Participant Directed Option
As an alternative to all retirement plan assets of a defined contribution plan being invested within a commingled portfolio in which all participants earn the same rate of return, many plans allow their participants to make their own investment decisions, most often by choosing investment alternatives from a "core" menu of choices.
Many plan trustees mistakenly believe that such a "participant-choice" program reduces their fiduciary liability, when in fact such programs result in the opposite. Only by meeting all the conditions of ERISA 404(c)—an arduous and ongoing disclosure obligation—can a trustee be relieved of liability associated with a participant's choices. Otherwise, a plan fiduciary personally guarantees that each and every investment choice made by a participant reflects an expert understanding of the financial markets and represents the proper diversification of that participant's plan investment account.
Despite the increase in fiduciary liability, NWCM can see good business reasons for allowing participant direction. The alternative, a commingled portfolio, will seldom meet the investment needs of all plan participants given the potentially wide range in the age and resources of plan participants. In addition, many plan participants insist on participant direction and this feature has grown to be recognized as an essential element of an employee benefit.
NWCM helps the plan fiduciary understand the scope of his or her personal liability and assists him or her in meeting the conditions required to claim statutory relief from liability under ERISA 404(c).
Selection of Menu Choices
The investment alternatives that comprise the list of choices in a participant-directed investment program must meet certain requirements set forth by the Department of Labor in the Final Regulations Regarding Participant Directed Individual Account Plans. Notwithstanding the need to meet these conditions for liability relief, the selection of investment alternatives directly affects the ability of plan participants to achieve their retirement objectives. NWCM believes that the investment menu should not be limited by the recordkeeper's platform.
The selection of investment alternatives is a fiduciary decision requiring appropriate expertise. NWCM undertakes these decisions and assumes this liability on behalf of the trustees, employing the appropriate professional expertise and the attendant analytical tools to conduct proper menu design, manager due diligence, and portfolio construction.
Model Portfolio Management
Few plan participants have the expertise or interest to make their own investment decisions. From our experience, a majority of plan participants invests their account balances within Model Portfolios if such investment alternatives are made available.
NWCM actively manages Model Portfolios whose investments are comprised of some or all of the investment alternatives that are on the plan's menu of choices. Typically, we manage four, each of which is differentiated by the percentage of the portfolio we can commit to stock funds. A participant need not make a choice among the different mutual funds that are the typical investment alternatives; rather, he or she identifies the level of investment risk that is acceptable and chooses the corresponding Model. NWCM then changes the allocation among the different investment alternatives based upon our outlook for the financial markets and within the constraints of a Statement of Investment Policy.
NWCM regularly offers four Model Portfolios at no extra charge to its plan sponsor clients. Click here to see samples of Model Portfolios.
Participant Education
Onsite participant education workshops are available. All workshops are taught by fully trained and licensed principals of NWCM. Workshop topics include:
- Investment Basics and Asset Allocation
- Determining Appropriate Retirement Objectives
- How to Make Room in Your Budget for Retirement Savings
- Understanding Investment Risk and Benefits of Diversification
- Adjusting Investment Strategy for the Distribution Phase of Life
NWCM can also provide a Plan Education Website that is customized to the parameters of the client's plan design and its investment alternatives. The website includes a comprehensive glossary of terms, discussion of investment basics, a risk profile quiz, decision-making tools, and access to investment alternative information required under 404(c). Contact us for more information.
404(c) compliance
Many plan fiduciaries fail to secure the statutory liability protection of ERISA 404(c) because they, or their advisors, either have a genuine misunderstanding of the requirements of 404(c), or have the inability to distinguish among service providers as to their actual capability to help the plan fulfill critical operational requirements.
Few plan fiduciaries have read ERISA, let alone the Department of Labor's various Regulations, Interpretative Bulletins or Field Assistance Bulletins. This is perfectly understandable given that the study of ERISA should not be their area of expertise or focus. Sadly, this lack of study is also true for many plan consultants. Most consultants have only read commentaries about ERISA rules and regulations. It is all too common to see mistakes in such commentaries. Consequently, many plan fiduciaries and their advisors operate under misconceptions that only result in personal liability to the plan fiduciary.
NWCM implements a process for review and documentation of all decisions made on behalf of the plan. This process is vital to ensuring compliance with ERISA, including compliance with 404(c). NWCM, in consultation with the client, prepares the agenda and materials for the regular trustee meetings that focus on investment-related fiduciary review matters. Our Fiduciary Reports focus on the critical areas of supervision required of trustees regarding the investment alternatives offered to participants and on the investment alternative disclosures required under ERISA 404(c).
The Final Regulations Regarding Participant Directed Individual Account Plans (ERISA Section 404(c) Plans) is an absolute "must read" for a plan fiduciary and its advisors. Many books that publish the code language neglect to include the originally-published Preamble. Plan fiduciaries will achieve a significantly greater understanding of the code for having read the Preamble.
All such Rules and Regulations of all Federal Agencies are disseminated through publication in the Federal Register. The DOL's 404(c) Regulations were published in 1992. Unfortunately, Internet access to the Federal Register includes only issues published in 1994 and after. However, a copy of this Rule can be secured from a Federal Depository Library.
To locate the nearest Federal Depository Library, link to: http://www.gpoaccess.gov/libraries.html
When requesting a copy, request 57 Federal Register, page 46906, published on 10/13/1992.
Access to Information
The mandatory information disclosures in addition to the notification that the plan intends to seek relief under 404(c) are:
- Description of the available investment alternatives including a general description of their investment objectives and their risk/return characteristics
- Identification of any designated investment manager
- Explanation of the various methods for giving investment instructions along with an explanation of any transfer or rights restrictions associated with any investment alternatives
- Disclosure of fees and expenses the plan may charge for any investment transactions including commissions, redemption fees, etc.
- Upon initial investment, a copy of the most recent prospectus for any investment alternative subject to the Securities Act of 1933
- Description of the plan provisions for exercising voting or other rights related to the investment alternatives where the plan passes through the rights to the participant
- Information specific to an investment alternative that consists of employer securities
- Description of all other information available on participant request.
Click here for a sample 404(c) notice.
One of the key attributes of a 404(c) plan is that the participant has the ability to exercise "independent control" over his/her assets, which by definition necessitates the participant having access to the information appropriate to properly exercise independent control. Paragraph 2550.404c prescribes a set of mandatory information disclosures and enumerates other information that must be made available on request.