Section 404(a) of the Employee Retirement Income Security Act (ERISA) requires that 401(k) investment options be prudently selected, their performance monitored, and if necessary, removed, diversified, or replaced.
Section 404(c) of ERISA does not protect fiduciaries from the failure to perform their 404(a) duties, but does protect fiduciaries from imprudent decisions by participants when the participants exercise control over their investment directions.
If a plan does not comply with Section 404(c) requirements, the plan fiduciaries are responsible for participant investment decisions. For example, if a participant invests his entire account in a technology fund and suffers a large loss, such as the losses suffered in the Enron Corporation litigation, the fiduciary would be responsible for the investment decision.
According to the Department of Labor (DOL), under Section 404(c), a fiduciary is not liable for losses to the plan resulting from a participant’s investment selection in his account, if the participant exercised control over the investment, and the plan met the detailed requirements of Section 404(c). Thus, if a fiduciary prudently selected the funds in the 401(k) plan, but a participant made a poor decision in allocating his account among the funds, the participant is responsible for any loss, not the fiduciary.
Because ERISA provides no protection to a fiduciary from participant investment decisions unless the plan complies with Section 404(c), plan sponsors should be aware of the conditions that satisfy Section 404(c), and realize that fiduciaries could be personally liable for participant investment decisions.
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