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Creation
of a defined contribution pension plan can create a liability to the performance of an employee's portfolio that is tied directly to the employer.
The majority of employers have no idea it exists and are taking
on risk without being aware of it.
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).
This is not enough to absolve the plan sponsor of liability for the performance of the participant's
portfolio.
The sponsor is, in fact,
liable unless it has followed the guidelines described n the Employee Retirement Income Security Act of 1974 (ERISA),
Section 404(c). As in many situations, careful
documentation of strict adherence to guidelines is the best
protection for a small business owner.
ERIDA 404(c) provides guidelines to give a plan sponsor the opportunity to shift the responsibility and liability for
investment performance to its plan participants and away from the plan sponsor. An
ERISA Section 404 (c) Plan is an individual account plan that (a) provides an opportunity for a participant to exercise control over the assets in his individual account, and (b) offers a broad range of
investment alternatives. Most modern plans meet these basic criteria, but liability for
investment performance is shifted away from the plan sponsor
only if the participant in fact exercises independent control with respect to the investment of assets in his or her individual account.
ERISA defines the necessary elements for independent control, which for the most part entail the
education of the plan participants empowering them to make prudent decisions. Surprisingly, most of the requirements are disseminated as an everyday part of most plans. But there are a few
particulars that require a conscious effort in order to become
compliant. It is worth your effort to ensure that you
are familiar with the particulars and that your are compliant
with them in all details.
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
specifically what needs to be done to become
404 (c) compliant. Additional information can also be found at a selection of web sites. Just search for
ERISA 404 and a number of sites come up, including firms that specialize in this area.
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