How to ensure you’re meeting your fiduciary responsibility as a plan sponsor

Richard Applegate, CFP, AIFA, ChFC, CLU, President, First Commonwealth Financial Advisors

Today, it’s not enough to simply select a retirement plan to offer to your employees. The rules are changing for plan sponsors, even if you have been working with the same broker for decades.

Business owners must understand and defend their retirement plan decisions. As a plan sponsor, you are considered a fiduciary, held to the standards of an industry expert.

And the Department of Labor is enforcing the laws with increased civil and criminal penalties being assessed. In 2010 alone, the DOL collected more than $1 billion in fines, says Richard Applegate, president, First Commonwealth Financial Advisors.

“Plan sponsors are trying to do the best thing they can for their employees, but increasingly, they have to be able to defend their plan decisions,” says Applegate. “There has been a movement toward expecting plan sponsors to understand their fiduciary responsibility and to develop processes that can be defended.”

Smart Business spoke with Applegate about a business owner’s fiduciary responsibility as a plan sponsor and how to withstand an audit.

How has the fiduciary environment changed for business owners who offer retirement plans?

In years past, retirement plans were primarily seen as a product, offered along with a company’s other benefits, such as group health, group life and other coverages. That was the case until the enactment of the Employee Retirement Income Security Act of 1974, which oversees how retirement plans are managed. But in the decades since ERISA’s enactment, many companies continue to handle their retirement plans as products, not processes that support the plan’s operation with the best interests of plan participants in mind.

Under George W. Bush’s administration, Secretary of Labor Elaine Chao emphasized procedures and processes that underscored a plan sponsor’s responsibility as a fiduciary. The DOL published guidelines to help plan sponsors adhere to these expectations and offered numerous regional seminars as part of that educational effort. Now, regulations going into effect in April 2012 hold plan sponsors responsible for knowing how their plan’s service providers are contracted, what they charge for their services, what those specific services are and whether the provider is acting as a fiduciary.

The message is this: Be prepared to defend all of the decisions made concerning your retirement plan and to show that you have a defined process that can be measured and repeated.

What responsibilities do plan sponsors bear by offering a retirement plan to employees?

Business owners who offer retirement plans generally do so because they believe the benefit is valuable for their workers. They are giving employees an opportunity: the ability to accumulate retirement dollars through a company-sponsored investment account.

But what many company owners may not recognize is that, as a plan sponsor, there is a tremendous amount of fiduciary responsibility. As fiduciaries of the plan, they are held to an expert standard, at least in the eyes of the DOL. If they don’t have the skills to meet such stringent standards, plan sponsors should choose and retain outside experts who can help guide them through the decisions that must be made on a recurring basis. But the DOL says the plan sponsor must be able to support the choice they made for the expert based on their qualifications and experience.

They also must be able to explain why the plan they chose and its underlying investments are the best options for their employees. Ultimately, this focus on process and the requirement to make informed fiduciary decisions is designed to build more plan sponsor accountability into their retirement plan operation. And since the DOL has stepped up its auditing and will continue to do so, plan sponsors must take care to understand their role and take the job of a fiduciary seriously.

It’s critically important for business owners in 2012 and beyond to completely understand the expertise of the professionals they hire to service their plan and find out whether they are contracted to serve as co-fiduciaries. This will be required by law, effective April 1, 2012.

How can a business owner find qualified fiduciary professionals?

Review the credentials of financial professionals and look for designations such as Certified Financial Planner™, Accredited Investment Fiduciary Auditor and Registered Investment Adviser. Choose an experienced fiduciary analyst and ask for referrals. Obtain disclosures that explain in detail what the professionals’ services include. What are the expenses? This must be spelled out in black and white as part of the new regulations. These disclosures allow business owners to compare one plan with another and to fully understand what they are paying one plan service provider versus competitors. Also, these disclosures are intended to shed light on any hidden fees.

How does a business get started with assessing an existing retirement plan and mitigating risk of an audit by the Department of Labor or other regulatory agencies?

The reality is, many business owners do not realize that they are at risk for an audit because they assume the financial services professionals they have worked with for years are looking out for their best interests. And perhaps this is true.

But that assumption is not acceptable in an audit situation in which a process must be defined and defended. It’s a good idea to consult with an Accredited Investment Fiduciary Auditor (AIFA™), who can take stock of your current retirement plan and help to develop best practice standards for the plan’s fiduciary processes.

Richard Applegate is president of First Commonwealth Financial Advisers, a Registered Investment Adviser. Reach him at (412) 562-3232, (724) 933-4515, or [email protected]