Section 404(c) of the Employee Retirement Income Security Act is section 404(c) of the Employee Retirement Income Security Act (ERISA) that protects the trustee from liability for investment losses arising from the choice of allocation in employee-focused pension plans ( for example, 401(k) plans) subject to certain requirements. These requirements include: (1) Plan participants must be able to allocate funds among at least three investment options with substantially different risk and return characteristics; (2) each major investment option should be sufficiently diversified; (3) plan members must be able to switch from or between investment options at least once every 3 months; (4) participants should be able to transfer between investment options at a frequency appropriate to the level of risk of each fund; and (5) participants must be provided with sufficient information to make informed decisions about the plan’s investment options. However, simply providing employees with options that meet the requirements of Section 404(c) does not protect the trustee from all lawsuits. Thus, fiduciaries can still be held liable for (1) unwise choice of funds, (2) failure to monitor funds for the ongoing appropriateness or reasonableness of fees, or (3) engaging in a prohibited transaction.
Insurance is a contractual relationship that arises when one party (the insurer), for a fee (premium), agrees to compensate the other party (the insured) for losses caused to a certain subject (risk) caused by certain unforeseen circumstances (hazards or dangers). The term ‘guarantee’, commonly used in England, is considered synonymous with ‘insurance’.
The 10/10 Rule is a matter of analyzing and demonstrating the transfer of risk as a precondition for the use of reinsurance accounting, which was codified in the early 1990s with the adoption of Financial Accounting Standard (FAS) 113 (and its statutory counterpart, SSAP 62). FAS 113 itself was a response to alleged abuses and set the standard for testing whether something should be called an insurance contract. FAS 113 required that the transfer of risk be demonstrated by comparing the present value of the cash flows associated with the contract and, in particular, by exceeding certain thresholds of “significance” of risk. The thresholds, often referred to as the 9a and 9b tests, are: 9a. The reinsurer assumes significant insurance risk under the reinsured parts of the underlying insurance contracts. 9b. It is possible that the reinsurer could suffer a significant loss from the transaction. While neither “significant” nor “reasonably possible” was defined in this context, standard rules of thumb quickly emerged in the implementation of FAS 113. The most commonly cited is the “10/10 Rule”. This rule states that a contract reaches a threshold if there is at least a 10 percent chance that it will suffer a loss of 10 percent or more in present value (expressed as a percentage of the contract premium ceded).