Fiduciary Duty

Joseph P. Trybula, CFP®, AIF® | May 11, 2021

When speaking with various Plan sponsors, I have found the vast majority of them have no idea of the significant liability they are exposed to in their duties regarding their company’s 401(k). Many Plan sponsors may have little or no prior experience or education in operating a 401(k) plan. Although it might seem like a secondary role, it is their fiduciary duty to ensure that decisions regarding retirement plans are always made in the employees' best interests. Turning a blind eye or missing a small detail may result in significant legal consequences and personal liability—potentially exposing their personal assets. Further, many Plan sponsors think that if they hired an investment advisor that they are no longer the fiduciary on their plan. However, this is not always the case. Just looking at the signature on the company's 5500 will show who is responsible for the plan. If your name is on the signature line, YOU are responsible. With the IRS continuing their focus on employer sponsored retirement plan and the lawsuits have continued to increase over the years, it is important that Plan Sponsors and owners review their current plan and make necessary changes if necessary.

IRS Claim Examples:

Failure to monitor investments — $858,000

Legal action brought by employees alleged the wrongful elimination of a profitable investment option and improper selection of another and failure to monitor the actions of the outside investment manager. Defense costs were $358,000 and the court awarded the plaintiffs $500,000 in damages.

Failure to provide information — $350,000

Two employees approaching retirement age discovered they had never enrolled in the company's 401(k) plan. The employees sued the company and plan trustees alleging the plan administrator failed to properly advise them how to enroll and the enrollment was not automatic. The value of the alleged lost benefits exceeded $150,000, and defense expenses were in excess of $200,000.

Failure to divest underperforming option — $400,000

Plan participants alleged that the fiduciaries of a 401(k) plan had failed to divest the plan of an investment option that was not keeping pace with the performance of the comparable index and resulted in poor returns. The case settled for $250,000 after $150,000 in legal fees had been spent.

Failure to disclose information — $250,000

Employees sued the plan fiduciaries alleging that they breached their fiduciary duties by providing an option to invest in a guaranteed investment option backed by a poorly performing insurance company. They further alleged that plan fiduciaries breached their duty of disclosure by providing misleading or incomplete communications to participants. The case eventually settled for $250,000.

Excessive management fees — $124,000

Department of Labor has alleged a wholesale electrical company violated ERISA by charging excessive management fees to the Plan. The burden of proof for compliance with all provisions of ERISA lies with the sponsor/employer. In many of these cases, defense expenses can easily reach $100,000 or more.

What is the solution?

What can organizations do to seek a solution to the problems associated with mismanagement of fiduciary duties? Hiring an actual “Investment Fiduciary” either ERISA 3(38) or ERISA 3(21) Fiduciary offers significant opportunities for Plan sponsors and HR professionals who are playing active roles in the management of their 401k plan to manage risk. Additional opportunities to address risk can be found in the proper creation of investment committees. A properly established committee can seek to prevent these disasters and also address the risk to some of the committee members from significant personal liability.

An investment committee would be responsible for staying up-to-date on the law, industry news, responsibilities under ERISA and any other relevant information related to ERISA and other legal responsibilities. Other activities may include:

Drafting a charter stating the purpose of committee and detailing how members are selected and what roles they play
Establishing formal protocol for management of the plan's investment strategy
Determining fiduciary and non-fiduciary members
Creating an investment policy statement

Investment committee members should be well-versed in the investment strategy and plan. While working towards ensuring the plan is responsibly managed and adapted if necessary. While investment committees are not required under ERISA, they are a good risk management mechanism and enable plan sponsors to focus on the important issues that impact plan participants. Committees aim to ensure due diligence and fiduciary duties are always appropriately met and can help avoid the types of decisions that can lead to costly lawsuits.

Printers 401k offers a solution to Plan sponsors by fulfilling your fiduciary obligation.

Printers 401k collaboration of 401(k) specialists who assume specific fiduciary duties for your plan. The solution is designed to fulfill your fiduciary obligations, allowing you to continue serving as the plan sponsor without the liability and responsibility. Click Here to learn about our Fiduciary Administration Services.