As a retirement plan sponsor, you are shouldering a lot of risk, whether you’re aware of it or not. Today, doing it right is even more critical, since there are attorneys watching. Litigation against retirement plan sponsors has been on the rise over the past decade. Initially limited to large companies, lawsuits have been filed against large and small plans alike, with claims that plan sponsors are not managing their plans properly.
Unfortunately, it’s no longer just a few isolated incidents. According to Plansponsor.com, more than 83,000 ERISA lawsuits have been filed against retirement plans since 2009. And some specialty law firms are now advertising for disgruntled employees who are not happy with their retirement plan.
Bottom line: you can’t afford to make mistakes with your employees’ retirement plan. Not only does your business have potential liability, but that liability can extend to you personally, too. (You can read more about your potential liability as a retirement plan sponsor in my previous article.)
So unless you have specialized experience in managing your firm’s 401(k) plan (or your nonprofit’s 403(b) plan), it’s prudent to consider outside help. In fact, doing so could be one of the most important decisions you make.
Role of the Retirement Plan Advisor
It might be easy to think that the role of a retirement plan advisor is to focus on investments. While they will help with that, the advisor’s real role is to make sure everything related to the plan is done properly and to ensure the interests of your participants are protected. In that process, the advisor’s presence also protects you, the retirement plan sponsor.
Minimizing Your Risk
Your goal should be to reduce your risks. These risks include the risk of lawsuits, risk of ERISA and Department of Labor audits, risk of penalties, and risk of complaints. That’s where having a professional retirement plan advisor can keep you out of trouble. You want someone who has experience managing multiple plans for decades. They should know the ins and outs of management, so they can make sure your plan is handled correctly. If you do this, it can help cut down your risk of problems. But the caveat is: you have to hire the right advisor.
Hire a Fiduciary
As a plan sponsor, you are already considered a fiduciary for your plan. That simply means you are on the hook to always do what’s best for your participants. If you don’t, you expose yourself and your company to potential liability.
Some advisors, such as brokers, may provide you with advice, but not serve as a fiduciary themselves. While that’s better than nothing, you still shoulder all the responsibility.
However, there’s a much better option: hire a fiduciary advisor.
Sharing the Responsibility
Fortunately, there are financial advisors out there who are qualified to share that fiduciary responsibility with you. Within the scope of fiduciary advisors, you have two options: a 3(21) advisor or a 3(38) advisor. Those numbers simply refer to sections of the Employee Retirement Income Security Act of 1974 (ERISA).
What’s the difference? A 3(21) advisor acts as a co-fiduciary with you. That means they primarily act as your advisor, but you maintain the discretion to make the final decision. This arrangement allows them to share some of the fiduciary responsibility, but you remain on the hook for most of it.
On the other hand, a 3(38) advisor has the discretion to make and implement investment decisions for the plan. In this case, you (as the plan sponsor) have less liability because the 3(38) advisor takes on more of it. One important thing to note, however: that doesn’t absolve you of all fiduciary responsibility. You’re still on the hook to hire that advisor carefully, then monitor their activities.
According to data from Ann Schleck & Co., in 2016 there were far more 3(21) advisors available than 3(38) advisors, so be sure you know the difference before you hire someone.
Get it in Writing
Hiring a firm for this role is a critical decision. They should be willing to document exactly the role they will play as a fiduciary to your plan. So don’t be shy; get it in writing from the firm you’re considering hiring.
Other Considerations
Because this is such an important hire, be sure to ask the right questions and document your entire hiring process.
Don’t just assume every firm is well-qualified. Often, a local advisor who does a “bit” of retirement plan work may approach you. While it makes sense to hire someone locally if possible, there’s a real risk that the advisor who only works with a few plans is not fully up to date on all the various issues facing plan sponsors. One misstep can mean potential liability.
Instead, it’s best to avoid being part of anyone’s learning curve. Look for an advisory firm that has worked with many retirement plans. And their experience should span decades, not just a few years. Because investments are involved, be sure to hire a firm that has helped clients successfully navigate all kinds of market and economic conditions.
As importantly, remember: you retain fiduciary responsibility no matter who you hire. Make sure the firms you consider communicate in a style you can understand and will devote enough time to your plan. That way you can stay in control and understand the process.
Many of the large firms are of course very competent, but may not devote enough time to smaller plans. The risk here is that something occurs that they aren’t aware of, which can happen when there’s little communication. We’ve seen that frequently in our decades of work with small and large plans so be aware of that.
We’ll have more tips in future blogs. Whatever you do, take your time and hire right, since this is a critical decision.
Download our Free EBook for More Tips
For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:
- Learn about your role as a retirement plan fiduciary
- Action steps you can take to identify any areas where you need to do more
- How to identify and implement best practices
As potential risks rise, make sure your organization is prepared. Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.
