Due Diligence: A Fiduciary’s First Line of Defense Forfeiture Accounts, Excessive Fee Questionnaires, and The Next Target Forfeiture Accounts Excessive Fee Questionnaires The Next Target Structure, Di...
The Ultimate Guide for Retirement Plan Fiduciaries
Sponsoring a retirement plan can be incredibly rewarding for you and your employees. It helps them feel appreciated, which in turn, offers the potential of boosting their quality of work and decreasing your turnover rates.
Unfortunately, though, litigation against fiduciaries is on the rise. When you sponsor a retirement plan, you are taking on a significant amount of responsibility that comes with increases you overall liability.
In this blog, we will discuss that responsibility and ways to defend yourself from legal or reputational consequences.
Due Diligence: A Fiduciary’s First Line of Defense
The way retirement plan regulations are set up is, quite frankly, flawed. In most industries, fiduciaries undergo rigorous training and education before being given their title, which leaves them with a legal and ethical responsibility to act in the best interest of another party. This training typically involves obtaining an advanced degree, licenses, certifications, or education that is continuous throughout their career.
In stark contrast, fiduciaries of retirement plans are often individuals who specialize in a completely unrelated field, lacking the expertise needed to properly act in the best interests of their plan participants, oversee investments, build retirement plans, and so on — all while finding themselves named fiduciaries and being held personally liable by three separate entities: the Department of Labor, IRS, and litigation firms.
So, how can a sponsor ensure compliance and protection when they are not experts in retirement plans? Hiring experts to handle the tasks you do not hold the experience to do well is not only a good first step- it is part of your fiduciary obligation. And your role does not stop there, after that you must conduct thorough and continuous due diligence [link to due diligence questionnaire] to ensure your hired partners are acting in the best interests of your plan participants.
Our retirement plan experts dive deeper into the subject of due diligence here!
Forfeiture Accounts, Excessive Fee Questionnaires, and The Next Target
While lawsuits still primarily address fiduciary responsibilities and fees, they are increasingly targeting forfeitures and the oversight of other fiduciaries. With your risk on the rise, you must take the necessary steps to ensure you are protected.
Forfeiture Accounts
One area where retirement plan sponsors have been targeted is forfeiture accounts, which contain the funds contributed by employees who leave before becoming fully vested. To protect yourself in this area, you must ensure three key things:
- You know what those funds can legally be used for. ERISA sets forth rules and regulations regarding these funds, and your plan must follow them to stay safe and compliant.
- You know what you have promised to use them for in your plan document. Regardless of what ERISA says is legally acceptable, you must go by your plan document.
- You have a thorough understanding and comprehensive documentation that you are, in fact, using them properly. Documentation is key to ensuring you are protected in case you need to defend yourself.
Excessive Fee Questionnaires
Insurance companies know that fiduciary responsibilities come with their own risk. To gauge the risk associated with your plan, many will administer excessive fee questionnaires to understand your processes and practices.
These questionnaires are becoming increasingly detailed, with some asking up to fifteen questions to ensure you are taking the necessary steps to avoid excessive fee lawsuits.
What If: You Don’t Understand Your Retirement Plan’s Fees?
The Next Target
There is really no crystal ball that can predict where the next trending target for retirement plan litigation will lie. Because of this, you must be thorough in your defense mechanisms.
While 5500 forms, administered and required by the U.S. Department of Labor, can help identify potential red flags, they are not always accurate. This is because different retirement plans will have different needs, making one plan’s red flag another’s requirement.
Ultimately, retirement plans that are successfully targeted have one thing in common: they lack process. If there is no reasons for your retirement plan decisions, your plan is vulnerable. The courts are not nearly as interested in where you end up as they are how you got there.
While the next wave of litigation is not easy to predict, those with the right documentation have a greater chance of finding their cases dismissed regardless of the target. The biggest defense does not lie in trying to predict the future of retirement plan lawsuits and litigation cases, it is being proactive and ensuring you are ahead of it rather than sitting back and waiting for a challenge.
The greatest advice for fiduciary defense is to make sure you have a process in place should the worst-case scenario occur.
Structure, Discipline, and Documentation: Build a Strong Plan Oversight Process
Cases where the retirement plan fiduciaries had the right playbook in hand allowed them to defend themselves when they were challenged. Courts have begun dismissing arguments about the outcome of a retirement plan in favor of the process behind the plan’s decision-making. Ultimately, your plan does not need the best options, because nobody can tell the future. What it needs is a reasonable process that proves you have acted in the best interests of your participants and their beneficiaries.
That is where structure, discipline, and documentation come in.
Structure
Your plan needs a roadmap that ensures everybody working with it understands how the plan is set up.
Without creating additional work or projects for you, at SWBC Retirement Plan Services, we work with our clients to ensure there is an advisory agreement, outlines for their investments, and that they have a clear understanding of how the plan is written and set up. Contact us today, so we can help you build a winning retirement plan!
You want to know that you are doing exactly what you have said you would do. Every meeting should end with next steps and action plans. There should be a strategy to keep your plan safe and compliant. Building a roadmap helps you ensure that a structure is in place to keep you accountable and on track.
Discipline
As a plan sponsor, you must ensure that your plan is maintaining active due diligence and proper management. There is a significant number of threats that could target your plan, which is why you and your other plan fiduciaries must remain disciplined, aware, and active in your management.
Documentation
Everything needs to be documented. In the eyes of the law, if you don’t document it, it never happened. Documentation will be your ultimate defender in the case of a challenge. It allows you to prove that you have completed your duties as a fiduciary to the best of your ability and keep track of your plan to catch any potential red flags you need to address.
SWBC Retirement Plan Services: Your Coach for a Winning Retirement Plan
It is crucial to have a specialist at your side with no vested interest in anything aside from helping you build a winning playbook for your plan participants and their beneficiaries. SWBC is a fully independent firm who takes conflicts of interest seriously and will only act in your best interests.
Sara Matlock
Sara Matlock is Senior Vice President of SWBC Retirement Plan Services and also serves as a voting member of SWBC’s Investment Committee. She has more than 27 years of experience in the financial services industry. Prior to joining SWBC, Sara was Vice President of Investor Relations for Jones Villalta Asset Management, where she provided retirement planning and investment management services to high-net-worth individuals, families, and companies. Before that, Sara spent eight years at National Financial Partners (NFP) as Vice President of Members’ Services, Marketing & Communications. She worked with firms specializing in high-net-worth clients, benefits, retirement planning, and investment management. Sara received her Bachelor of Arts in Economics, with a concentration in Engineering and Mathematics, from the University of Texas at Austin. She earned the designation Chartered Life Underwriter (CLU) from The American College and her Series 7 and 65 licenses.
Let Us Know What You Thought about this Post.
Put your Comment Below.