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clearly prudent not to diversify. The loan entrusted 90 percent
of the plan's assets, over $2 million, on an unsecured basis to
one creditor that operated in a limited geographic area and in a
risky business. In our view, the trustee did not minimize the
risk of a large loss.
We do not agree with petitioner that diversification is not
relevant in the instant case. Whether plan assets are
sufficiently diversified as a result of an investment is one
factor in determining whether the prudent investor rule has been
satisfied. The exception for participant-directed investments
involves individual account plans, not defined benefit plans, as
is involved in the instant case. The participant-directed
exception, therefore, is not applicable here. See ERISA sec.
404(c).13 Following the loan, the plan's assets were not
diversified. The note was not secured. Consequently, when made,
the loan was a risky investment for the plan. On the basis of
13 ERISA sec. 404(c) provides as follows:
(c) In the case of a pension plan which provides for
individual accounts and permits a participant or beneficiary
to exercise control over assets in his account, if a
participant or beneficiary exercises control over the assets
in his account(as determined under regulations of the
Secretary)--
(1) such participant or beneficiary shall not be
deemed to be a fiduciary by reason of such exercise, and
(2) no person who is otherwise a fiduciary shall be
liable under this part for any loss, or by reason of any
breach, which results from such participant's or
beneficiary's exercise of control.
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