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October 22, 1990
TO: PENSION COMMITTEE NO. 25-90
RE: STATUS OF ERISA SECTION 404(c)
__________________________________________________________
As we discussed at the last Pension Committee meeting,
Institute staff and representatives from individual fund sponsors
met with Assistant Secretary David Ball on October 16, 1990
regarding the status of the Department of Labor regulation under
ERISA section 404(c). At the meeting, Mr. Ball stated that the
Department of Labor intends to repropose its regulation under
section 404(c) before the end of this year. However, the
regulation will be substantially different from both the version
proposed in 1987 and version "leaked" to various members of the
financial services industry earlier this year (hereinafter
referred to as the "Spring Regulation").
As you recall, ERISA section 404(c) provides that the
fiduciaries of individual account retirement plans are not liable
for investment losses if they provide participants the
opportunity to control the investment of their individual
accounts. In 1987, the proposed regulation under section 404(c)
(the "1987 Regulation") generally would have required a 404(c)
plan to contain four investment options from which participants
could choose: A cash fund, an equity fund, a bond fund and a
balanced fund. There was some uncertainty as to whether the cash
fund could also serve as a "safe" fund for purposes of the
regulation or whether the 404(c) plan actually needed a fifth
fund which would hold accounts of employees who made no
investment choices.
The Spring Regulation would have required a 404(c) plan to
contain three investment options: A cash fund, an equity fund
and a bond fund. The "safe" fund concept was eliminated because
404(c) plan protections would not apply to accounts of employees
who failed to make investment decisions. Both the 1987 and the
Spring Regulations would have required unrestricted quarterly
transfers among investment options. Neither regulation allowed
employer stock investments to be covered by section 404(c).
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At our meeting, Mr. Ball expressed his intention to re-
propose the regulation in a form that would not provide any
certainty to employers as to whether their plans meet the
requirements of section 404(c). Instead, the regulation would
generally state that an ERISA section 404(c) plan must provide
participants with "a broad range of investment options", ample
diversification within the investment choices and reasonable
"control" over the investments, i.e., frequency of transfer. Mr.
Ball stated that the Department of Labor is still considering
providing a "safe-harbor" for participant directed investments in
employer stock under section 404(c). The re-proposed regulation
probably would state that two investment options do not provide a
"broad range of investment alternatives", although it would not
state that three options are sufficient. The regulation should
also explain that a plan will not satisfy section 404(c) if the
investment options offered have the same general investment
objective, e.g., a plan is not a section 404(c) plan if its only
investment options are three stock funds. However, the
regulation is expected to be less clear about which options are
necessary.
Mr. Ball stated that he wanted the marketplace to determine
the parameters of a section 404(c) plan. Thus, he did not want
the regulation to be a snapshot of participant directed plans in
1990. Rather, the regulation is meant to evolve with pension
industry standards, products and technology. For example, as
more self-directed plans offer daily switching among investment
options, daily exchanges will be the standard by which an ERISA
section 404(c) plan will be judged. Likewise, it is possible
that participants will not be considered to have a sufficiently
broad range of investment options available to them in the future
if they cannot invest in an international or global fund.
According to Mr. Ball, the Department of Labor will not
issue advisory opinions to employers who request rulings
regarding their plans' compliance with ERISA section 404(c). Mr.
Ball stated that employers will have to obtain such guidance from
their counsel and from any judicial opinions which arise out of
section 404(c) litigation. He also indicated that the regulation
proposed in 1987 should be useful to employers and the courts in
determining the Department of Labor's position regarding section
404(c).
If the Department of Labor reproposes the regulation as
described above, it does not appear that it will be necessary for
mutual fund companies to vigorously support the regulation in the
manner we discussed at the Pension Committee meeting because the
regulation will be non-controversial. However, the Institute
will provide suggestions to the Department of Labor regarding the
manner by which the re-proposed regulation should describe a
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"broad range of investment choices" and other matters. If you
have any comments in this regard, please call me at 202/955-3516
as soon as possible.
We will keep you informed of further developments.
W. Richard Mason
Assistant General Counsel