October 14, 1992
TO: BOARD OF GOVERNORS NO. 74-92
RE: DEPARTMENT OF LABOR ISSUES FINAL REGULATION UNDER ERISA
SECTION 404(c)
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Attached is a copy of the final regulation issued yesterday
by the Department of Labor under section 404(c) of the Employee
Retirement Income Security Act of 1974 (ERISA). Section 404(c)
provides that, where a participant in a retirement plan exercises
control over the assets in his individual account, the
fiduciaries of the plan (i.e., the employer) are relieved of
liability for the results of the participant’s exercise of
control.
The Institute first submitted proposals for a regulation
under section 404(c) 16 years ago, in June of 1976. The final
regulation includes a number of provisions recommended by the
Institute and we are hopeful that the regulation will lead many
plan sponsors to select mutual funds as their plans’ funding
vehicles.
In order to constitute an "ERISA section 404(c) plan" under
the regulation, an individual account plan must provide an
opportunity for a participant to exercise control over the assets
in his account and must provide the participant an opportunity to
choose, from a broad range of investment alternatives, the manner
in which some or all of the assets in his account are invested.
In order for a participant to have the opportunity to exercise
control over his account, he must have a reasonable opportunity
to give investment instructions to an identified plan fiduciary
who is generally obligated to comply with such instructions. The
instructions may be in writing or otherwise, but the participant
must have the opportunity to obtain written confirmation of such
instructions. A plan may impose reasonable restrictions upon the
frequency with which participants may give investment
instructions; however, the frequency must be appropriate in light
of the market volatility of the investment.
In addition, the participant must have sufficient
information to make informed decisions concerning the available
investments. The participant must be provided certain items of
information concerning the available investments, including a
general description of the investment objectives and risk and
return characteristics of the investment, and any transaction
fees and expenses in connection with purchases or sales,
including sales loads and deferred sales charges. Participants
must also be informed of the information that may be obtained
upon request, which includes the annual operating expenses of the
investment, copies of any prospectuses provided to the plan, and
performance information.
The requirement that the plan offer a broad range of
investment alternatives will be satisfied if participants can
choose among at least three diversified alternatives, each of
which has materially different risk and return characteristics
and which in the aggregate enable the participant to achieve a
portfolio with risk and return characteristics at any point
within the range normally appropriate for the participant. The
range of investments must also tend to minimize through
diversification the overall risk of the participant’s portfolio.
With respect to these "core" investment options, participants
must be permitted to give investment instructions at least once
within any three-month period.
The participant must also be able to diversify his account
so as to minimize the risk of large losses. Where the
participant’s account is limited in size, a plan can satisfy this
requirement only by offering "look-through investment vehicles,"
including investment companies.
The final regulation is generally effective for
transactions occurring on or after January 1, 1994. Transactions
occurring before that date are governed by section 404(c) without
regard to the regulation.
Matthew P. Fink
Attachment