What Safe Harbors Are Available to Retirement Plan Sponsors?

Safe harbor provisions protect employers from liability. That’s one good reason to understand them.

Safe harbors are widely known as a statute under law providing protection for liable circumstances. There are multiple safe harbors regarding retirement plans that plan sponsors need to know.

Plan sponsors can offer safe harbor plan designs to satisfy annual nondiscrimination-testing required for 401(k) plans. Under these rules, employers may make a traditional match, a qualified non-elective contribution (QNEC), or a mix of the two, known as qualified automatic contribution arrangements (QACA). A more recent type of safe harbor, employers who offer QACAs must make certain matching and non-elective contributions to all participants and must offer 100% vesting after a two-year period.

For plan sponsors and fiduciaries, there are safe harbor provisions that shield employers from being penalized for investment mishaps occurred in retirement plans. These guidelines provide better protection for employers against any fiduciary liability, and include section 404(c) safe harbor provisions, qualified default investment alternatives (QDIAs), and mandatory cash-outs.

“Voluntary safe harbor procedures were created in the response to emerging compliance issues that were created due to gray areas under which plan sponsors have to operate,” says Nasrin Mazooji, vice president of Compliance and Regulatory Affairs at Ubiquity Retirement & Savings. “They address and provide further guidance on behalf of the government.”

Section 404(c)

Section 404(c) safe harbors were created to relieve plan sponsors and fiduciaries who offer retirement plans, including 401(k)s and 403(b)s, from liability related to investment menus, plan designs and participant disclosure, says Mazooji. It allows employers to shift responsibility of investment management to the employees.

“Participants were directing their investments into 401(k)s and losing money, so they could have theoretically gone back to these plan fiduciaries and place the blame on them,” she adds. “Section 404(c) relieves those plan sponsors and fiduciaries from that kind of liability.”

While the list to qualify for 404(c) compliance is intricate, general qualifications to meet are offering a broad range of investment options and easing the process of viewing and controlling investments for participants.


Second to this type of safe harbor is the QDIA; also related to retirement plan investments. A QDIA safe harbor protects employers from liability when participant assets are invested in a default fund, says Robin Solomon, partner at Ivins, Phillips & Barker.

“A QDIA safe harbor offers protection for fiduciaries with respect to the selection of a default investment in the plan,” she explains.

Similar to how Section 404(c) protects plan sponsors from investment losses in an employee’s account—given the participant elects their investments—QDIA’s delegate responsibility to employees as well. Even if a participant fails to make an election and is thus defaulted to an investment alternative, the employee is still accountable for their investment losses, says the Department of Labor (DOL).

QDIAs are typically invested based on a participant’s age or risk tolerance, and are typically balanced funds, target-date funds (TDFs) or lifecycle funds. According to Solomon, to qualify for compliance on QDIAs, plan sponsors cannot impose financial penalties or otherwise restrict participants’ ability to transfer money from a QDIA to another investment alternative.

Mandatory Cash-outs

Also known as involuntary distributions, mandatory cash-outs allow those plan sponsors with small account balances in their plans to make distributions or automatically rollover the money into an individual retirement account (IRA).

“Sponsors who have small account balances in their plans for terminated employees are paying ongoing administration fees and are the fiduciary for those accounts for employees who no longer exist in the plan,” Mazooji explains.

Employers looking to apply cash-outs will need to ensure certain requirements if they want to avoid liability, too. Plan sponsors must give written notice to terminated employees warning them of the distributions and allow time for these participants to rollover account balances themselves. Should a participant fail to take action, employers can apply mandatory cash-outs on balances less than $1,000, and automatic rollovers to amounts between $1,000 and $5,000, says Mazooji.

According to the IRS, if an account balance exceeds $5,000, plan administrators must obtain a participant’s consent before making a distribution. Consent of a participant’s spouse may also be required, dependent upon the type of distribution.

Timely Elective Deferrals

Another, lesser known safe harbor provision regards submitting elective deferrals in a well-timed matter. While plan sponsors must submit employee contributions every pay period immediately, the Department of Labor offers a seven-day safe harbor for depositing these contributions, however this is only limited to small plans with fewer than 100 participants, says Solomon.

Larger plans are allowed submit contributions within 15 business days, however it’s important to know that this is only a ruling, not a safe harbor, she adds. If a plan sponsor can deposit these contributions at any point before the 15 business days, it is required to do so.

“If the employer generally can segregate employee contributions within three days, the Labor Department will expect these employee contributions to be deposited within three days every payroll,” Solomon clarifies.

Following safe harbor rules protects employers from liability, adding a blanket of relief to those who may not always have clear understanding of fiduciary guidelines. If a plan sponsor has questions about its plan, or finds an error, it should seek consult with a third-party administrator or an attorney to ensure it is protected, says Mazooji. Taking action and meeting with a professional is a greater solution than risking litigation, anyway.