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I’ve talked with many company decision-makers (fiduciaries) who felt that their advisor, record-keeper or provider had fiduciary responsibility for their plan. Jerome Schlichter, attorney for the largest awards for 401(k) class action lawsuits sues the employer. Recently, he won a case against Chicago area Boeing Corporation. Think it only happens to the big guys? Google “Department of Labor, EBSA, enforcement.” The Department of Labor’s Employee Benefits Security Administration (EBSA) is responsible for ensuring the integrity of the private employee benefit plan system in the United States under the Employee Retirement Income Security Act.
Often when there's something that we want to believe we tend not to do further investigation. If you make the decision on what broker to use, what record-keeper (often a bundled service provider) and custodian how can you not be responsible?
Limiting certain fiduciary liabilities
The law allows a couple of safe harbors to help limit certain liabilities. The longest standing has been 404(c). The following excerpt is from the Department of Labor publication titled Meeting Your Fiduciary Responsibilities: “Some plans… can be set up to give the participants control over the investments in their accounts and limit a fiduciary’s liability for the investment decisions made by the participants.” It is a list of things you can do such as providing proper disclosures. Employers that comply with 404(c) can shift responsibility for investment decisions to plan participants. In short, 404(c) offers a “safe harbor” for plan fiduciaries to not be liable for investment losses suffered by plan participants who self-direct their investments. This means that employers won’t be liable for their employees’ investment mistakes.
To qualify for this safe harbor, plan sponsors must comply with the requirements for investment selection, plan administration, and plan & investment disclosures before they obtain relief from fiduciary liability for losses plan participants incur as a result of their directing their own investments. 1
You may unknowingly be opting for the safe harbor relief or mistakenly believe you qualify. I have found many decision-makers that are unaware that they have filed for 404(c) relief. It is an election made on your tax return. One CFO shared with me that he was just filling out what his predecessor had done.
Another safe harbor is the use of a qualified default investment alternative (QDIA). The target date strategy has become a default choice by many brokers and plan providers. However, you may not qualify for relief at all! The Department of Labor who offers the relief says that you must properly select and monitor that choice. All target date strategies (or the other QDIA choices of lifestyle or balanced strategies are not created equal. Have you checked to see if your employees are getting better returns than before you opted for the QDIA? Is your QDIA selection based on an investment policy statement? If using a target date strategy, do you consider the difference between a to retirement or through retirement style when evaluating your choice? If not, your election may not qualify. This is not an all-inclusive list of considerations.
Sharing the fiduciary responsibility
If you don’t have the background and fiduciary investing, I recommend that you find professional investment fiduciaries that will share in seeing that you are running the plan with the best interests of your employees in mind. Why take on risks where there is little or no return I believe your first hire should be someone that has broad knowledge of the Employee Retirement Income Security Act that is at least an Accredited Investment Fiduciary. That person should also sign on to be an ERISA 3(21) investment advisor. This person can explain your options for hiring additional fiduciaries.
If you or your investment committee aren’t CERTIFEID FINANCIAL PLANNER™ professional, Chartered Financial Analysts how well could you defend your investment decisions? Are you willing to spend the time to get that level of knowledge? Imagine transferring fiduciary responsibility for investment decisions to a fiduciary, discretionary investment manager? Could you better use that time handling the core functions of your business?
Please don’t jump on the first firm that says that they can be a discretionary investment manager. You need to show a Department of Labor investigator that you went through a prudent process. Like an investment, everyone isn’t the same. You don’t want to pick a lemon when you were trying to manage risk. Be wary of the term consultant. Some consultants are fiduciaries while others may simply work for a well-known brand name which you assume has expertise and would stand behind their consultants.
Transferring some fiduciary responsibility
While you can’t get rid of all the risk, you can transfer some fiduciary responsibility. W. Scott Simon, Morningstar Columnist and author of The Prudent Investor Act: A Guide to Understanding says you may significantly reduce risk when you properly pick and manage an ERISA 3(38) investment manager. Why wouldn’t you want to give you and your employees the benefit of investment expertise rather than investment hope and a prayer.
The stakes are simply too high not to address potential fiduciary risks. Do you have 3 minutes and 43 seconds to learn more about our 6 step process, click here?
For Plan Sponsor Use Only – Not for Use with Participants or the General Public This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.