(a) In general. (1) Section 404(c) of the Employee Retirement Income
Security Act of 1974 (ERISA or the Act) provides that if a pension plan
that provides for individual accounts permits a participant or
beneficiary to exercise control over assets in his account and that
participant or beneficiary in fact exercises control over assets in his
account, then the participant or beneficiary shall not be deemed to be a
fiduciary by reason of his exercise of control and no person who is
otherwise a fiduciary shall be liable for any loss, or by reason of any
breach, which results from such exercise of control. This section
describes the kinds of plans that are ``ERISA section 404(c) plans,''
the circumstances in which a participant or beneficiary is considered to
have exercised independent control over the assets in his account as
contemplated by section 404(c), and the consequences of a participant's
or beneficiary's exercise of control.
(2) The standards set forth in this section are applicable solely
for the purpose of determining whether a plan is an ERISA section 404(c)
plan and whether a particular transaction engaged in by a participant or
beneficiary of such plan is afforded relief by section 404(c). Such
standards, therefore, are not intended to be applied in determining
whether, or to what extent, a plan which does not meet the requirements
for an ERISA section 404(c) plan or a fiduciary with respect to such a
plan satisfies the fiduciary responsibility or other provisions of title
I of the Act.
(b) ERISA section 404(c) plans--(1) In general. An ``ERISA section
404(c) Plan'' is an individual account plan described in section 3(34)
of the Act that:
(i) Provides an opportunity for a participant or beneficiary to
exercise control over assets in his individual account (see paragraph
(b)(2) of this section); and
(ii) Provides a participant or beneficiary an opportunity to choose,
from a broad range of investment alternatives, the manner in which some
or all of the assets in his account are invested (see paragraph (b)(3)
of this section).
[[Page 499]]
(2) Opportunity to exercise control. (i) a plan provides a
participant or beneficiary an opportunity to exercise control over
assets in his account only if:
(A) Under the terms of the plan, the participant or beneficiary has
a reasonable opportunity to give investment instructions (in writing or
otherwise, with opportunity to obtain written confirmation of such
instructions) to an identified plan fiduciary who is obligated to comply
with such instructions except as otherwise provided in paragraph
(b)(2)(ii)(B) and (d)(2)(ii) of this section; and
(B) The participant or beneficiary is provided or has the
opportunity to obtain sufficient information to make informed decisions
with regard to investment alternatives available under the plan, and
incidents of ownership appurtenant to such investments. For purposes of
this subparagraph, a participant or beneficiary will not be considered
to have sufficient investment information unless--
(1) The participant or beneficiary is provided by an identified plan
fiduciary (or a person or persons designated by the plan fiduciary to
act on his behalf):
(i) An explanation that the plan is intended to constitute a plan
described in section 404(c) of the Employee Retirement Income Security
Act, and title 29 of the Code of Federal Regulations, Sec. 2550.440c-1,
and that the fiduciaries of the plan may be relieved of liability for
any losses which are the direct and necessary result of investment
instructions given by such participant or beneficiary;
(ii) A description of the investment alternatives available under
the plan and, with respect to each designated investment alternative, a
general description of the investment objectives and risk and return
characteristics of each such alternative, including information relating
to the type and diversification of assets comprising the portfolio of
the designed investment alternative;
(iii) Identification of any designated investment managers;
(iv) An explanation of the circumstances under which participants
and beneficiaries may give investment instructions and explanation of
any specified limitations on such instructions under the terms of the
plan, including any restrictions on transfer to or from a designated
investment alternative, and any restrictions on the exercise of voting,
tender and similar rights appurtenant to a participant's or
beneficiary's investment in an investment alternative;
(v) A description of any transaction fees and expenses which affect
the participant's or beneficiary's account balance in connection with
purchases or sales of interests in investment alternatives (e.g.,
commissions, sales load, deferred sales charges, redemption or exchange
fees);
(vi) The name, address, and phone number of the plan fiduciary (and,
if applicable, the person or persons designated by the plan fiduciary to
act on his behalf) responsible for providing the information described
in paragraph (b)(2)(i)(B)(2) upon request of a participant or
beneficiary and a description of the information described in paragraph
(b)(2)(i)(B)(2) which may be obtained on request;
(vii) In the case of plans which offer an investment alternative
which is designed to permit a participant or beneficiary to directly or
indirectly acquire or sell any employer security (employer security
alternative), a description of the procedures established to provide for
the confidentiality of information relating to the purchase, holding and
sale of employer securities, and the exercise of voting, tender and
similar rights, by participants and beneficiaries, and the name, address
and phone number of the plan fiduciary responsible for monitoring
compliance with the procedures (see paragraphs (d)(2)(ii)(E)(4)(vii),
(viii) and (ix) of this section); and
(viii) In the case of an investment alternative which is subject to
the Securities Act of 1933, and in which the participant or beneficiary
has no assets invested, immediately following the participant's or
beneficiary's initial investment, a copy of the most recent prospectus
provided to the plan. This condition will be deemed satisfied if the
participant or beneficiary has been provided with a copy of such most
recent prospectus immediately prior to the participant's or
beneficiary's initial investment in such alternative;
[[Page 500]]
(ix) Subsequent to an investment in a investment alternative, any
materials provided to the plan relating to the exercise of voting,
tender or similar rights which are incidental to the holding in the
account of the participant or beneficiary of an ownership interest in
such alternative to the extent that such rights are passed through to
participants and beneficiaries under the terms of the plan, as well as a
description of or reference to plan provisions relating to the exercise
of voting, tender or similar rights.
(2) The participants or beneficiary is provided by the identified
plan fiduciary (or a person or persons designated by the plan fiduciary
to act on his behalf), either directly or upon request, the following
information, which shall be based on the latest information available to
the plan:
(i) A description of the annual operating expenses of each
designated investment alternative (e.g., investment management fees,
administrative fees, transaction costs) which reduce the rate of return
to participants and beneficiaries, and the aggregate amount of such
expenses expressed as a percentage of average net assets of the
designated investment alternative;
(ii) Copies of any prospectuses, financial statements and reports,
and of any other materials relating to the investment alternatives
available under the plan, to the extent such information is provided to
the plan;
(iii) A list of the assets comprising the portfolio of each
designated investment altenaive which constitute plan assets within the
meaning of 29 CFR 2510.3-101, the value of each such asset (or the
proportion of the investment alternative which it comprises), and, with
respect to each such asset which is a fixed rate investment contract
issued by a bank, savings and loan association or insurance company, the
name of the issuer of the contract, the term of the contract and the
rate of return on the contract;
(iv) Information concerning the value of shares or units in
designated investment alternatives available to participants and
beneficiaries under the plan, as well as the past and current investment
performance of such alternatives, determined, net of expenses, on a
reasonable and consistent basis; and
(v) Information concerning the value of shares or units in
designated investment alternatives held in the account of the
participant or beneficiary.
(ii) A plan does not fail to provide an opportunity for a
participant or beneficiary to exercise control over his individual
account merely because it--
(A) Imposes charges for reasonable expenses. A plan may charge
participants' and beneficiaries' accounts for the reasonable expenses of
carrying out investment instructions, provided that procedures are
established under the plan to periodically inform such participants and
beneficiaries of actual expenses incurred with respect to their
respective individual accounts;
(B) Permits a fiduciary to decline to implement investment
instructions by participants and beneficiaries. A fiduciary may decline
to implement participant and beneficiary instructions which are
described at paragraph (d)(2)(ii) of this section, as well as
instructions specified in the plan, including instructions--
(1) Which would result in a prohibited transaction described in
ERISA section 406 or section 4975 of the Internal Revenue Code, and
(2) Which would generate income that would be taxable to the plan;
(C) Imposes reasonable restrictions on frequency of investment
instructions. A plan may impose reasonable restrictions on the frequency
with which participants and beneficiaries may give investment
instructions. In no event, however, is such a restriction reasonable
unless, with respect to each investment alternative made available by
the plan, it permits participants and beneficiaries to give investment
instructions with a frequency which is appropriate in light of the
market volatility to which the investment alternative may reasonably be
expected to be subject, provided that--
(1) At least three of the investment alternatives made available
pursuant to the requirements of paragraph (b)(3)(i)(B) of this section,
which constitute a broad range of investment alternatives, Permit
participants and
[[Page 501]]
beneficiaries to give investment instructions no less frequently than
once within any three month period; and
(2)(i) At least one of the investment alternatives meeting the
requirements of paragraph (b)(2)(ii)(C)(1) of this section permits
participants and beneficiaries to give investment instructions with
regard to transfers into the investment alternative as frequently as
participants and beneficiaries are permitted to give investment
instructions with respect to any investment alternative made available
by the plan which permits participants and beneficiaries to give
investment instructions more frequently than once within any three month
period; or
(ii) With respect to each investment alternative which permits
participants and beneficiaries to give investment instructions more
frequently than once within any three month period, participants and
beneficiaries are permitted to direct their investments from such
alternative into an income producing, low risk, liquid fund, subfund, or
account as frequently as they are permitted to give investment
instructions with respect to each such alternative and, with respect to
such fund, subfund or account, participants and beneficiaries are
permitted to direct investments from the fund, subfund or account to an
investment alternative meeting the requirements of paragraph
(b)(2)(ii)(C)(1) as frequently as they are permitted to give investment
instructions with respect to that investment alternative; and
(3) With respect to transfers from an investment alternative which
is designed to permit a participant or beneficiary to directly or
indirectly acquire or sell any employer security (employer security
alternative) either:
(i) All of the investment alternatives meeting the requirements of
paragraph (b)(2)(ii)(C)(1) of this section must permit participants and
beneficiaries to give investment instructions with regard to transfers
into each of the investment alternatives as frequently as participants
and beneficiaries are permitted to give investment instructions with
respect to the employer security alternative; or
(ii) Participants and beneficiaries are permitted to direct their
investments from each employer security alternative into an income
producing, low risk, liquid fund, subfund, or account as frequently as
they are permitted to give investment instructions with respect to such
employer security alternative and, with respect to such fund, subfund,
or account, participants and beneficiaries are permitted to direct
investments from the fund, subfund or account to each investment
alternative meeting the requirements of paragraph (b)(2)(ii)(C)(1) as
frequently as they are permitted to give investment instructions with
respect to each such investment alternative.
(iii) Paragraph (c) of this section describes the circumstances
under which a participant or beneficiary will be considered to have
exercised independent control with respect to a particular transaction.
(3) Broad range of investment alternatives. (i) A plan offers a
broad range of investment alternatives only if the available investment
alternatives are sufficient to provide the participant or beneficiary
with a reasonable opportunity to:
(A) Materially affect the potential return on amounts in his
individual account with respect to which he is permitted to exercise
control and the degree of risk to which such amounts are subject;
(B) Choose from at least three investment alternatives:
(1) Each of which is diversified;
(2) Each of which has materially different risk and return
characteristics;
(3) Which in the aggregate enable the participant or beneficiary by
choosing among them to achieve a portfolio with aggregate risk and
return characteristics at any point within the range normally
appropriate for the participant or beneficiary; and
(4) Each of which when combined with investments in the other
alternatives tends to minimize through diversification the overall risk
of a participant's or beneficiary's portfolio;
(C) Diversify the investment of that portion of his individual
account with respect to which he is permitted to exercise control so as
to minimize the risk of large losses, taking into account the nature of
the plan and the size of participants' or beneficiaries'
[[Page 502]]
accounts. In determining whether a plan provides the participant or
beneficiary with a reasonable opportunity to diversify his investments,
the nature of the investment alternatives offered by the plan and the
size of the portion of the individual's account over which he is
permitted to exercise control must be considered. Where such portion of
the account of any participant or beneficiary is so limited in size that
the opportunity to invest in look-through investment vehicles is the
only prudent means to assure an opportunity to achieve appropriate
diversification, a plan may satisfy the requirements of this paragraph
only by offering look-through investment vehicles.
(ii) Diversification and look-through investment vehicles. Where
look-through investment vehicles are available as investment
alternatives to participants and beneficiaries, the underlying
investments of the look-through investment vehicles shall be considered
in determining whether the plan satisfies the requirements of
subparagraphs (b)(3)(i)(B) and (b)(3)(i)(C).
(c) Exercise of control--(1) In general. (i) Sections 404(c)(1) and
404(c)(2) of the Act and paragraphs (a) and (d) of this section apply
only with respect to a transaction where a participant or beneficiary
has exercised independent control in fact with respect to the investment
of assets in his individual account under an ERISA section 404(c) plan.
(ii) For purposes of sections 404(c)(1) and 4040(c)(2) of the Act
and paragraphs (a) and (d) of this section, a participant or beneficiary
will be deemed to have exercised control with respect to the exercise of
voting, tender and similar rights appurtenant to the participant's or
beneficiary's ownership interest in an investment alternative, provided
that the participant's or beneficiary's investment in the investment
alternative was itself the result of an exercise of control, the
participant or beneficiary was provided a reasonable opportunity to give
instruction with respect to such incidents of ownership, including the
provision of the information described in paragraph (b)(2)(i)(B)(1)(ix)
of this section, and the participant or beneficiary has not failed to
exercise control by reason of the circumstances described in paragraph
(c)(2) with respect to such incidents of ownership.
(2) Independent control. Whether a participant or beneficiary has
exercised independent control in fact with respect to a transaction
depends on the facts and circumstances of the particular case. However,
a participant's or beneficiary's exercise of control is not independent
in fact if:
(i) The participant or beneficiary is subjected to improper
influence by a plan fiduciary or the plan sponsor with respect to the
transaction;
(ii) A plan fiduciary has concealed material non-public facts
regarding the investment from the participant or beneficiary, unless the
disclosure of such information by the plan fiduciary to the participant
or beneficiary would violate any provision of federal law or any
provision of state law which is not preempted by the Act; or
(iii) The participant or beneficiary is legally incompetent and the
responsible plan fiduciary accepts the instructions of the participant
or beneficiary knowing him to be legally incompetent.
(3) Transactions involving a fiduciary. In the case of a sale,
exchange or leasing of property (other than a transaction described in
paragraph (d)(2)(ii)(E) of this section) between an ERISA section 404(c)
plan and a plan fiduciary or an affiliate of such a fiduciary, or a loan
to a plan fiduciary or an affiliate of such a fiduciary, the participant
or beneficiary will not be deemed to have exercised independent control
unless the transaction is fair and reasonable to him. For purposes of
this paragraph (c)(3), a transaction will be deemed to be fair and
reasonable to a participant or beneficiary if he pays no more than, or
receives no less than, adequate consideration (as defined in section
3(18) of the Act) in connection with the transaction.
(4) No obligation to advise. A fiduciary has no obligation under
part 4 of title I of the Act to provide investment advice to a
participant or beneficiary under an ERISA section 404(c) plan.
(d) Effect of independent exercise of control--(1) Participant or
beneficiary not
[[Page 503]]
a fiduciary. If a participant or beneficiary of an ERISA section 404(c)
plan exercises independent control over assets in his individual account
in the manner described in paragraph (c), then such participant or
beneficiary is not a fiduciary of the plan by reason of such exercise of
control.
(2) Limitation on liability of plan fiduciaries. (i) If a
participant or beneficiary of an ERISA section 404(c) plan exercises
independent control over assets in his individual account in the manner
described in paragraph (c), then no other person who is a fiduciary with
respect to such plan shall be liable for any loss, or with respect to
any breach of part 4 of title I of the Act, that is the direct and
necessary result of that participant's or beneficiary's exercise of
control.
(ii) Paragraph (d)(2)(i) does not apply with respect to any
instruction, which if implemented--
(A) Would not be in accordance with the documents and instruments
governing the plan insofar as such documents and instruments are
consistent with the provisions of title I of ERISA;
(B) Would cause a fiduciary to maintain the indicia of ownership of
any assets of the plan outside the jurisdiction of the district courts
of the United States other than as permitted by section 404(b) of the
Act and 29 CFR 2550.404b-1;
(C) Would jeopardize the plan's tax qualified status under the
Internal Revenue Code;
(D) Could result in a loss in excess of a participant's or
beneficiary's account balance; or
(E) Would result in a direct or indirect:
(1) Sale, exchange, or lease of property between a plan sponsor or
any affiliate of the sponsor and the plan except for the acquisition or
disposition of any interest in a fund, subfund or portfolio managed by a
plan sponsor or an affiliate of the sponsor, or the purchase or sale of
any qualifying employer security (as defined in section 407(d)(5) of the
Act) which meets the conditions of section 408(e) of ERISA and section
(d)(2)(ii)(E)(4) below;
(2) Loan to a plan sponsor or any affiliate of the sponsor;
(3) Acquisition or sale of any employer real property (as defined in
section 407(d)(2) of the Act); or
(4) Acquisition or sale of any employer security except to the
extent that:
(i) Such securities are qualifying employer securities (as defined
in section 407(d)(5) of the Act);
(ii) Such securities are stock or an equity interest in a publicly
traded partnership (as defined in section 7704(b) of the Internal
Revenue Code of 1986), but only if such partnership is an existing
partnership as defined in section 10211(c)(2)(A) of the Revenue Act of
1987 (Public Law 100-203);
(iii) Such securities are publicly traded on a national exchange or
other generally recognized market;
(iv) Such securities are traded with sufficient frequency and in
sufficient volume to assure that participant and beneficiary directions
to buy or sell the security may be acted upon promptly and efficiently;
(v) Information provided to shareholders of such securities is
provided to participants and beneficiaries with accounts holding such
securities;
(vi) Voting, tender and similar rights with respect to such
securities are passed through to participants and beneficiaries with
accounts holding such securities;
(vii) Information relating to the purchase, holding, and sale of
securities, and the exercise of voting, tender and similar rights with
respect to such securities by participants and beneficiaries, is
maintained in accordance with procedures which are designed to safeguard
the confidentiality of such information, except to the extent necessary
to comply with Federal laws or state laws not preempted by the Act;
(viii) The plan designates a fiduciary who is responsible for
ensuring that: The procedures required under subparagraph
(d)(2)(ii)(E)(4)(vii) are sufficient to safeguard the confidentiality of
the information described in that subparagraph, such procedures are
being followed, and the independent fiduciary required by subparagraph
(d)(2)(ii)(E)(4)(ix) is appointed; and
(ix) An independent fiduciary is appointed to carry out activities
relating to any situations which the fiduciary
[[Page 504]]
designated by the plan for purposes of subparagraph
(d)(2)(ii)(E)(4)(viii) determines involve a potential for undue employer
influence upon participants and beneficiaries with regard to the direct
or indirect exercise of shareholder rights. For purposes of this
subparagraph, a fiduciary is not independent if the fiduciary is
affiliated with any sponsor of the plan.
(iii) The individual investment decisions of an investment manager
who is designated directly by a participant or beneficiary or who
manages a look-through investment vehicle in which a participant or
beneficiary has invested are not direct and necessary results of the
designation of the investment manager or of investment in the look-
through investment vehicle. However, this paragraph (d)(2)(iii) shall
not be construed to result in liability under section 405 of ERISA with
respect to a fiduciary (other than the investment manager) who would
otherwise be relieved of liability by reason of section 404(c)(2) of the
Act and paragraph (d) of this section.
(3) Prohibited transactions. The relief provided by section 404(c)
of the Act and this section applies only to the provisions of part 4 of
title I of the Act. Therefore, nothing in this section relieves a
disqualified person from the taxes imposed by sections 4975 (a) and (b)
of the Internal Revenue Code with respect to the transactions prohibited
by section 4975(c)(1) of the Code.
(e) Defintions. For purposes of this section:
(1) Look-through investment vehicle means:
(i) An investment company described in section 3(a) of the
Investment Company Act of 1940, or a series investment company described
in section 18(f) of the 1940 Act or any of the segregated portfolios of
such company;
(ii) A common or collective trust fund or a pooled investment fund
maintained by a bank or similar institution, a deposit in a bank or
similar institution, or a fixed rate investment contract of a bank or
similar institution;
(iii) A pooled separate account or a fixed rate investment contract
of an insurance company qualified to do business in a State; or
(iv) Any entity whose assets include plan assets by reason of a
plan's investment in the entity;
(2) Adequate consideration has the meaning given it in section 3(18)
of the Act and in any regulations under this title;
(3) An affiliate of a person includes the following:
(i) Any person directly or indirectly controlling, controlled by, or
under common control with the person;
(ii) Any officer, director, partner, employee, an employee of an
affiliated employer, relative (as defined in section 3(15) of ERISA),
brother, sister, or spouse of a brother or sister, of the person; and
(iii) Any corporation or partnership of which the person is an
officer director or partner.
For purposes of this paragraph (e)(3), the term ``control'' means, with
respect to a person other than an individual, the power to exercise a
controlling influence over the management or policies of such person.
(4) A designated investment alternative is a specific investment
identified by a plan fiduciary as an available investment alternative
under the plan.
(f) Examples. The provisions of this section are illustrated by the
following examples. Examples (5) through (11) assume that the
participant has exercised independent control with respect to his
individual account under an ERISA section 404(c) plan described in
paragraph (b) and has not directed a transaction described in paragraph
(d)(2)(ii).
(1) Plan A is an individual account plan described in section 3(34)
of the Act. The plan states that a plan participant or beneficiary may
direct the plan administrator to invest any portion of his individual
account in a particular diversified equity fund managed by an entity
which is not affiliated with the plan sponsor, or any other asset
administratively feasible for the plan to hold. However, the plan
provides that the plan administrator will not implement certain listed
instructions for which plan fiduciaries would not be relieved of
liability under section 404(c) (see paragraph (d)(2)(ii)). Plan
participants and beneficiaries are permitted to give investment
instructions during the first week of each month with respect to the
equity fund and at any time with respect to other investments. The plan
provides for the pass-through of voting, tender and similar
[[Page 505]]
rights incidental to the holding in the account of a participant or
beneficiary of an ownership interest in the equity fund or any other
investment alternative available under the plan. The plan administrator
of plan A provides each participant and beneficiary with the information
described in subparagraphs (i), (ii), (iii), (iv), (v), (vi) and (vii)
of paragraph (b)(2)(i)(B)(1) upon their entry into the plan, and
provides updated information in the event of any material change in the
information provided. Immediately following an investment by a
participant or beneficiary in the equity fund, the plan administrator
provides a copy of the most recent prospectus received from the fund to
the investing participant or beneficiary. Immediately following any
investment by a participant or beneficiary in any other investment
alternative which is subject to the Securities Act of 1933, the plan
administrator provides the participant or beneficiary with the most
recent prospectus received from that investment alternative (see
paragraph (b)(2)(i)(B)(1)(viii)). Finally, subsequent to any investment
by a participant or beneficiary, the plan administrator forwards to the
investing participant or beneficiary any materials provided to the plan
relating to the exercise of voting, tender or similar rights attendant
to ownership of an interest in such investment (see paragraph
(b)(2)(i)(B)(1)(ix)). Upon request, the plan administrator provides each
participant or beneficiary with copies of any prospectuses, financial
statements and reports, and any other materials relating to the
investment alternatives available under the plan which are received by
the plan (see paragraph (b)(2)(i)(B)(2 )(ii)). Also upon request, the
plan administrator provides each participant and beneficiary with the
other information required by paragraph (b)(2)(i)(B)(2) with respect to
the equity fund, which is a designated investment alternative, including
information concerning the latest available value of the participant's
or beneficiary's interest in the equity fund (see paragraph
(b)(2)(i)(B)(2)(v)). Plan A meets the requirements of paragraphs
(b)(2)(i)(B)(1) and (2) of this section regarding the provision of
investment information.
Note: The regulation imposes no additional obligation on the
administrator to furnish or make available materials relating to the
companies in which the equity fund invests (e.g., prospectuses, proxies,
etc.).
(2) Plan C is an individual account plan described in section 3(34)
of the Act under which participants and beneficiaries may choose among
three investment alternatives which otherwise meet the requirements of
paragraph (b) of this section. The plan permits investment instruction
with respect to each investment alternative only on the first 10 days of
each calendar quarter, i.e. January 1-10, April 1-10, July 1-10 and
October 1-10. Plan C satisfies the condition of paragraph
(b)(2)(ii)(C)(1) that instruction be permitted not less frequently than
once within any three month period, since there is not any three month
period during which control could not be exercised.
(3) Assume the same facts as in paragraph (f)(2), except that
investment instruction may only be given on January 1, April 4, July 1
and October 1. Plan C is not an ERISA section 404(c) plan because it
does not satisfy the condition of paragraph (b)(2)(ii)(C)(1) that
instruction be permitted not less frequently than once within any three
month period. Under these facts, there is a three month period, e.g.,
January 2 through April 1, during which control could not be exercised
by participants and beneficiaries.
(4) Plan D is an individual account plan described in section 3(34)
of the Act under which participants and beneficiaries may choose among
three diversified investment alternatives which constitute a broad range
of investment alternatives. The plan also permits investment instruction
with respect to an employer securities alternative but provides that a
participant or beneficiary can invest no more than 25% of his account
balance in this alternative. This restriction does not affect the
availability of relief under section 404(c) inasmuch as it does not
relate to the three diversified investment alternatives and, therefore,
does not cause the plan to fail to provide an opportunity to choose from
a broad range of investment alternatives.
(5) A participant, P, independently exercises control over assets in
his individual account plan by directing a plan fiduciary, F, to invest
100% of his account balance in a single stock. P is not a fiduciary with
respect to the plan by reason of his exercise of control and F will not
be liable for any losses that necessarily result form P's investment
instruction.
(6) Assume the same facts as in paragraph (f)(5), except that P
directs F to purchase the stock from B, who is a party in interest with
respect to the plan. Neither P nor F has engaged in a transaction
prohibited under section 406 of the Act: P because he is not a fiduciary
with respect to the plan by reason of his exercise of control and F
because he is not liable for any breach of part 4 of title I that is the
direct and necessary consequence of P's exercise of control. However, a
prohibited transaction under section 4975(c) of the Internal Revenue
Code may have occurred, and, in the absence of an exemption, tax
liability may be imposed pursuant to sections 495 (a) and (b) of the
Code.
(7) Assume the same facts as in paragraph (f)(5), except that P does
not specify that the stock be purchased from B, and F chooses to
purchase the stock from B. In the absence of an exemption, F has engaged
in a prohibited
[[Page 506]]
transaction described in 406(a) of ERISA because the decision to
purchase the stock from B is not a direct or necessary result of P's
exercise of control.
(8) Pursuant to the terms of the plan, plan fiduciary F designates
three reputable investment managers whom participants may appoint to
manage assets in their individual accounts. Participant P selects M, one
of the designated managers, to manage the assets in his account. M
prudently manages P's account for 6 months after which he incurs losses
in managing the account through his imprudence. M has engaged in a
breach of fiduciary duty because M's imprudent management of P's account
is not a direct or necessary result of P's exercise of control (the
choice of M as manager). F has no fiduciary liability for M's imprudence
because he has no affirmative duty to advise P (see paragraph (c)(4))
and because F is relieved of co-fiduciary liability by reason of section
404(c)(2) (see paragraph (d)(2)(iii)). F does have a duty to monitor M's
performance to determine the suitability of continuing M as an
investment manager, however, and M's imprudence would be a factor which
F must consider in periodically reevaluating its decision to designate
M.
(9) Participant P instructs plan fiduciary F to appoint G as his
investment manager pursuant to the terms of the plan which provide P
total discretion in choosing an investment manager. Through G's
imprudence, G incurs losses in managing P's account. G has engaged in a
breach of fiduciary duty because G's imprudent management of P's account
is not a direct or necessary result of P's exercise of control (the
choice of G as manager). Plan fiduciary F has no fiduciary liability for
G's imprudence because F has no obligation to advise P (see paragraph
(c)(4)) and because F is relieved of co-fiduciary liability for G's
actions by reason of section 404(c)(2) (see paragraph (d)(2)(iii)). In
addition, F also has no duty to determine the suitability of G as an
investment manager because the plan does not designate G as an
investment manager.
(10) Participant P directs a plan fiduciary, F, a bank, to invest
all of the assets in his individual account in a collective trust fund
managed by F that is designed to be invested solely in a diversified
portfolio of common stocks. Due to economic conditions, the value of the
common stocks in the bank collective trust fund declines while the value
of publicly-offered fixed income obligations remains relatively stable.
F is not liable for any losses incurred by P solely because his
individual account was not diversified to include fixed income
obligations. Such losses are the direct result of P's exercise of
control; moreover, under paragraph (c)(4) of this section F has no
obligation to advise P regarding his investment decisions.
(11) Assume the same facts as in paragraph (f)(10) except that F, in
managing the collective trust fund, invests the assets of the fund
solely in a few highly speculative stocks. F is liable for losses
resulting from its imprudent investment in the speculative stocks and
for its failure to diversify the assets of the account. This conduct
involves a separate breach of F's fiduciary duty that is not a direct or
necessary result of P's exercise of control (see paragraph (d)(2)(iii)).
(g) Effective date--(1) In general. Except as provided in paragraph
(g)(2), this section is effective with respect to transactions occurring
on or after the first day of the second plan year beginning on or after
October 13, 1992.
(2) This section is effective with respect to transactions occurring
under a plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
ratified before October 13, 1992 after the later of the date determined
under paragraph (g)(1) or the date on which the last collective
bargaining agreement terminates. For purposes of this paragraph (g)(2),
any extension or renegotiation of a collective bargaining agreement
which is ratified on or after October 13, 1992 is to be disregarded in
determining the date on which the agreement terminates.
(3) Transactions occurring before the date determined under
subparagraph (g)(1) or (2) of this section, as applicable, are governed
by section 404(c) of the Act without regard to the regulation.
[57 FR 46932, Oct. 13, 1992]
