401(k) Fiduciary Liability Protection: Why It’s Important

As a bi-product of the slew of high profile 401(k) fiduciary based lawsuits, most executives and business owners are aware that they may be fiduciaries of their company 401(k) plan, and therefore bear some personal exposure as it relates to the stewardship of their plan.

A company’s plan sponsor can face substantial financial liability for breaching their fiduciary duties to the plan regardless of their ability to pay, and sometimes regardless of the actual damages caused by the breach.

Per the IRS, fiduciary status is based on the functions performed for the plan, not a title.

However, many of the officers of a company will fit this definition merely by selecting a plan provider(s), or being on a selection committee that selects a third party to the plan.

Understanding who is a plan fiduciary to the 401(k) is only the first step.  Here are the duties of these defined fiduciaries:

IRS-Defined 401(k) Fiduciary Duties

Acting solely in the interest of the participants and their beneficiaries

Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan

Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters

Following the plan documents

Diversifying plan investments

401(k) Fiduciary Guidelines Practical Application

Expenses

Almost all of the recent 401(k) breach of fiduciary duty lawsuits were based on excessive plan expenses.  These are primarily related to the investments, but can also apply to excessive administrative and recordkeeping fees paid by the participant.  It is important to benchmark your plan (and investment expenses) periodically to ensure that they are in-line with the market for a plan of your size.

Investments

Fund expense ratios are an important component of investment selection. However, fees should not be the only consideration in designing an appropriate plan lineup. A holistic analysis should consider multiple fund quality factors such as return, risk, style discipline, diversification and experience.

Implementing and adhering to a quality investment monitoring process ensures a low-cost diversified investment menu.

Fund monitoring is a commonly outsourced function as many 401(k) investment advisors will act as a fiduciary to the plan, are bonded and insured, and provide high quality comprehensive fund evaluation reports.

The breadth and complexity of effectively meeting these obligations is the main reason that the vast majority of plans outsource some or all of these responsibilities.  It is important to note that fiduciaries can never eliminate 100% of the liability.  The act of selecting a third party is a fiduciary duty.  However, if a rational and documented process was used in the selection, most of those concerns are eliminated regardless of performance.

As one can infer, meeting their fiduciary duty is more easily achieved through documented, rational, ethical and careful execution of their fiduciary decisions and duties and acting exclusively for the benefit of the plan participants and their beneficiaries.