Who’s responsible for 401(k) plan monitoring?
401(k) plan monitoring is likely not your sole duty. Like many plan sponsors, you may feel, “Isn’t that what I pay my well-known brand name financial companies to do”. The laws that govern your 401(k) say that is your ultimate responsibility for 401(k) plan monitoring. After all, you are the one that chose your providers. It is not in their interest to be unbiased when comparing themselves to their competitors. 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?”
The industry often uses the term asset gatherer for advisors that adept at selling plans. Asset gatherer does not sound like someone that has your best interest or the best interest of your employees in mind. If your advisor is an asset gatherer (as opposed to an investment fiduciary) the need for 401(k) plan monitoring should be clear.
$35 million reasons to care about 401(k) plan monitoring
The largest 401(k) class action settlement I am aware of is $35 million. One can only guess what the defendant paid in legal fees. The 401(k) plan sponsor was not protected because they worked with the well-known financial services firm. Providers typically are only on the hook if they take on fiduciary responsibility in their contract. The Google search results typically read that the fiduciaries (defendants) failed in their 401(k) plan monitoring duties.
Small companies also are victims. If you surf the DOL Employee Benefit and Security Administration website, you will find lawsuits hitting smaller companies. One lawsuit required restoration of over $500,000 to a small graphics firm. The DOL cited the fiduciaries for lax 401(k) plan monitoring of a key provider.
It’s common not to monitor people you trust. Think Bernie Madoff. If you’re like most 401(k) plan sponsors you trust in the company you hired because of a relationship with your advisor and/or because of the aura of a well-known and respected brand name 401(k) provider. Being registered to sell investments does not mean you also have 401(k) plan knowledge. While well-known financial firms offer packaged 401(k) plans, it does not mean their offering is run to benefit your employees. That responsibility falls on you which requires 401(k) plan monitoring.
Six questions to test your 401(k) plan monitoring
- Have you had formal fiduciary training on your 401(k) responsibilities? The DOL wants to know.
- Have you independently benchmarked your plan’s fees and services after receiving your fee disclosure from your service providers?
- Do you independently monitor your investment menu or pass on that liability to an ERISA 3 (38) investment manager? Some 401(k) providers also include their own good or bad investments.
- If you use a qualified default investment alternative (QDIA), do you monitor it according to guidelines on the DOL’s website?
- Have you selected 404(c) protection, do you have an attorney annually audit your compliance? According to Fred Reish, a prominent ERISA attorney few companies actually qualify.
- If you have a fiduciary warranty from your provider and/or a fiduciary liability insurance policy, has your attorney review it? You don’t want to find yourself needing protection that is empty.
While this list is not exhaustive, it should go a long way and either justifying your confidence or shaking you to know you could easily become a victim. Please let us know if you went six for six on these questions or what questions gave you pause.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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