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Participant-directed Investment Accounts

This feature is typical in Profit Sharing Plans with a 401(k) feature.  However, the employer/plan sponsor has the option to include this feature, it is not required by law.  It is also permitted for any account balance defined contribution plan (Money Purchase Pension, Profit Sharing or Profit Sharing with a 401(k) feature). 


The employer/plan sponsor also has the option to differentiate the responsibility between the direction of the investment of each respective account within the plan.  This permits the employer /plan sponsor to allow the investments to be directed as follows:

  • All plan accounts are trustee-directed

  • All plan accounts are participant-directed

  • Certain accounts are trustee-directed (e.g., employer profit sharing and match accounts), others are participant-directed (e.g., employee 401(k) and rollover accounts)

The employer/plan sponsor also has the option to establish a private brokerage account (PBA) for each plan participant (see discussion below).  As with the typical participant-directed account discussed above, the PBA feature can be limited to particular accounts (e.g., employee 401(k) and rollover).


All eligible plan participants must receive the same benefits, rights and features with regard to the direction of investments.  This means that the option to direct investments in a PBA cannot be limited to selected individuals.  However, while the law requires this option to be uniformly available, it does not require that all plan participants elect to use the option.


The option with regard to the direction the investments of participant accounts must be stated in writing within the plan documents or  separately in written procedures.


ERISA Section 404(c) provides Fiduciary Relief    Plan fiduciaries are relieved of liability for investment losses resulting from participant investment decisions if the plan offers a “broad range” of investment options and the plan gives the participants the ability to “exercise control” over the assets in their accounts.


Broad Range Requirement   The “broad range” requirement is satisfied by providing “core investments” consisting of a minimum of three (3) diversified investment options.  These options must allow participants to materially affect their potential investment return and degree of risk while minimizing potential losses through diversification. 

Exercise Control Requirement   The “exercise control” requirement is satisfied if the plan permits the participants to change their investment selections as frequently as is appropriate based on asset volatility, and by providing prescribed information

Prescribed Information   This prescribed information requirement falls into two broad categories.  One is information with respect to the plan’s “designated alternatives”.  The other is information with respect to all types of investments, both designated and “administratively feasible” investments (“nondesignated” investments).

General information must be provided for the plan’s designated alternatives.  This includes a description of these investment options and, if applicable, a general description of the participant’s ability to invest in securities by other means (e.g., private brokerage account).  In addition, specific information must be provided regarding the designated alternative’s investment objectives and risk/return characteristics.  The specific information requirement does not apply to nondesignated alternatives.

Lastly, with regard to the information requirement, expenses that are chargeable to participant accounts, prospectuses, listings of an investment option’s underlying assets, etc. must be available upon request of the participant. 

Notification in Writing   In addition to the above requirements, the plan participants must be notified in writing of the employer/plan sponsor’s intention to qualify for the fiduciary relief afforded through compliance with ERISA Section 404(c).

Selecting and Monitoring   After all of the above requirements are satisfied, the fiduciaries still have the responsibility for selecting and monitoring the investment alternatives that are made available to the plan participants.  The monitoring process should be facilitated by information provided through the plan’s investment vendor.  This information should include fund peer group and indices performance.


Private Brokerage Accounts (PBA)    A private brokerage account permits the plan participant to invest a much broader range investments as compared to the menu of pre-selected investment options typically available with a participant-directed account.  This optional feature can provide plan fiduciaries with relief from any liability arising from investment losses resulting from the participant-directed investment decisions only if the plan otherwise meets the previously described 404(c) requirements. 

 © 2003 Milberg Consulting LLC  All Rights Reserved

We intend the information in this publication as a general resource, not as legal or plan compliance advice or counsel. If you consider any actions discussed herein, we suggest that you consult a tax or ERISA professional. Milberg Consulting LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this information.