Werewolves of Pension

I was recently asked to write an article on ERISA Section 404(c).  As I contemplated how to approach the article, I recalled many situations in which I have heard 404(c) pitched as the mythical silver bullet to save plan fiduciaries from the specter of liability associated with participant-directed investments.

Despite the heading for the post, this is more a 401(k) issue than a pension issue; but “silver bullet” led me to werewolves which led me to this classic song from the late Warren Zevon.  Werewolves of 401(k) just didn’t have the same ring to it.  But, I digress.

In short, 404(c) provides a safe harbor for fiduciaries who prudently select and monitor the menu of funds offered to participants.  Fiduciaries who jump through 404(c)’s 20+ hoops are entitled to claim an affirmative defense against claims from participants who suffer losses due to their investment decisions.

Unfortunately, there is a great deal of misinformation about what 404(c) does.  I have witnessed many sales presentations in which 404(c) was touted as the way to guarantee fiduciaries won’t get sued.  Or, in reverse, I have heard, “If you are not 404(c) compliant, you are guaranteed to get sued.”  Both ends of the spectrum are absolutely false.

Compliance with 404(c) is not mandatory; it is one option plan fiduciaries may pursue to minimize their liability.  Nonetheless, they can still be sued.  If they are, it’s not as simple as waving the 404(c) “get out of jail free” card.  The accused fiduciaries must still go to court to actually prove they jumped through all the hoops at the time the alleged breach took place.

Therein lies one of the challenges of 404(c)…it is all or nothing.  Miss a single hoop and the defense is out the window.  Another challenge is that some fiduciaries mistake the safe harbor as a “set it and forget about it” arrangement.  However, 404(c) relief is predicated on the fund menu having been prudently selected in the first place and monitored on an ongoing basis.

The good news is that losing reliance on 404(c) is not the end of the world.  No one has a crystal ball, and ERISA does not require plan fiduciaries to make perfect decisions every time.  Rather, one of the over-arching themes of ERISA’s fiduciary rules is that plan fiduciaries must follow a prudent process to arrive at decisions.

Instead of taking the silver bullet approach, plan fiduciaries would be well-served to focus on creating, following and documenting a prudent process.  404(c) may be a part of that process, but it shouldn't be the only part.  By making prudence the primary concern and jumping through hoops secondary, missing a hoop isn’t quite as detrimental.

Anyone know where the nearest Trader Vic’s is?  I could really go for a pina colada.  Ah-oooo.

 

Comments

[Lynne McAuley]

Well-written article. You are spot on to the limitations to 404(c) and how it is pitched as the answer.

Lynne McAuley

[Nevin Adams]

Adam, nice tie in with a classic (and too-often overlooked) Zevon contribution. One more thing about 404(c)... it's transactional...so you have to do everything right every time....that's the problem for most who would pursue this. Aside from the fact that 404(c) ostensibly only shields you from liability from a bad participant decision (but not the more likely problem of a bad fund menu decision), while most plans/providers can do the communications right at, say a conversion - it's the subsequent interactions where things can get a little sloppy. Sort of like a werewolf shot with a non-silver bullet...they get back up!

[Jon Chambers]

Nevin, I agree with your transactional comment--but I don't necessarily see it as a negative. If you get your 404(c) compliance right on most transactions, but miss it on a few, you can use 404(c) to mitigate--not eliminate--your fiduciary liability.

Also agree with your comment on 404(c) not protecting against fund menu decisions.

Finally, will observe that courts have regularly adopted expansive interpretations of the scope of the 404(c) defense (e.g., Hecker v. Deere), but have not consistently required sponsors to jump through all 404(c) "hoops" to benefit from the defense.

[Jason Grantz]

Adam, nice post. I was going to ask you how fast your Mazerati drives, but that is the wrong songwriter. I think as an add-on to this. If your Plan Sponsor is advised to check off on the 5500 an intention to comply with 404(c), it is probably a good idea to adopt an annual policy to verify that they actually DO comply with 404(c). Not hard to find a 404(c) checklist, the DOL publishes one and there's about a million of them online with a simple Google Search.

BTW - Best songs by Zevon, in my opinion are Keep Me In Your Heart and Janey Needs A Shooter (Co-written by The Boss).....