And 404
Overview of ERISA §404 and §404
When was the last time you reviewed your basic fiduciary responsibilities?
At your next Investment Committee meeting, consider a discussion around the basic guidelines as set forth by ERISA Section 404 and Section 404. If you do not have an Investment Committee that currently holds fiduciary responsibility for your retirement plan, please contact 401 & 403 Fiduciary Advisors for best practices in forming one.
The core fiduciary responsibility under Section 404 is to maintain and follow a written plan document that complies with ERISA and when making decisions that affect the plan, ensure that these decisions are made prudently and solely on behalf of and for the exclusive benefit of the plan participants and their beneficiaries.
Even when participants have full control of investment decisions, plan fiduciaries could still be responsible for participant investment choices. Fortunately, plan fiduciaries do have an option that offers certain protections. An effective method of managing this risk rests in Section 404 of the Employee Retirement Income Security Act of 1974, as amended . This provision generally allows fiduciaries to be relieved of liability for participants’ investment decisions.
While not all-encompassing, the following acts as a primer in regards to ERISA §404 and §404.
How 404 Participant Fee Disclosures Impact Employee Benefits
Fee disclosures are all about transparency – and thats because transparent fees help participants pick the best options and save more money – the whole point of 401 retirement savings.
In fact, the DoL has estimated $14 billion in savings to participants in 10 years as a result of fee disclosure rules. The vast majority of the savings, according to the DoL, come from the access to information and increased ability to choose lower cost investments. Information is power !
Remember, as plan sponsor, you have the fiduciary responsibility to act in the participants best financial interest. That means asking yourself the all-important question… Are my plan participants paying reasonable fees?
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More Regulation Leading To Less Fiduciary Liability
If you sponsor a 401k plan that allows participants to direct the investment of their account, you want the fiduciary protection provided by ERISA section 404 – participants make bad investment choices, even when expert advice is easily accessible. When they do, you dont want to be found responsible for their losses.
Fortunately, the 404a-5 notice makes 404 compliance easier than ever. A point worth noting as you distribute 401k notices this year.
About Eric Droblyen
Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the companys operations and service delivery.
- Connect with Eric Droblyen
Erisa Section 404 Meets The Real World
Who is responsible for a 401k plan participant’s investment losses? Some courts agree with the DOL that the selection of a plan investment is a fiduciary function and, as such, lies outside ERISA Section 404s protection. Other courts take a totality of the circumstances approach and indicate Section 404, under the right set of facts, may protect a fiduciary from liability when a 401k plan investment goes bad.
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Understand Responsibilities And Use Governing Documents
Good governance processes and procedures help reduce the likelihood of a plan straying off course. The governing documents provide the terms to be followed and overall direction for operating the plan. Everyone handling the retirement plan is responsible for understanding the governing documents and ensuring the terms are followed. When a retirement plan doesnt operate according to its governing documents, its commonly viewed as an operational error or fiduciary breach. Examples of key governing documents include:
- Plan document
Why A Plan Does Not Fail To Provide An Opportunity For A Participant Or Beneficiary To Exercise Control Over His Individual Account
In the previous section the importance of participant or beneficiary notification was highlighted and cannot be understated if a retirement plan intends availing itself of section 404. A plan fiduciary is within the rights of the plan and section 404 to levy charges for reasonable expense on the accounts in which a participant or beneficiary exercise control. However, the reasonable expenses must be related to investment execution and the plan fiduciary must develop procedures under the plan to notify participant or beneficiaries of the actual incurred expenses within their retirement account on a periodic basis.
In addition, a plan fiduciary is not required take action on all the participants or beneficiarys investment instructions. The plan fiduciary may in fact impose restrictions on the frequent of investment activity, so long as it is reasonable. That said, the participant or beneficiary must be allowed to provide investment instructions at a frequency that is line with the markets present volatility for which an alternative investment of that type would reasonable be subjected.
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Work With Your Employer On Strategy
Since your employer has more control over a 401 plan than a private-sector employer does over a 401 plan, it’s a good idea to work with your organization to create the best plan strategy for your unique needs.
That means scheduling a meeting with your organization’s benefits manager to discuss the right contribution level for you, ask about any investment advisory help from your employer to choose the right investments for your 401 plan, any employee matching contributions that are available, and any vesting, tax and withdrawal questions. It’s always advisable to meet with your own financial planner first to set the stage for a good, long-term 401 plan experience.
Icipant Notices Required Upon Changes To Plan
The following plan-related events would trigger the need for disclosure by the plan administrator.
General plan-related information
Changes to the plans general plan-related information require a notice, including the following events:
- A designated investment alternative is added to or removed from the plans investment lineup.
- A fund in the plan merges with another fund and its name is changed to the acquiring fund. Conversely, if a fund in the plan merges with or acquires another fund and does not undergo a name change, a change notice is not required, as theres no change to the investment lineup or identification of the fund.
- Theres a change to voting rights for a fund in the investment lineup, and the voting rights are passed along to participants with the fund in their retirement account.
- Theres a change in any designated investment manager under the plan, including the hiring of a DIM. Note: Not all plans have a DIM.
- Investment restrictions are changed, such as the short-term trading policy or direct transfer rules.
- Theres a change to how and when participants can give investment instructions.
- Theres an addition of or change to a brokerage account option under the plan.
If the plan pays expenses by charging participant accounts in any manner, any new fee or change to the charge or allocation requires a change notice. Examples include the addition of fees relating to or changes to:
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