By Craig Erickson
Those with discretionary authority or administrative control over their organization’s retirement and 401(k) plan face significant risks. If fiduciaries make decisions that negatively affect plan participants or beneficiaries, they can be held personally liable for breaching their fiduciary duties, even if the action was unintentional.
Although fiduciaries cannot entirely eliminate the risks associated with their role, there are several things they can do to protect themselves and reduce fiduciary liability.
- Fiduciary liability insurance is the most common measure used to protect fiduciaries against charges of noncriminal mismanagement and breach of fiduciary duty. This insurance covers missteps such as inadequately funding a plan, imprudently investing assets, poorly selecting third-party service providers and other administrative errors. This is one of the easiest ways to reduce fiduciary risk.
- Hiring the right 401(k) advisor gives fiduciaries an expert guide to help them navigate plan administration and compliance oversight, plan level investment selection and monitoring, participant education and communication, compliance with fee disclosure regulations and vendor analysis. A qualified 401(k) advisor can offer guidance that reduces fiduciary liability by providing expert opinions with plan document review, monitoring loan requests, approving hardship withdrawals, supporting annual plan audits, reviewing discrimination testing, performing an investment review, looking into creating an education policy statement and performing fee benchmarking for both funds and vendors.
- An investment policy statement (IPS) can be an essential roadmap for a 401(k) plan. An IPS can help with outlining investment objectives, defining roles and responsibilities for those responsible for the plan’s investments, describing the criteria for documenting and monitoring investment performances against a benchmark and describing ways to address investment options and investment managers that fail to satisfy objectives. With a well-designed plan for monitoring and replacing underperforming funds, fiduciaries can avoid having kneejerk reactions and making hasty investment decisions.
- Formation of an investment committee. Instead of shouldering all of the liability alone, fiduciaries can establish an investment committee to help manage their risk and support their decision-making process. It’s imperative to record minutes from investment committee meetings to keep track of plan decisions being made, action items, underperforming funds over time and other developments. Committees should regularly discuss what is happening both in the industry and economically to re-evaluate whether a plan’s design is still relevant.
- Appointing an additional fiduciary can further alleviate the fiduciary liability on a single plan sponsor.
- A 3(16) fiduciary handles discretionary administrative decisions such as eligibility, vesting and distributions. Hiring a third-party administrator as a 3(16) fiduciary does not relieve the plan or its fiduciaries of their fiduciary responsibility. Periodic monitoring of the service should be performed.
- A 3(21) fiduciary is a paid professional who makes investment recommendations to the plan sponsor, sharing fiduciary responsibility. The co-fiduciary, 3(21) professional, shares responsibility for the performance on all investment choices recommended to the plan.
- A 3(38) fiduciary takes full discretionary authority and control over investment decisions.
- Compliance with section 404(c). Plans that are 404(c) compliant are offered a safe harbor and will not be held liable for investment losses suffered by plan participants who self-direct their investment, as long as there is a prudent selection process. In order to be compliant, plan sponsors must comply with certain requirements for investment selection (offer a broad range of investments), plan administration (participants must exercise control over the assets in their accounts) and plan and investment disclosure requirements.
One of a fiduciary’s main responsibilities is to act in the best interest of plan participants. Although a fiduciary may not always do the right thing — after all, that person does not have a crystal ball to predict how funds will perform — he or she can implement systems and processes to reduce fiduciary liability and minimize risks.
Craig Erickson is the Partner-in-Charge of our Employee Benefit Plan Group where he handles audits of defined contribution plans, defined benefit plans, health and welfare plans and ESOPs. If you would like to speak with Craig, you may reach him at 973.994.9400 or at firstname.lastname@example.org.