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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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