Ubiquity

What Is 404c Safe Harbor?

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By choosing to be a plan sponsor of a 401k 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 401k 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:

  • Employers must offer a broad investment menu with a range of risk and return potentials.
  • Employers must have a user-friendly participant portal for easy viewing and control of investments.
  • Employers must provide timely notices to keep plan participants informed of their options.

A traditional 401k 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 401k, which is a type of retirement savings plan designed to automatically pass most, if not all, annual IRS nondiscrimination testing requirements. 401k plans may be designed to both meet 404c compliance standards and to include a Safe Harbor feature.

What criteria must plan sponsors meet to limit liability in a 404c plan?

The following are required to qualify for 404c compliance:

Investment Menu Options

  • Plan participants must be allowed to make their own investment decisions.
  • Three or more investment options must be included.
  • Plans should offer at least three core options representing differing risk and return values.
  • Participants should be able to allocate assets among the core options to meet their risk profiles.
  • Each core option should be diversified to minimize loss potential.

Plan Design

  • Plan participants must be able to transfer in and out of each core option quarterly, if not daily.
  • A plan fiduciary should be responsible for carrying out investment instructions.
    Participants should have the option to receive written confirmation of all instructions given.
  • Plans offering employer stock options should describe procedures for purchasing and selling.

Disclosures

  • The Summary Plan Description should include notice of the sponsor’s intent to comply with 404c.
  • Descriptions of each investment option (objective, risk, return, and portfolio holdings) must be given.
  • Upon request, a description of each option’s annual operating expenses should be made available.
  • Prospectuses, financial statements, share values, and performance details are to be sent on request.

How does a 404c plan work?

It is a common misconception that setting up a 404c plan automatically exempts plan sponsors from any and all liability for the 401k’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.

Here are a few extra tips to consider:

  • Create a living document. You can’t just “set it and forget it.” Many employers feel that they can just come up with a few core options, and their work is done. A diligent plan administrator will recommend that you take the time to develop an Investment Policy Statement, which shows why investments were selected and on what criteria they are either retained or replaced.
  • Limit investment expenses. Another major problem is that employers get bogged down by investments with high fees that drastically reduce what participants can save for retirement. It’s important to have the freedom to select a provider who doesn’t gouge revenues with high fees and commissions. Working with a third-party administrator like Ubiquity with a low, flat, transparent pricing structure and no AUM fees is the ideal scenario.
  • Go above and beyond in your educational support.  While the Department of Labor doesn’t require plan sponsors to provide specific investment advice in order to be a 404c plan, they do encourage sponsors to offer investment education. Online portals and regular disclosure notices work best.
  • Document everything. The best way to ensure full 404c protection is to maintain an IPS and take minutes for all investment decisions made for the plan. Keep records of investment education materials, records of all participant enrollment meetings, and attendance at important meetings.

As a 401k 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 401k that works for your small business.

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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2020 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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