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The Employee Retirement Income Security Act (ERISA) is a federal law intended to protect individuals enrolled in retirement and health plans by setting minimum standards that plans are required to follow. These standards are intended to ensure fairness and integrity within your plan. When these crucial standards are not being met, you, as a plan sponsor, could face some serious consequences.
Take the 2021 Supreme Court case of Hughes vs. Northwestern University, for instance. The case saw current and former plan participants in two of the university’s retirement plans claim that the academic institution was in breach of its fiduciary duties.
The National Law Review reports that the plaintiffs alleged that the plan sponsor violated their statutory duty of prudence by:
- Failing to monitor and control recordkeeping fees, resulting in unreasonably high costs to plan participants
- Offering mutual funds and annuities in the form of retail share classes that carried higher fees than those charged by otherwise identical share classes of the same investments
- Offering overly complex investment options that were likely to confuse investors
The Supreme Court unanimously ruled that the plaintiffs’ arguments were plausible and recommended the claim for further review. In their decision, the Court clarified the standards on which claims against ERISA fiduciaries are judged.
Hughes vs. Northwestern University was one of many cases alleging that defined contribution plan fiduciaries imprudently selected or failed to monitor plan investments with excessive fees that underperformed lower-priced investments.
To ensure your organization is compliant with ERISA, it’s critical to understand everyone’s role as it relates to fiduciary responsibility
Who assumes the role of a retirement plan sponsor?
If your company offers a 401(k) retirement plan to your employees as the sponsoring organization, it is a retirement plan sponsor.
As a retirement plan sponsor, the organization has a fiduciary duty to ensure the selected plan service providers, including investment advisors and plan recordkeepers, uphold ERISA’s standards of professional responsibility. It is also important to determine the fiduciary status of your retirement partners with extreme clarity.
According to the IRS, plan fiduciaries hold a position of trust regarding their plan’s participants and beneficiaries. A fiduciary is responsible for:
- Acting solely in the interest of the participants and their beneficiaries
- Operating with the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries
- Defraying reasonable expenses for the plan
- Carrying out duties with the care, skill, prudence, and diligence of a thorough and mindful individual
- Following the plan documents
- Diversifying plan investments
What If I Don’t Meet My Fiduciary Responsibilities?
Failure to satisfy your obligations could result in your organization facing legal liability or fines from the DOL or IRS. ERISA is a personal liability law meaning if you are a fiduciary, you are personally liable for the areas of the plan that you oversee. It’s imperative that plan sponsors adopt a process and implement standards to document that process to clearly demonstrate how they will satisfy their responsibilities.
How Can I Ensure I am Meeting My Fiduciary Responsibilities?
As a retirement plan sponsor, you have two options for meeting your fiduciary responsibilities:
Adopting and Implementing Carefully Designed Internal Controls
To ensure your responsibilities are being fulfilled properly, creating an internal control, such as a trust committee that includes the proper checks and balances to maintain your plan’s integrity can be critical. This internal committee should possess clear and thorough rules, procedures, duties, and documentation.
Mitigate Risk for Your Organization by Partnering with a Retirement Plan Specialist
Many businesses engage a retirement plan advisor with the understanding that doing so will help mitigate the risks associated with the selection and monitoring of their retirement plan investment option offerings.
An essential part of selecting a retirement plan advisor lies in the ability to determine if they will be assuming responsibility for performing functions. If so, that will deem them to be a fiduciary to your plan for the services they provide.
If, for example, you believe that your organization is receiving investment recommendations from your advisor, you should ensure that this understanding is made clear, in writing, between the parties. You should also make clear that you expect the advisor to accept all related responsibilities and liability for the performance of this key plan support function.
Does your existing retirement plan advisor accept fiduciary responsibility for your plan?
Leadership within your business should review their organization’s advisory agreements with a fine-tooth comb to determine whether their existing retirement advisor accepts liability, properly protects you as a plan sponsor, and/or limits your rights and recourse—or those of your employees and plan beneficiaries—under ERISA.
If you determine that your advisor is not acting as a fiduciary for your plan, you may need to question whether that advisor is serving your institution’s best interests.
Find Confidence in Your Compliance
As the retirement plan sponsor and fiduciary to your plan, you are required to adhere to the professional responsibilities set by ERISA, which provides crucial standards you must uphold. This professional responsibility can include preparing items such as an RFI for recordkeeping costs, confirming vendor fiduciary commitments, eliminating conflicts of interest, and a variety of other critical hazards.
ERISA states if you are unable to accomplish your fiduciary duties like selecting and monitoring your investments, you are required to hire someone who can. The best course of action is usually to hire help.
SWBC Retirement Plan Services can help organizations by serving as a fiduciary and advocate to evaluate the current state of their plan and provide specific advice to guide plan success. Contact us today, and a retirement plan expert will work to help you meet your plan’s needs.
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