With all the exuberance around technology stocks this past year, are investors and/or participants in company-sponsored retirement plans throwing caution to the wind?
Are you, the trustee of the retirement accounts, acting as a prudent fiduciary? What steps have you taken to minimize your liability in the investment process?
First, as defined in the Employee Retirement Income Security Act (ERISA), a person is a fiduciary of a plan to the extent that he or she:
1. Exercises any discretionary authority or discretionary control over management of the plan.
2. Exercises any authority or control over the management or disposition of the plan’s assets.
3. Renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the plan, or has any authority or responsibility to do so.
4. Has any discretionary authority or responsibility in the administration of the plan.
If you have a pension or profit-sharing plan, have you documented your Investment Policy Statement (IPS) for that plan addressing investment criteria and employees’ expectations? An investment policy establishes general investment guidelines and restrictions, allocations among asset classes — stocks, bonds, cash — and managers, benchmarks and performance objectives.
The investment policy is formally communicated through the investment policy statement. Keep in mind that ERISA does not explicitly require retirement plan sponsors to draft an IPS. However, one of the first documents that will be requested during an examination in any type of compliance audit conducted by the Department of Labor is the IPS.
Broadly speaking, an IPS addresses two major issues:
- Establishing criteria for each asset class and portfolio managers of the accounts; and
- Identifying performance goals for each portfolio.
What if you have a 401(k) as your company-sponsored plan? A 401(k) is a retirement account which the employee/participant has direct control over. Section 404(c) of ERISA took an important step toward providing participants with sufficient information about investment options. It limits employers’ and other plan fiduciaries’ responsibility for the investment decision for employees who have the opportunity to exercise control over the assets in their accounts, if the employee/participant has access to an adequate range of investment choices.
The employee must be provided specific information about investment choices, including a description of the investment alternative available under the plan and a general description of transaction fees and expenses.
How does a plan become a 404(c) plan? No notice is required to be filed with the IRS or Department of Labor concerning a plan’s intent to comply with section 404(c) regulations. The plan simply complies with regulation guidelines, including giving notice to plan participants that the retirement plan is designed to comply, and that plan fiduciaries may be relieved of liability for investment losses experienced by the employee/participant.
When the employee/participant is controlling the investment decision, the employee has responsibility to make investment and retirement-related decisions appropriate to his or her situation. Employees should consider their own individual investment policy statements to guide themselves as they allocate their accounts.
Employers should be sure they are acting responsibly with their employees’ retirement funds. When in doubt, check with your adviser about covering your assets. Ask your adviser if IPS+404(c) = CYA.
Robert A. Valente ([email protected])is president of RAV Financial Services Inc., an Independence-based financial services firm that works with small- and mid-sized business owners. He can be reached at (216) 447-3015.
