No 404(c) Protection for Default Accounts (Posted February 28, 2001) Technical Tip 7: The following question and answer were from the DOL Q&A Session at the 2000 ASPPA Annual Conference: The IRS has recently issued additional guidance on negative elections/ automatic enrollment for 401(k) plans. In automatic enrollment plans, it is likely that some participants will not direct the investment of their accounts. If they do not (in either an automatically enrolled plan or the regularly enrolled plan), what is the responsibility of the plan’s fiduciaries? May the deferrals be safely "defaulted" into a money market account? A balanced fund (e.g., 60% equities/40% bonds)? Is the default protected under 404(c)? DOL Response: In Revenue Ruling 2000-8, the IRS said in footnote 1, based on advice from the DOL, that: "The Department of Labor has advised Treasury and the Service that, under Title I of the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries of a plan must ensure that the plan is administered prudently and solely in the interest of plan participants and beneficiaries. While ERISA section 404(c) may serve to relieve certain fiduciaries from liability when participants or beneficiaries exercise control over the assets in their individual accounts, the Department of Labor has taken the position that a participant or beneficiary will not be considered to have exercised control when the participant or beneficiary is merely apprised of investments that will be made on his or her behalf in the absence of instructions to the contrary. See 29 CFR section 2550.404c-1 and 57 F.R. 46924." Moderators Comment: Thus, 404(c) protection is not available if the participant does not direct the investment of his or her account. In addition, the plan fiduciaries have a responsibility to select the investments for that account and to monitor that decision to determine if it continues to be prudent. Comment by the RL&R ERISA Attorneys: Even if the plan document provides for an automatic default account, under certain circumstances the fiduciaries (e.g., the plan committee) have a duty to ignore the terms of the document and prudently invest an account where the participant has not given investment direction. Section 404(a)(1)(D) of ERISA requires that fiduciaries follow the terms of the plan document unless it is clearly not prudent to do so. Arguably, for example, it would be imprudent to invest all of a participant’s retirement money in a money market account for an extended period of time. Caveat: The answer was drafted by Fred Reish and Brad Huss, the program moderators, based on their understandings of discussions with four senior officials of the Pension and Welfare Benefits Administration (PWBA) of the U.S. DOL. As a result, it does not represent a formal or binding position statement by the PWBA. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.