There are 4 key areas for plan sponsors to understand that will help you manage your fiduciary liability with confidence.
Excessive Plan Fees
Selecting Imprudent Investments
Failing to Follow Plan Document Terms
Late Participant Contributions
In the current environment, excess fees, typically investment related, carry the largest fiduciary liability. This is common sense as they are the largest cost in a Plan; excess fees erode principal value. Therefore, a thorough competitive review of services and fees will include a benchmark so you know where you stand on the cost and compliance curve.
Most service providers aren’t very transparent in pricing. Your adviser or service provider should help you make the evaluation simple and straightforward, as outlined below:
- Collect the 408(b)(2) disclosure for each service provider – this will tell you how much each provider is paid; and how they are paid (direct or indirect).
- Review each disclosure for completeness
- Benchmark your cost and services with objective data. Knowing your Plan’s fees is your legal requirement. The absolute lowest price isn’t a requirement; however, fees must be reasonable for services rendered.
Imprudent Investment Selection
Excessive 401k fee lawsuits are largely caused by hidden fees buried in plan investments. Providers often are paid by the mutual fund companies from the investment expenses to sell their products. This creates an incentive to sell higher cost funds that don’t deliver sufficient returns to cover their cost. Many different payout schemes blur your true “all-in” costs. Courts have deemed a sponsor’s failure to understand costs a lack of fiduciary prudence because overpaying impacts participant outcomes. Costly litigation and fines can result.
Lowest cost isn’t always the best investment. However, numerous research studies over the last eighty years have consistently shown that the best predictor of future returns is the investment’s cost.
Failing to Follow Plan Document
Under IRS rules, 401k sponsors must be sure they operate in compliance with their written plan document. Failure to do so can result in the loss of tax-favored status. Failure to fix operational defects like these can result in Plan disqualification. A good Plan administrator and your adviser can help with questions that arise. However, it’s up the Plan Administrator (which is defined in your document and is almost always the employer) to know their document provisions.
Late Participant Contributions
Employers must deposit participant contributions (deferrals, loan payments) to the plan’s trust account on the earliest date they can reasonably be segregated from general corporate assets. For large plans with over 100 participants, the timely deposit determination is based on facts and circumstances. For plans with less than 100 participants, a timely deposit is within 7 business days after the date the contributions would have been otherwise payable in cash.
The DOL actively enforces these deposit standards. Failure of employer to meet these standards can result in civil penalties. Hence, given this potential fiduciary liability, 401k sponsors should prioritize deposits.
Jerry Matecun helps business owners to understand and manage 401k Plan risks and responsibilities, as well as help participants understand saving, investment, and distribution strategies vital to retirement readiness. For a no cost, confidential conversation regarding your retirement plan call or email Jerry at 949-273-4200, 616-499-2000 or firstname.lastname@example.org.