A federal court of appeals in Chicago ruled recently in Jenkins v. Yager that a retirement plan may qualify as a “participant-directed” plan that involves reduced fiduciary responsibilities, even though the plan fails to satisfy the Employee Retirement Income Security Act of 1974 provision that establishes specific criteria for participant-directed plans.
Typically, investments for ERISA plans must be managed exclusively by trustees or other fiduciaries who may become liable for plan investment losses if they are inattentive or otherwise imprudent. However, plans that qualify as “participant-directed” may allow participants to make investment decisions for their accounts – e.g., allocating the account among a menu of mutual funds – rather than having the plan trustee or other fiduciaries determine those investments.
Because participants are responsible for managing their accounts directly, the trustee and other fiduciaries of participant-directed plans generally are not responsible for managing these accounts, and are not liable for losses resulting from the participants’ investment decisions.
ERISA contains a specific provision – Section 404(c) – which, along with accompanying Department of Labor regulations, establishes extensive criteria that must be satisfied for a plan to qualify as participant-directed. For example, the regulations under Section 404(c) require that participants must be able to change their investment elections at least quarterly (and in some cases more frequently).
However, the court in Jenkins v. Yager held that a plan which permitted participants to adjust their investment elections only once per year could nevertheless qualify as a participant-directed plan with reduced responsibilities for plan fiduciaries.
Jenkins v. Yager involved the following facts: Earlene Jenkins participated in a 401(k) plan that Mid America Motorworks Inc., Effingham, Ill., a company that Michael Yager owned and operated, had established in 1991. That plan allowed participants to defer up to 15% of their salary and invest it in 1 of 4 funds, with Mid America matching up to 6% of that deferral. Participants could change their investment elections only once per year (not quarterly, as required under the ERISA Section 404(c) regulations). Neither Yager nor any other plan fiduciary ever reviewed the participants’ investment decisions.