New federal rules took effect last year regarding 401(k) fees, encouraging greater transparency, mandating heightened scrutiny, and imposing greater liability on employers. Many employers are not aware of their fiduciary responsibilities, which can make them vulnerable to claims for breach of fiduciary duty and/or prohibited transaction penalties. Companies and executives should document, implement, and follow clearly defined fiduciary processes and procedures with regard to their retirement plans. Failure to do so can put business and personal assets at risk.
The threat of lawsuits filed by retirement plan participants has become a serious risk for companies of all sizes. Plaintiffs’ attorneys have been successful in financial recoveries and are pursuing these cases aggressively, because the federal Employee Retirement Income Security Act (ERISA) allows successful plaintiffs to recover their legal fees from defendants. The government is also active. The Department of Labor (DOL) conducted 3,600 civil investigations last year, with 72 percent of those cases resulting in a recovery.
Generally, a person is an ERISA fiduciary to the extent he or she (i) exercises any discretionary authority or discretionary control respecting management of the plan, (ii) exercises any authority or control respecting management or disposition of its assets, or (iii) provides investment advice. This is determined by the functions performed and the authority retained, rather than the formal plan documents. ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. When these standards are violated, even if there is no resulting harm, ERISA provides financial remedies.
Many who do not realize that they are fiduciaries discover, much to their dismay, that they actually are responsible. All too often, plan sponsors deny their fiduciary role or operate in a fiduciary capacity without fully understanding their responsibility or liability. Third party administrators and service providers may carefully structure their agreements and operations so that their duties are “ministerial” only, according to policies and procedures set or “adopted” by plan sponsors, so the directors, business owners and/or benefits committees retain the fiduciary liability.
401(k) plan sponsors are operating in an ever-changing regulatory environment defined by mandatory disclosure of information regarding plan investments and mandatory consideration of fees paid from plan assets (including revenue sharing and 12b‑1 fees) for plan services. ERISA fiduciary liability insurance is available, but this coverage is often excluded from general business and directors’ liability policies. While insurance cannot prevent future lawsuits, employers can significantly minimize fiduciary risk when they couple coverage with the documentation, implementation, and observance of a strong set of internal processes and procedures and a good investment policy.
Now, more than ever, it’s critical to comply with government regulations regarding sound execution of retirement plan fiduciary responsibilities. Consult with an employment benefits attorney to determine whether your company is taking adequate steps to comply with the law and to avoid potential lawsuits, damages and penalties.