You've finally incorporated a 401(k) plan into your business. Now, the individual investment choices are in the hands of your employees.
Your job as plan trustee is essentially over, right?
Not so, says Robert Arnoff, owner of Broadview Heights-based employee benefits firm Arnoff & Associates Inc. In reality, much of the burden for qualified benefit plans falls upon the trustees, often in ways many aren't even aware of.
"A lot of employers don't know about the inherent risks concerning qualified plans such as 401(k)s," Arnoff says.
One risk is a fiduciary breach, which occurs when a trustee of the qualified plan commits an action that is not in compliance with ERISA regulations. Trustees are typically either the business owner or a senior-level decision-maker within a company, and they can be noncompliant without knowing it.
There are many types of breaches. These can include situations in which a trustee is not working solely in the interest of plan participants. One example is if the trustee is friendly with a broker and limits the type of funds employees can put their 401(k) money into for self-interest reasons. Another situation may arise when a trustee pilfers funds from the plan. No matter the type of breach, each carries stiff penalties.
"The main repercussion of a fiduciary breach is that the trustees can potentially be responsible for paying a huge settlement," Arnoff says.
In accordance with section 409 of the ERISA law, a fiduciary who breaches any of his or her duties for overseeing a qualified plan must restore to the plan any losses that occur because of the breach.
So what can you do to keep fiduciary breaches from occurring? Beyond keeping your hands out of the till, Arnoff offers three suggestions.
Assess the plan
First, determine the total assets in your 401(k) plan. Once you have amassed more than $1 million, your exposure is greater. ERISA guidelines fall under something called the "prudent man principle," meaning trustees are held to standards based on what a prudent person would do.
"The prudent trustee should have a fiduciary audit done after a plan has reached $1 million is assets, at least every three to four years, and perhaps even more frequently based on the type of plan that is in place," says Arnoff.
Undergo a fiduciary audit
A fiduciary audit will determine not only how your plan stacks up but whether it's in compliance with federal law. It is also a risk reduction measure for the trustees.
Arnoff suggests a first audit three years after introducing a plan into your business. After an audit, it is wise to have any and all substantial changes reviewed by an ERISA attorney.
Define your risks
"Defining who is at risk from a fiduciary standpoint is an important consideration," Arnoff says. "The business owner may not have the ultimate exposure if he or she is not a trustee of the company's plan."
There are additional measurements of exposure that are spelled out in a fact-finding session during a fiduciary audit.
The bottom line, Arnoff says, is that unless you run the plan through careful inspection, you could be flirting with disaster. It's better to know today whether your 401(k) plan is in compliance than to find out in a few years when it could cost you thousands, if not hundreds of thousands of dollars in penalties.
How to reach: Arnoff and Associates Inc., (440) 717-1775
Dustin Klein (firstname.lastname@example.org) is editor of SBN Magazine.