March 13, 1991
TO: PENSION MEMBERS NO. 11-91
INVESTMENT ADVISER MEMBERS NO. 11-91
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 12-91
RE: DEPARTMENT OF LABOR REPROPOSES ERISA 404(c) REGULATION
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Attached is a copy of the Department of Labor's reproposed
regulation under ERISA Section 404(c). ERISA Section 404(c)
provides that, when a participant of an employee pension benefit
plan exercises control (as defined by regulation) over the
investment of assets in an individual account, the fiduciaries of
the plan are not liable for plan losses which result from the
participant's exercise of control. The Department of Labor first
proposed a regulation under ERISA Section 404(c) on September 3,
1987. (See Institute Memorandum to Pension Members No. 44-87,
dated September 8, 1987.)
The reproposed regulation provides, in general, that in
order for a participant to exercise control over the assets in
his individual account, the participant or beneficiary must have
the opportunity to (1) choose from a broad range of investment
alternatives, which consist of at least three diversified
investment categories, each of which has materially different
risk and return characteristics, (2) give investment instruction
with a frequency which is appropriate in light of the market
volatility of the investment alternatives, but not less
frequently than once within any three month period, and (3)
diversify investments generally and within investment categories.
Unlike the 1987 regulation, the new proposal does not
require defined investment alternatives to be made available to
participants. Rather, the regulation is designed so that plan
sponsors are not limited in their ability to accommodate changes
in employee needs and changes in investment products and markets.
The regulation does not require any "safe" or "default"
investment option which plan administrators could use to invest
accounts of participants who make no affirmative investment
decision. As a result, ERISA Section 404(c) could not apply to
the accounts of such individuals.
The regulation requires quarterly transferability among at
least three investment vehicles. The plan may offer additional
investment vehicles with greater or less frequency of transfer.
However, the least volatile of the three basic investment
alternatives must permit transfers as often as that permitted by
the most volatile investment alternative under the plan.
In determining whether a plan provides a broad range of
investment alternatives, only those investment alternatives are
to be taken into account as to which sufficient information is
available to the participant to permit informed investment
decisions. This requirement is satisfied if an identified plan
fiduciary is available to provide participants and beneficiaries
with directions as to how such information may be obtained.
The proposed regulation allows an ERISA 404(c) plan to
offer employer stock as an investment alternative as long as the
stock is "qualifying employer securities" as defined in ERISA
Section 407(d)(5), publicly traded on a national exchange or
other recognized market in sufficient volume to assure prompt
purchase and sale, informational materials and proxy voting and
similar rights are passed through to participant shareholders and
all activities relating to the purchase, sale and exercise of
voting and similar rights are the responsibility of an
independent fiduciary (one who is not affiliated with the plan
sponsor) who carries out such activities on a confidential basis.
Department of Labor stated that it continues to believe
that plan fiduciaries have an ongoing duty to consider the
suitability of designated 404(c) plan investment vehicles in
order to protect the interest of participants. This includes the
continuing determination that each investment vehicle remains a
prudent investment option.
We will keep you informed of further developments.
W. Richard Mason
Assistant Counsel - Pension
Attachment