Offering a 401(k) or retirement plan for employees is one of the best benefits an employer can offer its employees. However, in our experience working with companies on retirement plans, we’ve found many are unaware of their fiduciary liability, particularly when it comes to monitoring the plan fees employees must pay, putting themselves at undue risk.
While fees may not seem like a huge consideration to some, recent articles in The Wall Street Journal and USA Today have highlighted the liability employers hold by sponsoring 401(k) plans, of which many employers are unaware. In the May 18, 2015 USA Today article, “Court Makes It Easier to Sue Over 401(k) Retirement Plans,” author Robert Powell reports that “the Supreme Court today made it possible for workers saving for retirement to sue over their 401(k) plans for offering investments with excessive fees.”[i] In this particular case, the Court “unanimously ruled in favor of current and former employees of Edison International […] who claimed that six retail-class mutual funds selected by plan fiduciaries as investment options were imprudent because they charged higher fees than identical institutional-class funds that were allegedly available to large investors.”[ii]
In the same vein, an August 26, 2015 article in The Wall Street Journal titled, “Boeing Settles Lawsuit Accusing Company of Mishandling 401(k) Plan,” by Sara Randazzo discusses how the lawsuit was filed on behalf of former and current Boeing employees who allege that Boeing “failed to uphold its fiduciary duties to employees by allowing excessive 401(k) fees to go unchecked, choosing higher-cost retail mutual funds over cheaper options, and improperly making 401(k) plan decisions to benefit vendors receiving other Boeing business.”[iii]
The lawsuits mentioned above are just two of various actions taken against companies that have allegedly violated the federal Employee Retirement Income Act, or ERISA, which resulted in hefty fees.
We don’t mention the above lawsuits to scare companies away from sponsoring a retirement plan, but rather to alert employers to their fiduciary duty and the liability and responsibility that follow, which is defined by the United States Department of Labor as:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carrying out their duties prudently;
- Following the plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
- Paying only reasonable plan expenses.[iv]
To drill this down even further, consider how you would answer the following questions:
- Do you know who the fiduciary on your plan is?
- Do the plan committee and other fiduciaries meet at least annually?
- Have the plan fiduciaries compared the quality and cost of your current provider to that of the competition?
- Is your plan designed to meet the needs of your employees and management?
- Do your plan fiduciaries have and comply with a written investment policy, summary plan descriptions and other plan documents?
- Do your plan fiduciaries monitor and evaluate investment options and performance annually?
- Do your plan fiduciaries monitor and evaluate service providers?
- Have the plan fiduciaries conducted a comprehensive comparative analysis of each service component, including all administrative and investment fees?
- Are your participants able to invest in a “broad range” of funds?
- Does your plan provide ongoing employee investment education materials and seminars explaining plan choices, how to contribute and diversify and the importance of investing to achieve the highest participation rates possible?
- Have all participants received information about each of the options under the plan?
While this isn’t a complete list of all of your fiduciary responsibilities, how you answer the questions can help you determine what areas need improvement. If you checked off more than eight questions, you seem to be on the right track. However, if you checked off less than 8 questions you should focus on improving your plan to protect your liability.
Regardless of your score, you should focus on how you can achieve your fiduciary responsibility to your fullest ability. No only will this manage your risk, but also will benefit your employees as they save for retirement.
Fiduciary obligations can be difficult and overwhelming for some employers to navigate, but at Legacy we make it our mission to mutually benefit employees and employers. We take pride in our Investment Committee Consulting Services and our guidance as you strive to fulfill your fiduciary responsibility, and would love to help you.
[i] Powell, Robert. Courts Make It Easier to Sue Over 401(k) Retirement Plans. USA Today. 18 May 2015.
[ii] Powell, Robert. Courts Make It Easier to Sue Over 401(k) Retirement Plans. USA Today. 18 May 2015.
[iii] Randazzo, Sara. Boeing Settles Lawsuit Accusing Company of Mishandling 401(k) Plan. The Wall Street Journal. 26 August 2015.