When it comes to retirement planning, one important piece of the puzzle often gets overlooked: legal protection for plan sponsors. That’s where ERISA Section 404(c) comes in. If you're a business owner or plan sponsor offering a retirement plan like a 401(k), understanding this ERISA rule could save you from unnecessary legal risks.

In this article, I’ll break it down simply, so you can confidently manage your plan while helping your employees make informed choices.

What Is ERISA Section 404(c)?

ERISA stands for the Employee Retirement Income Security Act. It sets standards to protect employees and their retirement savings. Section 404(c) is a part of this law that gives plan sponsors legal protection — as long as certain conditions are met.

Here’s what that means: if your retirement plan follows the rules of ERISA 404(c), and your employees make their own investment decisions, you won’t be held liable if their investments lose money. The key is giving them the tools and information they need to choose wisely.

Why ERISA 404(c) Matters for You

Without ERISA 404(c) protection, you could be on the hook for every bad investment decision your employees make. That can be a heavy burden. ERISA 404(c) helps reduce that risk by:

• Encouraging transparency

• Supporting participant education

• Protecting you from legal claims over investment losses

It’s a win-win: employees get more control, and you get peace of mind.

What You Need to Do to Comply

To qualify for protection under ERISA Section 404(c), your retirement plan must meet three key requirements:

1. Offer a Broad Range of Investment Options

Your plan must provide at least three diversified investment choices with different risk levels and potential returns. For example:

• A stock-based growth fund

• A bond-based income fund

• A stable value or money market fund

These options allow participants to build a portfolio that fits their financial goals and risk tolerance.

2. Allow Regular Transfers Between Investments

Participants must be able to move their money between investment options at least once per quarter. More frequent access may be needed if the investments are especially volatile.

This gives participants flexibility to adjust their portfolios as needed.

3. Provide Clear and Complete Information

You must give participants enough information to make informed investment decisions, including:

• A description of each fund’s goals, risks, and returns

• A summary of fees and expenses

• Instructions on how to make investment choices

• A statement saying the plan intends to comply with ERISA 404(c)

It’s also important to provide access to account statements and offer education resources.

What About Default Investments?

Sometimes, employees don’t choose any investments. When that happens, their money goes into a default fund, usually called a Qualified Default Investment Alternative (QDIA).

Good news: if your QDIA meets certain standards (like being a target-date fund or balanced fund), you may still get ERISA 404(c) protection. Just make sure employees were given a chance to choose and were properly notified.

Your Role Doesn’t End There

Even if you follow 404(c) rules, ERISA still expects you to:

• Select high-quality, fairly priced investment options

• Monitor those investments regularly

• Replace underperforming funds when necessary

Remember, you’re a fiduciary. That means acting in your participants’ best interest at all times.

Final Thoughts: A Smarter, Safer Retirement Plan

Following ERISA Section 404(c) helps you offer a stronger retirement plan. It puts employees in control of their savings while giving you legal protection when you meet the requirements.

At Clarity Financial, I work with plan sponsors to design retirement plans that are both smart and compliant. Whether you need help reviewing your investment lineup, improving plan education, or confirming 404(c) compliance, I’m here to help.

If you’re not sure your plan is protected, let’s talk. I’ll help you navigate ERISA with confidence — and make sure your plan supports everyone’s future.