‘I don’t know if you’ve been watching the news lately, but we live in contentious times,’ said [anyone at any given moment in history]. It seems to be the case that putting people near each other is the fastest way to guarantee discord of some kind. In our industry, that can play out in a number of ways; making major headlines these days, though, are lawsuits targeting 401(k) plans.
For the last decade, most of these lawsuits have been aimed at mega plans – those in the multibillion-dollar arena – and their service providers. But the past few years have seen this litigation creep down market and target plan sponsors for their lack of fiduciary prudence. So the question must be asked: as a plan sponsor, do you know how to help reduce the threat of litigation?
First, remember the point of the 401(k) plan is to help employees achieve desired retirement outcomes. In other words, your legal obligation is to ensure your plan’s administration and investment management decisions are in the best interest of the participants. Keeping that in mind, it’s useful to understand potential danger zones.
Inappropriate investment choices – ERISA puts the emphasis on a prudent decision-making and monitoring process in the selection of investments, rather than on the specific funds chosen. Creating an investment policy statement (IPS) is the best way to establish guidelines for making investment-related decisions in a prudent manner, but plan sponsors must be diligent in following its criteria and objectives. Once established, failure to follow an adopted IPS could be considered a demonstration of fiduciary imprudence.
Excessive fees – Again, ERISA requires a careful, prudent process to ensure no more than reasonable fees are paid for necessary services. High fees aren’t inherently bad, but they can become legally problematic if a plan sponsor can’t demonstrate their prudent decision-making. Understanding if fees are reasonable requires a thorough benchmarking process – fund fees should be compared to other funds with similar risk/return and asset class characteristics, and plan fees (recordkeeping, administration, advising, and any other recurring expenses) should be compared to peer plans.
Documentation is an important element here – formally demonstrate the process undertaken to select and regularly monitor investments, review fees charged and services received, and choose which benchmarks were used. Continue to monitor fees over time and consider how changes in the plan have affected those fees. (For example, as plan assets grow over time, the plan may become eligible for a lower cost share class.)
Committee members who both understand and properly execute their fiduciary roles and responsibilities are better equipped to serve their plan participants and avoid litigation. That’s a winning formula for everyone (except the litigation lawyers, I guess).
Did you know Department of Labor investigations consistently find failures in over 70% of retirement plan audits? These findings could be anything from failing to monitor the plan to defects in plan administration to misinterpreting plan provisions. Since spring is now officially upon us, consider a few suggestions for cleaning up your retirement plan.
Review your plan documents
First of all, it’s pretty helpful to know where they are – an auditor would certainly want to. Plan documents include the adoption agreement, amendments, summary plan description, investment policy statement, and so on. If you don’t have a fiduciary file or secure online vault in which to store these documents, start one today. Request any missing documents from the appropriate parties. Next, verify your plan documents are compliant with laws and regulations; amend them as required. Most importantly, though, ensure you are adhering to them!
Know your roles
To be compliant, the people running your day-to-day operations need to understand both the plan documents and their fiduciary duties. Define roles and clarify responsibilities. Don’t forget to document these assignments, as well as the processes to implement them – it may be beneficial to utilize a committee charter, fiduciary acceptance and acknowledgement letters, or a retirement plan internal controls policy. It’s important to be aware of all the fiduciaries serving your plan, because you have potential liability for their actions. And even if you have delegated certain fiduciary duties to others, you still retain fiduciary responsibility for prudently monitoring their performance.
Monitor the contribution process
The most common ERISA violation is making delinquent contributions and loan repayments. No matter who is responsible for remitting contributions, you must know your plan’s reasonable standard and understand the overall remittance process. Take care to monitor the responsible parties so you are attuned to issues as they arise; if they do, work with an advisor to determine how you should correct late payments, as well as report delinquent payments on your Form 5500.
Schedule your audit
If you haven’t done so already, schedule your plan’s required audit. Take care as you select your auditor: an auditor plays an important role in the health of your plan, so be sure to ask clarifying questions regarding their capabilities, workload, credentials, etc. Exhibit due diligence by documenting your selection process.
Clear the clutter
You also have a fiduciary responsibility to monitor the assets held in your plan and prudently act on your participants’ behalf. This includes terminated participants with account balances in the plan. And that’s not all. Those terminated participants are also required to receive benefit statements and plan disclosures. Depending on your service agreements, you may be paying a per-participant fee to maintain these terminated account balances. Discuss with your advisor if it would be beneficial to initiate a force-out campaign – following the terms of your plan document, of course!
Look ahead
You have three quarters left to achieve the goals initially set for 2018. Preparing participants for retirement might be high on the list (we sure hope so!), but have you put plans in place to make it happen? Pull out your calendar and prioritize time for your employees – schedule enrollment and engagement meetings to increase their financial wellness. Equip them with the tools they need to succeed. Determine the metrics you’ll use to track their progress, then decide next steps based on that data.
Being a plan fiduciary is not a duty to take lightly – there are many administrative and compliance-related tasks to perform. But we do believe you should take pride in being a good steward of your company’s retirement plan assets, because it means you are better equipping your employees for retirement. After all, the primary purpose of a retirement plan is to provide benefits for plan participants and beneficiaries. So roll up your sleeves and take time to polish your plan.