If you are like most executives, neither you nor your manager’s sole duty is the retirement plan. You often gather enough facts to allow you to feel confident in your decision based upon its relative value to you and the company. Unfortunately, this often leads to the oversimplifying the decision-making process. Often the decision is based on what’s good for the business and not the fiduciary standard of the best interest of the employees. The Department of Labor (D0L) regularly posts press releases of the thousands to millions they have recovered from plan sponsors. Noted ERISA Attorney, Jeff Mamorsky points out that “The fiduciaries found liable for not only the employer plan sponsor but also members of the plan investment and benefits committees, the vice president of human resources, and the manager of the sponsor’s Human Resource Service Center.”1
Business decisions versus 401(k) plan sponsor decisions
The decision to have a 401(k) is a business decision. You may have done so to reduce your taxes, save for your own retirement or to attract key talent. However, as soon as you begin the selection process of who’s going to manage the functions of your plan you have now become a fiduciary plan sponsor. I have yet to meet a plan sponsor that has had formal fiduciary training or read the DOL’s “Understanding Your Fiduciary Responsibilities”.
I wouldn’t blame you if you have not. It just doesn’t seem like one would need to do that. You pick a provider just like any other vendor. You may rely on a current relationship with a financial provider. You may choose to do an RFP. Unfortunately there is a whole body of law that governs the 401(k) which these traditional selections methods don’t address.
Plan sponsor overconfidence and oversimplifying your 401(k) plan
Many sponsors say, “I know what I’m doing. You simply call a well-known brand name financial company and tell them you want a 401(k).” Recently I met with a firm that was comfortable only in answering what they knew. When I asked questions outside of their comfort zone, they became defensive. Apparently it is uncomfortable when your confidence is shaken by someone with a new body of knowledge.
I asked one 401(k) plan sponsor if their plan was handled by a 401(k) advisor or if they were dealing direct with the well-known company that administered their plan? They asked me “what’s the difference?” Prior to this meeting the Human Resources Vice President continued to feel that the CFO knew all things regarding their retirement plan.
The cost of plan sponsor overconfidence
The largest 401(k) settlement I am aware of is $35 million. Legal fees are running north of $10 million as the case continues on appeal. The plan sponsor was not protected because they worked with the well-known financial services firm. You the plan sponsor is the one liable for complying with the law. Providers typically are only on the hook if they take on fiduciary responsibility in their contract.
Plan sponsors of smaller companies are not immune. If you surf the Department of Labor (DOL) website, you will find several actions and lawsuits brought by the DOL. One lawsuit that required restoration of benefits of over half $1 million cited the fiduciaries for not monitoring their providers. It’s common not monitor people you trust. Think Bernie Madoff. If you’re like most plan sponsors you trust in the company you hired because of a relationship with your broker or because of the aura of the well-known and deep pocketed brand name provider.
You may also figure that the retirement plan is a take it or leave it employee benefit that should be provided with as little cost and time spent by the company’s executives and managers.
Six questions to see if your confidence as a plan sponsor is justified?
- When was the last time you had formal fiduciary training on your 401(k) responsibilities? The Department of Labor is asking that questions when performing plan auditing.
- Have you independently benchmarked your plan’s fees against like plans after receiving you received your 408(b) (2) fee disclosure?
- Do you independently monitor your investment menu or use your provider’s reports? If your provider also provides investments, it is not in their interest to show you any monitoring reports that do not shed the best light on their investments. How do you vet the conflict of interest?
- If you seek the protection from your employees’ investment decisions through a qualified default investment alternative (QDIA), do you monitor it according to the guidelines published by the Department of Labor?
- Have you selected and do you qualify for the protection of 404(c) which protects you from your employees’ bad choices of investments? I have found several companies that were unaware that they selected that protection on their tax filing. Fred Reish a prominent ERISA attorney states few companies actually perform the required actions.
- If you have a fiduciary warranty or a fiduciary liability insurance policy, have you had an ERISA attorney review it? Some warranties actually exclude the very protection you seek.
While this list is not exhaustive, it should go a long way in either bolstering your confidence or leave you wondering? Please contact us if you would like to pursue a more formal assessment using FI360’s Self-Assessment of Fiduciary Excellence or the Pension Resource Institute’s Resource Optimizer.
(1) CFO Magazine, June 20, 2011, Nowhere to Hide On Hidden 401(K) Fees
(2) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(3) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
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