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The Top Five Things You Need to Know About ERISA 404(c)

This article originally ran on November 21, 2014.

By Michael A. Webb, TGPC, AIF™, CEBS

Section 404(c) is a historically misunderstood part of ERISA, with misconceptions rampant through the plan sponsor community even before the 404(a)(5) participant fee disclosure regulations added to the confusion. As a plan sponsor, what do you need to know about 404(c) and its potential impact upon your retirement plans? This article attempts to address the fundamental issues regarding ERISA section 404(c) that every advisor should master. 

404(c) Is the Exception, Not the Rule 

The general rule is that ERISA plan fiduciaries are liable for all aspects of selection and monitoring of plan investments, and are on the hook for any participant claims for fiduciary breaches should something go wrong. 

Section 404(c) is a limited exception to this general rule. It only applies to individual account plans (including Code Section 403(b) and 401(k) plans, but NOT 457(b) plans, which are not subject to the fiduciary provisions of ERISA) whose participants can direct investment of their accounts. If the ERISA plan satisfies 404(c), fiduciaries would NOT be liable for any claim of a breach related to a participant’s selection of investments. However, since this is an exception, and not a rule, plan fiduciaries remain liable for the selection and monitoring of all investment options made available to the participant. 

For example, let’s say Participant X, ignoring the principles of proper diversification, invests all of his assets in Plan Y’s emerging markets fund. The fund loses nearly half of its value in one year. The participant cannot make a claim for fiduciary breach related to his/her selection of the emerging markets fund, unless he/she can successfully claim that the plan did not properly follow 404(c). However, the participant could claim a fiduciary breach regarding Plan Y offering this particular emerging markets fund on its investment menu in the first place, if the selection/monitoring of the fund was imprudent. Thus the protection from fiduciary liability offered under 404(c) is quite limited. 

Practice Pointer: ERISA 404(c) is often misunderstood as providing far greater fiduciary protection that it actually does. The knowledgeable advisor should be able to clarify the scope of the protection of 404(c) for plan fiduciaries as well as the plans to which 404(c) applies (ERISA plans with participant-directed investments).

The Participant Fee Disclosure Requirements Under 404(a)(5) Essentially Replaced the Disclosure Retirements Under 404(c)

The release of the fee disclosure regulations under 404(a)(5), which apply to all participant-directed plans regardless of whether or not such plans qualify for 404(c) protection, resulted in dramatic changes to ERISA 404(c). Essentially, all of the disclosure requirements under 404(c) have been replaced by those of 404(a)(5). To qualify for 404(c) protection, plan sponsors must follow all of the requirements of the fee disclosure regulations under 404(a)(5), along with just two additional requirements of 404(c):

  • The rather obvious explanation that the plan is intended to comply with 404(c); and 
  • If the plan offers employer stock or other securities as an investment option (not applicable to 403(b) plans), a description of the procedures for maintaining confidentiality when a participant invests in employer securities, and the name, address, and telephone number of the plan fiduciary responsible for monitoring compliance with the procedures.

Thus, for 403(b) plan sponsors, there is little else to disclose other than what is required under 404(a)(5). Thus, if such sponsors previously elected not to be covered under 404(c) because they found the disclosure requirements to be too onerous, they may wish to reconsider that decision, since they are now required to follow requirements that satisfy 99.9% of the disclosure obligations under 404(c).

404(c) No Longer Requires Automatic Delivery of Prospectuses to Plan Participants, but this Distinction Is Moot for 403(b) and 457(b) Plans

One of the many changes brought about by the replacement of the disclosure requirements of 404(c) with the requirements of 404(a)(5) was the elimination of the automatic prospectus delivery requirement. This is because the regulations under 404(a)(5) only require delivery of a prospectus upon participant request. 

However, unlike 401(k) plans, 403(b) and 457(b) plans are subject to the Securities and Exchange Act of 1933, which requires that prospectuses be delivered simultaneous to or immediately preceding investment in securities subject to the registration requirement (e.g., variable annuities and mutual funds). It should be noted that this automatic prospectus delivery requirement exists regardless of ERISA status in the case of 403(b) plans. 

There Are No Investment Requirements in 404(c) that Are Not Already Present in the Vast Majority of 403(b) and 457(b) Plans

Under 404(c), participants must be able to select from at least three investment alternatives, each of which is diversified and has materially different risk and return characteristics. Most 403(b) and 457(b) plans I have encountered maintain far more than three investment choices, and, though there may be overlap among asset classes within an investment array, at least three investments with materially different risk and return characteristics can be identified in that vast majority of 403(b)/457(b) plans as well. 

QDIA Regulations Enjoy Fiduciary Relief Under 404(c) as Well

At one time, 404(c) protection was only afforded to investments that were actively selected, so default investments could not qualify for 404(c) protection. However that all changed with the Pension Protection Act of 2006, which extended the fiduciary liability relief under 404(c) to QDIAs as well. 

Thus, presuming that all QDIA requirements are followed, participants who are defaulted to a QDIA may not make a claim for a fiduciary breach relative to the election of that investment option, even though the election was by default and not an active election. However, as is the case with active investment elections, the fiduciary liability relief does NOT extend to claims addressing the selection and monitoring of the QDIA itself. 


With the advent of the final participant fee disclosure regulations under 404(a)(5), what was the most misunderstood aspect of ERISA 404(c) — the disclosure requirements — has been simplified, as the 404(a)(5) requirements are essentially replicated. However, other aspects of ERISA 404(c) remain important for advisors to master, such as the scope of the protection from liability afforded to ERISA plan fiduciaries. 

Practice Pointer: Those advisors who are well versed in the important aspects of ERISA 404(c), as well as the related 404(a)(5) participant fee disclosure regulation, should enjoy a competitive advantage in the ERISA 403(b) marketplace over advisors who are not cognizant of such issues.

Michael Webb is the NTSA Communication Committee Co-Chair and a Vice President at Cammack Retirement. 

Cammack Retirement is an independent retirement plan consulting firm specializing in non-profit industries. Offering tailored, actionable solutions, to help clients achieve the greatest return on their employee investment, Cammack Retirement delivers end-to-end solutions for complex retirement plan challenges.

Please note that this article is for general informational purposes only, is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article.