Here’s something that might help you out. Pull out a copy of your most recent 5500 Form and look at item 8a. Is “2F” one of the codes listed next to 8a? If not, you may have a problem. If it is, you may also have a problem.

If 2F is listed, it means that your 401(k) plan intends to satisfy section 404(c) of ERISA. By signing the front of the 5500, someone at your company (possibly the chair of the plan committee) has declared under penalty of perjury that the plan intends to comply with 404(c).

There shouldn’t be any problem if:

  • the person knew what they were signing;
  • the plan intends to comply; and
  • a good faith effort has been made to satisfy the conditions for compliance.

On that last point, the Department of Labor (DOL) takes the position that, if characteristic code 2F is included on the 5500, the plan administrator (that is, the officers responsible for operating the plan—typically, the plan committee) must make a good faith effort to comply with the conditions.

On the other hand, if 2F is not on the 5500, in effect the fiduciaries have declared, under penalty of perjury, that the plan does not intend to comply. In most cases, that would be a serious mistake. That is because 404(c) is the provision of ERISA that protects fiduciaries from imprudent or inappropriate investment decisions made by participants. Otherwise, the fiduciaries could be liable if participants make bad investment decisions because, for example, some of the participants do not know how to invest properly.

Either way, make sure you know what you are signing. As a word of caution, it is a good idea to get legal advice about whether or not your plan intends to comply with 404(c) and, if so, how to go about bringing the plan into compliance.


Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: The Report to PLANSPONSOR