When a company sets up a 401(k) plan or pension plan for its employees, the focus is on the benefit it provides to employees, and executives are not always aware of the added personal liability that they are incurring.
The Employee Retirement Income Security Act of 1974 (ERISA) formalized and increased the potential personal liabilities of fiduciaries, says Charles Bernier, president of ECBM Insurance Brokers and Consultants, and anyone administering a plan can be at personal risk.
“According to a 2008 Supreme Court ruling, plan fiduciaries can be held personally liable for any losses if they breach their responsibilities,” Bernier says. “You may have placed your home at risk and not even known it.”
Smart Business spoke with Bernier about your fiduciary responsibilities and what you need to do to fulfill them.
What are the fiduciary responsibilities of administering a 401(k) plan?
If you are the fiduciary of your company plan, you have accepted personal liability. Those responsibilities include:
1. Acting solely in the interest of the plan participants and the beneficiaries and with the exclusive purpose of providing benefits to them
2. Carrying out your duties prudently
3. Following the plan documents (unless inconsistent with ERISA)
4. Diversifying plan investments
5. Paying only reasonable plan expenses
Who is exposed to personal liability?
Any employee who is a trustee of the plan is personally liable to the plan participants, along with the employer or owners of the firm. This is often an owner, a financial or human resources officer or director, but it doesn’t stop there. Fiduciaries include any individual who exercises discretionary control in managing plans or has authority or responsibility for administering plans.
Many people are in tune with some of the risks because they are aware of the fidelity requirements of ERISA. They must show evidence of crime coverage for their IRS filings their 5500 forms. ERISA includes a provision requiring uninsured plans to have an employee dishonesty policy of 10 percent of the plan assets. While important, the ‘ERISA bond’ does not provide all the protection that is needed.
Don’t most plan fiduciaries perform their responsibilities?
Yes, they make a good faith effort to fulfill their responsibilities. However, one of the most difficult responsibilities to comply with is ‘paying only reasonable plan expenses.’ The law requires that your 401(k) provider tell you what it is charging. However, it does not require the provider to tell you what it makes. But your fiduciary responsibility is to find out.
The first step is to research what specific questions to ask your provider. If you ask specifically, the provider is required to answer. This is very important on a number of levels, not the least of which is the personal liability that you have as the plan’s fiduciary.