Rarely have I found a business owner that calls themselves an ERISA fiduciary. ERISA stands for Employee Retirement Income Security Act. ERISA’s fiduciary standard is one of the highest standards of care available under the law. 1 You might’ve just thought you were providing your employees a valued benefit. Moreover, that should they use it, might help them retire but so what is this ERISA fiduciary thing. While many people refer to all participant directed plans as 401(k) that is not the case. Let’s look at some “simpler” options.
SIMPLE plans and SEP plans
You may have started or inherited a retirement plan known as a SIMPLE plan. SIMPLE stands for (Savings Incentive Match Plan for Employees). In some ways it looks like a 401(k) plan where your employee gets a match from you the employer. The cap on a SIMPLE plan however is $12,500 (over 50 can add another $3000).
Another plan type is the SEP IRA. The SEP plan stands for Simplified Employee Pension Plan. You determine on an annual basis whether or not to make a contribution to your employee. All of these plans have the benefits of providing a tax-deductible contribution for you the employer. If you provide a SEP contributions can be as high as $53,000 but capped at 25% of wages. Unlike the SIMPLE IRA employees make no individual contributions.
The best part of these two plan types is that you are NOT considered an ERISA fiduciary. As these are IRA plans the money is immediately employees money (no vesting).
‘Uh oh here comes the fiduciary responsibility
If you offer a 401(k), profit sharing or cash balance plan you are an ERISA investment fiduciary. ERISA provides that a retirement plan fiduciary must act with prudence and undivided loyalty to the participants in that plan.1 making matters worse, there is personal and business liability the comes along with this fiduciary responsibility. If you’re a small business owner, the company and you are for all intents and purposes one and the same.
That means that your personal stockbroker that has been good to you throughout the years may not be the best choice for your employees. That could especially be true if they have no specific knowledge of ERISA. You are supposed to avoid any conflicts of interest that might harm your employees. If your trusted financial professional is a stockbroker (registered representative) versus being an investment advisor representative they are not considered to sharing your fiduciary liability. In fact your contract might actually say that same thing that you likely assumed was just the necessary paperwork. You can Google retirement plan fiduciary and Department of Labor to uncover a wealth of information on the heated debate over fiduciary status they waged in Washington.
The Department of Labor has a couple of publications to help educate you on what you should be doing to oversee your plan at all of its providers. If you have not done so I highly recommend downloading a copy of “Meeting Your Fiduciary Responsibilities at the Department of Labor Employee Benefits Security Administration. The short list includes a duty of loyalty to your employees and their beneficiaries and a duty to show a prudent process related to your oversight.
While you may see yourself as a simple business owner the law sees it totally differently. While you may be aware that the IRS is in involved in plan oversight because of its tax advantages you may not be aware that the true police for plans is the Department of Labor. If the Department of Labor sent you a letter regarding informing you that you would be investigated would you be able to show evidence that you have been running the plan for the sole benefit of your employees (participants). The interest of your participants only. That all of the elements of the plan have been done with them solely in mind?
What should you do?
Is there a strategic reason you have a 401(k) versus one of the other plan types such as a SIMPLE or SEP IRA? Have you calculated how much you need to save to live the retirement lifestyle you desire? For example, if you do not need to save more than the maximum of a SIMPLE plan $12,500 ($15,500 over 50) potentially that is the best plan for you to offer your employees. Further what are your employees saving today? It’s often surprising when you see some fortune 100 companies whose average deferral rate is less than the IRA maximum. If you switch plan types your out-of-pocket match and their deferral may go unchanged. If so, why are you taking on the fiduciary risk?
I strongly believe in finding a CERTIFIED FINANCIAL PLANNER™ professional to work with you to help you calculate how much you need to save. You may want to read our white paper Architect Businesswoman Plans for Retirement at our sister site Envision Wealth Planning to learn more about our comprehensive approach to helping business owners. If you find that you need to sponsor an ERISA plan then I think it’s imperative that you both learn more about your responsibilities and seek out providers and financial professionals that will take on fiduciary responsibility for their actions. It’s also good for them to have knowledge of ERISA’s standards for prudence that would be evidenced if they had a designation such as an Accredited Investment Fiduciary® from the Center for Fiduciary Studies. However while one may be an Accredited Investment Fiduciary® they may not be acting in a fiduciary capacity on your plan. To be sure that they are you should ask what type of fiduciary they will be on your plan. Some of these types include an ERISA 3(21) investment advisor, ERISA 3(38) investment manager, ERISA 3(16) plan administrator, discretionary trustee an independent named fiduciary ERISA 404(a)(5). Suffice it to say that when a fiduciary for the ultimate breach in duty they replace that person with an independent named fiduciary ERISA 404(a)(5).
You could decide to keep it simple and contact us to help guide you through the maze. And yes, we will sign a contract affirming that we are acting as a fiduciary.
1 Time to Update ERISA Fiduciary Rule – Op-ed by Phyllis C. Borzi, Pension & Investments, April 18, 2011 available on the DOL EBSA website
For Plan Sponsor Use Only – Not for Use with Participants or the General Public This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
