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Summary of ERISA 404(c) Requirements

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  • 1. SUMM ARY OF ERISA SECTION 404(C) REQUIREMENTSIntroductionERISA section 404(c) (“404(c)”) applies to individual benefit account plans that are covered by Title I ofERISA. Should an employer choose to comply with 404(c), plan fiduciaries will not be liable for anylosses on individual investments so long as: • The participant exercised control with respect to the transaction; and, • The investment losses were a result of investment instructions given by the participant.The 404(c) requirements can be met even if: • Only certain participants are able to exercise investment control (assuming this is not discriminatory); or, • Participants may only exercise investment control over a portion of their account balance.What follows below is a description of the 404(c) requirements and the information that either must beprovided automatically or at the participant’s request.RequirementsTo be deemed to exercise investment control, the participant must give investment allocationinstructions. The participant must also receive written confirmation of investment transactions,including investment allocation instructions. Allocation instructions must be given to an identified planfiduciary. In turn, the plan fiduciary must give certain information to participants as follows.To avail themselves of 404(c) relief, plan fiduciaries must provide information that is sufficient toenable the participant to make informed investment decisions. The information that must be providedto participants includes: • A statement that the plan intends to follow 404(c). • An explanation that the plan fiduciaries may be relieved of liability as a result of their compliance.
  • 2. • A description of each available investment alternative, preferably encouraging participants to review investment information. • A description of the investment objectives and risk and return characteristics of each investment, and information regarding the type and diversification of assets in the portfolio of the designated alternative. • The identity of all designated investment managers. • An explanation of how participants may give investment instructions, including limitations, restrictions, penalties or adjustments related to investment transfers. • A description of transaction fees charged to participants. • Information on indemnification of the plan fiduciary responsible for giving information on request. • Company stock information, if applicable. • A copy of the most recent prospectus. • Information related to the exercise of voting, tender, or similar rights to be executed by participants.These items must be provided before participants direct their investments.Participants must also be provided with certain information on request. This information includes: • A statement of the annual operating expenses of each designated investment alternative, including fees that reduce the rate of return expressed as a percentage of average net assets of the designated investment alternative. The prospectus may be sufficiant. • Copies of prospectuses, financial statements and reports related to the investment alternatives to the extent that this information has been provided to the plan. • A list of assets comprising the investment alternative portfolio, including plan assets and their value. If the investment has a fixed rate of return, the name of the issuer, the contact term and the rate of return must also be made available upon request. • The value of shares or units and past and current investment performance of each available alternative, minus expenses.
  • 3. • The value of the shares or units held in the particular participants account.These items must provided upon request with sufficient time for the participant to weigh it prior tomaking an investment decision.Even where 404(c) requirements are otherwise met, the plan fiduciary will not be relieved ofinvestment liability when a participant’s investment direction would: • Violate the terms of the plan document. • Cause plan assets to be owned outside the United States. • Jeopardize tax qualified status of the plan. • Result in a loss in excess of the entire participant account balance. • Constitute or result in a prohibited transaction.Plan sponsors may decide not to implement a participant’s investment instructions that would causethese circumstances to arise and remain protected under 404(c).Additionally, participants must be given the opportunity to make changes their investment directives asoften as the investment volatility may require. This principle is known as the “general volatility rule.”Specifically, participants must be able to change core investment alternatives (those that constitute abroad range of investment alternatives) at least every three months, subject to the general volatilityrule.If an investment alternative permits changes more frequently than once every three months, at leastone core investment must permit the same frequency of change. The investment alternative into whichparticipants transfer must be income producing, low risk and liquid. Non-core investments are notsubject to this three month requirement, but they are subject to general volatility rule.Finally, investment alternatives must be sufficiently diverse to permit participants a broad range ofinvestment alternatives that provide participants the opportunity to affect the potential return and riskon their investments. Under this requirement, participants must be able to choose from at least threediversified investments that: • Have materially different risk and return characteristics. • Enable the participant to achieve appropriate relative aggregate risk and return.
  • 4. • Tends to minimize the overall risk of the portfolio when combined with the other available alternatives.Participants must be given the opportunity to diversify the investments to minimize the risk of largelosses, taking into account the nature of the plan and the size of participant accounts.ConclusionERISA section 404(c) provides electing plan sponsors with a fiduciary liability shield against participantinvestment decisions so long as the requirements outlined above are met. The attached checklist maybe used as a tool to assist plan sponsors in determining whether their plans are in proper compliancewith 404(c).
  • 5. ERISA 404(C) COMPLI ANCE CHECKLISTThe ERISA Section 404(c) Checklist below will help to ensure that your plan is complying with ERISAsection 404(c). To the extent that your plan permits participants to exercise control over the assets intheir individual accounts, you will not be liable for losses resulting from investment choices made by aparticipant if your plan elects to comply with ERISA section 404(c) and certain information is providedto participants. This protection does not extend to the selection of the investment lineup, default fundor to transactions involving voting, tender and similar rights to the extent those rights are not passedthrough to plan participants.Plan Requirements  The plan offers three or more funds that are diversified, have materially different risk and return characteristics, enable the participants to achieve aggregate risk and return characteristics within the range normally appropriate for each participant and enable participants to minimize risk through diversification.  Plan participants are given the opportunity to give investment instructions to an identified plan fiduciary who is obligated to comply with such instructions.  Plan participants are given the opportunity to make investment changes at least quarterly and with a frequency that is appropriate in light of market volatility.Disclosure RequirementsThe following information is provided to participants automatically:  An explanation that the plan is intended to be a section 404(c) plan;  An explanation that plan fiduciaries may be relieved of liability for any loss that is the direct and necessary result of investment instructions given by the participant.  An explanation of how participants may give investment instructions and any limitations on those instructions including restrictions on transfers and restrictions on the exercise of voting, tender, and similar rights.  A description of each of the investment alternatives including the type and diversification of assets, investment objectives and risk and return characteristics.  The identity of any designated investment managers.
  • 6.  A description of any transaction fees and expenses chargeable against the participant’s account.  The name, address, and phone number of the plan fiduciary responsible for giving information upon request and a description of the information available upon request (see below).  A copy of the most recent prospectus provided to the plan for investment alternatives subject to the Securities Act of 1933 (this must be given immediately before or after an initial investment).The following information is being provided to participants upon request:  A description of the annual operating expenses of each investment alternative that reduces the participant’s rate of return and the aggregate amount of such expenses expressed as a percentage of average net assets of the investment alternative.  A copy of any prospectuses, financial statements and reports and materials relating to the available investment alternatives to the extent the information is provided to the plan.  A list of assets comprising the portfolio of each investment alternative, the value of each such asset and, if the asset is a fixed rate investment contract, the name of the issuer, the term and the contract’s rate of return.  Information on the value of shares or units held in the participant’s own account.  Information on the value of shares or units in available investment alternatives and the past and current investment performance of the investment alternatives, net of expenses.Multnomah Group, Inc.Phone: (888) 559-0159Fax: (800) 997-3010www.multnomahgroup.com

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