The 404(c) Safe Harbor

ERISA demands that fiduciaries demonstrate their performance consistent with their duties of prudence and skill. But, in a 401(k) plan, the scope of a fiduciary’s role can be limited under Section 404(c) of ERISA.

Minimum Requirements

ERISA §404(c) sets forth the requirements for participant-directed retirement plans, in order for the plan and its fiduciaries to receive safe harbor protection under ERISA. Although there are a variety of disclosure requirements, the three basic structural requirements are:

  1. The plan must make available at least three diversified investment options, which have varying degrees of risk and return.
  2. The three diversified investment alternatives must enable plan participants to achieve a balanced portfolio.
  3. At least three “core options” must be look-through investment vehicles.

In addition, the plan fiduciaries must provide certain information and disclosures to participants in order to fully satisfy the requirements of ERISA §404(c).

ERISA §404(c) is a safe harbor that is granted when it can be reasonably assured that participants are enabled to make informed investment decisions, when allocating their plan assets.

The Educated Investor

ERISA §404(c) mandates that specific financial concepts be described in layman’s terms, to effectively enable participants to educate themselves about the basics of retirement planning and investing. This information must cover the following financial and investing concepts:

  • Investment risk and return characteristics
  • How to achieve diversification through asset allocation
  • The effects of compound interest, tax deferral and inflation
  • Sources of retirement income

The Informed Investor

ERISA §404(c) also mandates that certain information about the plan’s investment options be made readily available to plan participants, to enable them to make informed investment decisions. This information must include the following for each investment vehicle made available under the plan:

  • Descriptions of each investment’s objectives
  • Historical risk and return statistics, including definitions
  • Historical total return data, including comparative indices
  • Access to prospectuses and other regulatory filings
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