Fiduciary Duty Advice for 401(k) Plan Sponsors: The Small Things Matter

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

When 401(k) Plan Sponsors end up in trouble, it is often due to small things that were neglected or not given proper attention. Small mistakes can lead to big problems when it comes to the breaching of fiduciary duty. Below is a summary of mistakes made by Plan Sponsors that can lead to future problems and the breaching of fiduciary duty.

Mistake: Not Having Fiduciary Liability Insurance

  • Every plan subject to ERISA is required to have a fiduciary bond. A bond is used to protect plan assets from theft. However, it is often assumed that a bond will serve as overall liability insurance for the Fiduciary. This is not true.
  • Every plan sponsor should consider purchasing Fiduciary liability insurance. The cost to benefit ratio provided by liability insurance may be worth the investment.

Mistake: Not Hiring an Independent Financial Adviser

  • It may seem obvious, but when this is not done, there is a lot of risk on the table for the Plan Sponsor. Fiduciary duty requires the highest duty of care in equity and law. The lack of a financial adviser for a retirement plan may signal a lack of duty of care by the Plan Sponsor.

Mistake: Not Having an Investment Policy Statement

  • Just because your retirement plan has a financial adviser, doesn’t mean your retirement plan has a good investment policy statement.
  • One of the most important tasks of a financial adviser is to develop an investment policy statement that serves to protect plan sponsors from lawsuits regarding investment losses.
  • Any individual auditing the plan – from your 401(k) auditor to DOL to IRS auditor – will generally ask for the investment policy statement.

Mistake: Not Providing Investment Education to Plan Participants

  • The more education provided to Plan Participants, the less liability Plan Sponsors may be subjected to. Under section 404(c) of ERISA, Plan Sponsors may be granted relief for the losses incurred by plan participants if the plan has provided adequate education to those participants.

Mistake: Not Reviewing Plan Expenses

  • As a plan sponsor, you have a fiduciary duty to pay reasonable expenses, especially if your participants are responsible for supporting the bill. As the transparency of plan expenses has increased over the years, it has become more important for plan sponsors to review plan expenses and limit their liability.
  • Reviewing means benchmarking, not just reading the expenses to make sure they sound reasonable with what you were told the charge would be. Benchmarking involves comparing the services you receive with similar services offered by other retirement plan service providers and determining if the cost you pay is reasonable based on available alternatives. Make sure to document this review.

By Josh Mitchell, CPA