If you are like most executives that oversee their company 401(k), you have never received formal education on the 401(k) fiduciary responsibilities and personal liabilities. When the Department of Labor (DOL) wins a lawsuit for breaching a responsibility, they remove the fiduciary and replace them with an independent fiduciary. Apparently, the DOL knows that there are providers in the world who know the laws well enough to take on this liability.
“Employers that sponsor retirement plans have a fiduciary duty to monitor plan assets and ensure they are handled appropriately and protected,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “Contracting with an outside firm to manage those assets does not absolve them of their legal responsibilities. 1
Many fiduciaries suffer from the peril Nobel Laureate Daniel Kahneman calls “herding”. In this case, they rely too much on the well-known brand that everyone is picking. This is most often at the expense of having familiarized themselves with ERISA.
SPONSOR: I picked a good provider (typically a brand name) who runs the retirement plan.
ENVISION: Do they have a specialty in 401(k) plans?
SPONSOR: They work for household brand name financial firm and they handle my personal money.
ENVISION: Do they share or take on any of your 401(k) fiduciary responsibility to your employees?
Do they take on any of your 401(k) fiduciary responsibility?
In many things in our lives we look for expert advice where the caregiver or provider must put out interest ahead of theirs aka fiduciary. The Employee Retirement Income Security Act (ERISA) allows for and recommends plan fiduciaries seek out “ERISA experts” to help them carry out their duties. The problem is that those that one might assume are experts aren’t- at least to the extent that their advice might not be conflict free. The DOL developed the fee disclosure legislation because many in the know were hiding and charging fees that weren’t helping employees retire. In fact, Government Accountability Office estimated that a one-percentage point difference in fees could reduce a worker’s retirement savings by 28 percent at the end of his or her career. 1
Before moving forward I recommend asking your providers-
- Are you willing to be a 401(k) fiduciary on our plan?
- What kind will you be?
- Can I see the contract?
- What insurance do you have to back your claim?
What providers share in your personal 401(k) fiduciary risk today?
ERISA mandates a Duty of Loyalty to your employees. If you offer them a plan that is supposed to help them, why not get them the help they need? Moreover, why take on risk for non-core business functions where the risk/reward is completely out of whack (Google 401k lawsuits)?
Ask your current providers if they are acting in your best interest (fiduciary) and have them show you the contract. If you are unsure of the contract language, have an attorney that specializes in ERISA read the contract. Please let us know what you find out. Need help? Email me at firstname.lastname@example.org.
1 EBSA News Release: [07/18/2012], Release Number: 12-1122-CHI
2 401(K) Plans Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees
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