Financial Strategy

401k Plan: Understand Your Fiduciary Responsibility

Published by Bob Gustafson

401k Plan: Understand Your Fiduciary Responsibility

If you’ve set up 401k plans for your employees, or are thinking of doing so, it’s vitally essential that you understand the many facets of your fiduciary responsibility to your employees regarding their 401k plans.

If you assume that the financial company you set up your 401k plan with – be it an insurance company, mutual fund company or other financial institution – bears the responsibilities for your employees’ 401k plans, that they ‘take care of those things,’ you could be setting yourself up for a legal nightmare such as a class action lawsuit that could have a devastating impact on your personal assets..

If you just felt a twinge of fear, good. This is a serious issue, one many employers don’t understand (until it’s too late.)

The Fiduciary Standard

There is no higher standard held under the law than to be a fiduciary, the one who is responsible for the inner workings of a 401k such as diversity of investments, fees and other details that affect your employees’ gains or losses. Again, and it bears repeating, if you assume that the company providing your 401k plan bears all of that responsibility, you are headed for trouble. You’re responsible. You’re the fiduciary and the plan sponsor.

Let’s back up a little bit here.

Most employers who set up 401k plans for their companies primarily do so for three reasons:

  • To attract and keep talent
  • To help their employees save for retirement
  • To save for his or her own retirement.

Employers who decide to offer their employees 401k plans often do so in a very naïve fashion, not truly understanding what their responsibilities are when setting up these types of plans.

Most employers think their responsibility pretty much ends when the plan is set up, assuming that their only other responsibility is to get withholdings from the employees’ paychecks into their 401k accounts (which if you are using a payroll company like ADP or Paychex is done by them).

They may think that the employees are completely responsible for the investment selection, and that the investment company is responsible for providing education and a good investment lineup.

Unfortunately, nothing could be further from the truth. An employer’s responsibility to the employees as it relates to the 401k plan is actually quite serious…and scary.

According to the Department of Labor, an employer’s responsibility rises to the level of what is called “fiduciary”. This term over the last 5 years or so has slowly crept its way into the lexicon of the employee benefits space, but there is real confusion about its meaning and who is the actual fiduciary of a 401k plan. In fact, you’ve probably heard of all the hoopla recently as it relates to the new DOL fiduciary rule that may (or may not) go into effect this coming April.

In lay terms, a fiduciary is someone who is in charge of another person’s financial affairs and is held by law to act with the utmost good faith and carry out their duties in an expert fashion.

When it comes to determining who the 401k plan fiduciary is, look no further than the owner in most small companies. Larger companies may name a CFO or another higher-level person, but most often it’s the owner of the company. Rarely, if ever, is it the investment company or the investment advisor as most employers either think or are led to believe.

Your Fiduciary Responsibility

So now that you know that you, as the business owner, are the plan’s fiduciary, what are your duties?

  • You are supposed to make sure that the fees in the plan are reasonable
  • You are supposed to make sure the investments offered cover a broad number of asset classes
  • You are supposed to make sure that your employees receive enough education to be able to make good decisions

With this better understanding of your obligations, remember that you have to carry out these obligations in a fiduciary capacity.

Think of it this way. If your plan were audited by the Department of Labor tomorrow, how would you PROVE to them that you are prudently managing your responsibilities?

The short answer is that you need to establish a written procedure for the management of every important function of the plan. Some of the more important functions are:

  • The investment selection and retention
  • Educating the employees
  • Making sure your plan’s fees are in line with other plans.

If you do not have a written procedure for each of these, and sufficient written documentation that you followed all the procedures, you could have a real problem.

Right now, you might have that twinge of fear again, wondering how exactly you’re supposed to prudently manage these processes and procedures. I agree, it’s very challenging, especially since most of us business owners are concerned with the day-to-day operations of our companies, never mind dealing with the 401k plan. It can all be very overwhelming.

What can you do?

Fortunately, the Department of Labor gives us an out, and that out is to hire a fiduciary to run the plan for you. These experts are out there and often more than pay for themselves by negotiating lower fees with the investment providers. If you’re not an expert running your 401k plan, simply hire someone who is.

What’s the risk of not doing so?

You can be held personally responsible for the shortcomings of your plan.

The corporate veil does not protect you from your fiduciary responsibility.

You might think, ‘What’s the probability of being audited and having problems?’ Well, the risk is not very high … unless you have a disgruntled employee. Ever have one of those? Ever hear from a fellow business owner about the fallout from having a disgruntled employee? It can be devastating to your company, and to you personally.

We live in a litigious society, unfortunately. Individual employees may be quick to sue employers, and there are certain types of lawyers out there who may actually fish for class action lawsuit potential from groups of disgruntled employees about non-diversified 401ks and fees. I’ve seen these ads myself on late night television. This can happen in large and small companies alike.

My concern lies with smaller companies who may not have the financial wherewithal to defend themselves and may not be aware their general business liability policy could be completely insufficient.

Listen to our podcast for more information on your 401k plan fiduciary responsibilities, including:

  • Getting insight and assistance with your 401k plan process
  • Obtaining fiduciary responsibility insurance
  • Understanding your responsibilities as fiduciary for a 401k plan.

The risks are real. So take your 401k plan fiduciary responsibility seriously and either make sure to have documented procedures for all important aspects of your plan or hire a fiduciary that will take over the responsibilities for you.