How 401(k) plan sponsors must fulfill their fiduciary duties to avoid liability

If your employees have a company retirement plan, then you have a fiduciary responsibility to them. The days of ignoring this responsibility are over. Some of the settlements linked to charges of negligence or mismanagement can be painful for businesses big and small.

In 2010, a California Fortune 500 engineering firm settled $18.5 million with two employees after a class action case claimed it was making an insufficient effort to reduce 401(k) account fees.

The Department of Labor (DOL) recovered more than $117,000 in unremitted employer contributions and associated lost opportunity costs for two Wisconsin employee benefit plans with 25 active participants. The owner had to pay nearly $23,000 of that court judgment.

“With the increased responsibilities facing 401(k) plan fiduciaries, it is crucial that a sound administrative process is in place,” says Phil Ruggeri, an investment executive at Cetera Investment Services, located at First State Bank

Smart Business spoke with Ruggeri, who used material from MarketingLibrary.Net Inc., about recent changes to the fiduciary responsibilities.

What are some key issues with 401(k) fiduciary responsibility?

Fiduciaries are issuing a detailed breakdown of account fees and expenses to plan participants because of new DOL regulations. In addition, plan sponsors must give out investment instructions that follow strict DOL guidelines.

Every employer-sponsored retirement plan must name a fiduciary, but function also determines fiduciaries. Although someone may not be named as a fiduciary, if he or she participates in the management or administration of the plan or hires a service provider, the DOL considers those fiduciary functions.

In addition, the plan sponsor should document all investment processes, so it has proof that the plan is operating according to stated procedure. You need to follow a written summary plan description and investment policy statement. The investment policy statement defines the plan’s investment program and establishes formal standards for monitoring, benchmarking and assessing performance results of various investment options over time. It’s critical to have input from your registered investment adviser with this.

How should plan sponsors educate their participants?

To keep your retirement plan from being undervalued and underutilized, your company needs to have an effective employee education program. Employees must understand the investment options the plan presents, as well as the fees and risk associated with each one. Don’t give it the short shrift for legal reasons alone. 

You should regularly call in an investment professional to help explain the choices and the potential role the plan plays in an employee’s overall retirement savings effort.

What else is necessary to comply with your fiduciary obligations?

Most administrators of workplace retirement plans — those with 100 or more plan participants — are required by the IRS to annually file a Form 5500. This disclosure is then made available to the DOL and the Pension Benefit Guaranty Corporation.

You should carefully oversee your plan providers, as you don’t want the wrong kinds of investments creeping into the plan. Watch for changes in how the plan provider is compensated, changes in the fees that affect plan participants and anything else that seems unusual.

This is just the beginning of fiduciary responsibility. With so much to watch over in the typical employer-sponsored retirement plan, you certainly can miss details, which may lead to big headaches for your business. 

Don’t open the door to liability. Do the right thing, the smart thing: Turn to an experienced, professional adviser who can help play a fiduciary role and ensure you adequately fulfill your obligations.

Phil Ruggeri is an investment executive at Cetera Investment Services, located at First State Bank. Reach him at (586) 445-4769 or [email protected].

Securities and insurance products are offered by licensed agents of Cetera Investment Services located at First State Bank. Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither Cetera Investment Services nor any of its representatives can provide legal or tax advice. Securities products are not a deposit, not FDIC insured, not insured by any federal government agency, not bank guaranteed and may lose value.

Insights Banking & Finance is brought to you by First State Bank

 

 

 

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