The laws and regulations surrounding retirement plans are complex and confusing. It isn’t any wonder, then, that there are a lot of misconceptions floating around. From fiduciary liability to required disclosures, there are a lot of common beliefs that aren’t necessarily true. Are the following statements fact or fiction? Read on to find out how much (or little) you really know about retirement plans.
I Can Delegate All Fiduciary Liability
While it is possible to delegate much of your fiduciary liability, it is impossible to delegate all of it. Just the act of delegating is a fiduciary activity. When you choose fiduciaries and delegate responsibilities to them, you are acting in a fiduciary capacity and are therefore liable.
My Consultant/Advisor Is A Co-Fiduciary To Our Plan
Not all consultants and advisors take on fiduciary responsibility. Brokers are exempt from becoming fiduciaries. (1) Registered Investment Advisors can be co-fiduciaries or 3(21) or 3(38) fiduciaries under ERISA. Different fiduciary roles come with varying levels of fiduciary responsibility. It is important to have a clear understanding of the capacity in which your consultants and advisors are serving you and what, if any, fiduciary responsibilities they have.
ERISA Bonds And Fiduciary Liability Insurance Are Optional
There has been a lot of confusion surrounding ERISA bonds, which are a kind of insurance that protects the plan against losses caused by fraud and dishonesty. (2) Many plan sponsors once thought they were not required, but just suggested through Department of Labor (DOL) guidance. The DOL has now made it clear that ERISA bonds are indeed mandatory. (3)
Though not legally required, it is wise to also have fiduciary liability insurance to protect fiduciaries against losses caused by breaches of fiduciary duty. Fiduciary liability insurance does not, however, satisfy the ERISA requirement to be bonded. (4)
Any Third Party Administrator (TPA) Will Do
Contrary to popular belief, TPAs are more than just expensive bookkeepers who perform recordkeeping and file Form 5500. A good TPA will maximize tax savings through sophisticated plan design. A bad TPA can cause errors that put the plan’s IRS qualification at risk and expose the plan sponsor to liability. You don’t want to work with just any TPA, you need to make sure you are working with a good one.
Plan Investments Are Employee-Directed, And Therefore Not Our Responsibility
Even if you offer a self-directed retirement plan, you are not free of all liability. Protection under ERISA Section 404(c) is not an all-or-nothing deal. Providing your employees with high-quality investment education and a broad range of good investments while documenting everything is a good way to shield yourself from liability. (5) However, simply handing out prospectuses and fund reports is not sufficient for full protection under Section 404(c). (6)
We Aren’t Required To Provide Investment Education And Advice
It is true that there is no legal requirement to provide 401(k) plan participants with investment education and advice. If a plan sponsor wants ERISA 404(c) protection as mentioned above, though, plan participants need to be provided with the necessary tools to make informed investment decisions. These necessary tools usually come in the form of education and/or advice. Plan sponsors should view investment education and advice as liability protection and not just a nice participant benefit. (7)
We Only Need To Choose Our Investments Once
The investments that were best for your plan ten years ago aren’t necessarily still the best options today. Things change over time, including investment companies, investment managers, and investment styles. Your financial advisor should be constantly monitoring your investment choices to ensure they are still the best options for your plan. There have been more lawsuits recently regarding imprudent management of investment options, so this is an area you shouldn’t ignore.
Retirement Plans Are Not Required To Have Investment Policy Statements (IPSs)
True, there is no law requiring IPSs. However, having one will help you choose competitive investment options, minimize potential liability and is considered best practice. It also really helps during an audit to have an IPS if the DOL agents ask for one.
Simply Disclosing Fees Is Enough
Back in 2012, new regulations ensured that both plan sponsors and participants would receive disclosures as to the true cost of their plan’s administration. While helpful, that’s not enough for plan sponsors. They are required to evaluate their plan providers for competency and reasonable fees.
The only way to do such an evaluation is by comparing their current service providers with others that are available to them. It is a lot of work, so many plan sponsors delegate the task to a retirement plan consultant or ERISA attorney. If a plan sponsor simply accepts their fee disclosures without ensuring that they are reasonable, they are increasing their liability and putting the plan at risk. (8)
How We Can Help
How did you do on the quiz? Are you a retirement plan genius, or do you think you could use a little help? Most plan sponsors find the intricacies of retirement plans overwhelming. You don’t need to feel overwhelmed, though. An independent retirement plan consultant can not only clear up all of your misconceptions but also ensure that your retirement plan is both serving your participants well and remains compliant. If that sounds appealing to you, call us at (312) 973-4911 or email info@planpilot.com. With our specialized knowledge and vast experience, we can get your retirement plan on the right track today.
(1) http://documents.jdsupra.com/9d9deed6-2d6a-4337-bbca-30d5f91f21d2.pdf
(2) https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/erisafidelitybondplanprotection.pdf
(3) http://www.jdsupra.com/post/documentViewer.aspx?fid=0535df8e-90fb-40b5-9fc4-95b5a4ddcb6c
(4) https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/erisafidelitybondplanprotection.pdf
(5) http://www.jdsupra.com/legalnews/the-potential-liability-of-participant-d-03283/
(6) http://www.jdsupra.com/post/documentViewer.aspx?fid=0535df8e-90fb-40b5-9fc4-95b5a4ddcb6c
(7) http://documents.jdsupra.com/9d9deed6-2d6a-4337-bbca-30d5f91f21d2.pdf
(8) http://documents.jdsupra.com/9d9deed6-2d6a-4337-bbca-30d5f91f21d2.pdf