Did you know that by offering a 401k to your employees, you become their fiduciary? According to the Employee Retirement Income Security Act (ERISA) of 1974, that means you must act in their best interests. This might sound easy enough but in the past year, over 90 companies have had to defend themselves in lawsuits brought about by their own employees for fiduciary mismanagement of the company’s 401k plan. At the heart of these cases are claims of excessive fees that employees have to pay as part of their 401k plan. The result of these lawsuits is an estimated $1 billion in settlements.
These companies probably didn’t set out to harm their employees. But unfortunately, the set of requirements for retirement accounts set forth by the Department of Labor are both vague and comprehensive – which is horrible for plan sponsors and managers, and perfect for plaintiff lawyers.
It’s not just Fortune 500 corporations that are at risk for lawsuits, even plans with assets as low as $4.5 million have been successfully sued.
So how do you make sure you do right by your employees and protect yourself from excess litigation? The first step is to understand what your fiduciary responsibilities are.
What are my fiduciary responsibilities?
According to the Department of Labor, anyone involved in the management of a 401k plan is legally required to:
- Act solely in the interest of plan participants and their beneficiaries
- Act prudently
- Diversify plan investments
- Follow the terms of plan documents
- Avoid conflicts of interest
Investment-specific fiduciary responsibilities require plan managers to offer a set of ‘prudent investments’ to their participants— which are defined as, “funds that meet their objective for a reasonable fee”. Plan managers must also provide access to a broad range of financial markets so that plan participants are able to properly diversify their accounts to avoid major losses.
New to the world of investments? Too bad. Under ERISA, retirement plan managers are held to the ‘Prudent Expert’ fiduciary standard. This means they must act ‘with the care, diligence, prudence, and skill of someone familiar with such matters’ — specifically an investment professional. Employers lacking expertise are not excused from this requirement, so the vast majority of employers are expected to either seek professional advice or risk litigation.
401k plan managers are also responsible for extensive record keeping. Specifically, plan documents must provide enough information to be “verified, explained, or clarified, and checked for accuracy and completeness.” Mandatory records include fee invoices, trust statements, services contracts, claim records, payrolls, plan documents and amendments, board resolutions, insurance contracts, among many others.
How can I protect myself from Excessive Fee litigation?
If you’re looking to protect your plan from Excessive Fee litigation, you have a couple of options:
Fiduciary Liability Insurance
You can obtain Fiduciary Liability Insurance. Without it, you’re vulnerable to the following claims:
- Breaches of Fiduciary Duty – violations of fiduciary obligations, responsibilities or duties under ERISA.
- Errors or omissions in the administration of a plan. Including:
- Advising, counseling, or giving notice to employees, participants and beneficiaries
- Providing interpretations
- Handling Records
- Activities affecting enrollment, termination or cancellation of employees, participants, and beneficiaries under the Plan
Fiduciary Liability Insurance can be extremely costly, depending on the structure of your retirement plan. And as a result of the previously discussed lawsuits, premiums have spiked by an average of 30-40%.
Offer a retirement plan that doesn’t carry the fiduciary risk
Icon’s innovative platform enables employers to help their employees save for retirement without exposing the business or themselves to all of the above. By using a payroll IRA as the investment vehicle, instead of a defined contribution plan (like a 401k) our plan removes the fiduciary risk, ERISA requirements and federal filing requirements. New to the world of investments? No problem. Icon is an SEC registered investment advisor, so the fiduciary burden is on us.
With Icon setting up your company’s retirement plan takes minutes, not months. It’s the easiest, most affordable way to offer a retirement plan.