As a steward aka fiduciary of a 401(k) savings plan, your own balance is at risk. If there is a lawsuit brought by the IRS, DOL or a former employee and you lose, your 401(k) savings or your house can be liquidated to pay. If you are a business owner and chose the 401(k) savings plan design, you should be engaged in the savings design that lets you save up to $54,500. While the people that service your plan may work for “deep pocketed” firms, in all but a few instances you bear all the liability. What can you do to manage your 401(k) savings?
Procedural Prudence and 401(k) savings plans
Procedural prudence is the ability to demonstrate that duties and responsibilities were carried out. The laws governing fiduciary investing stress process and NOT outcomes. As markets are always uncertain, the law recognizes this and gives you a break. What is considered procedural prudence has a long list of best practices steps. One of the steps is having an investment policy statement. This is considered the business plan for the investments. How do you select and monitor your investments? Is it random or based on a documented process? Do you follow your process? If you find reasons to “not follow” your policy, do you document why? Do you amend your investment policy as the laws change?
This makes it critical that you have a documented process and paper trail to demonstrate the reasons behind any decisions made on the plan.
401k Savings Plan Safe Harbors
Safe Harbors are the procedures that have been defined by regulations that affect fiduciaries. Procedural prudence also applies to Safe Harbors. Safe Harbors Include:
- The Committee Directed Safe Harbor [ERISA §404(a) & §402(c)(3)]
- The Participant-Directed Safe Harbor [ERISA §404(c)(1)(b)]
- The Qualified Default Investment Alternative (QDIA) [PPA 2006 & ERISA §404(c) ]
- The Fiduciary Advisor Safe Harbor [PPA 2006]
I’ll touch on a couple of these here. The responsible plan fiduciary indicates on the 401(k) savings plans annual tax filing intent to or not to elect the participant-directed safe harbor. Fiduciary nerds call it 404(c). Many fiduciaries don’t understand what they are signing. Recently, a CFO told me that he apparently just continued to do what his predecessor did. He had no idea what it entailed. It requires an annual audit. Noted 401(k) Plan Expert Attorney, Fred Reish, has stated that few companies actually meet the test for 404(c) compliance.
Why use a broker when you could use an investment fiduciary advisor? Check out our fiduciary advisor tag for me on this safe harbor.
Fiduciary Liability Insurance vs. Fidelity Bond
While a Fidelity Bond is required for those who directly handle plan assets it does not cover other named fiduciaries responsible for investment and plan decisions. Fiduciary Liability Insurance is not required but is an option that you should consider. Do not assume that your Directors & Officers insurance automatically covers you for ERISA based plans such as a 401(k) savings plan.
Want the confidence of a 401(k) savings plan risk review?
Sound like a lot to juggle? Unsure if you are actually juggling? Contact us to learn about a plan risk review. The primary purpose of getting an independent, objective plan review is to:
- Evaluate how well your plan management process is adhering to regulations and best practices,
- Identify areas that could be improved upon, and
- Identify ways to correct any potential risks that may leave you open to unnecessary liability.
This report includes a baseline industry comparison, a detailed fiduciary and investment assessment of your plan, and suggested action steps.
(1) This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. The advisor is providing educational services only and is not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
(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.
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