While COVID-19 may not be the emergency it once was, it’s still out there. And that continues to impact both people and markets. If your organization sponsors a 401(k), a 403(b), or some other type of retirement plan, it’s especially important to pay attention. With the continued uncertainty, chances are that participants 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.
Conclusion
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 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.
