How fiduciaries can reduce their personal liability through due diligence
As a fiduciary of your company’s retirement plan, you oversee finances that affect the livelihood of tens, hundreds or even thousands of employees and their families.
However, despite the gravity of this responsibility, many fiduciaries are unaware of the extent of their responsibilities or are lax in their duties, and the consequences can be severe.
In fiscal year 2013, the Department of Labor collected $1.69 billion in civil and criminal penalties related to the management of employee benefit plans, closed 3,677 civil investigations and indicted 88 people for crimes.
In addition, your actions affect employee benefit plan participants, who will depend on income from those plans to survive post retirement. Because of these ramifications, as the fiduciary, you face risk and have responsibility for everything from the design of your employee benefit plan to implementation, ongoing monitoring and overall management.
“There are a lot of people who are fiduciaries that don’t know what that role means,” says Gerald Wernette, principal and director of retirement plan consulting at Rehmann Retirement Builders, which provides 401(k) and retirement planning services. “Anybody can be designated as a fiduciary, but it should be someone who is going to be responsible for that plan, carry out the duties it dictates and make sure that they are providing all the oversight the plan needs.”
Knowing the basics
The most important thing you need to know as a fiduciary is that the position comes with risk — you can be held personally responsible for your actions and decisions regarding your company’s employee benefit plan.
As a result, you should keep stringent records of all communication, contracts, decisions, filings, signatures, etc., on behalf of the plan. This includes Department of Labor and IRS forms, such as Form 5500, minutes for committee meetings and information on plan vendors, including the services they provide, what they cost and whether the vendor serves as a fiduciary.
You also need to create a process to continually evaluate this information, including monitoring investments and fees. The law requires that fees be reasonable, and benchmarking is the most common way to determine this.
“Go out and get proposals, and if you have three companies whose fees are 30 percent lower than what you’re paying now, your fees probably aren’t reasonable,” says Phil Webb, senior plan advisor at RPS Retirement Plan Advisors.
As for investments, Webb says fiduciaries don’t necessarily need to worry about choosing the best-performing funds; however, you do need a rationale for why you chose a certain fund.
In addition, you need to know your co-fiduciaries. An adviser typically qualifies as a fiduciary, while a plan provider that provides general education services does not. Your plan’s record keeper or third-party administrator is usually not a fiduciary, but that determination depends on its duties and what is included in your contract. Many plan sponsors rely on their advisers or record keepers to choose investments and don’t realize it is their responsibility to ensure those investments serve their clients’ best interests.
In addition, only decision-makers should be listed as fiduciaries. Often, and especially in the case of committees, fiduciaries who shouldn’t be are listed on an employee benefit plan. Remember, all of these fiduciaries are treated equally in terms of liability under the law and will be held accountable in the same manner as the person calling the shots.
The Department of Labor monitors fiduciaries by evaluating 408(b)2 disclosures and inquiring into company processes. However, not all of the department’s initiatives are aimed at monitoring or enforcing regulations; it also has resources to help fiduciaries understand their responsibilities. It hosts seminars, workshops, presentations and webinars and distributes educational resources to help employers and fiduciaries understand their responsibilities. In fiscal year 2013 alone, it conducted 113 of these educational initiatives.
The Employee Benefits Security Administration also has voluntary compliance programs for self-correction of violations. If an investigation reveals a violation of the civil provisions of the Employee Retirement Income Security Act, EBSA takes action to obtain correction of the violation using voluntary compliance measures whenever possible, according to the Department of Labor. In addition, the department is working on a proposal that will inform plan participants of the correlation between the money they’re investing and accumulating and the income stream they will have upon retirement.
“Every record keeper will have to produce, on a participant basis, if you have $100,000 in your account and you’re 30 years old and you work until you’re 65, here’s what that amount of money is going to give you at retirement as a monthly income,” Wernette says. “That will help participants in their plan decision-making process.”
The Department of Labor is also hiring additional enforcement agents and will step up its audits and enforcement in the coming years, Webb says.
One of the biggest mistakes Wernette sees fiduciaries make is failing to make contributions in a timely manner. The Department of Labor requires participants’ contributions be deposited as soon as reasonably possible, but no later than the 15th business day following payday. Plans with fewer than 100 participants must make deposits no later than the seventh business day following payday, something your provider needs to understand.
However, there are a lot of providers in the marketplace, and few are both experienced and proactively manage their employee investment plans, Wernette says. And because many fiduciaries don’t sufficiently research their plan provider, they may find themselves with one that is lax, or even negligent, in its duties.
“I see plan providers go with wholesalers who sell them an investment platform rather than sitting down with the plan sponsor and consulting with them to find the platform with the right fit,” he says.
But it’s not only the provider’s fault. As a fiduciary, you need to monitor your provider and ensure that its plan is right for your company — and if it is not, to find another provider. Careless management can result in participants coming up short when it’s time to retire.
“If you add that up across the country, you have a national retirement policy crisis,” Wernette says. “And what happens when we have those kinds of things? Along comes Uncle Sam, and it’s going to save the day by instituting a mandatory, across-the-board policy, which we’re doing with health care right now, and it doesn’t necessarily provide the best solution at the end of the day.”
Fiduciaries must thoroughly understand their responsibilities and have a defined process to oversee them. If this includes working with a retirement plan service provider, it is your responsibility to understand that employee retirement plans are not one size fits all and to make sure that your company gets the most out of its investment.
In addition, when you receive information from the Department of Labor, don’t just file it away. In 2012, the department distributed 408(b)2 notices regarding fiduciary responsibilities, but many fiduciaries failed to take a proactive approach to the information contained in the notice, which highlighted their responsibility to ensure reasonable fees.
“If you are audited by the Department of Labor, it will ask, ‘What did you do with that notice?’” Webb says. “You have an ongoing obligation to make sure your fees are still reasonable three years from now, not just when the notice went out.”
Fiduciaries who are not company owners should also have their employer purchase fiduciary insurance, which protects against fiduciary liability, and sign an indemnification agreement, which ensures you will be compensated in the event of personal expenses. Your plan provider, if it is a co-fiduciary, should also carry fiduciary insurance, so should an issue arise, you are not solely responsible.