How will the new ERISA rules affect your business: a clarification of section 404(c).Many businesses enjoy the benefits of establishing a qualified retirement program for their employees. With most programs, there are substantial business and personal tax advantages for you and your employees. A retirement program also can be an important tool for recruiting, retaining and rewarding talented employees. But a qualified business retirement program also entails required regulations for business owners which can sometimes be complicated. For example, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the Employee Retirement Income Security Act The Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.A. § 1001 et seq. (1974), is a federal law that sets minimum standards for most voluntarily established Pension and health plans in private industry to provide protection for individuals enrolled in these plans. (ERISA See Employee Retirement Income Security Act. ERISA See Employee Retirement Income Security Act (ERISA). ), a qualified plan sponsor has certain fiduciary fiduciary (fĭd  `shēĕ'rē), in law, a person who is obliged to discharge faithfully a responsibility of trust toward another. responsibilities to plan participants Plan participantsEmployees or other beneficiaries who are eligible to receive benefits from a company's employee benefit plan. with respect to the plan's investments. While as a business owner, you might want to provide your employees with the benefits of a qualified retirement program, you might also want your employees to take responsibility for making their own investment decisions. Recognizing that desire, one of ERISA's sections, 404(c), states that if participants were allowed to make their own investment decisions by "self directing" their individual account balances, the employer and other fiduciaries were generally not liable for those investment decisions. In theory, section 404(c) sounded great. But, in reality, employers and retirement plan sponsors had little guidance on how to comply with this provision. To help clarify section 404(c), the department of labor issued new regulations in October 1992 which become effective for most qualified plans on January 1, 1994. The new regulations are intended to relieve plan sponsors, trustees, and managers from fiduciary liability for investment losses resulting from participants' control over their account assets. If you currently sponsor a qualified plan -- or are considering offering one to your employees -- it's important to understand the new regulations on compliance with section 404(c). It's also important to understand what your continuing fiduciary responsibilities will be under the new rules. Complying with the new regulations In general, to meet section 404(c), plan sponsors must provide employees with a broad range of investment choices, detailed information on investment options offered, and the chance to change investment funds Noun 1. investment funds - money that is invested with an expectation of profit investment assets - anything of material value or usefulness that is owned by a person or company frequently. The following are the specific requirements: Investment Choices Participants must be allowed to: * Choose from at least three diversified diversified (di·verˑ·s and materially different investment alternatives. * Diversify diversify To acquire a variety of assets that do not tend to change in value at the same time. To diversify a securities portfolio is to purchase different types of securities in different companies in unrelated industries. investments to minimize the risk of large losses. * Materially affect the potential return on assets Return on assets (ROA) Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets). over which the participants have control. Investment Information Sufficient information must be available to make informed investment decisions. Information must be given automatically to participants, including: * An explanation that the plan is a section 404(c) plan. * A full description -- including investment objectives and risk and return characteristics -- of available investment alternatives. * A description of transaction fees and expenses. * Information regarding voting, tender and similar rights. Investment Changes Participants must be allowed to change investments as often as is appropriate in light of the market volatility of the investment options, but at least once a quarter. Your Continuing Fiduciary Responsibilities Despite the new regulations, there are many fiduciary responsibilities for which plan sponsors are still liable. These responsibilities include the obligation to: * Carry out participant's investment instructions. * Furnish fur·nish tr.v. fur·nished, fur·nish·ing, fur·nish·es 1. To equip with what is needed, especially to provide furniture for. 2. required information. * Monitor the performance of the plan's investment alternatives. * Decline to implement any participant instructions that are inconsistent with plan documents. The new regulations regarding section 404(c) will help clarify and alleviate some of your fiduciary responsibilities as a qualified plan sponsor. For more specific information about the regulations and how they apply to your particular qualified plan, talk to your investment executive today. Steven R. Baaden is first vice-president, investments and Karen L. Grewar is an investment executive for PaineWebber, Los Angeles Los Angeles (lôs ăn`jələs, lŏs, ăn`jəlēz'), city (1990 pop. 3,485,398), seat of Los Angeles co., S Calif.; inc. 1850. . |
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