Sponsoring or Administering a Retirement Plan? You Are the Fiduciary, and with that Role Comes Great Responsibility

As a company owner or leader, CFO, or HR professional, managing a 401(k) plan comes with significant responsibilities, particularly as a fiduciary. Understanding and fulfilling these responsibilities is crucial to ensure compliance, safeguard employees’ retirement savings, and avoid potential legal and financial repercussions.  

The fact of the matter is that anyone who has decision-making authority in any aspect of the company’s retirement plan is personally liable, not just the company for which he or she works.  

While this realization may keep some up at night, there are some fairly straightforward actions that both the individual and the company can take (and document!) to avoid legal ramifications, unnecessary costs, and even a costly worst-case scenario that has, unfortunately, become an all-too-frequent reality in recent years.

What Is a Fiduciary?

Under the Employee Retirement Income Security Act (ERISA), a fiduciary is anyone who exercises discretionary authority or control over the management of a retirement plan or its assets. This includes making decisions about plan investments, selecting service providers, and overseeing the plan's operations. As a fiduciary, you are legally obligated to act in the best interests of the plan’s participants and beneficiaries.  

(Note: As we explore below, this doesn’t necessarily mean that the fiduciary is obligated to always offer the best-performing investments at the lowest available fee structures. More on that as we continue.)

Key Fiduciary Duties

While not an exhaustive list by any means, here are the broad strokes by which a fiduciary is measured. Should your company be subject to an audit by either the Department of Labor (DOL) or the IRS, these are the types of compliance obligations the auditors will be scrutinizing:

1. Duty of Care: This obligation requires a fiduciary to act prudently and with the same level of care that a “prudent” person would use in a similar situation. While this may sound subjective in nature, it’s really not: this includes regularly reviewing plan investments, monitoring fees, and ensuring that the plan’s operations comply with legal and regulatory standards.
   

2. Duty of Loyalty: A fiduciary must act solely in the interest of plan participants and beneficiaries, putting their needs above one’s own or the company’s interests. This includes avoiding conflicts of interest and disclosing any potential conflicts that may arise.
   

3. Duty to Follow Plan Documents: One must also ensure that the plan is administered according to the explicitly expressed plan documents. If a plan document specifies eligibility criteria, vesting schedules, or other provisions, it is essential to adhere to these rules to avoid violations and their attendant penalties.

Compliance and Oversight: Say What You’ll Do, and Do What You Say

It is worth noting what the worst-case scenario looks like. As we advise clients all the time, “All it takes is for one disgruntled employee to be up late watching TV and, seeing a commercial for an attorney who is chasing retirement plans rather than ambulances, hears just enough to plant the seed that ultimately leads to a class-action lawsuit against the company.”

Suffice to say, should the worst-case scenario come to pass — regardless of the ultimate outcome — the stress, costs, and resources it takes for a company to navigate such an ordeal should be avoided at all costs. Especially knowing how specific measures taken will help shield the company — even from smaller penalties — the old adage comes to mind: An ounce of prevention is worth a pound of cure.

In order to fulfill the fiduciary duties enumerated above, we are careful to work with plan sponsors to implement a clear and well-documented oversight process, to include the following:

1. Regular Reviews and Benchmarking: Regularly review and benchmark plan costs and investment performance. This includes assessing recordkeeping and advisory fees, and ensuring they are competitive and reasonable. ERISA requires that you document these reviews and decisions. As mentioned earlier, you aren’t necessarily obligated to choose the lowest-fee advisory services nor the best-performing investment class options — just that you are doing the work to consistently evaluate on a regular basis (every one to three years, for example) how the fees and performance compare to what’s available in the market and considered relatively standard.
   

2. Form a Retirement Plan Committee: We recommend that the organization form (and document the formation of) a Retirement Plan Committee. The individuals in this committee would be responsible outlining the plan’s specific criteria for selecting and monitoring investments, among other responsibilities.  
   

3. Committee Charter: Once the retirement plan committed has been formed, a committee charter should be developed. The charter is a document that outlines who the committee members are and what processes and procedures they will follow on a regular basis. As with most everything we recommend here and in working with our clients, the biggest failure is not having a regular ongoing monitoring process and failing to document committee deliberation and decisions made. The meeting minutes can be the most critical piece of work the committee does, as it documents committee discussions and provides proof that a prudent process was carried out.  
   

4. Investment Policy Statement (IPS): Develop and adhere to an IPS, which is a formal document that outlines the rules and guidelines for managing the company’s investment portfolio. This document, crafted via cooperation between the Retirement Plan Committee and the company’s advisor, is a strategic guide that helps financial advisors and portfolio managers launch and manage a client's investment program. The IPS should be reviewed at least annually.  
   

5. Plan Document Compliance: Pursuant to the previous point, ensure that your plan operates according to the provisions laid out in the plan document. This includes correct handling of employee contributions and other administrative tasks. Regularly verify that your practices align with these provisions to avoid violations — perhaps once every year or two.
   

6. Outsourcing Expertise: If your company lacks the internal expertise to manage these responsibilities, strongly consider outsourcing this to a qualified advisor. ERISA guidance recommends that fiduciaries seek expert advice if they are not equipped themselves to handle complex retirement plan duties. Many small and mid-sized businesses, for example, do not have in-house, full-time retirement planning specialists or departments, and it could be argued that such companies fall within this stated guidance. It is situations like this for which our team of experienced professionals are called upon to advise on fiduciary duties and oversee the fiduciary oversight process, a role that we relish as professionals with long track records in this capacity.

Risks and Penalties for Failure to Comply

Failing to meet fiduciary responsibilities can lead to significant risks and penalties, in addition to the worst-case scenario discussed earlier. Some of the outcomes that range from mild nuisance to major disruption to the company and its profitability include:

Audits and Investigations: Plans are subject to audits by the Department of Labor (DOL) and the IRS. Non-compliance can result in fines, penalties and associated legal costs. An inadequate fiduciary oversight process can exacerbate these issues.  

Legal Liabilities: Companies can face lawsuits from disgruntled employees or participants, as documented above. Examples of negative impacts that can result from DOL or IRS audits  include a plan (knowingly or unknowingly) charging excessive administrative fees or making improper investment selections, which could result in costly legal settlements or punitive legal damages.

Plan Disqualification: In severe cases, a retirement plan could be disqualified altogether, leading to the loss of favorable tax treatment and additional financial consequences for both the employer and the company’s plan participants — your employees and their families, in other words.

We Can’t Overstate the Importance of Independent Advice

It is crucial to work with independent fiduciary advisors. Ensure that any advice you receive is unbiased and free from conflicts of interest. Independent advisors can provide objective guidance and help manage the complex responsibilities associated with retirement plans in a way that some providers cannot. They may represent a specific investment company, serve as a recordkeeping provider, or sell additional proprietary products, all of which present potential conflicts of interest.

Being a fiduciary for a 401(k) plan involves a commitment to careful management and adherence to regulatory requirements. By implementing a structured oversight process, adhering to plan documents, and seeking expert advice and guidance, you can mitigate risks and ensure that you are acting in the best interests of your employees’ retirement savings.  

Remember, failing to uphold these duties can have serious legal and financial implications, so it’s essential to take these responsibilities seriously and act prudently. For further guidance on managing your fiduciary duties or to address specific concerns, consulting with experienced retirement plan advisors can be an invaluable step in ensuring compliance and safeguarding your employees’ financial futures.  

If you would like a quick and complimentary self-administered audit of your company’s plan and its fiduciary responsibilities, contact me and I will send you a checklist that will either reveal some fiduciary oversight omissions in your retirement plan design or execution…or help you feel more confident because you, as the fiduciary, are meeting your obligations.