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By choosing to be a plan sponsor of a 401(k) plan, you are likely also becoming a fiduciary.
This means that you are liable and responsible to act in the best interest of the plan and its participants.
Section 404c of the Employee Retirement Income Security Act (ERISA) provides a safe harbor for fiduciaries related to the investment actions of participants.
Employers can opt for a 404c 401(k) plan to give employees greater power to choose how their retirement savings are being invested, while limiting their own liability for losses sustained by participants. Plan sponsors must satisfy three requirements for the 404c rule to apply:
A traditional 401(k) plan involves trustees choosing investment menus for plan participants, but over the last 20 years, plan participants have sought more control over where and how their investments are made.
Given online brokerages, independent financial advisers, and employee portals, it’s never been easier for plan participants to take a more active role in their own savings.
It’s important to note here that when we use the word “safe harbor” here, it is being used to mean protection from liability for fiduciaries under ERISA.
It doesn’t refer to a Safe Harbor 401(k), which is a type of retirement savings plan designed to automatically pass most, if not all, annual IRS nondiscrimination testing requirements. 401(k) plans may be designed to both meet 404c compliance standards and to include a Safe Harbor feature.
The following are required to qualify for 404c compliance:
It is a common misconception that setting up a 404c plan automatically exempts plan sponsors from any and all liability for the 401(k)’s losses.
Working closely with a financial advisor and third-party administrator is the key to satisfying all the necessary requirements for maximum protection under 404c.
As a 401(k) plan administrator, Ubiquity is fully committed to helping sponsors limit their liability while offering employees maximum choice. Since 1999, we’ve developed a solid reputation for maintaining low, fair, flat administrative fees.
All Ubiquity plan participants enjoy access to a user-friendly education portal, among other benefits. Contact us for details on how to set up a 404c compliant 401(k) that works for your small business.