401(k)s & Fiduciaries: Harmony or Catastrophe?
Courtesy Strategic Financial Partners, Colorado Springs LIVING WELL Magazine
The world of qualified retirement plans has seen a tidal wave of interest from multiple sources over the past few years. 401(k) plans and 403(b) plans, in particular, have come under quite a bit of scrutiny by the regulators and legislators in Washington. Two new pieces of legislation, 408(b)(2) and 404(a)(5), that were enacted this summer, have brought retirement plan fees and investment costs under a microscope for both the organizations that sponsor these plans, as well as for their employees and plan participants.
While ultimately a good thing, these “fee disclosure” regulations have created some heartache and head scratches for company owners and HR departments across the country. Especially during times of market volatility and negative returns (have we seen any of that lately?), investors tend to pay much closer attention to the fees they pay within their company-sponsored retirement plan. The Department of Labor (DOL), over the past 18 months, has also been substantially increasing the number of agents tasked with enforcing the rules governing retirement plans––rules established by ERISA (the Employee Retirement Income Security Act) back in the 1970s, but evolving each and every year.
Becoming a “plan sponsor” and setting up a 401(k) or 403(b) plan for your organization is no longer about simply offering a retirement benefit for you and your employees. Creating and maintaining a plan brings along with it an ever-increasing amount of responsibility and exposure to liability. As the sponsor of a retirement plan with decision-making capacity, you are legally considered a “fiduciary” and, according to ERISA, are responsible for ensuring that the plan is operated solely in the best interest of the plan participants and their beneficiaries.
For plan fiduciaries, ERISA imposes what is known as the “duty of prudence,” which is often referred to as one of the highest duties known to law––and for good reason! Fiduciaries must act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims”…Whew! What’s more, failing to perform these fiduciary obligations could lead to severe consequences including plan disqualification, monetary fine, and even personal liability.
You may be thinking to yourself, “Yes, I sponsor a plan for my employees, and I have offered this as a benefit so they can meet their eventual retirement goals someday. But I’m not an expert in this area––especially not to the extent that ERISA might require me to be under the duty of prudence! Should I even bother anymore?”
Fear not, fellow plan sponsors! 401(k) and 403(b) plans can be constructed as effective, understandable, and tax-efficient tools that allow you and your employees the ability to create sustainable, long-lasting retirement income streams. With corporate pensions no longer available to the vast majority of Americans, and Social Security on unstable ground, these types of plans will be relied upon for the bulk of a retiree’s “paycheck.” Paying attention is now a must, but expertise is available. There are a number of logical steps that can be taken to mitigate your risk as a plan sponsor as much as possible, while continuing to offer a high quality and valued plan for your organization. And, if you find that you lack the skills, prudence, and diligence of an expert in these matters, the laws expect that you will reach out for help as needed in those particular areas.
Below, we have listed several fiduciary responsibilities and best practices that you may or may not already be utilizing within your organization.
- Establishment of a Retirement Plan Investment Committee – You don’t have to make decisions all alone. Creation of a committee to gain insight from multiple sources within your company on the retirement plan is considered a best practice.
- Holding regular Retirement Plan Investment Committee meetings – Once you have a committee, put it to work, and remember to keep minutes of all meetings!
- Creation of an Investment Policy Statement (IPS) – This is often one of the very first items that a DOL enforcement agent will ask for when they show up for a plan audit. It documents exactly how your plan screens and monitors the investment offerings within your plan––a roadmap for decision-making.
- Following ERISA rule 404(c) – If your plan has elected 404(c) status, which offers some levels of fiduciary protection against individual participant investment elections, make sure you are following the required rules. We find that very few plans actually qualify for this protection, even though they think they have do.
- Follow the rules in your Plan Document – Assuming that the way things have always been done in the past is okay is a recipe for disaster. Check back with your plan document to make sure you are following your plan’s particular provisions.
- ERISA Bonding – Make sure you have an ERISA bond in place for your retirement plan. This is a requirement by law! You may also want to look into fiduciary liability insurance protection to cover any pitfalls not insured by the ERISA bond.
- Plan Education for your Participants – While not specifically required by law, this is certainly a best practice, especially when trying to satisfy protection under 404(c).
- Depositing Contributions in a Timely Manner – This is a widely misunderstood rule, and one of the most common strikes in DOL audits. The law requires deposits to participant accounts “as soon as is administratively feasible.” Are you comfortable with your deposit process?
- Hiring Experts as Needed – Whether it be your third-party administrator (TPA), ERISA legal counsel, or plan advisor/consultant, seek help in areas where you require it. Mitigating fiduciary risk equals proper adherence to ERISA’s duty of prudence, and expert assistance is available.
Sponsoring a retirement plan can seem a burdensome task at times, and following the applicable rules poses significant challenges, especially in today’s litigious environment. However, these plans also hold the key for the vast majority of Americans in realizing their dream of a comfortable and sustainable retirement. The end result of an unmanaged and forgotten plan could be catastrophic for fiduciaries and their participants––but it doesn’t have to be. A harmony can exist between plans and their fiduciaries through the implementation of simple planning and sound processes, leading to positive outcomes for everyone involved.
Written by Tim Watson, AIF®, CFP®, executive vice president of Business Planning at Strategic Financial Partners (SFP). 1755 Telstar Dr. Suite 501, Colorado Springs, CO 80920
Investment advisory services offered through Securian Financial Services, Inc., Member FINRA/SIPC. A registered investment advisor. Strategic Financial Partners is independently owned and operated.
The Retirement Plans Team at SFP was created by Tim Watson, Bob Book, Jim Fredrick, and Joel Malick, with the express purpose of offering a higher level of understanding and advocacy for employers offering qualified retirement plans for their employees. The team can be reached at 719-388-0259, or via email at twatson@sfp.us.
Neither the retirement plan team nor SFP provide tax or legal services. This should not be considered tax or legal advice. You should consult your own tax or legal advisor regarding your own specific tax or legal situation.
515664 DOFU 06152012
