With the right steps, a business owner’s fiduciary duties should be nothing to panic about
Many business owners and retirement program managers are under-informed about the fiduciary responsibilities that go hand-in-hand with setting up an employer-sponsored 401(k) plan. And over the past decade, several high-profile 401(k) fee lawsuits and heightened attention from government regulators sometimes transform this employer confusion into significant worry about potential liabilities.
The concern is understandable: 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.
But here’s the thing: It’s true that not understanding or meeting your 401(k) fiduciary duties can open the door to steep fines, plan disqualification by the IRS, lawsuits from participants, and even personal liabilities. But meeting fiduciary responsibilities isn’t necessarily hard—employers simply need to get educated about what their duties are and how they can be easily achieved with professional support.
Who is a fiduciary for a 401(k) plan?
The IRS defines a fiduciary as someone “who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity.” The Employee Retirement Income Security Act (ERISA) defines several fiduciary roles for 401(k) plans. But essentially, if you exercise control or discretion over the plan, you’re considered a plan fiduciary. The simple act of hiring someone to perform fiduciary functions is in itself a fiduciary act.
An employer’s fiduciary responsibility basically boils down to monitoring your 401(k) provider’s performance and helping your employees achieve their desired retirement goals. The Department of Labor (DOL) sums up the basic responsibilities of a 401(k) plan fiduciary as follows:
- Acting solely in the interest of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents (unless they are inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable plan expenses
6 detailed responsibilities of a 401(k) fiduciary
But the DOL’s list often leaves employers scratching their heads about the specific actions they really need to take. Let’s examine six steps that can help employers meet their 401(k) plan fiduciary duties and limit potential liabilities:
- Make prudent investments. Employers generally find fiduciary responsibilities related to plan investments as the most alarming ones. Let’s dig into what that responsibility really entails. Fiduciaries are charged with choosing a fund lineup of “prudent” investments that enable plan participants to diversify their accounts through access to a broad range of financial markets. “Prudent” investments don’t need to generate off-the-chart results; it just means that the investment must meet its objective for a reasonable fee.Index funds, which track a market benchmark like the S&P 500 index, are a simple way of achieving this goal—and establishing a three-fund line-up that includes equity through stocks, fixed income through bonds, and capital preservation via a money market can easily meet diversification requirements. There’s no question that broad index funds are “prudent”—meeting the investment objective for market-correlated returns and low fees across the board. But even if you go in that direction, it’s wise to document your decision-making process for choosing plan funds to demonstrate a “prudent” process.Of course, an even simpler way for employers to limit their liability (and any potential headaches) is by outsourcing their investment-related 401(k) responsibilities to a skilled investment advisor who also documents the rationale and details. To that end …
- Carefully select and monitor service providers. Selecting skilled service providers with reasonable fees is arguably an employer’s most challenging fiduciary responsibility. Here’s why: not only are 401(k) plans complex, but comparing providers isn’t always apples to apples, with offerings varying dramatically from price to what’s included in their services.Once you determine the services your 401(k) plan needs, it’s a good idea to thoroughly vet and compare at least three providers before making your selection. Review each candidate’s experience, the qualifications of the professionals who will handle your accounts, and the assets under their control. Inquire how the firm will invest plan assets or handle participants’ investment directions. And, of course, study the proposed fee structure. Be sure to document your process so there is no question that it was done prudently.Since employers are also charged with making sure the provider completes their assigned responsibilities competently, in a timely manner, and for a reasonable fee, it’s preferable to narrow your search to providers with very transparent services.
- Complete all administrative duties. An employer’s administrative 401(k) duties are significant, although most of the tasks can be delegated to the plan provider you hire. But blindly trusting providers to dot every “I” and cross every “T” can land employers in fiduciary hot water. Since the employer is charged with monitoring the performance of any service providers they hire, implementing a checklist can help you ensure that all administrative duties are met. That includes:
- Operating the plan in accordance with its plan documents
- Ensuring the plan document complies with the law
- Meeting government reporting and participant disclosure requirements, including providing education and timely communication to participants about the plan
- Keeping plan records that meet ERISA’s document retention rules
- Completing annual testing required by ERISA to confirm that plans don’t discriminate in favor of high earners or exceed contribution limits, and correcting any failures in a timely manner
- Be attentive to plan costs. Unreasonable 401(k) fees have been the intense focus of regulatory attention and lawsuits; even seemingly small overcharges today can dramatically impact account balances in the future. Fiduciaries also must ensure that fees are appropriately allocated between the employer and the plan.But here’s where employers can run into trouble: ERISA doesn’t define “reasonable” and The Department of Labor only provides general guidance. Regularly benchmarking 401(k) fees against competing providers or industry averages can give employers an idea if what they’re paying from plan assets is “reasonable.”
- Make timely deposits. Employers have a fiduciary responsibility to deposit employee contributions in their retirement accounts as soon as they can be “reasonably” segregated from the general assets —but no later than the 15th business day of the following month. For plans with fewer than 100 participants, “timely” deposits are made within seven business days from the date the contribution was withheld.
- Protect employees with ERISA fidelity bond coverage. Due to your fiduciary authority to control the assets of the 401(k) plan, ERISA requires employers to be covered by an ERISA fidelity bond. These bonds act as insurance that protects the plan against losses caused by acts of fraud or dishonesty by the employer. Usually, coverage must equal the lesser of 10 percent of plan assets from the previous year or $500,000.
Fiduciary duties can’t be taken lightly, and employers can face serious consequences if they breach ERISA regulations. But when employers are properly educated, 401(k) fiduciary responsibilities should be nothing to fear. A qualified investment advisor can provide the support employers need to meet their fiduciary duties while helping employees achieve their financial goals.
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.