Who is managing your retirement plan?

• Author: Lizzio, Joseph P.

WITH TODAY'S defined contribution plans, whoever is in control of the retirement plan's investments and directs the investment dollars generally is responsible for the results of the participants' investment allocation decisions. That is why employers and corporate employee benefit administrators should pay particular attention to the provisions of Section 404 (c) of the Employment Retirement Income Security Act of 1974 (ERISA). It states that, if an employee is allowed to self-direct per regulations issued by the Department of Labor, the plan administrator isn't liable for losses in the employee's account due to his or her failure to diversify.

For an employer or human resources administrator, meeting the requirements of Section 404 (c) can reduce concerns about fiduciary responsibility over investments in the retirement plan. By allowing plan participants to direct the investments in their accounts, the employer can transfer a substantial portion of the fiduciary responsibility to them. At the same time, the employer can allow participants to have greater control of their retirement portfolios.

ERISA imposes various qualification standards and fiduciary responsibilities on retirement plans. These include contribution programs such as profit-sharing, money purchase pension, and 401 (k) plans. It is with these participant-oriented plans that Section 404 (c) is having its greatest impact and generating the most questions. Employers must meet the following criteria to comply with 404 (c):

* Participants must be able to choose from a broad range of investment alternatives. The plan must offer at least three core alternatives. Each must be diversified and have materially different risk and return characteristics. (Company stock does not qualify as a core alternative.) An example of three different alternatives is a stock mutual, bond mutual, and money market mutual fund.

* Participants must be able to direct investments in their accounts. They have to be able to transfer between core alternatives on at least a quarterly basis. More volatile investments may require exchanges to be made more frequently--perhaps monthly or, in some cases, daily.

* Participants must have received sufficient information about each fund. Plan sponsors must provide certain information, including that it is designed to qualify under 404 (c); a description of each investment alternative (e.g., a prospectus); names of investment managers; directions on how to give...