Liability Protection for Plan Sponsors

There are a number of steps advisers should take to ensure that their plan sponsors are protected from substantial personal liability.

Personal liability protection is a critical component of running a retirement plan that advisers need to ensure their plan sponsor clients are aware of, experts say.

It starts with identifying plan fiduciaries, formally defining their roles in writing, and training them to properly perform their functions, says Barb Van Zomeren, vice president of ERISA and compliance at Ascensus in Brainerd, Minnesota. The sponsor should also establish a formal retirement committee to manage the plan and the investments—ensuring the committee meets regularly, documents discussions and records the rationale for why specific decisions were made, she says.

Bill Peartree, director of retirement services at Barney & Barney Insurance Services in San Diego, says prudence must be at the forefront of how a sponsor handles their retirement plan. The Employee Retirement Income Security Act (ERISA) “requires that a fiduciary discharge its duties ‘with care, prudence and diligence,’” Peartree says. This means it is incumbent on fiduciaries to investigate facts, ask questions, consult experts and consider alternatives, he says.

Most plan sponsors today work with third-party administrators (TPAs) who can help reduce the plan’s administrative fiduciary liability, says Chad Parks, CEO and founder of Ubiquity Retirement + Savings in San Francisco.

The TPA handles a whole host of functions, including preparing the plan documents and keeping them up to date with Internal Revenue Service amendments; compliance testing, which includes nondiscrimination and top-heavy rules; gathering all of the information for the Form 5500; and ensuring that all the necessary disclosures are prepared and disseminated, such as notices on fees, summary annual reports and safe harbor notices, Parks says. But just because the TPA performs these functions does not mean the sponsor has fully offloaded the related liability. Supporting contractual language is absolutely critical, and when problems arise plan sponsors often find they have offloaded far less fiduciary responsibility than they thought.

NEXT: Some fiduciary best practices

As far as fiduciary liability concerning investments, automatically enrolling participants into a qualified default investment alternative (QDIA) that is protected by the fiduciary safe harbor rule is a step sponsors and their advisers should seriously consider, says Fred Reish, chair of the Financial Services ERISA practice at Drinker, Biddle & Reath in Los Angeles. “One of the biggest steps that a plan sponsor can take to insulate the company and its officers from fiduciary liability is to automatically enroll their 401(k) plan,” Reish says. When a plan is automatically enrolled, it is common for 90% or more of the employees to remain invested in the default, he says.

If the plan automatically enrolls (or re-enrolls) a participant into one of the three QDIAs that the Department of Labor (DOL) allows—managed accounts, balanced funds or target-date funds—“most of the participants will be invested in professionally designed portfolios that are based on modern portfolio theory and other generally accepted investment theories,” Reish says.

If certain sponsors don’t want to automatically enroll participants into a QDIA, they should hire an adviser or other independent investment consultant “to advise the plan fiduciaries as to what funds are appropriate to offer in the 401(k) plan and when it is appropriate to make changes,” adds Robert Lowe, a partner with Mitchell Silberberg & Knupp LLP in Los Angeles.

Whether the investments are a QDIA or from an investment menu, with the help of their adviser, the sponsor should review the investments on a periodic basis, examining performance and investment fees, Lowe says. “A quarterly review is the standard practice these days,” he says.

“Most ERISA litigation is about investment expenses,” Reish notes. “As a result, it is critically important for plan sponsors to benchmark the expense ratios of their investments, comparing the expense ratios to the types of share classes that are available to a plan of a similar size.”

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Sponsors also need to inquire about any revenue-sharing payments their participants may be paying to the recordkeeper and/or the adviser, Reish says. “When plan fiduciaries do that analysis, they may find that some of their participants are paying substantially all of the cost of their plan, while others are not,” Reish says. “This is an emerging issue.”

As well, the sponsor should permit participants to change their investments at least quarterly; provide all investment-related information to participants so that they can made educated investment decisions; and upon significant changes to the investment options, provide revised disclosures to participants, Van Zomeren says.

Because managing the investments is so complex, many sponsors today are partnering with retirement plan advisers that offer 3(38) fiduciary oversight of the investments by selecting and monitoring them, Parks says. “The investments need to be suitable, and their performance and expenses need to be competitive,” Parks says. “This is an area where you really do have to be an expert, which is why 3(38) services have become much more popular.”

While the DOL doesn’t require retirement plans to have an investment policy statement (IPS) providing general guidance as to how the plan should be run, Lowe believes it is a best practice that sponsors should seriously consider implementing. Sponsors should review their IPS periodically, just as they do their investments, he says. The IPS should be flexible so that it doesn’t pigeonhole the sponsor into “promises it can’t keep” and result in the plan sponsor inadvertently violating the IPS, Lowe says.

In addition, sponsors need to review their third-party administrator, recordkeeper, accountant, trustee, attorney and adviser every three to five years through a request for proposal (RFP), says David Kaleda, a principal in the fiduciary responsibility practice group at Groom Law Group in Washington, D.C. Make sure that they are doing their jobs properly, that their compensation is competitive and that they are not making mistakes, Kaleda says.

NEXT: It’s all about the clause 

As for insurance, “almost all plans are required to carry a fidelity bond, but that only protects the plan itself, not the fiduciaries,” says Sam Henson, director of legislative and regulatory affairs at Lockton Retirement Services in Kansas City, Missouri. “Beyond that, the most common type of coverage is a fiduciary liability insurance policy that the plan sponsor should purchase. This type of policy will provide protection involving fiduciary breaches, imprudent administration and the costs of litigation, settlements and judgments. Adding ERISA coverage to an existing directors and officers (D&O) or errors and omissions (E&O) policy is also an option, but typically these policies exclude ERISA unless additional coverage is negotiated for or purchased as a rider.”

And the sponsor should ensure that all service provider contracts have an indemnification clause whereby the provider promises to pay for any future damages, losses or injuries, Henson says. The importance of ensuring contracts have such a clause “cannot be overstated,” he says. “Before signing any contract for services, someone with knowledge of the industry and contracts should carefully review the terms. This is where partnering with an adviser can make a big difference.”

And while retirement readiness and outcomes are two emerging trends, Bob Fischgrund, vice president at CBIZ Retirement Plan Services in Kansas City, Missouri, believes they are fast becoming fiduciary best practices that sponsors and advisers cannot afford to ignore. “Ultimately, a plan sponsor is going to be judged by how effective the plan is to help participants achieve their retirement goals,” Fischgrund says. “We have tried to move the conversation from just participating to employee financial wellness. So, if we can help employees understand how to become better financial managers by helping them with budgeting and debt, not only will they become more productive employees but they will be able to find the additional dollars to save into the plan.”