401(k) Trustees May be Held Liable for Failing to Educate Employees About Retirement Savings

A company’s responsibility doesn’t end when third-parties oversee its 401(k) plan

Offering employer-sponsored retirement plans to employees is a no-brainer for most businesses. But many business owners don’t realize that, by sponsoring a 401(k) plan, they take on a fiduciary duty to help employees achieve their desired retirement goals, including providing education and timely communication to participants about the plan.

Take this responsibility lightly and you can easily run afoul of the rules and regulations set forth under the Employee Retirement Income Security Act of 1974 (ERISA). That’s true even if plan sponsors entrust plan oversight to an experienced third-party administrator. In most cases, company owners also serve as the trustee for the retirement plan, and the trustee is ultimately responsible for monitoring the actions of other service providers.

An alarming number of Americans are not prepared to retire

Government agencies have sharpened their focus on employer-sponsored retirement plans in recent years. And while much of the attention has swirled around excessive plan fees, regulators are also publicly worrying that plan participants are not receiving proper guidance for making appropriate retirement planning and investment decisions.

Their fears are fueled by alarming statistics that reveal a potential crisis looming: many Americans approach retirement age without nearly enough savings to retire. A recent CNBC report showed that 1 out of 3 American workers has put away less than $5,000 for their golden years.

There’s a growing consensus that a major factor is that too many American workers are simply not informed enough to make sound retirement planning decisions. And that’s putting retirement plan sponsors in the hot seat, risking a serious breach of their fiduciary duties if they don’t take steps to ensure that all plan participants have adequate information. This includes the guidance, education and tools to make financial and investment decisions that deliver the best chance of successfully reaching their retirement goals.

Companies have paid almost $400 million to settle class action lawsuits brought by employees about 401(k) fees since 2006, with the most recent case settling in March for $55 million. Often inherent in those lawsuits are accusations that a company failed to properly disclose information that would help participants make informed choices about their retirement plans.

Courts are also beginning to hold companies responsible for inadequate education and communication that violate ERISA employee benefit plan rules. In September, the 2nd Circuit Court of Appeals held the trustees of a welfare fund liable for a summary plan description (SPD) of post-retirement medical benefits that it agreed was not clear or user-friendly. The court found that misstatements made by non-fiduciary plan representatives—coupled with the insufficient SPD—was enough to hold plan fiduciaries responsible for a breach.

In January, an Iowa circuit court ruled that an employer had to cover the full value of a life insurance benefit reportedly lost after it failed to distribute a copy of its group life insurance policy or SPD, which the court considered a fiduciary breach.

Although these decisions do not specifically involve retirement plans, they emphasize that failure to convey accurate and complete plan-related information to participants that’s required by ERISA exposes a plan’s fiduciaries to liability.

Ignorance isn’t an acceptable defense

401(k) plan sponsors are subject to various government reporting and participant disclosure requirements that are numerous and complex, and it’s easy to simply trust that your plan provider is offering adequate information to meet the requirements of the law.  Human Resources departments are overwhelmed by the number of new state and federal regulations being imposed on employee benefit programs. But too often, the provider isn’t handling disclosures and ignorance isn’t an acceptable defense for a plan sponsor/trustee accused of mishandling their fiduciary duties.

If you get sued, the ability to show “evidence of comprehension” can help you win your case—meaning that you must prove that plan participants not only received adequate information, but understood it. To avoid unnecessary risk, it’s wise for plan sponsors to work closely with their plan provider to build a comprehensive education program into the plan’s communication strategy. That should include clear, easy-to-digest information about the types of funds and risk associated with each, costs to the participant vs. cost to the employer/trustee, liquidity, reasonably expected returns, and more.

Here are three tips for educating plan participants about their retirement plans:

  1. Keep it simple. The most important part of employee education is keeping everything as easy-to-understand as possible (remember the 2nd Circuit Court decision?). Provide too much information to digest or make it confusing and some employees will simply give up.

Think about your audience and provide information in a way they’ll find appealing, such as webinars and videos for tech-savvy employees and one-on-one appointments for those who prefer a more hands-on approach. Make sure you cover what they get if they sign up (read: employer match, tax benefits, and compounding interest) and how to start contributing. Be sure to also emphasize the value of time in saving for retirement, and provide regular tracking and reporting of participants’ progress so they can see if they’re on track.

  1. Make investing painless. Key to achieving retirement savings goals is making the right choices about how to invest hard-earned dollars—and knowing when it’s time to change the strategy. But many employees aren’t investment-savvy and have no idea how to determine which funds are the best fit.

Managed models or Target Date funds that simplify investment options within default age groups can be an easy solution, putting young employees into a more aggressive model, for instance, and making it more conservative as they age. Automatic enrollment and automatic escalation features until a predetermined cap can also simplify investing for busy employees while ensuring that they are taking the right steps to secure their financial future.

  1. Don’t let them “set it and forget it.” Be proactive about keeping retirement savings at the forefront of employees’ minds. For instance, make sure an employee who just got a raise is notified that 401(k) deferred contributions can be adjusted to reflect the salary increase. But keep this in mind: there’s a fine line between helpful and annoying, so don’t overdo the reminders.

Business owners who sponsor 401(k) plans can open themselves up to fiduciary liabilities if they fail to improve their employees’ retirement planning literacy, especially as government leaders attempt to crack down on the nation’s lack of preparedness for retirement. But many companies lack the time or expertise to properly monitor and manage a 401(k) plan, or the knowledge to educate program participants about their options. A competent investment advisor will help trustees understand the crucial details of a retirement program, giving them the tools to show that they met their responsibility to communicate with investors.

Lindberg & Ripple is an independent investment and insurance advisory firm providing sophisticated Wealth Management, experienced Investment Consulting, and innovative Insurance Solutions for wealthy families, successful executives and business executives. Contact us to learn how we can help your family or business achieve your financial objectives, while minimizing hassle, expense, and taxes.

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