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Six 401(k) Committee Best Practices to Reduce Your Liability in 2021

With the continued rise in retirement plan litigation, 401(k) committee members are likely wondering what can be done to reduce potential liability.  While new cases can bring up new themes, one has persisted:  that’s the need to adopt best practices in your participant’s best interests.

But for busy professionals who find themselves on a 401(k) committee, what exactly does that mean?

As retirement plan specialists for the past three decades, we work with many 401(k) committees.  Here are our top tips to get your committee on track, so you can minimize liability and maximize service to your valued participants.

1) Formalize your 401(k) committee policies and practices.

As a committee member, it’s crucial to separate your role at the company from your role as part of the 401(k) committee.  When working on the committee, there’s only one thing that is important:  the best interests of the participants.

Given that they must trust the plan to safeguard their retirement savings, the entire effort must be viewed through that lens.

That’s why you need formal policies and procedures for all committee functions.

If you have a retirement plan advisor, they should typically provide this for you. If not, take the time to establish these essential guidelines in the form of a charter or by-laws.  The following should be covered, at a minimum:

  • Outline the responsibilities of all members
  • Document each member’s fiduciary duty (which should be acknowledged in writing)
  • Outline how often the committee will meet
  • Document the procedure for handling participant questions
  • Create a formal process for decision-making

The last item is essential.  That’s because the ERISA Act, the law that governs qualified retirement plans, requires plan sponsors to use a prudent decision-making process when deciding for the plan.[i]

2) Educate your 401(k) committee members.

Committee members should be hand-selected; you cannot afford those who may not take the process seriously.  In fact, these individuals need to take the process seriously as they potentially face personal liability as plan fiduciaries.[ii]

That’s where education is key.  With busy people used to looking out for the company, you need to train all participants in several aspects of the regulations present in ERISA and 401(k) plan management:

  • The fiduciary role and mindset
  • Plan policies and procedures
  • Investment review guidelines
  • Plan documents

3) Periodically review plan expenses.

Current litigation trends continue to show that plan expenses are still an important focal point.  Understandably so, since plan expenses directly impact the ability of your participants to create retirement wealth. Your participants count on the plan sponsor to keep these fees reasonable, to keep their money working for them efficiently.

So a primary purpose of the 401(k) committee is to control all costs related to the plan.

Past litigation has focused on the following aspects of fees:

  • Utilizing the most inexpensive share class for each investment option
  • Keeping custodian and record keeper costs reasonable and competitive
  • Managing fees for retirement plan advisors, trustees, auditors, and other service providers

However, just choosing the lowest cost option is not necessarily prudent, either. You’re also responsible for finding value and making sure the option selected is the best combination of value and price.

The best practice is to do fee benchmarking, which is a way to compare your plan’s fees to peer plans.  Doing it right can also allow you to lower costs without having to change vendors.  You can learn more about this process in our fee benchmarking article.

4) Establish a system to monitor the plan’s investments.

Another litigation hot point has been monitoring the plan’s investment options.  Many firms do a lot of work up front to identify an excellent, low-cost fund lineup, then think most of that work is done.

Unfortunately, courts see it otherwise.  The US Supreme Court has ruled that plan sponsors have a continuing duty to monitor the plan and its funds.[iii]

What does that mean to you?  It is your organization’s responsibility to monitor funds offered.  Then, if and when a fund or investment shows signs of faltering, you are responsible for replacing it with a better option.

As you can imagine, this task requires some specialized expertise.  Most firms do best partnering with a retirement plan advisor who has a system to monitor funds.  But be careful because not all retirement plan advisors have an automated system or extensive experience in this area. Given the legal precedent, you don’t want to make a mistake here.

We covered this step in more detail in a previous article, Why it’s Critical for Plan Sponsors to Continually Monitor Plan Investments.

5) Document everything that is done for the plan.

So far, we’ve reviewed four critical practices 401(k) committees should consider adopting.  The fifth is simply documenting everything you do.  Why?  If you’re ever threatened with a lawsuit, you don’t want to have to try to prove you covered something but have no physical record of it.

Instead, you’ll want plenty of proof to show the efforts you’ve taken on behalf of the participants and the plan.  Good documentation does that for you.

Here are a few tips for documenting actions effectively:

  • Every meeting should be planned with a formal written agenda.
  • Meeting minutes should be recorded, including detail on options evaluated when making decisions, along with documenting the entire voting process.
  • Any correspondence with participants should be documented and retained, including any follow-up that occurred.

For more on this, you can review our previous article on documentation best practices.

Please don’t underestimate this step.  Quality documentation of the actions you’ve taken to help protect the plan and participants will be invaluable if you ever wind up in court.

6) Work with an advisor who shares your liability.

As you can see, there’s a lot to do to manage potential liability, much of it requiring specialized knowledge.  That’s why having the right retirement plan advisor isn’t just important; it’s critical.

Many times firms hire a local firm. This can be fine if they are retirement plan specialists.  But given the ongoing litigation, you don’t want to work with someone who just dabbles in a few plans as a sideline to their core business.  You will likely be best served by working with a specialist firm that actively stays on top of litigation trends.  They can help your committee remain compliant and avoid missteps.

Even better, certain retirement plan advisors can actually help you reduce your liability.  Not all can, though, so you need to choose carefully.  Brokers can provide advice but may not serve as a co-fiduciary for your plan.  However, two types of retirement plan advisors can reduce your liability by acting as a co-fiduciary for the plan:

  • The ERISA 3(21) Investment Advisor. This type of advisor may advise you, which assumes some responsibility, but you still retain most of the liability.
  • The ERISA 3(38) Investment Manager. This type of advisor can provide advice, but along with that, has the discretion to make and implement investment decisions for the plan. [iv] This allows you to shift much of the liability to that advisor.

While fewer firms are qualified to act as a 3(38) manager, this type of advisor can significantly lessen your plan’s liability by shouldering more responsibility.  Please note you’re still on the hook for carefully hiring this type of firm.

Final Words of Advice

Unfortunately, the continuing litigation trend is a cause for concern, so don’t take this responsibility lightly.  Fortunately, by following best practices, you can actively reduce potential liability.  Working with a 3(38) advisor can reduce it even further.

Whatever you do, always keep in mind, your participants are counting on you to help protect their retirement savings.  Go into every committee meeting with that in mind, and it can go a long way in helping you avoid liability and get better results for all parties involved.


[i] https://www.govinfo.gov/content/pkg/COMPS-896/pdf/COMPS-896.pdf

[ii] https://retirementlc.com/are-plan-committee-members-fiduciaries/

[iii] https://www.venable.com/insights/publications/2015/06/us-supreme-court-holds-that-retirement-plan-fiduci

[iv] https://www.employeefiduciary.com/blog/hiring-an-erisa-338-investment-manager-limites-401k-investment-liability

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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

Is Your Organization’s Retirement Plan Ready for What’s Coming?

Updated 12/9/201

Most people are sadly still dealing with some aspect of COVID-19 fallout. But if your organization sponsors a 401(k), a 403(b), or some other type of retirement plan, it’s especially important to pay attention.   Many individuals are continuing to experience financial stress, so chances are they will be looking more closely at all of their financial accounts, including retirement plans, in the coming months.

Why It’s More Critical Than Ever

Managing your plan has always been important, but it’s even more so now. Why? Unfortunately, litigation against retirement plans continues to increase.

A recent article published by the American Bar Association noted that ERISA lawsuits are at an all-time high.[i] According to Plansponsor.com, over 83,000 ERISA lawsuits have been filed since 2009.ii

Additionally, 403(b) plans, along with small retirement plans of all types, are being increasingly targeted in those lawsuits.

With layoffs and pay cuts on the increase, there’s no reason to expect this trend to slow…and every reason to anticipate it speeding up.

Your Role as a Fiduciary

If you’re a business owner or a human resources manager with control over your organization’s retirement plan, you’re likely considered a legal fiduciary of the plan. That means you’re responsible to put the participant’s interests above your own at all times.

Unfortunately, this liability is not just pure business liability. As a fiduciary, you could be held personally liable as well, putting your personal assets on the line.

Of course, you’re probably taking all the obvious steps to keep the plan on track. This is where the problem lies; it’s not always the obvious things that will trip you up. It’s often the smaller administrative details that the complex regulations require of you.

Continuous Monitoring Required

One benefit of all this legal activity is the clarification of what’s required of retirement plan sponsors. And what has become clear throughout is that your responsibility is continuous, not one-time.

It’s not enough to set the plan up meticulously and select a great lineup of low-cost mutual funds for your participants to choose from.  According to recent case law, that’s just the beginning of your responsibility.

Here are some examples of what courts have found:

  • You must continuously monitor the investments selected for your plan. If any of those mutual funds begin to underperform their peers, you as a plan sponsor are responsible for quickly finding an alternative and replacing the fund.
  • As the plan sponsor, you need to frequently audit the plan to make sure all costs and expenses are reasonable. That means comparing your plan’s costs against those of similar plans and negotiating lower rates when needed.

Emphasis on Fees

Not surprisingly, the biggest area of concern is fees. Which makes sense; every dollar of fees directly impacts each participant’s account.  That’s why it’s critical to pay attention to all costs by asking some key questions:

  • First, is the service you’re paying for necessary in the first place? Do other plans of your size use that service?
  • If the expense is necessary, how much are you paying? Everything you pay should be in line with what other plans of your size are paying, so the participants aren’t being overcharged.
  • Are fees transparent and easy to understand?

Complicating matters are the often confusing fee structures in use by service providers.  Fortunately, there’s a solution to that problem:  ask your service provider for a simpler fee structure. If they are unwilling to work with you, consider that a valuable red flag.  Quality firms are very well aware of the litigious environment and should understand your request and work with you to find a better solution.

Who’s Watching?

Of particular concern is that a few law firms have been specializing in retirement plan litigation. Some have been advertising online, seeking employees who are unhappy with their retirement plans.

As you probably know, a lawsuit doesn’t even need to have merit to be extremely expensive to defend.

Reduce Risk With Best Practices

So how do you stay safe?  Our best advice is to make sure you are compliant with all regulations and implement best practices with your retirement plan administration.

Also, it’s a good idea to do everything with the assumption you might get called into court to prove it.  To put it another way, now is not the time to be casual with recordkeeping.  Instead, your motto should be document, document, document.

Please see my recent article for further tips on effective documentation practices.

Reduce Your Liability by Sharing with an Expert

Another way to manage risk is to share your liability with a specialist firm that has expertise in retirement plan administration.

There are two different ways to do this. First, you can hire a 3(21) advisor, who will share that fiduciary responsibility for plan management with you. Even better, you can hire a 3(38) advisor. (These numbers simply refer to that numbered section of the Employee Retirement Income Security Act of 1974 (ERISA).)

The 3(38) advisor can make investment decisions for your plan and assume responsibility for implementing them. In this way, they take on more liability for issues, thereby reducing yours.

Choose Very Carefully

One critical thing to remember is that everything you do needs to be well-reasoned and documented. That includes hiring the right financial advisor for your retirement plan. If there ever were any legal claims, you would want to be able to show the steps you took to screen and select the best retirement plan advisor.

You can read my previous article providing specific screening steps so you can hire properly.

One More Complication

Finally, one more challenge was created with the arrival of the pandemic, and that’s some new provisions in the CARES Act. The Coronavirus Aid, Relief and Economic Security Act was created to help people and businesses impacted by COVID 19.[ii]

There have been a few changes impacting retirement plans:

  • If your business has been heavily impacted by the virus, you may have the ability to reduce or temporarily suspend your employer contributions.
  • Several changes may be available for your participants, including increased ability to cash out a portion of their account or take a loan to help them with income losses.

Any change to the plan should be done carefully and with the best interest of the participants in mind.

Also, this is evolving as the IRS works to interpret the newly passed CARES Act.


Unfortunately, it’s not an easy time to be a retirement plan sponsor, but your responsibility to your participants doesn’t disappear in a pandemic. Given the high stakes, it’s critical to make sure you are doing things according to regulations and best practices. In the case of avoiding expensive legal problems, an ounce of prevention really is worth a pound of cure.

[i] Jara, José M. ERISA: THOU SHALL NOT PAY EXCESSIVE FEES! www.americanbar.org/groups/real_property_trust_estate/publications/ereport/rpte-ereport-winter-2019/erisa–thou-shall-not-pay-excessive-fees-/.

[ii] Manganaro, John. Assessing Courts’ ERISA Decisions in 2018. 31 Dec. 2018, www.plansponsor.com/assessing-courts-erisa-decisions-2018/.

[ii] “Guide to the CARES Act.” Guide to the CARES Act – U.S. Committee on Small Business & Entrepreneurship, U.S. Senate Committee on Small Business & Entrepreneurship, www.sbc.senate.gov/public/index.cfm/guide-to-the-cares-act.

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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

How To Find The Best Financial Advisor for Your Retirement Plan


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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

How Plan Sponsors Can Help Reduce Participant Investing Mistakes


Most of the people enrolled in your organization’s 401k retirement savings plan are not experienced investors.  In fact, for most, the mere act of choosing which funds to include in their account can be a real challenge, if not downright intimidating.  Along with that, the 24/7 presence of financial news on the internet can create anxiety for the retirement investor.

As a result, many of your plan’s participants are vulnerable to making some serious mistakes along their journey of investing for retirement.

The reality is markets, like most things in life, are cyclical in nature. There are periods when markets advance (bull markets), followed by periods of time when markets mostly drop or stay flat (bear markets).  This is natural of course, but sometimes happen with little to no warning– just think of the 2008 market crash.

As a retirement plan sponsor, you have responsibility to provide education to your participants.  But education can only do so much.  Even if people are taught to expect the ups and downs, natural human emotions of fear and greed unfortunately drive our investing decisions.  With enough repetition, education can sometimes overcome those emotions; but that doesn’t happen very often.

Want proof that retirement savers don’t always make the most sound investment decisions?  According to a recent Dalbar Inc. study, “In 2018 the average investor underperformed the S&P 500 in both good times and bad, lagging behind the S&P by more than 100 basis points in two different months”.  This study is not alone, either; many others have reported similar results.

But why do individual investors make such poor investment decisions in the first place?


Behavioral Finance: Identifying Common Culprits

You can chalk it up to a collection of emotional and cognitive biases. Emotional biases allow an investor’s judgment to be clouded by their emotions, such as the natural instinct to try to prevent a monetary loss or the tendency to over-value a personal possession.

Cognitive biases, on the other hand, cause investors to make poor decisions because of objective errors in their thinking or reasoning process. In other words, their brain plays tricks on them causing them to over-estimate their reasoning abilities.

It’s these biases that can cause individual investors to overreact to any number of “triggers,” such as market performance or economic news.  Investors then end up being overly confident or overly cautious, trading too often too soon, or too little too late.

Here are a few of the common biases impacting retirement plan investors that you should be aware of:

Endowment Bias. We tend to place a greater value on an investment we currently own. This means once something comes into our possession, it’s hard to think about its value in a rational way. Our selling price then rises above what most buyers are willing to pay.

Recency Bias. We have a tendency to believe that what happened in the most recent past will continue to happen in the future. Thus, investors choose investments for their portfolio based on their most recent performance, a behavior also known as “chasing returns.”

The Disposition Effect. The disposition effect is the reluctance of an investor to sell losing investments, while at the same time prematurely selling off those investments that have made gains. Investors dislike losses and are willing to take risks in order to avoid experiencing them. Conversely, investors want to lock in gains, so they sell assets that have already earned them money– even if those same assets could potentially earn them even more in the future.

The Sunk-Cost Fallacy. The disposition effect is related to the sunk-cost fallacy. It occurs when investors refuse to cut their losses once an investment is made. Instead, they may actually invest additional time and money into the asset in the hope that they will eventually recoup their loss.

Herding Bias. In general, we tend to feel more comfortable following the crowd, assuming that the consensus opinion is the most appropriate one even when there is clear evidence indicating otherwise.

The Overconfidence Effect. We tend to overestimate our own abilities, thinking we know more than we actually do. But, the reality is most professionals have access to sophisticated tools and algorithms as well as historical data, and even they can’t always beat the market.


How Can You Help Plan Participants Avoid Costly Investment Mistakes?

Aside from regularly monitoring and reviewing the funds in your organization’s 401k plan so you can remove any under-performing investment options, the need for professional investment management and coaching is apparent given the results individual investors produce.

Education helps, of course and needs to be part of your offering.  But in addition, this is where offering low-fee managed options, like model portfolios, can help you provide a better option.  Target date funds are popular, but most may have high fees, so as always, take care in evaluating your options.

In summary, investor bias can be a real threat to the balances in your participant’s 401k accounts. But, by proactively offering safer investment options and a little guidance, you can help steer them and their money in the right direction.




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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

Why it’s Critical for Plan Sponsors to Continually Monitor Plan Investments


As a retirement plan sponsor, you’ve got many responsibilities.  But once you get the plan setup and do extensive research to offer a great lineup of professionally managed, low-cost mutual funds, you’re done, right?

Not so fast.

As a retirement plan sponsor, never forget that you are considered a fiduciary for the plan.  That means you must always put the interests of the participants first.  It’s their money and you are entrusted to look out for it.

As modern day plan sponsors are finding, that responsibility cannot be understated.

Let’s say you pick a fund family or group of funds that offer value for reasonable fees.  That’s great, you’re doing your job.  You document everything fully.  Are you done?  No.  These funds each have a lot of moving parts. Things can change:

  • The fund manager(s) may change.
  • The fund may change its investment approach.
  • The fund may stray from its investment approach
  • The management may not execute on their plan effectively

Then there are other factors that might not impact the fund, but still impact your participants.  For example, maybe fund management fees start dropping in the industry, making quality, lower cost options available.


Continuing Fiduciary Duty Confirmed by the Supreme Court

That’s why it’s important to understand that your responsibility does not just lie with selecting the initial fund lineup.  You’re responsible for continually monitoring the funds to make sure they remain a prudent choice for your participants.

This was underscored in 2015 when the United State Supreme Court held that employers have a continuing fiduciary duty to monitor the investment alternatives offered under the retirement plans they sponsor. In this case involving Edison International 401(k), the Supreme Court justices were unanimous in their finding that monitoring investments in a retirement plan is a “continuing duty”.

The ruling also provide some specific guidelines, too:

  • Plan sponsors or an investment fiduciary have a continuing duty to review plan options and remove any investment options that become imprudent.
  • That continuing duty requires that the creation of a process to regularly review the plan’s investment options and take action when needed.

The message is clear:  if you haven’t been regularly reviewing mutual funds in the plan, you need to start now.  And it needs to be done regularly with an organized, documented process.


What’s Your Process?

Since most plan sponsors are not investment experts, this is where your retirement plan advisor can (and already should be) helping.

At Capital Research + Consulting, over the years, we’ve identified a handful of signals mutual funds give off prior to faltering. Our research has found that these signals usually result in later underperformance. We’ve invested in automating that research.  Our Early Warning System continuously monitors our client’s plan investments.  We receive an alert when and if it signals. At that time, we’ll research and recommend a suitable replacement.

That’s just an example of our process.  Be sure that your retirement plan advisor creates a process based on best practices as that is likely what the courts will be looking for.

This is where it’s also important that you employ a retirement plan advisor who is very experienced with retirement plan administration.  If you hire a generalist advisor who just manages a few plans, you risk potential problems, since they may not be that aware of the issues they may face.

So learn a lesson from the Tibble v Edison case:  the courts take this responsibility seriously.  As a fiduciary, you not only have corporate responsibility, you potentially have personal liability too.  (You can learn more about that in our previous article on fiduciary responsibility).

Whatever you do, understand that attorneys and courts will be watching.  So don’t put this off….double check you’re doing this now, for the good of all parties involved.



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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

Why Fee Benchmarking Can Help Plan Sponsors Reduce Potential Liability


Fees have been a focal point of recent retirement plan litigation, for good reason.  Small percentage differences, over time, can eat away at participant nest eggs.

Because of the frequency of excessive fee lawsuits, it is imperative that you employ best practices related to retirement plan fees.  That means taking the time to develop a documented procedure on how you will help ensure that plan fees are kept reasonable.

Here’s a few tips.

Tip 1.  First, know exactly what you are paying.

One challenge to fee review and benchmarking is the complexity of some fee arrangements.  The financial services industry historically is notorious for hidden and confusing fees, so as the plan sponsor you need to be crystal clear on how all plan provider fee arrangements work.  If you don’t understand this to the letter, you could be putting you and your organization at risk.  That’s why it is always recommended to hire service providers who have transparent, easy-to-understand fee schedules. There’s just too much at stake to not require that.

That also means speaking up.  If existing plan service providers give you fee schedules that are not clean and clear, ask for a different structure.  Or just look for other firms who will provide easy to understand fee schedules.

Tip 2.  Make sure all fees are reasonable and necessary

Along with knowing the fees the plan and participants are paying, you also are required to ensure that the services you are purchasing for the plan are necessary and reasonable.  If they are not providing a very specific and needed benefit, you should probably revisit if they are appropriate.  The last thing you want is an attorney finding expenses paid year after year that are optional.

Remember, as plan sponsor you are serving as a fiduciary for your plan participants.  They are counting on you to spend plan money very carefully.  That means every expense should be justified.  There is no room for extras that don’t provide a measurable benefit to the participant.

What about extras that make your job as plan sponsor easier?  Remember, as a fiduciary, you are legally required to put the participant’s interest first.  Always make decisions keeping that factor in mind.

Tip 3.  Benchmark Everything Regularly

Once you are clear on the above, now you need to make sure you’re getting good value for the plan and participants.  The way you can do that most effectively is through benchmarking.

With benchmarking, you periodically compare your fees against the fees of similar plans.  That way, you can see if the fees that your plan and your participants are paying are more than what others pay.  You can then use that information to negotiate better prices with service providers.

This is good news for participants, of course.

Tip 4.  Use the RFI (Request for Information) Process

One of the best ways to benchmark is to periodically engage in something called the “request for information” process.  For most plans, every three to five years is a good interval for this.  More often and you may end up losing effectiveness.

This process keeps the retirement plan market competitive.  In most cases plan sponsors simply opt to remain with their existing provider, but the RFI process allows them to negotiate a better deal.

If you have a full-service retirement plan advisor, they can help you with this process.  At Capital Research + Consulting, we normally do this every three years for our clients.

Things to keep in mind

While fees are critical, don’t lose sight of the need for experience and the right knowledge as well.  Newer entrants to the retirement plan industry might price lower to gain new clients, but that may expose your plan to someone’s learning curve.

As a fiduciary, you want to make the best decisions possible for your participants, so the fees should always be balanced with the need to hire an experienced provider with the right expertise.

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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

How Proper Documentation Can Help Retirement Plan Sponsors Prevent Liability


If your organization sponsors a retirement plan, you don’t want to underestimate your potential liability.  Why?  Because along with your organization being liable, you might be personally liable, too.

Several years ago, litigation against 401(k) and other retirement plans was focused on the really large plans, but more recent actions have been filed against all sizes of plans. Worse yet, attorneys are starting to target disgruntled employees to seek out potential actions.

As long as this trend continues, it’s vital to realize that no organization is immune to potential legal troubles.

Fortunately, there are some steps you can take to minimize your potential liability. One important one is keeping good records.


Put it in Writing

If you’ve ever had the unfortunate experience of being involved in any type of lawsuit or legal claim, you probably quickly realized the importance of getting things in writing.

As a retirement plan sponsor, you’ve got significant fiduciary responsibilities. That means you are responsible, both personally and through your organization, to always put the participant’s interests first; you need to make sure the participants’ money is always handled correctly. And you need to administer the plan to the letter of regulations and always use best practices.  That makes sense, since your valued team entrusts the plan with the money they will rely on after they retire.   The plan needs to be managed cost-effectively and transparently.

So there’s no room for error. You’ve got to do everything required of you as a plan sponsor. Then, once you do it, you want to properly document it all.


Keep it Thorough and Formal

Furthermore, you must be very careful to document things in a way that is thorough and formal. In a legal proceeding, everything in writing might be put under a microscope. Worse, if you didn’t document certain things (like meeting minutes, or how you handled participant concerns), that could create risk for you and your organization.

With retirement plans, literally everything you do should be documented. Since we’re dealing with your employees’ money, again, documentation should never be informal. Everything should include sufficient detail about what is being done for the plan, and provide reasoning behind why certain decisions were made. While it might seem laborious, this process is your potential protection if you end up involved in any type of legal claim.

One caveat, though: the documentation needs to remain consistent. If you detail actions that need to be followed up on, then those follow-up actions must also be documented in a similar fashion. If not, your detailed records can potentially backfire on you.

If you’ve got a retirement plan advisor who’s knowledgeable about litigation trigger points, they can help you with this process. Also, your consultants should be providing you with regular reports, which should be added to your documentation.

With the responsibilities placed on you as plan sponsor, this message is vitally important: You must document everything you do for the plan.

Don’t forget to take detailed minutes in your retirement plan meetings. Your retirement plan advisor may provide that service for you, but you should always review those and retain copies in the plan records.

Other areas that should be thoroughly documented:

  • Lists of attendees and facilitators at participant education and enrollment meetings
  • Copies of all communications sent and received
  • Copies of all investment education materials

When handling your participants’ investments, it’s not enough to make sure you’re doing it right; you must also keep detailed records of how you’re doing it. The former protects their money; the latter protects you.


(This was an excerpt from our free eBook, How to Reduce Your Potential Liability as a Plan Sponsor.)

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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

How an Investment Policy Statement Can Help Retirement Plan Sponsors Prevent Liability


Many employers today offer a 401(k), 403(b) or other retirement plan for their valued staff. That’s a great thing, but it comes with significant responsibility.  If you’re a plan sponsor, you’re charged with ensuring the retirement funds, and the plan itself, are administered properly.  That makes sense, since your employees are depending upon you to safeguard their retirement savings.  So it’s no surprise there’s significant liability as well—for your organization, and potentially for you too.

Yes, that’s actually personal liability. If you’re in a position of responsibility for the plan, you are usually considered a fiduciary, and you must always put the participants’ interests first. Failure to do what’s required of you could be something that puts your own assets as risk.  (Read more about this liability issue in our previous article).

That’s even more important today than it was a decade or two ago, since we’re now dealing with a new reality: a growing trend of lawsuits against retirement plan sponsors. Originally, these lawsuits focused on only the largest plans, but lately smaller plans have been targeted, too.

With increased media attention to these lawsuits, more attorneys are watching.  The emergence of retirement plan rating websites like Brightscope.com are also gaining in popularity, making it unlikely that this trend of litigation is going to end anytime soon.


Retirement Plan Lawsuits Continue Forward

If anything, the trend continues to build momentum.  In fact, now all sizes of plans are being targeted, which should be concerning for anybody who runs one.

Of course, not all litigation will make it all the way to court.  Some of the cases are settled and some don’t have merit to continue.  But there is one constant:  all of these cases, realistic or not, cost money to defend.  And that process is notoriously expensive.

So clearly prevention is key.  Now is the time to make sure you’re doing everything you can to prevent liability.

Enter the Investment Policy Statement

One critical step to preventing liability is to make sure your plan investments are selected and managed properly. The best way to manage that process is through the creation of an Investment Policy Statement (“IPS”). While not technically required, this document can go a long way in clarifying and documenting the goals and policies of the plan, and protecting you and your organization rom liability.

What is an Investment Policy Statement?

An investment policy statement, or “IPS,” is a document that outlines the policies that the retirement plan will adhere to. The IPS is not required by law. However, this is one of the documents the IRS and Department of Labor will ask for when conducting plan audits, and a properly written and executed one can help make these processes go more smoothly. It is also a key document to help you and your plan prevent liability, when properly constructed and adhered to.

How Common is an Investment Policy Statement?

According to the Callan Institute Survey, an estimated 90% of retirement plans maintain an Investment Policy Statement. However, this has traditionally been found most commonly with large plans. Regardless, with the increasing litigation against plans of all sizes, it makes sense for every plan to use this valuable document to guide investment decisions.

What you’ll find in an Investment Policy Statement

Most investment policy statements will include the following:

  • A list of eligible investments that may be included in the plan
  • A list of prohibited investments (such as individual stocks)
  • A description of the roles and responsibilities of the plan participants (which may include an investment committee, custodian, investment advisor, etc.).
  • A description of the investment selection process
  • A description of the investment monitoring process
  • A description of the process used to replace a poorly performing investment option

Following the Investment Policy Statement

Once you’ve established an IPS, it’s vital to follow it very closely. In fact, there’s been recent litigation over a plan that strayed from its IPS.

According to the Callan Institute Study, however, fewer than two-thirds of plans had reviewed their IPS in the past year. This is a recipe for a future problem.

Instead, your IPS should be an integral part of your administration process, not a document to keep on file in the back somewhere. Auditors as well as any potential judge or jury would like to see that all aspects of your administration are formal and disciplined.  So be sure to:

  • Use your Investment Policy Statement as a reference point in the administration process
  • Review it formally and frequently to determine if any changes are needed
  • When changes are identified, modify it in a timely manner

Most importantly: Stick to it. Any plan or policy is worthless if it’s not adhered to, and when it comes to protecting the assets that are entrusted to your organization, you owe it to your employees to make sure every decision is sound, reasonable, and puts their interests first.


(This was an excerpt from our free eBook, How to Reduce Your Potential Liability as a Plan Sponsor.)

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 fiduciaryCRC eBook
  • 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.

Get Our Free eBook

Retirement Plan Sponsors: It Can Be Costly to Underestimate Your Responsibilities

If you play a key role at an organization with a retirement plan, there’s a strong chance you would be considered a plan fiduciary. That means you’re responsible to make sure everything in the plan is managed for the benefit of participants.

That should not be surprising. If your employees are putting their own money away each month to save for retirement, they should be able to expect those responsible for the plan to manage the plan very carefully. Their future depends on it.

What is surprising? A recent survey showed that about half of plan sponsors don’t believe they are fiduciaries.

Houston, we have a problem.

The Fiduciary Role

When you’re a fiduciary, the pressure is on you to do the right thing consistently, or be held accountable. So everything you do with your retirement plan must be in the best interests of the participants. That includes such diverse tasks as creating an investment policy, selecting mutual funds, managing fund costs and educating participants. Even if you have professionals helping you with all of those functions, as a plan sponsor, you’re still held responsible. You’re in a position of authority in watching over participant money, so you had better do it right.

A New Landscape

The fiduciary responsibility is nothing new. What is new is the evolving legal landscape. With litigation against plan sponsors increasing at a frightening rate, you probably don’t want to be one of those who doesn’t understand your role. Because not properly managing the company retirement plan may put your company at risk. Worse, you could be sued personally.

You May Face Personal Liability

Corporate or organizational liability is bad enough. Even if the plan sponsor prevails, the cost to defend can be devastatingly expensive. But it can get worse: in some cases you may face personal liability.

One recent example is the case of Tibble v Edison International. In this case, the Vice President of Human Resources was found personally liable for a fiduciary breach, along with the corporation.
With attorneys actively prospecting for unhappy participants, the message is clear: you cannot afford to ignore the importance of doing this right. Otherwise you may be opening yourself up to potential liability.

Ensuring Good Compliance

Because of what’s at stake, you can’t treat the responsibility casually. A simple misstep or omission could create liability.

Especially given the fact that the US has enjoyed a decade of strong stock market returns. Most participants are probably looking at gains. But the stock market is cyclical. When the next “bear” market occurs, which can happen at any time, we anticipate there will be much more unhappiness among participants.

So, you’ll want to have experienced experts helping you manage your plan correctly and effectively. It’s usually best to hire a fiduciary retirement plan advisor, who can share the responsibility with you.

You Still Retain Responsibility

Some plan sponsors believe once they hire an expert, their responsibility is less. Not so. You still have to watch the firms you hire and ensure they are doing a good job. You also need to make sure you are paying reasonable fees at all times.

So it’s critical that you choose your retirement plan consultants very carefully. What should you look for in a retirement plan advisor to minimize liability? Here’s some tips.

Experience. How long has the company been in business? You don’t want to be part of anyone’s learning curve, so best to limit your choice to firms with at least a decade or more of experience.
Specialization. Some local financial advisors who primarily help individuals may dabble in retirement plan advisory. That’s usually not your best choice. Its better to limit your search to firms that handle a lot of plans, simply because they have the experience and knowledge to do it right. One oversight and the generalist may put you in a problematic situation.

Track Record. You’ll want to find a narrow your search to firms that have a track record of helping clients successfully avoid liability. In the current environment, there’s just too much at risk.

Independent. It’s no surprise, but excessive fees are a target in recent litigation. If you’re working with a firm with ties to a product company, you’ll likely receive recommendations to use proprietary products (which usually carry higher fees). Instead, it’s safest to work with a completely independent firm, to avoid those conflicts of interest. It’s safer for you and your participants.

Fiduciary. By hiring a Registered Investment Advisor, you are hiring a firm that is able to serve as a full fiduciary. This way you have an experienced partner who will share your liability. This firm should be able to assist you in implementing best practices and ensuring proper plan compliance.

Fund Selection Expertise. Another focus of recent litigation has been poor fund selection and inadequate monitoring to remove failing funds from the lineup. To address this area, make sure the advisor you choose has systems in place to monitor your mutual funds and remove them when they show signs of deteriorating performance or excessive management fees.

With regard to retirement plan administration, an ounce of prevention really is worth a pound of cure. Put the time in now to make sure you hire the right professionals, then work closely with them to keep your participants’ futures on the right track.


John Odell is Principal of Capital Research + Consulting, a Retirement Plan Advisor to governmental, non-profit and corporate retirement plans.   With over $4 billion in plan assets, we have over 27 years of experience keeping plan sponsors compliant and helping participants prepare for the future.  Visit us at www.capitalresearchandconsulting.com.


Retirement Plan Administration: The Problem with Target Date Funds

By almost any measure, target date funds have been a runaway success.  These funds, in theory, provide a fantastic service:  you pick a fund that matches when you expect to retire, and the fund takes care of all the details for you, like asset allocation and rebalancing.  These funds are perceived by many as a simple and ideal solution in the complex investment world.  If you’re not comfortable investing for your future, simply pick a target date fund with a date near when you think you’ll retire.   Presto…you’re done!

The statistics show just how well this idea has been received by retirement savers.  A recent report by The Vanguard Group found that an estimated 51% of retirement plan participants used a target date fund as their sole investment.

And retirement plans have embraced target date funds as well.  According to that same report, an estimated 97% of plans with automatic enrollment adopted target date funds as the default investment option.

Target date funds are an easy sell because they are easy to understand.  And the sales pitch is a good one:  Pick your retirement date and all the asset allocation and timing is taken care of for you.

Unfortunately, as with any investment, there is no one magic solution.  While target date funds provide convenience and simplicity, they have some serious potential issues too.  If you’re a plan sponsor, you’re a fiduciary for the plan, so these factors should be considered and weighed prior to adopting a target date fund as the default investment option.

High Fees.  Target date funds are considered actively managed funds and so they generally carry higher fees than passively-managed index funds.  According to the Investment News, the average expense ratio for target date funds was 0.66%.  However, target date funds vary with investment practices.  Investors probably assume that target date funds are doing a lot of work for them, but in reality, some of these funds are not very actively managed.  For example some target date funds buy index funds and then rebalance only every five years.  That’s not a lot of work for that high of a fee.

Fortunately, target date expense ratios have been trending down, but investors still are paying a high premium for something that may not be as dynamic as they may perceive.  And that fee premium alone may put a dent in their returns versus lower fee options.

No Long-Term Track Record.  Target date funds are relatively new so there isn’t much long term performance data yet.  No one really knows how these will perform over the very long term.

In fact, most target date funds did not perform well during the Global Financial Crisis of 2008.   Fortunately, most of these funds have recovered, but the fact remains that there is no long term track record.

Given that fees are a lightning rod for litigation these days, plan sponsors want to be very careful about selecting target date funds for their lineup. If you’re going to go that route, be sure to pick a target date fund with reasonable fees.  Or, look for lower price options that can provide similar results for a lower fee.

The Danger of Simplicity.  Another issue with target date funds is their simplistic, one-size-fits-all approach.  Let’s say you have three employees who plan to retire in 2030.  They do have an ideal retirement date in common.  But the similarities might stop there:

  • One is a single parent with a child in college and a mother who is starting to need financial help.
  • One is the spouse of a high earning physician.
  • One is a young worker aiming to retire in her 40s.

In this example, all of these people have radically different life situations.  The target date fund will likely work for one or maybe two of them, but hopefully the others will have received more personalized financial planning to help them prepare appropriately.  Our society’s increasing longevity throws another wrench into this situation.  As a retirement plan advisor, seeing all these different people pile into target date funds is a source of concern.

Proceed with Caution

While target date funds are one option, plan sponsors must always keep their fiduciary responsibility in mind.  Therefore, keep your eyes wide open when evaluating target date funds for use in your plans.


John Odell is Principal of Capital Research + Consulting, a Retirement Plan Advisor to governmental, non-profit and corporate retirement plans.   With over $4 billion in plan assets, we have over 27 years of experience keeping plan sponsors compliant and helping participants prepare for the future.  Visit us at www.capitalresearchandconsulting.com.

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