Pension Plan Pitfalls

By LaneReport.com Staff

In a business-sponsored defined contribution pension plan, there exists a liability to the performance of an employee’s portfolio that is tied directly to the employer. And the majority of employers have no idea it exists.

Most modern defined contribution pension plans – 401(k), profit sharing, etc. – allow plan participants (the employees) to manage their own portfolios using a selection of investment options defined by the plan sponsor (the employer). It would seem intuitive that those decisions eliminate any liability the plan sponsor would have for the performance of the participant’s portfolio, since they do not directly manage the portfolio. The reality, however, is much different. The sponsor is, in fact, liable unless he/she has followed the guidelines described in the Employee Retirement Income Security Act of 1974 (ERISA) Section 404 (c). In the litigious environment in which businesses operate, this can be a significant issue to be dealt with.

An ERISA Section 404 (c) Plan is an individual account plan that provides an opportunity for a participant to exercise control over the assets in his individual account and offers a broad range of investment alternatives. Most modern plans meet these basic criteria, but liability for investment performance is shifted a way from the plan sponsor only if the participant exercises independent control in of his or her individual account. And this is what could create the potential firestorm of litigation.

ERISA defines the necessary elements for independent control, which primarily involve educating plan participants, empowering them to make prudent decisions. But there are a few particulars that require a conscious effort in order to become compliant. However, a conscious effort is minimal when compared to the potential cost a disgruntled employee might create.

If you are an employer not currently following and documenting the ERISA Section 404 (c) guidelines, you should seriously consider contacting your plan representative and find out what needs to be done to become 404 (c) compliant.

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