401(K) Fiduciary Compliance Review

Dennis S. Nudo

Recently I had a breakfast meeting with a friend and in the course of the meeting he brought up the fact that there is personal liability in the event that a retirement plan administrator, or plan trustee, does not comply with certain standards. This conversation caught my attention because I believe that most plan administrators of small retirement plans are the owners of the company or members of upper management in larger companies.
Well, what does it mean to be in compliance? After all, the client generally works with an advisor for an investment company (such as Voya, Fidelity, Merrill Lynch and many others) and at least annually, and in many cases more frequently, the employees of the company meet with the investment counselor. The employees are given a list of investments and told what the risk element is for various investments being offered. Isn’t this enough to be compliant? And the answer is a resounding NO!
Plan sponsors are required to regularly and continuously monitor investments offered under the plan to plan participants. The plan sponsors are responsible to be knowledgeable with respect to the fees charged and use appropriate benchmarks to evaluate the performance of the investments. This process needs to be documented. So if Plan fiduciaries (those making decisions about what investments are being offered to participants) should adopt and then review their Investment Policy Statement (IPS) to ensure that it contains clear guidelines as to how investments should be monitored and how often the reviews will take place. Best practices indicate that the investments being offered should be reviewed at least annually or more frequently if the fiduciary determines that doing so would be prudent under ERISA’s fiduciary standards. Once it is confirmed that the IPS contains language that periodic monitoring will take place, it is crucial that the monitoring process actually take place and is documented.
In a recent case (Tibble vs. Edison International) the Supreme Court stated a “fiduciary must discharge his responsibility with the care, skill, prudence, and diligence that a prudent person acting in like capacity and familiar with such matters would use.” The plan sponsors are fiduciaries. The ruling in that case emphasizes the need for plan sponsors to regularly and continuously monitor investments and fees, use appropriate benchmarks and document the process. Additionally, the plan sponsor will need to monitor the costs of administering the plan, not just the investment expense. This becomes extremely important if the plan participants are bearing the cost of the administration and recordkeeping for the plan.
Okay, I’m a busy executive and I don’t have time to do all of the things that appear to be necessary in order to be compliant with the regulations for managing a 401(k) program. What should I do?
First, if you have a plan advisor, find out if you have an IPS currently in place. If so, are you meeting regularly to review the criteria set forth in the policy? If not, you will want to work with an advisor to create an IPS for your plan. The criteria should be broadly drafted to provide for both quantitative and qualitative analysis of the investments offered, but not too stringent so as to require a specific action if the fund’s performance lags the appropriate benchmarks for a short period of time. Remember, you don’t have to be the investment expert here, you, as a plan fiduciary, just need to make reasonable and prudent decisions based on the information provided to you.
Also, keep minutes of these investment meetings along with any reports provided by your Advisor. This will provide defensible documentation of your periodic and formal monitoring process.
Lastly, you may want to consider fiduciary liability insurance coverage to help protect personal assets against claims by participants and beneficiaries as related to investment decisions made for the retirement plan. You may want to consider hiring an independent advisor who specializes in retirement plans.


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