Neglecting Retirement Plan Fiduciary Obligations: Plan Sponsors Have

By: Bob Trobe, Managing Director at Crystal & Company

Employers who sponsor defined contribution (DC) retirement plans for their employees select the plan’s broker, record keeper, and third party administrator (TPA) as well as determine the plan design, pick investment options, and educate employees about the program. These plans can be rewarding and beneficial for both employer and employee. Most such plans are, however, subject to the Employee Retirement Income Security Act of 1974 (ERISA) which imposes significant fiduciary obligations on the individuals serving as plan sponsors. In some cases the individuals can be held personally liable for losses.

The good news is that the government provides guidance for best practices which, if followed, significantly reduce plan sponsor liability. These practices address vendor selection (broker, record keeper and TPA), investment guidelines, and educational policy among other matters.

The article outlines the key points of a strong retirement program that will significantly reduce fiduciary liability.

Real World Risks

Three examples where plan sponsors failed to meet their ERISA fiduciary obligations:

Flagstar Bank agreed to make a $3 million payment to its 401(k) plan for allowing investments in its own stock during the Great Recession, “when they allegedly knew, or should have know, that such investment was imprudent.”
Coin Builders LLC of Wisconsin Rapids and its president was sued by the Department of Labor for improperly transferring $1.3 million in plan assets to a Coin Builders bank account. The president also allegedly handled plan assets without being bonded as required by ERISA.
Engineering giant Bechtel has agreed to an $18.5 million settlement of an excessive 401(k) fee suit.

The following retirement plan strategies may reduce the likelihood that these types of lawsuits will happen to your organization.

Core Elements of a Retirement Plan

All ERISA retirement plans must include:

A written plan that describes benefit structure and guides day-to-day operations.
A trust account that holds the plan’s assets.
A recordkeeping system to track the flow of monies to and from the plan.
Reports that furnish mandatory disclosures (e.g., fees) to plan participants, beneficiaries, and government.

Who Will Manage Your Retirement Benefits Plan?

Selection of reputable and competent vendors and assignment of the right staff or board members are integral to implementing a compliant plan:

Hiring outside professionals (e.g., investment advisor)
Forming an internal administrative committee
Assigning management to Human Resources if applicable
A combination of the above

Six Important Rules for Fiduciaries of Retirement Plans

Following these six rules can help reduce fiduciary risk:

Act solely in the interests of the plan participants and exclusively for the purpose of providing benefits.
Act “prudently” and document decision making
Follow the terms of your plan (except where it conflicts with ERISA) and keep it current.
Diversify investments to minimize risk of loss
Pay only “reasonable” expenses and fees
Avoid “prohibited” transactions

The “prudent man rule” in ERISA requires fiduciaries to carry out their duties with the same “care, skill, prudence and diligence” as would a person who is familiar with the subject and has the capacity to understand the issues.

Document Your Process and Build an Inspection Ready ERISA File

Your assigned staff with the help of your broker/consultant should ensure that appropriate documentation has been kept on your process: An inspection ready ERISA file should include:

Basic plan document w/amendments, adoption agreement, SPD
IRS opinion, advisory, or determination letter
Investment policy statement and ongoing IPC minutes
Investment contracts, prospectuses, semi-annual reports
Form 5500, summary annual report.
ADP/ACP and other required tests
Fidelity bond
404(c) documentation (regarding diversification of plan investments)
408(b)(2) disclosures & reasonableness determination of service providers (service provider disclosures of services, fiduciary status, and compensation)
404(a)(5) participant disclosures (plan sponsor explanation of fees and expenses deducted from participant accounts)
Performance, monitoring, benchmarking, & fee analysis reports
Education and enrollment information
Qualified Default Investment Alternative (QDIA) determination (the account into which contributions are placed when no investment election has been make by the participant)

This article was written by: Bob Trobe, Managing Director at Crystal & Company. For more information please contact Bob at 212.504.5960 or robert.trobe@crystalco.com