401k Best Practices | Limiting 401k Fiduciary Risk | Ohio Accounting Firm | Rea CPA

Five Steps to Mitigate Your 401k Fiduciary Risk

There is so much noise in the marketplace regarding the fiduciary responsibility of plan sponsors it’s no wonder people are confused. The confusion starts with who is a fiduciary so it’s important to note that fiduciary status is based on the functions performed for the plan, not a person’s title.

Your plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if you have one) and those who select committee officials. When determining if an individual or an entity is a fiduciary, you need to look at whether or not they are exercising discretion or control over your plan.

401K Management Best Practices

Implementing the following best practices will help you mitigate fiduciary risk:

  1. Adhere to a well-defined, deliberative, documented process.
  • Include a well-drafted investment policy statement (IPS) that describes the investment selection and monitoring criteria.
  • Review annually the performance of the plan’s fund line-up to determine if it meets IPS criteria.
  • Identify all of your plan’s service providers; know and understand their services and fees; monitor performance; and determine if fees are reasonable through objective plan benchmarking.
  1. Identify conflicts of interest. While they are not illegal, they will result in higher plan fees and reduced investment performance over time if not monitored. Any relationship that prevents the plan from being operated in the exclusive best interest of plan participants increases fiduciary risk.
  • Beware of financial arrangements between service providers (for example, payments from mutual fund managers to the plan record keeper, TPA or investment advisor) as they are the biggest source of conflicts. Also be aware of personal relationships between plan fiduciaries and plan service providers.
  • Use investment advisors in a fiduciary capacity and make sure they document that status in writing. If your advisors don’t serve in a fiduciary capacity, be certain they are compensated on a level fee arrangement and know who pays them.
  • Seek an independent review of your plan’s service providers and investment platform every three to five years. Use an outside consultant, regardless of how much you trust your advisor.
  1. Take full advantage of fiduciary safe harbors provided for in the law.
  • Comply with ERISA 404(c) if you allow participants to make investment decisions. There are three compliance areas: 1) investment menu requirements; 2) plan design and administrative requirements; and 3) information and disclosure requirements.
  • Implement a Qualified Default Investment Arrangement (QDIA), especially if your plan has automatic enrollment provisions. This is an approved investment selection for participants not making an affirmative investment election. You should also consider moving all participant balances into the QDIA and then allow participants to make affirmative elections. Be sure to comply with all QDIA requirements.
  1. Establish a fiduciary file that contains documentation of your plan oversight activities listed above, such as:
  • All legal documents, including the IPS
  • A copy of all service provider contracts and required disclosures
  • All investment monitoring reports and prospectuses
  • Minutes of all plan committee meetings
  • All due diligence performed when selecting service providers
  • Annual Form 5500 and audited plan financial statements, if required
  • Annual plan activity summaries from service providers
  1. Purchase fiduciary insurance. This is not an ERISA fidelity bond which is actually required coverage for all employees handling plan assets. Whereas a fidelity bond reimburses the plan for any losses resulting from dishonest acts by employees of the plan sponsor, fiduciary insurance protects the personal assets of all plan fiduciaries due to allegations of breach of fiduciary duties or failure to act prudently in the best interest of participants.

As a plan sponsor, you have the ultimate responsibility for monitoring the performance of the plan service providers your plan hires. You cannot assign or delegate away fiduciary responsibilities to another person or organization; however, you can share fiduciary status with others that may be more knowledgeable about retirement plan operations. If you don’t follow the basic standards of conduct described above, you may be personally liable to restore any losses to the plan or to restore any profits made through improper use of the plan’s assets resulting from their actions.

Limiting your fiduciary risk as it relates to your retirement plans is only five steps away. Follow them to protect yourself and you plan participants.

This article was originally published in Retirement Plan Insights, a Rea & Associates enewsletter, 9/4/2013.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.