| 404(c) Regulations | ||||||||||||
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| Overview | ||||||||||||
| After several years of vacillating, the Pension and
Welfare Benefit Administration has issued final regulations under ERISA 404(c), affecting
plans with participant directed accounts. The basis of the 404(c) regulation is to release fiduciaries of certain fiduciary responsibilities for investment losses when participants exercise independent control over the assets in their individual accounts. Compliance with the final regulation is strictly voluntary. According to David Ball, Assistant Secretary of Labor, "this regulation will afford millions of American workers the opportunity to exercise independent, meaningful control over the investment of their pension dollars." Under the final regulations a participant must be given the opportunity to choose from a broad range of investment alternatives and have the freedom to issue investment instructions with adequate frequency. The available investment must afford the participant the opportunity to adequately diversify their investments and finally, the participants must have available to them on an ongoing basis sufficient information to make informed investment decisions. The final regulations are quite clear to point out that fiduciaries are not relieved of their duty to consider the prudence of the investment alternatives made available to participants under the plan. |
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| Analysis of Investment Alternatives | ||||||||||||
| According to the final regulations, in order for the
investment choices available to qualify as a broad range of investment alternatives, the
participant must exercise control over the investments in such a way to materially affect
the potential return on assets. A participant must be given at least three investment choices, each of which is diversified and has materially different risk and return characteristics, so as to minimize the risk of large losses, including a money market fund. |
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| Investment Instruction Frequency | ||||||||||||
| The final regulation did give the plan sponsor the
authority to establish reasonable restrictions on the frequency with which participants
may give investment instructions to the plan administrator. The minimum suggested
number of instructions to satisfy the final regulations would be quarterly with one
exception for those investments with high volatility, the participant should be allowed to
give instructions more frequently than quarterly. The final regulations attempt to offer more flexibility by offering alternative means for handling transfers from more volatile investments to non-volatile, or as is referred to in the regulation "core" investments or to a temporary holding fund to hold transfers until the transfer to the "core" investment is made available. |
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| Informed Investment Decisions | ||||||||||||
In order for a participant to be deemed having complete
control over their investments it must be demonstrated they were provided with sufficient
information about the plan and all available investment options. Therefore to make
informed decisions, the participant must be provided with:
The final 404(c) regulations are applicable to all participant-directed investment transactions occurring on or after the first day of the second plan year beginning on or after October 13, 1992, the day the regulations were published in the Federal Register. |
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Alpha & Omega, Inc. Financial Management
Consultants |
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