Most 401(k) sponsors are complying with 404(c) rules to limit liability.

More than three-quarters of companies sponsoring 401(k) plans complied with Employee Retirement Income Security Act section 404(c) rules for participant-directed account plans, accoridng to a survey by Towers Perrin, a management consulting firm. The companies did so despite the increased costs and greater burdens of accounting and administration that resulted from compliance.

The rules, which became effective on January 1, 1994, are designed to protect sponsors and other fiduciaries of 401(k), profit-sharing and thrift-savings plans from liability due to poor returns or losses on participants' investments.

"Compliance means added internal paperwork for companies but it provides them and their accounting staffs with a safe harbor from liability," said John W. Hamm, CPA, senior consultant with Towers Perrin. "It's also to everyone's advantage when an employee is able to make a good investment decision thanks to the availability of good information and investment options."

Compliance with 404(c) is voluntary; to qualify for protection, individual account plans must give participants a broad range of investment alternatives and an opportunity to exercise control over some or all of the assets in their accounts. Among the key requirements:

* A plan must offer at least three diversified investment choices. Each of the core funds must have materially different risk and return characteristics so participants can build portfolios that offer the maximum expected return for a given level of risk.

* At a minimum, participants must be able to transfer money among the core funds at least quarterly.

* If a plan offers more volatile investment alternatives, such as single-sector stock funds or direct investments in individual stocks, participants must be able to switch out of them as frequently as is appropriate for such investments.

* Participants must receive sufficient information about the plan's features and the investment alternatives available to make informed investment decisions.

Compliance with the 404(c) rules meant additional costs for most of the companies. For example, 80% of those providing information said they would have to increase employee communications, 35% mentioned the cost of offering additional investment funds and 33% reported increased recordkeeping.

Just over half the respondents said increased disclosure was the most common change they would have to make to comply, and 47% said they would have to provide additional investment options. Other changes that would have to be made included allowing participants to transfer money among funds more frequently (mentioned by 24%) and changing or eliminating funds from plan options (mentioned by 12%). Just under 40% of the companies would have to make more than one change.