New York Life Retirement Plan Services A Guide to ERISA 404(c) Compliance A G U I D E T O E R I S A 4 0 4 ( c ) C O M P L I A N C E
ERISA 404(c) Compliance: The Fiduciary Protection You Need It s time for a reality check. Has the recent market crisis caused you to re-assess your fiduciary responsibilities as a plan sponsor? It should have, because as a fiduciary of a defined contribution plan, such as a 401(k) or Taft-Hartley plan, you are responsible for the plan s investments. Your role also includes the fiduciary responsibility (and potential liability) for the investment choices made by your employees. Fortunately, you can protect yourself from liability for your participant investment elections if your plan complies with ERISA section 404(c). According to a recent survey, 94% of plan sponsors believe their plan is structured to comply with 404(c).* However, alarming findings by industry experts suggest the vast majority do not successfully meet all requirements.** New York Life Retirement Plan Services Can Help You Stay In Compliance To assist our plan sponsor clients (and their financial advisors, if applicable) in this important area of retirement plan management, New York Life Retirement Plan Services (New York Life) worked with Fred Reish, a noted ERISA attorney and leading expert in the field of 404(c) compliance, to create this 404(c) Checklist. The Checklist identifies the specific requirements of the 404(c) regulations and demonstrates how New York Life helps you to comply with most of them. The Checklist also explains how you, your financial advisor, and New York Life can work together to try to ensure that your plan complies with 404(c) and thus transfer the legal responsibility for participant investment decisions away from you and to the plan s participants. Protect Yourself The only way legal responsibility for a plan s investments can be transferred away from fiduciaries and to its participants is under Section 404(c). There are approximately 20 requirements in the 404(c) regulations that must be met in order to shift that responsibility. Some of the key provisions are highlighted in the next section. *Source: 2008 401(k) Benchmarking Survey, Deloitte Consulting, July 2008. **Source: ERISA Advisory Council, Testimony of C. Frederick Reish, September 2006.
Key 4 0 4 (c ) P r o v i s i o ns Prospectus delivery: Once is not enough Section 404(c) states that each participant must be given a copy of the most recent prospectus, summary prospectus, or profile immediately before or after the participant s initial investment in an option. Many plan providers furnish prospectuses once usually in the Enrollment Kit. While this satisfies 404(c) requirements for the participant s initial involvement in the plan, it does not cover any subsequent investments into new or different options. New York Life furnishes each participant with a current prospectus/profile after an investment into anew option is made. Identify the fiduciary: Put it in writing Participants must be given the name, address and phone number of the plan fiduciary (or any persons authorized to act on the behalf of the fiduciary) responsible for providing participants with certain information needed to comply with 404(c). Many plans fail to name this fiduciary. New York Life includes all pertinent identification in the Summary Plan Description (SPD). Additionally, New York Life will serve a fiduciary role if requested by the plan sponsor. Compliance: Indicate intent in writing Participants must be notified in writing that the plan intends to comply with404(c), a step many plan sponsors neglect to take. If New York Life prepares the SPD, New York Life will automatically include this provision in the SPD. Investment selection: Risk/return diversity needed The plan must offer a broad range of investment options. At least three of these options must satisfy requirements for diversification and offer varying degrees of risk and return characteristics. New York Life s comprehensive Portfolio CompleteSM product was designed to construct a diverse lineup, from which plan sponsors can choose, that satisfies these requirements and meets each plan s unique and often evolving needs. New York Life also offers options intending to qualify as qualified default investment alternatives. Investment information: Make it available Participants must be given, upon request, a wealth of information about the investment options in their plan. This information includes details about the operating expenses of the plan s investments, copies of any pertinent materials that relate to the investments (such as a financial statement or report), and a list of assets held by each of the investment options. All required information is readily available on request from New York Life. NOTE: The materials provided in this Checklist address the steps needed to comply where core mutual funds or similar vehicles are the only options. If the plan offers a mutual fund window, brokerage account, or company stock as an investment option, the plan fiduciaries will need to comply with additional requirements in order to be protected by 404(c). The information contained herein is general in nature and is provided solely for educational or informational purposes. Neither New York Life Retirement Plan Services nor its affiliates provide legal, accounting or tax advice. You should obtain advice specific to your own circumstances from your own legal, accounting and tax advisors.
Many company officers who act as fiduciaries mistakenly believe that defined contribution plans provide a liability-free way to provide retirement benefits. Fred Reish, Esq. Managing Partner and Chair Reish Luftman Reicher & Cohen 404(C) REQUIREMENTS REQUIREMENTS TAKEN CARE OF BY NEW YORK LIFE ACTION REQUIRED BY PLAN FIDUCIARY The plan document must provide for individual accounts and permit participants to give investment instructions to a plan fiduciary or an agent of the fiduciary and receive written confirmation of those instructions. If New York Life prepares the plan document and the summary plan description (SPD), New York Life will include these provisions in the plan document and SPD. New York Life also provides participants with confirmations, via the web, of their investment instructions. None Participants must be notified in writing that the plan intends to comply with 404(c). If New York Life prepares the SPD, New York Life will include the provision in the SPD. Deliver SPD to participants. Participants must be notified in writing that the fiduciaries of the plan may be relieved of liability for any losses that result from participants investment instructions. If New York Life prepares the SPD, New York Life will include the provision in the SPD. Deliver SPD to participants. Participants must be given a description of the investment options available under the plan, including the objectives and risk and return characteristics for each option, as well as information about the types of investments and diversification of assets. New York Life provides this information to participants in the Enrollment Kit. Deliver Enrollment Kit to participants. Participants must be notified if the plan designates any investment managers. This requirement is generally not applicable. However, in the event your plan appoints an investment manager, New York Life will either notify participants in the SPD or prepare a special participant notice. Deliver SPD or notice if applicable. Participants must be notified in writing how they can give investment instructions. New York Life gives participants directions on how to give investment instructions in the Enrollment Kit and SPD. Deliver Enrollment Kit and SPD to participants. If the plan limits the investment instructions participants can give, participants must be provided with an explanation of the limitations. New York Life notifies participants of any such limits in the Enrollment Kit and SPD. Deliver Enrollment Kit and SPD to participants.
404(C) REQUIREMENTS REQUIREMENTS TAKEN CARE OF BY NEW YORK LIFE ACTION REQUIRED BY PLAN FIDUCIARY If voting, tender and similar rights are passed through to participants, an explanation of any limitations placed on those rights must be given to participants. This requirement is generally not applicable if a plan has only mutual fund and/or stable value options because these rights are not passed through to participants. If any transaction fees or expenses are charged in connection with purchases or sales of investment alternatives and affect participant account balances (e.g., redemption fees), a description of the fees or expenses must be provided to participants. This requirement is generally not applicable because there are no transaction fees or expenses charged by New York Life for participant investment transactions. In the event a mutual fund company assesses any sales fee, redemption fee, or expense, the requisite description will be set forth in the plan communication materials. Participants must be given the name, address and phone number of the plan fiduciary, or any persons authorized to act on behalf of the fiduciary, responsible for giving certain information (described below) to participants upon request. New York Life provides this information to participants in the SPD. If so requested by the plan sponsor, New York Life will serve in that fiduciary role. Deliver SPD to participants. Participants must be notified that they may receive certain information upon request. New York Life provides this information to participants in the SPD. Deliver SPD to participants. Each participant must be given a copy of the most recent prospectus or profile provided to the plan immediately before or after the participant s initial investment in an option. New York Life provides prospectuses to participants immediately after a participant s initial investments in an option. Note: Providing prospectuses in Enrollment Kits, an approach taken by many service providers, will satisfy only the delivery requirement for the participants initial investment elections. Any subsequent changes in investment elections by participants will be protected under 404(c) only if the corresponding prospectuses are again provided to the participants. A profile (or summary prospectus) may be used in lieu of a prospectus only if it meets specific securities law requirements.
404(C) REQUIREMENTS REQUIREMENTS TAKEN CARE OF BY NEW YORK LIFE ACTION REQUIRED BY PLAN FIDUCIARY Participants must be given the following information directly or upon request: Description of the annual operating expenses of each designated investment option and the percentage of assets the expenses represent for each investment option. Copies of any prospectuses, financial statements and reports, and any other materials provided to the plan that relate to the plan s investment options. List of the plan assets held by each designated investment option and the value of each asset (or proportion of the option it comprises). For fixed-rate investment contracts (such as GICs), the name of the issuer, the term and the rate of return of each contract. The value of the shares of each designated investment option. The past and current net investment performance of each designated investment option. The value of the shares held by the participant. If the plan charges participants accounts reasonable expenses for carrying out their investment instructions, procedures must be established to periodically inform participants of the actual expenses charged to their accounts. Participants must be able to give investment instructions with a frequency that is appropriate in light of the market volatility of the investment option. New York Life provides this information upon the request of participants. New York Life does not impose any charges for carrying out participant investment instructions related to core mutual funds (or similar vehicles). New York Life s recordkeeping system generally satisfies this requirement. If you receive any requests for this information from participants, please contact us and we will provide the information directly to the participants.
404(C) REQUIREMENTS REQUIREMENTS TAKEN CARE OF BY NEW YORK LIFE ACTION REQUIRED BY PLAN FIDUCIARY The plan must offer a broad range of investment options that are sufficient to provide participants with a reasonable opportunity to materially affect the potential returns in their accounts and to diversify their accounts so as to minimize the risk of large losses. New York Life offers a broad range of investment options that may be selected by the plan sponsor in order to satisfy this requirement. You may wish to consult with your advisor regarding the selection of the options in your plan. At least three of the investment options must: Be diversified. Have materially different risk and return characteristics. Enable the participant to achieve a portfolio with varying risk and return characteristics. Tend to minimize through diversification the overall risk of the participant s portfolio. New York Life offers investments that meet these requirements. Additionally, through Portfolio Complete, New York Life delivers comprehensive investment information to the plan sponsor (and financial advisor, if applicable) to assist in the selection of investments that satisfy this requirement. The plan sponsor must select investment options from the menu offered by New York Life in order to satisfy this requirement. You may wish to consult with your advisor regarding the selection of the options. The participant must exercise control over his or her account. New York Life provides enrollment meetings, investment education and communication, and other services to encourage and assist participants in making investment decisions. New York Life also offers investment options intending to qualify as qualified default investment alternatives for participants who fail to make affirmative investment elections. No fiduciary action is required, although fiduciaries may want to encourage employees to participate in the plan and to use New York Life s resources to direct their accounts. Participants may not engage in transactions prohibited by the plan or ERISA. The investment options offered through New York Life are not of the type that would allow participants to engage in transactions prohibited by the plan or ERISA. Participants may not select investments that would: Cause a fiduciary to maintain the indicia of ownership of any assets outside the jurisdiction of the U.S. district courts unless authorized by the Secretary of Labor. Jeopardize the tax-qualified status of the plan. Result in losses in excess of their accounts. Result in prohibited transactions. New York Life does not include investment options that would allow any of these events to occur. Additional Requirements There are two other requirements not included in the 404(c) regulations. These requirements are not conditions for obtaining 404(c) protection, but plan sponsors and fiduciaries should comply with them both to avoid potential liability and to properly report to participants and the government. 1. The regulation governing the contents of the SPD (29 C.F.R. 2520.102-3) requires plans to specify whether they intend to comply with 404(c). As mentioned, New York Life includes this information in the SPD provided to the plan. 2. If the plan intends to comply with 404(c), this intention must be reflected on the Form 5500 by noting a specific code. On New York Life -prepared Form 5500s, this code will be included.
The information contained herein is general in nature and is provided solely for educational or informational purposes. Neither New York Life Investments nor its affiliates provide legal, accounting or tax advice. You should obtain advice specific to your own circumstances from your own legal, accounting and tax advisors. 2010 New York Life Retirement Plan Services, a division of New York Life Investment Management LLC, 690 Canton Street, Westwood, MA 02090. New York Life Investments is a service mark used by New York Life Investment Management Holdings and its subsidiary, New York Life Investment Management LLC. Securities are distributed by NYLIFE Distributors LLC,169 Lackawanna Avenue Parsippany, NJ 07054 www.nylim.com/retirement RPS404CB-0211 First Use: 02/11 NYLIM-19409