Business owners use retirement plans to attract quality employees, retain talent, and ultimately reward them for their years of service. For employees, the plan participants, the promise of a secure and comfortable retirement is a powerful incentive to work hard and collaborate, to do all they can to perform well and advance company goals. And for their employers, the plan sponsors, the plans deliver the satisfaction that they are able to ensure their employees are ready for retirement. They want what is best for their employees.
Unfortunately, sometimes the best intentions go unfulfilled. Employers, unaware of their duties as fiduciaries of the retirement plans they sponsor, make mistakes that produce disappointing, even tragic results.
As an advisor to employer sponsored defined contribution plans, my goal is to alert and educate fiduciaries of their responsibilities and help them reduce the related liabilities. Those responsibilities can be overwhelming. Consider the burdens associated with just these:
Review the plan administrator’s services and fees, then determine if they are appropriate (requires the employer to know what is appropriate)
Create the investment fund lineup, then monitoring the investments for performance (requires investment savvy)
Carry out fiduciary duties with prudence, care and diligence in the best interests of the plan participants (requires knowing the duties and executing them)
With each and every responsibility there are nuances and requirements that can get lost in the shuffle. For example, many trustees don’t realize they are required to ensure their plan participants make prudent investment decisions, which is explained in the next paragraph. It is a responsibility that can’t be delegated or shifted to another party. And the only way to address it and reduce their liability is to comply with ERISA section 404(c), a part of the federal regulations governing retirement plan sponsorship. Even if the services of an investment professional have been engaged, the employer as fiduciary or co-fiduciary of the plan is responsible and at risk if the plan is not compliant. Nor does status as a limited liability company (LLC) alleviate the obligation or liability relative to a defined contribution plan. The knowledge gap related to the requirements of section 404(c) has over 30 percent of defined contribution plans in the Pittsburgh region currently out of compliance.
ERISA Interpretative Bulletin 96-1 {29 CFR 2509 .96-1) states: “Fiduciaries of an employee benefit plan are charged with carrying out their duties prudently and solely in the interest of participants and beneficiaries of the plan, and are subject to personal liability to, among other things, make good any losses to the plan resulting from a breach of their fiduciary duties.” The phrases “personal liability” and “make good any losses” are dire warnings. Take, for example, a 60-year-old employee who invests 100 percent of his plan account in an aggressive growth stock fund. The market collapses and the value of his account follows suit. He can sue you, the plan sponsor, personally, for his poor asset allocation decisions. And as investment decisions are not a one-time event, fiduciary responsibility requires ongoing diligence, as plan participants make investment decisions over the course of their employment.
The Department of Labor has a long list of requirements for 404(c) compliance, but there are ultimately three key directives:
Participants must be allowed to self-direct the investment of their accounts with a broad range of investment alternatives.
Participants must be allowed to change their investment selections frequently (as deemed appropriate by the volatility of the investment alternatives, that is, the more volatile, the more frequent).
Plan fiduciaries must provide appropriate disclosures and investment information to plan participants.