March 25, 2015

By Julie Eisenhauer, CPA

A lawsuit was recently settled for $62 million in which the employees accused the employer of mismanaging their 401(k) plan. The lawsuit stated that the employer hid excessive fees and invested in conservative investments that resulted in diminished investment returns for plan participants. In another case, the U.S. Supreme Court will soon hear arguments where participants in a 401(k) plan argued that they were being charged excessive fees.

These cases raise the question: what are the employer’s fiduciary responsibilities with respect to retirement plans they sponsor? The Employee Retirement Income Security Act (ERISA) sets standards of conduct for those who manage private-sector retirement plans and its assets (called fiduciaries). Under the law, the basic fiduciary responsibilities applicable to retirement plans include the following:

Duty to Act Prudently

Because a fiduciary is acting on behalf of participants in a retirement plan, a core responsibility of a fiduciary is to exercise good judgment, care and wisdom. It requires the fiduciary to possess expertise in a wide range of functions, such as investments. If the fiduciary does not have the necessary expertise, they should hire someone with the professional knowledge to carry out the investment function.

Documenting the process for hiring an investment advisor is a good practice that demonstrates the fiduciary’s duty of care. Potential investment advisors should be evaluated equally and the reasons for the selection should be documented. Once a service provider is selected, the plan sponsor’s fiduciary responsibility does not end. The fiduciary should regularly monitor the service provider’s performance, evaluate notices received, read reports, ask about policies and practices, check on actual fees charged and follow up on employee complaints.

Follow the Plan Documents

The plan document is the foundation for the day-to-day plan operations. It describes key elements of the plan such as eligibility for participation, contribution limits, vesting, and distributing plan assets. The fiduciary should be familiar with the plan document and make sure it remains current. Failing to timely amend your plan document for changes in federal tax laws can affect your plan’s status as a tax-qualified plan. Consider reviewing your plan documents on an annual basis with a third-party service provider with expertise in this area.

Diversifying Plan Investments

Employers have the fiduciary responsibility to act in the best interest of their employees by offering a broad range of investment options in their plan. We have all heard the saying “Don’t put all your eggs in one basket.” This principle holds true for investing. Employees, who have choices to invest in a broad range of baskets, have the opportunity to minimize investment losses. The fiduciary should provide the employees with adequate information about their investment options so they are equipped to make informed decisions that fit their specific retirement needs. The fiduciary should also act prudently in selecting service providers and plan investment options by considering the fees and expenses charged by the service provider and understanding which services are covered by those fees.

These lawsuits demonstrate the important role an employer has in the oversight of its sponsored retirement plan. The duty to act prudently as a fiduciary of a retirement plan should not be taken lightly. Now is a great time to review your fiduciary responsibilities, monitor your service provider’s performance and ensure your plan documents are current as you prepare to file your Form 5500, Annual Return/Report of Employee Benefit Plan, with the federal government.

© Clark Nuber PS, 2015.  All Rights Reserved

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.