Are you a Plan Sponsor who has just received your annual liability insurance renewals?
You may have received some unpleasant surprises:
- Increased liability insurance premiums,
- Limits on liability coverage,
- More restrictions and exclusions,
- Higher risk-retention levels, or,
- All of the above!
More and more Plan Sponsors are being held liable for breaches of Fiduciary responsibility to retirees, and many of these cases are being settled at substantial financial costs.
In 2016, Anthem settled a 401(k) lawsuit alleging excessive fees for more than $23 million.
According to Bloomberg Law, proposed class actions challenging 401(k) plan fees were on track for a fivefold increase between 2019 to 2020. More than 60 cases were filed from January to August 2020, compared to about 20 in all of 2019.
In August 2020, participants filed a class-action lawsuit against LinkedIn, alleging mismanagement of its 401(k) plan. The following month, a federal judge rejected a petition by AutoZone to dismiss allegations of ERISA violations.
So you may be thinking: Is it even worth buying liability coverage anymore?
We’ll cover that, as well as 5 ways you can reduce your 401(k) plan liability.
Am I a Fiduciary?
A surprising number of Fiduciaries are not aware of their Fiduciary duty. If you’re a member of your 401(k) oversight committee, you’re probably a Fiduciary.
That means you are personally liable for mishandling plan management, such as selecting or failing to remove underperforming mutual funds from the plan’s investment menu.
Step 1: Watch your plan fees
The #1 source of 401k fiduciary liability is paying excessive plan fees. As a Fiduciary, you must make sure the services provided to their plan are necessary and that contracts or arrangements for services, and the cost of those services, are reasonable.
To judge whether a fee is reasonable, follow this simple process:
- Collect the “408(b)(2)” disclosure for each plan service provider
- Review each disclosure for completeness
- Benchmark the service provider’s fees for reasonableness
Low on time?
401(k) fee benchmarking should be done at least every 1 to 2 years. We’ll help you calculate the “all-in” fee for your plan, then compare this fee to the all-in fee of 3+ other 401(k) providers.
Call us at (925) 314-8500 or fill out the form below to start the conversation today!
Step 2: Ensure prudent investment options
A prudent investment is one that makes sense for your Plan Participants — without costing an arm and a leg in fees. Today, most excessive 401(k) fee lawsuits can be traced back to hidden fees buried in plan investments. The thing is, it’s nearly impossible to “prudently” select investments when you aren’t sure what fees you’re paying.
Unfortunately, many service providers provide a rather opaque picture of investments. You may receive conflicting advice that leads to excessive fees and poor investment returns for your participants. As a result, you fail to meet your Fiduciary responsibility and place yourself at risk for Fiduciary liability.
Step 3: Prioritize deposits
You must deposit participant contributions (e.g., pre-tax/Roth 401k deferrals, loan payments) to the plan’s trust account on the earliest date they can reasonably be segregated from general corporate assets.
Does your plan have fewer than 100 participants? You need to make that deposit within 7 business days.
Does your plan have more than 100 participants? You may have more wiggle room, but you’d better have a solid alibi in the form of facts and circumstances.
The DOL actively enforces these deposit standards under the Employee Contributions Initiative. And yes, you may be subject to civil penalties if you don’t meet these guidelines.
Step 4: Follow Plan Document terms to a T
The Plan Document is a comprehensive written instrument describing the operation and administration of an employer’s plan. Think of it as a contract to your Plan Participants.
When you think about your Fiduciary responsibilities, you must use your Plan Document as a guide in running day-to-day activities.
Step 5: Keep an eye on emerging risks
Keep a close eye on new areas of Fiduciary liability risk, including those related to cybersecurity.
In addition, Plan Sponsors need to be prepared to respond to questions about how they handled their Fiduciary duties during the COVID-19 pandemic, including how they handled questions about COBRA eligibility and questions related to 401(k) loans and investments.
Do I need an Advisor when I have 401(k) plan liability coverage?
Managing retirement plan investments and administration is no simple task. Plan Sponsors are subject to complex Fiduciary responsibilities under ERISA, including but not limited to:
- Investment-related responsibilities
- Administration-related responsibilities
- Ensuring you are only paying “reasonable” 401(k) fees from plan assets
- Depositing employee contributions timely
- Maintaining adequate ERISA fidelity bond coverage
- Selecting and monitoring competent 401(k) service providers with reasonable fees
There are a lot of things that go into running a 401(k) plan properly, and 401(k) plan liability coverage helps reduce the personal liability held by you, the Fiduciary. When plan participants cry foul, you are at less risk of paying through the nose.
However, if you truly want to sleep well at night, hire a 3(38) Retirement Plan Advisor. The liability associated with making these decisions shifts from you, the Plan Sponsor, to us, the 3(38) Advisor. Call our San Ramon, CA office at (925) 314-8500 to book your free consultation with Prosperity 401(k) Advisors today.
What does a 3(38) Advisor do for me?
Now that you understand common 401(k) plan pitfalls, you need to appoint the individual decision-makers. One of the biggest risk-mitigation steps is to divide fiduciary roles among different people. And one effective strategy is to appoint an independent Fiduciary Advisor who will choose and evaluate your 401(k) investment menu, monitor its continued performance and make sound recommendations.
An ERISA 3(38) Financial Advisor is responsible for selecting, managing, monitoring, and benchmarking the investment menu for your 401(k) plan. When you have a 3(38) Advisor on your team, you can present a strong case your plan is well-run and follows Fiduciary best practices.
One way that working with a 3(38) Advisor helps you strengthen your defense — if your 401(k) has been dinged for noncompliance in the past, it is especially important to show that you’ve addressed those issues by hiring competent 401(k) service providers.
Another reason to have a 3(38) Advisor — your Advisor will examine your plan for potential weaknesses and quickly correct any problems. Your Advisor will also conduct quarterly reviews of investment performance and assist you in disclosing plan fees to your participants. Your Advisor can even conduct relevant benchmarks on your behalf.
You can also tap your 3(38) Advisor for guidance on significant 401(k) decisions, such as the decision to offer company stock — which is often a major Fiduciary risk.
Finally, your 3(38) Advisor will keep notes about all investment decisions. That way, if you, the employer, faces questions about 401(k) Fiduciary matters, you’ll have the documentation and evidence that you’ve fulfilled your Fiduciary responsibilities and compliance requirements.
We Can Help
When you work with Prosperity 401(k) Advisors, we’ll actively monitor the plan and keep you fully informed so that you can stay compliant — so that you have time to focus on your business.
To schedule your free consultation, please call (925) 314-8500 or fill out the form below. We look forward to speaking with you.