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A Special Report on 401(k) Best Practices

As you may recall, we have written previously on the importance for retirement plan sponsors to better understand their responsibilities under ERISA to more effectively operate their plans.  In my opinion, it is no longer prudent to default to actions being/not being taken by plan vendors not serving in a fiduciary role. ERISA specifically requires fiduciaries to adhere to a duty of loyalty, a duty of prudence, a duty to diversify plan investments and to not engage in any prohibited transaction, unless exempted.

Do you know which of your plan vendors are serving in a fiduciary capacity, and if so, to what extent?

A recent special report written by Lars Golumbic, of the Groom Law Group, discusses the types of lawsuits being brought against sponsors and offers some suggestions on reducing ERISA risks.

When interviewed by PR Newswire , Lars says “although ERISA class-action lawsuits have been around for years, we’ve recently seen an expansion in the number of plaintiffs’ law firms bringing these cases.  More and more firms are jumping on the bandwagon as they see other firms’ investments in ERISA litigation paying off.  What’s more, even the established firms have significantly expanded their fiduciary targets—and now no plan sponsor or fiduciary is immune from suit.”

The Special Report points out that plaintiffs are narrowing in on:

-401(k) plans that offer employer stock

-401(k) plans whose fees may appear unreasonable for the types of services being provided (e.g., recordkeeping, investment management)

-401(k) plans that use proprietary funds from a financial institution that appear to have high fees and/or track records of poor performance

Golumbic then goes on to share best practices and specific things that plan sponsors can do prior to becoming one of these targets.  Here are just a few taken from the Special Report.

Best Practices

 – “The process by which their 401(k) plan adds, reviews, and removes plan investment options- focusing, if applicable, on review of the inclusion of proprietary funds

  • Sponsors should have a formal due diligence process for selecting and monitoring all plan level investment options. This should include performance, expenses/fees and risk measurements.

– “The internal understanding of who constitutes a fiduciary under ERISA with regard to the 401(k) plan and what exactly that obligation entails

  • Sponsors need to know their roles and responsibilities as fiduciaries. If they are not comfortable with certain functions then they should delegate those to experts.

Overall Administrative Structure and Design

– “Avoid naming the plan sponsor as fiduciary”

  • Consider the formation of a committee. This can be an employee benefits committee or even segregated into two (investment and administration) and be specifically named as fiduciary

– “Define the roles of plan sponsor and fiduciaries”

  • It is important to be able to separate fiduciary with settlor functions while clearly outlining who has the power to delegate, monitor and remove other fiduciaries

Plan Administration

– “Have regular, structured meetings”

  • 401(k) plans require the monitoring of many moving parts. It is essential to review compliance deadlines, disclosure requirements and administrative processes while properly documenting any decisions being made.

– “Review agreements with outside fiduciaries”

  • Confirm the fiduciary status and responsibilities of your plan vendors and make sure they are properly documented.

Selecting and Managing Investment Options

 – “Consider establishing an investment policy”

  • Developing an Investment Policy Statement creates a road map for the proper selection and ongoing monitoring of investment options.

– “Review investment performance (e.g., consider hiring an outside investment consultant)

  • If you or committee members do not feel comfortable with investment decision-making then consider hiring an expert.

– “Be educated about fees”

  • Know exactly what you and your participants are paying and to which vendor. This information can be obtained through plan-level 408(b)(2) and participant-level 404(a)(5) fee disclosures.

It`s simple, plan sponsors that document their decisions and arm themselves with knowledge about their plan level responsibilities, investment options, and cost structure can help drive positive participant outcomes while simultaneously mitigating fiduciary risk.  At ThirtyNorth, we work with our clients by providing a formal process and fiduciary framework to assist with plan design, compliance, cost structure and fiduciary roles.  If you would like more detail on implementing a formal process and the proper steps that should be taken, please click on our Thin(k) Process grid.