One Less Furrowed Brow for 401k Plan Sponsors
by Lawrence Groves
Published on this site: May 13th, 2006 - See
more articles from this month
There was a sneak preview of the Dept of Labor's preliminary guidance
on setting up 401k default investment options. These situations
occur when 401k participants fail to select an investment option
for their 401k contributions or a 401k default fund is used in 401k
plans with automatic enrollment features.
Currently, 401k plan sponsors are rethinking their default fund
decisions because they are concerned about the risk associated with
their fiduciary responsibility and about the risk of the earnings
performance of the default investments of those participants who
failed to choose any.s
When a participant fails to make a choice, the default fund is the
choice made for them by the plan's fiduciaries. And because the
participant is not making the decision when a default investment
is used, the plan fiduciaries are responsible to prudently invest
their funds.
Many plan sponsors feel that their decision on the default investment
is protected by the safe harbor exemption of Internal Revenue Code
Section 404c. Section 404c provides an exemption to plan sponsors
from liability for investment decisions when participants are given
the choice to choose their own investments. Section 404c transfers liability to plan
participants for their choices of investment options. Here, sponsors
believe that by not making an active choice, the participant has
decided to take the default investment.
And if the default investment is a Stable Value or Money Market
Fund, the participant does not loose any of his principal. Plan
sponsors feel that the participant's funds are not at risk and so
neither are they.
Because the participant is not making the decision when a default
investment is used, there is no 404c defense for plan fiduciaries.
Also, sponsors are required by ERISA to invest with a reasoned,
thoughtful process for evaluating risk and returns and for providing
investment options that are diversified and prudent.
Under the forthcoming guidance - which, said a Dept of Labor law
specialist in the Office of Regulations and Interpretations, is
subject to change - 401k fiduciaries are given a safe harbor on
401k investment management decisions and any breach that is "the
direct and necessary result of investing a participant or beneficiary's account" in a default investment.
Investment managers and advisers, on the other hand, are solely
responsible for any decisions they make with regard to the 401k
investments or any resulting losses and do not get that kind of
relief.
In order to qualify for that 401k safe harbor, however, 401k
fiduciaries must allow participants:
- The opportunity to move their investments into an alternate
account
- Provide advance notice of the default investment and
- Invest the assets in a certain kind of qualified default investment.
Moreover, that choice, which can be a lifecycle fund or a managed
account, among others, must limit the presence of employer stock
in the portfolio, as well as allow funds to be transferred out of
the default.
The 401k fiduciary responsibility associated with selecting funds
for the default investment options in a 401k plan has now been tempered
with this new preliminary safe harbor.
One less furrowed brow for 401k plan sponsors.
Lawrence Groves Want to retire with $1,127,376.04?
http://www.solo-k.com
or http://www.womensolok.com
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