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.
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.
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