For retirement plan sponsors who are unclear about their fiduciary responsibilities, the “someplace else” they wind up could be civil or even criminal court. The U.S. Department of Labor is serious about ensuring the integrity of employee benefits plans and, to prove it, recently reported that its investigative arm protected or recovered $12 billion in assets so far during this decade. Included in the figures were 32,338 civil investigations, two thirds of which ended badly for fiduciaries, and 1,441 criminal investigations resulting in 510 convictions. For the latter group, “someplace else” was a jail cell.
As a financial professional, you can tower above the competition through educating your clients about their fiduciary duties and helping ensure that none of them become part of these statistics. It’s important to remember, though, even if you the adviser have acknowledged a fiduciary role to the plan, the employer remains a fiduciary as well. Many retirement plan fiduciaries mistakenly believe their biggest concern is protecting the investments of plan participants. While the investment side of the fiduciary equation is important, plan administration issues trip up more fiduciaries. As Yogi once put it, they make “too many wrong mistakes.”
The main responsibility of a fiduciary, as defined by the Employment Retirement Income Security Act (ERISA), is to act solely in the interest of plan participants and beneficiaries. Fiduciaries must demonstrate prudence, diversify investments, and adhere to the plan and act in accordance with the documents and instruments governing the plan. ERISA provides that fiduciaries who breach any of their responsibilities, obligations or duties are “personally liable to make good to such plan any losses to the plan resulting from such breach.”
This chilling admonition could discourage anyone from serving in a fiduciary capacity. Fortunately, though, most retirement plan providers can help educate both you and your clients about the responsibilities associated with being a fiduciary and can often provide tools and other assistance. For starters, there are ways to lessen potential liabilities.
ERISA Section 404(c) offers plans and plan fiduciaries limited protection when participants make certain investment decisions. To qualify, your clients should offer plan participants
- a broad range of investment options (at least three diversified core investment categories with different risk-reward characteristics)
- The ability to personally select among the plan’s investment options
- The opportunity to transfer among investment options at least quarterly
- Certain information and disclosures automatically and upon request.
This sampling represents an overview of the requirements of 404(c); there are other underlying requirements.
Although Section 404(c) does not make employees fiduciaries, they generally are responsible for any losses their retirement accounts may incur due to investment decisions they make. Most retirement plan providers make resources available to help plan sponsors satisfy the requirements of Section 404(c). Although many employers believe they are in compliance with 404(c), a closer examination reveals that many in fact fall short. As a financial adviser, you can provide invaluable assistance to plan sponsors to help ensure they meet these requirements.
Another protection for fiduciaries is what is called, “procedural prudence.” This means that fiduciaries should make decisions consistent with straightforward, established procedures and practices. Maintain clear, written plan processes and procedures.
Yogi explained it best when he said, “In theory, there is no difference between theory and practice. In practice there is.” More to the point, prudence is not necessarily measured by results. Prudence is a measure of conduct.
Another important line of defense against fiduciary liability is establishing an investment policy statement (IPS). The IPS should outline the purpose of the plan, its long range investment framework, an outline of the investment selection, a monitoring and replacement process, and a clear definition of related investment duties and responsibilities.
The benefits of developing an IPS include documenting the plan’s policies and procedures for making investment selections; continuity to ensure that future fiduciaries will understand the goals and procedures; communicating a logical and disciplined process to participants; and creating a first line of defense against fiduciary liability.
Establishing a 401(k) or other defined contribution retirement plan can be the source of many positives for any employer and its employees. But the plan also comes with fiduciary responsibilities that, if left unattended or violated, pose serious consequences.
Yogi understood these responsibilities well and was philosophical about them. “If the world was perfect, it wouldn’t be,” he said. Make sure your clients are perfect when it comes to being a fiduciary.
E. Thomas Foster Jr., Esq., is The Hartford’s national spokesperson for qualified retirement plans. Foster works directly with broker/dealer firms and advisers to help them build their qualified retirement plan business and educate them about industry issues.
This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. This information cannot be used or relied upon for the purpose of avoiding IRS penalties. This material is not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.