The top 10 404(c) mistakes.

• Author: Reish, C. Frederick

You may be failing to comply with 404(c) ERISA regulations without even knowing it. Find out whether you pass the test.

Recent studies show that about 85 percent of 401(k) plans in the United States have participant-directed accounts and that most employers believe they have successfully transferred liability for investment losses to their employees under Employee Retirement Income Security Act Section 404(c). However, in our experience, many of those employers inadvertently fail to meet all of the 404(c) requirements. Because these companies are not protected under 404(c), they - and possibly their officers and directors - could face claims for compensation of their employees' investment losses. Plus, at least one U.S. Court of Appeals has said fiduciaries will be liable if they fail to disclose adverse information about the investment alternatives to participants.

Department of Labor (DOL) regulations under Section 404(c) create 22 criteria that allow employers to successfully shift liability to the participants. But employers usually know about only a few of them, and the remaining requirements are ignored. Often no one on the employer's 401(k) team is solely in charge of 404(c) compliance. The corporate finance and human resources personnel, the investment provider, the contract administrator and the benefits lawyer all have different responsibilities for making sure the plan meets the criteria to qualify as a 404(c) plan. Here are the top 10 areas companies miss in attempting to comply with 404(c) regulations.

Forgetting to tell employees about 404(c). The regulations require employers to tell participants that the plan intends to comply with Section 404(c) and that the plan fiduciary will be relieved of liability for losses on participant investments. If the company does not make this simple statement, either in the summary plan description or elsewhere, it has ongoing liability as "co-fiduciary" for employee-directed investments.

Not designating a 404(c) fiduciary. The plan must identify the fiduciary responsible for carrying out the participants' investment instructions and providing specified information to the participants. The fiduciary may delegate its duties, but if you do not designate the fiduciary in writing or do not identify the fiduciary to participants, you do not meet 404(c) requirements.

Selecting investment options that may not be considered prudent. The 404(c) rules protect the plan fiduciary from liability only to...