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If you participate in any way in the administration or oversight of the retirement plan your organization offers for your employees, you assume fiduciary responsibility. That opens a number of risks, including legal action and personal liability. When you work in the retirement plan business, you hear about companies facing lawsuits. These companies often mean well, but they still get into trouble with their retirement plans.
Fiduciary Responsibility and Legal Risks
The catalyst for action is often a disgruntled former employee going to an attorney. The attorney most often looks for easily identifiable issues such as mutual funds with higher-than-average expenses based on the holdings information that is publicly disclosed (IRS Form 5500). The attorney calculates what they view to be the excessive annual investment expenses and then multiplies that amount as much as by six years (statute of limitation under ERISA).
Even for small retirement plans, this number can quickly reach a level where the attorney determines that it is financially worthwhile to file for legal action. To further complicate the matter, under the rules for a class action suit in the 401(k) world, just one person satisfies the rules for a class action suit because the class is easy to define (all current and former employees).
Documentation and Neglect
In discovery, the attorney will search for signs of neglect (not replacing funds that are overpriced, underperforming, or have manager turnover) and lack of documentation (written recommendations from the advisor and/or committee minutes), to prove shortcomings in the basis for how decisions are made.
ERISA Standards
Fortunately, the standard of fiduciary law under ERISA isn’t that your recommendations be 100% correct. But rather that you follow prudent standards (structure, discipline, and documentation) to prove that you have a process in place.
Proactive Steps to Reduce Risk
In hindsight, it is always easy to see the weaknesses that have been highlighted in these retirement plan lawsuits. The target for legal action has traditionally been very large retirement plans, there is room for improvement in most company retirement plans regardless of their size.
If you are committed to the best interests of your employees and are at all concerned about how your advisor is managing your organization’s retirement plan, or you don’t have an advisor assisting you with your fiduciary duties, there are specific, proactive steps you can take to reduce your risk by conducting proper due diligence:
1. Solve for Documentation
Pick a random quarter from the past six years and locate or ask your advisor for documentation such as:
- Investment Policy Statement
- Investment Monitoring Reports
- Investment Change Notices
- Meeting Minutes
- Due diligence documentation for each of your vendors to prove ongoing due diligence
2. Solve for Excessive Fees
- Request a fee proposal for your recordkeeping and advisory services.
- Ask if the investment options in your plan have lower cost versions (share classes). If there are, why hasn’t action been taken?
- Ask the previous question at your committee meetings and document next steps should there be room for improvement. Perhaps more importantly, document that the question was asked and that everything was confirmed to be in good order.
- Ensure expenses for all vendors are thoroughly understood and, if deducted from your plan, equitably applied to plan participants.
3. Avoid Conflicts of Interest
- Make sure that your current fiduciary advisor does not solicit your employees for other services.
- Ensure that solutions offered to employees are fully understood, especially with respect to fees/compensation.
- Request confirmation from all vendors that no conflicts of interest exist.
Final Thoughts
Being a retirement plan sponsor comes with a great deal of responsibility. When you place many of the decisions and due diligence in the hands of your advisor, it’s important that you regularly evaluate them to ensure they are acting in the best interest of you and your plan participants.
Have you evaluated your retirement plan advisor lately? Download our Due Diligence Assessment to give you the tools you need to evaluate your advisor.
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