Full Version: May a 401(k) plan refuse paper investment directions?
An ERISA-governed 401(k) retirement plan provides participant-directed investment, and is meant to meet the conditions for ERISA 404(c) relief. The plan's sponsor and administrator would prefer to provide in the plan and its written investment-direction procedures (and describe in the summary plan description) that a participant, beneficiary, or alternate payee may give his or her investment direction only by computer or telephone, and not by paper. Allowed? Is a rule against paper consistent with the ERISA 404(c) condition that a participant must have an opportunity to give his or her investment instruction? Does anything else in ERISA make this no-paper rule impossible or impractical? (For clarity, the plan administrator understands that disclosures to a participant must allow a paper option, but is asking rather about whether plan procedures may restrict the form in which a participant renders his or her investment direction to the plan.)
Do you think the phrase "...(in writing or otherwise)..." in 2550.404c-1(b)(2)(i)(A) requires that a written option be available?
(I'm not advocating either way, just tossing it out.)
Sorry, I don't have the reg. preamble to see if that helps.
(I'm not advocating either way, just tossing it out.)
Sorry, I don't have the reg. preamble to see if that helps.
A 'no paper' rule is practical and in use in 401(k) plans. Some consider it prudent to exclude paper, for example, to avoid avoidable (excessive?) delays in getting the instructions executed.
But considering who posted this question, I have to wonder if there is more to it.
But considering who posted this question, I have to wonder if there is more to it.
Here is part of the preamble to the final 404(c) regs published 10/13/1992.
QUOTE
1. Opportunity to Exercise Control
Paragraph (b)(1) of the proposed regulation provided that, to be an ERISA section 404(c) plan, a plan must (among other things) provide an opportunity for a participant or beneficiary to exercise control over the assets in his individual account in the manner described at paragraph (b)(2). In turn, paragraph (b)(2) set forth the rules with respect to a participant's or beneficiary's opportunity to exercise control. First, the terms of the plan must provide that participants and beneficiaries have a reasonable opportunity to submit investment instructions to an identified plan fiduciary who is obligated to comply with such instructions. Second, a plan may impose reasonable restrictions on the frequency with which participants and beneficiaries may give investment instructions. Third, certain other reasonable limitations may be imposed on the participant's or beneficiary's ability to exercise control. As discussed below, the general rules of paragraph (b)(2) have been retained with some modification, including new disclosure provisions, in response to comments on the 1991 proposal.
A. The Identified Plan Fiduciary.
Paragraph (b)(2)(i) of the 1991 proposal provided that a plan affords a participant or beneficiary with an opportunity to exercise control over assets in his account if, under the terms of the plan, the participant or beneficiary has a reasonable opportunity to give written investment instructions, or oral instructions followed by a written confirmation, to an identified plan fiduciary who is obligated to comply with such instructions.
A number of commentators requested that the regulation be clarified so as not to preclude the use of electronic or telephonic communications of investment instructions. It was not the intention of the Department to preclude the use of such communications. Accordingly, paragraph (b)(2)(i)(A) of the final regulation requires only that the participant or beneficiary be afforded a reasonable opportunity to provide investment instructions (written or otherwise) and an opportunity to obtain a written confirmation of such instructions. The Department believes that the ability of a participant or beneficiary to obtain a written confirmation of his investment instructions is considerably more important than the means by which investment instruction is communicated. In this regard, the Department notes that, unlike the 1991 proposal, the final regulation requires that the opportunity to obtain written confirmation of investment instructions be extended to all participants and beneficiaries who give investment instructions. A commentator also requested that the Department clarify that the specific means by which investment instructions are communicated are not required to be described in the plan document. The Department does not believe that the specific means by which participants and beneficiaries are to communicate investment instructions necessarily has to be in the plan document as long as the plan has written procedures for such communications and information concerning those procedures is furnished to participants and beneficiaries (see 2550.404c-1(b)(2)).
Other commentators requested that the Department clarify that the plan fiduciary responsible for receiving and acting on investment instructions may be identified in the plan by position rather than name inasmuch as responsible individuals often change and frequent plan amendments would be required to reflect such changes. It is the view of the Department that the identification of a fiduciary by position or function (e.g., plan administrator, investment committee, etc.) would satisfy the requirements of the regulation for an identified plan fiduciary under paragraphs (b)(2)(i)(A) and (b)(2)(i)(B)( 1), and for a designated plan fiduciary for purposes of paragraph (d)(2)(ii)(E)( 4 )( viii). In this regard, the Department notes that the requirement for an identified plan fiduciary who is obligated to comply with participant and beneficiary instructions is applicable to all ERISA section 404(c) plans, including those which do not designate investment alternatives, i.e., those plans which permit investments in any asset which it is administratively feasible for the plan to hold and do not specifically describe any investment alternative.
In order to make clear that a fiduciary's obligation to follow investment instructions is not without limitation, the final regulation (paragraph (b)(2)(i)(A)) has been modified to recognize the exceptions to following investment direction described in paragraphs (b)(2)(ii)(B) and (d)(2)(ii).
Paragraph (b)(1) of the proposed regulation provided that, to be an ERISA section 404(c) plan, a plan must (among other things) provide an opportunity for a participant or beneficiary to exercise control over the assets in his individual account in the manner described at paragraph (b)(2). In turn, paragraph (b)(2) set forth the rules with respect to a participant's or beneficiary's opportunity to exercise control. First, the terms of the plan must provide that participants and beneficiaries have a reasonable opportunity to submit investment instructions to an identified plan fiduciary who is obligated to comply with such instructions. Second, a plan may impose reasonable restrictions on the frequency with which participants and beneficiaries may give investment instructions. Third, certain other reasonable limitations may be imposed on the participant's or beneficiary's ability to exercise control. As discussed below, the general rules of paragraph (b)(2) have been retained with some modification, including new disclosure provisions, in response to comments on the 1991 proposal.
A. The Identified Plan Fiduciary.
Paragraph (b)(2)(i) of the 1991 proposal provided that a plan affords a participant or beneficiary with an opportunity to exercise control over assets in his account if, under the terms of the plan, the participant or beneficiary has a reasonable opportunity to give written investment instructions, or oral instructions followed by a written confirmation, to an identified plan fiduciary who is obligated to comply with such instructions.
A number of commentators requested that the regulation be clarified so as not to preclude the use of electronic or telephonic communications of investment instructions. It was not the intention of the Department to preclude the use of such communications. Accordingly, paragraph (b)(2)(i)(A) of the final regulation requires only that the participant or beneficiary be afforded a reasonable opportunity to provide investment instructions (written or otherwise) and an opportunity to obtain a written confirmation of such instructions. The Department believes that the ability of a participant or beneficiary to obtain a written confirmation of his investment instructions is considerably more important than the means by which investment instruction is communicated. In this regard, the Department notes that, unlike the 1991 proposal, the final regulation requires that the opportunity to obtain written confirmation of investment instructions be extended to all participants and beneficiaries who give investment instructions. A commentator also requested that the Department clarify that the specific means by which investment instructions are communicated are not required to be described in the plan document. The Department does not believe that the specific means by which participants and beneficiaries are to communicate investment instructions necessarily has to be in the plan document as long as the plan has written procedures for such communications and information concerning those procedures is furnished to participants and beneficiaries (see 2550.404c-1(b)(2)).
Other commentators requested that the Department clarify that the plan fiduciary responsible for receiving and acting on investment instructions may be identified in the plan by position rather than name inasmuch as responsible individuals often change and frequent plan amendments would be required to reflect such changes. It is the view of the Department that the identification of a fiduciary by position or function (e.g., plan administrator, investment committee, etc.) would satisfy the requirements of the regulation for an identified plan fiduciary under paragraphs (b)(2)(i)(A) and (b)(2)(i)(B)( 1), and for a designated plan fiduciary for purposes of paragraph (d)(2)(ii)(E)( 4 )( viii). In this regard, the Department notes that the requirement for an identified plan fiduciary who is obligated to comply with participant and beneficiary instructions is applicable to all ERISA section 404(c) plans, including those which do not designate investment alternatives, i.e., those plans which permit investments in any asset which it is administratively feasible for the plan to hold and do not specifically describe any investment alternative.
In order to make clear that a fiduciary's obligation to follow investment instructions is not without limitation, the final regulation (paragraph (b)(2)(i)(A)) has been modified to recognize the exceptions to following investment direction described in paragraphs (b)(2)(ii)(B) and (d)(2)(ii).
David Rigby, GMK, and Kevin C, thanks for your good help.
For these and all BenefitsLink mavens, a related question:
If an applicant asked for an ERISA Advisory Opinion that a no-paper rule as described above doesn't cause the plan to fail to provide "a reasonable opportunity to give investment instructions", would EBSA give that opinion? Or would EBSA say that what is or isn't reasonable is "inherently factual" and decline to give any opinion?
For these and all BenefitsLink mavens, a related question:
If an applicant asked for an ERISA Advisory Opinion that a no-paper rule as described above doesn't cause the plan to fail to provide "a reasonable opportunity to give investment instructions", would EBSA give that opinion? Or would EBSA say that what is or isn't reasonable is "inherently factual" and decline to give any opinion?
QUOTE (Fiduciary Guidance Counsel @ May 14 2009, 05:08 AM) 
David Rigby, GMK, and Kevin C, thanks for your good help.
For these and all BenefitsLink mavens, a related question:
If an applicant asked for an ERISA Advisory Opinion that a no-paper rule as described above doesn't cause the plan to fail to provide "a reasonable opportunity to give investment instructions", would EBSA give that opinion? Or would EBSA say that what is or isn't reasonable is "inherently factual" and decline to give any opinion?
For these and all BenefitsLink mavens, a related question:
If an applicant asked for an ERISA Advisory Opinion that a no-paper rule as described above doesn't cause the plan to fail to provide "a reasonable opportunity to give investment instructions", would EBSA give that opinion? Or would EBSA say that what is or isn't reasonable is "inherently factual" and decline to give any opinion?
I think that EBSA would give the Advisory Opinion if the situation as described in the OP gives each EE the opportunity to make the paperless direction by phone as well as online. Hard to imagine in 2009 that an EE would not have reasonable access to a telephone as an alternative to paper.
QUOTE (J Simmons @ May 14 2009, 10:46 AM)
Hard to imagine in 2009 that an EE would not have reasonable access to a telephone as an alternative to paper.
Would the nature of the workforce be relevant to this question?
It is quite possible that the majority of employees do not have access to a telephone for the purpose of making personal telephone calls during working hours. Think service employees, factory workers, health care workers, school employees etc.
It's an interesting observation that many working people (including those GBurns describes, and many kinds more) might not be in a position to make a personal telephone call until a meal break or after hours. If one assumes that a plan's investment-direction procedure closes a day's investment directions at 4:00 p.m. New York time, a wait to make the telephone call often might mean one business day's lag in implementing an investment direction.
But perhaps a paper investment direction is similarly burdened. The worker must have time available to put it in the mail. And the mailing time might result in an implementation delay that's at least as long as what results from waiting to do an after-hours telephone call.
Further thoughts from the BenefitsLink team?
But perhaps a paper investment direction is similarly burdened. The worker must have time available to put it in the mail. And the mailing time might result in an implementation delay that's at least as long as what results from waiting to do an after-hours telephone call.
Further thoughts from the BenefitsLink team?
Mostly, just more to think about:
- Any concern that the plan (via either plan provsions or administrative procedures) should not inherently burden, or advantage, different participants merely because they have different access to submitting a change of investment election?
- That is, should the white collar EE in the home office get an ability to submit speedier elections than the blue collar worker who works in Division X in factory Z? (By way of example, assume they both heard the same radio announcement at lunch time that caused them to consider submitting a change election.)
- Any concern that the plan (via either plan provsions or administrative procedures) should not inherently burden, or advantage, different participants merely because they have different access to submitting a change of investment election?
- That is, should the white collar EE in the home office get an ability to submit speedier elections than the blue collar worker who works in Division X in factory Z? (By way of example, assume they both heard the same radio announcement at lunch time that caused them to consider submitting a change election.)
QUOTE (Fiduciary Guidance Counsel @ May 14 2009, 12:27 PM)
It's an interesting observation that many working people (including those GBurns describes, and many kinds more) might not be in a position to make a personal telephone call until a meal break or after hours. If one assumes that a plan's investment-direction procedure closes a day's investment directions at 4:00 p.m. New York time, a wait to make the telephone call often might mean one business day's lag in implementing an investment direction.
But perhaps a paper investment direction is similarly burdened. The worker must have time available to put it in the mail. And the mailing time might result in an implementation delay that's at least as long as what results from waiting to do an after-hours telephone call.
Further thoughts from the BenefitsLink team?
But perhaps a paper investment direction is similarly burdened. The worker must have time available to put it in the mail. And the mailing time might result in an implementation delay that's at least as long as what results from waiting to do an after-hours telephone call.
Further thoughts from the BenefitsLink team?
I agree with Peter. A paper investment direction is, if anything, more burdened by a time lag in getting the trade effected than a telephone call availability is.
Just because some might yet prefer paper, I do not think you have to accommodate that just because paper has a longer historical run than the telephone calls in making investment directives.
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