Limiting Your Potential Fiduciary Liability 

By Jim Trujillo

The 401(k) litigation tides are rising, and a new wave of lawsuits aimed towards employers and the administration of their retirement plan is here. According to new analysis from Bloomberg Law, proposed class action lawsuits claiming excessive 401(k) plan fees are on track for a fivefold increase between 2019 and 2020, with 65 cases filed during the first eight months of 2020, and almost 100 by the end of 2020. With this new focus on retirement plan oversight, here are the things you need to know. 

WHERE DOES THE RESPONSIBILITY LIE?

When it comes to a 401(k) plan, anyone who has fiduciary oversight can be held personally liable for any shortcomings in the plan. A “fiduciary” is anyone making decisions for the plan on behalf of the employees participating in that plan. This can include employers, plan administrators, trustees, and investment committee members. Often a CFO or HR manager, to act as a “plan administrator” who plays an active role in the ongoing management of the company plan. Depending on how much responsibility this person has in making decisions about the 401(k) plan, they may also be a fiduciary.

But when it comes to acting as a fiduciary, the responsibility may go deeper than you think. These individuals have a personal and legal responsibility to do what’s in the best interest for their employees, avoid conflicts of interest, and keep fees reasonable in relation to the plan. Not doing so opens the gates for fiduciaries to be held liable for damages. 

Some of the more notable recent lawsuits include Anthem, which settled in 2019 for $23.7 million; ABB, which also settled in 2019 for $55 million; and Boeing, which settled in 2015 for $57 million. Each one of these cases had their unique circumstances, but the common thread was lack of fiduciary responsibility held by their plans’ decision makers. 

And while these were very large companies with hefty retirement plans, the idea of only the big shots having a target on their back is a thing of the past. Smaller companies and plans are now at risk. Over the last few years, some recent notable lawsuits included Checksmart Financial, whose plan had $25 million in assets, and LaMettry’s Collision, Inc., whose plan had roughly $9 million in assets. 

HOW CAN YOU PROTECT YOUR COMPANY AND YOURSELF?

First and foremost, the best way to protect against potential DOL litigation is to ensure you have a solid, compliant plan in place. As the plan sponsor, your responsibility to develop a plan document, establish the investment lineup, and work with your chosen service providers to support and administer your company’s 401(k) plan. 

1. Develop a Plan Document

A 401(k) plan document should layout clear expectations for how the plan operates. Your plan document should include details such as employee eligibility, employer contributions, fees, loan allowances, profit sharing provisions, student debt repayment options, and other additional plan features that best fit the needs of your employee base.

2. Select the Plan’s Investment Lineup

As a fiduciary, it is your responsibility to choose, monitor, and update the investment lineup. Your plan should offer a mix of different investment options such as money market funds, bond funds, mutual funds, and target date funds. If this seems like a daunting task, a 3(38) investment advisor can take over this piece of the plan’s management. 

3. Closely Monitor Your Fees

The DOL does not say that you have to have the cheapest plan, but that you should be paying a reasonable fee for the services being provided. To do this, you should keep track of every fee being paid, who is getting that fee, and what they are doing for you and your employees to earn it. In addition, you should be benchmarking your fees, which means comparing what you’re currently paying to the open market place. Benchmarking is an industry best practice, and you’re advised to perform it every 3-5 years. You should closely document the process and the decisions made to show proof of your due diligence in case the DOL ever comes knocking on your door. 

4. Establish Recurring Fiduciary Education

According to the Plan Sponsor Council of America, however, several recent DOL audits included requests for plan sponsors to provide documentation of training within the last year. These requests, and an increase of lawsuits against employers’ and other retirement plan fiduciaries, has refocused attention on the need for plan administrators to continue to educate themselves so they can ensure that they are honoring their fiduciary duties and prudently managing their plans. It’s important to note that this training is not just checking a box. The DOL sets complex rules and regulations that are ever changing, so it’s best to consider this education as ongoing training rather than a one and done task.

5. Utilize Retirement Plan Specialists

As a fiduciary on the plan, it is your job to monitor the parties involved and their processes. This includes third party administrators, recordkeepers, and advisors, but not all advisors are created equal. All too often, financial advisors claim that they can “do 401(k) plans,” but it may not be their primary focus. The biggest difference between these two types of advisors is who they are advising to. Traditional financial advisors counsel individual clients to help them make a plan for their personal financial goals. Retirement plan advisors focus on helping businesses manage their employer-sponsored retirement plans. Retirement plan advisors can also provide higher levels of fiduciary protection to you including 3(21) and 3(38) services. 

To ensure your advisor is specifically focused on retirement plans, look for professionals with retirement plan focused designations. Some of the most common designations are Accredited Investment Fiduciary (AIF®), Qualified Plan Financial Consultant (QPFC), Professional Plan Consultant (PPC®), and Certified Financial Planner (CFP®)

Ensuring you and your company have your employees’ best interest in mind is the foundation for fiduciary responsibility. Keeping this idea at the forefront of your decisions can help guide you in the right direction and stay in a good light with the DOL.