As 401(k) plan fiduciaries, sponsors are, of course, responsible for acting in the best interest of participants. Among other things, that means they are liable for any mistakes, negligence or misconduct related to the oversight of the plan.
This includes actions, or lack thereof, by financial intermediaries such as custodians, record keepers, third-party administrators, plan advisors and investment managers.
In fact, courts have found that 401(k) fiduciaries have at one point or another been liable for everything from cyber theft of plan assets and excessive plan fees to failure to file forms and maintain records properly. Not only do failures in these areas result in multi-million-dollar losses from fines, settlements and reputational damage, but the regulatory environment suggests these costs will rise as cases occur more frequently.
To make matters worse, many small- to mid-size sponsors tend to underestimate the ramifications of overlooking or falling victim to fiduciary risks.
Look Out for New Threats
Cyber breaches, for example, are becoming increasingly common and complex. They not only put at risk plan assets and participants’ personal information, but they can invite civil suits that ensnare the plan’s sponsor and all their relevant service providers. In the past, we have seen thieves pose as company insiders, tricking employees into facilitating fraudulent withdrawals from a single 401(k) or across participants’ accounts.
Cybercriminals have exploited other weaknesses as well, including when sponsors fail to ensure that a designated receiving bank account is correct, authorized or even associated with an eligible plan participant.
To mitigate the risk of cyber threats, ensure you are following cybersecurity best practices from the Department of Labor, which also provides advice on vetting service providers.
Pay Attention to the Plan Fees
Sponsors could also face allegations related to their plan fees—especially in an era of rampant inflation. Such claims could emerge from multiple fronts, including everything from sponsors employing actively managed funds when suitable passive strategies are available, to failing to leverage the plan’s size to negotiate lower expense ratios on investment options.
To ensure plan participants pay reasonable and competitive fees, sponsors must also keep up with the latest regulatory changes. Compliance with regulations like the Employee Retirement Income Security Act, for example, can impact fee structures. The best fiduciaries have a finger on the pulse of pertinent regulations and routinely review their impact on plan fees. Failure to stay abreast of regulatory changes could cost plan participants and their sponsors.
From benchmarking fees to finding ways to reduce administrative costs, there are many steps sponsors can take to achieve the lowest plan fees. But doing all this work doesn’t mean much if you are not providing participants with clear and transparent fee disclosures. Not only does the DOL mandate this but doing so ensures participants can make informed decisions.
Avoid Operations Defects
Plan sponsors could be subject to substantial fines and penalties for operations defects, or errors in the day-to-day management of the plan. From not counting an entire group of employees as plan participants because the company didn’t think they qualified, to business leaders borrowing money from the retirement plan, we’ve seen operations defects range in severity. In any case, they should all be avoided. Missteps here could even jeopardize your plan’s tax-favored status.
Despite good intentions, operations defects do happen quite regularly. Thankfully, the IRS recognizes this and provides guidelines for fixing the most common mistakes. For those less common and more severe operations defects, it is prudent for plan sponsors to work with compliance professionals to remedy them. Not only will it ensure compliance, but it will also free up sponsors to focus more on their line of business.
Time to Course Correct
One way sponsors can safeguard themselves against all these potential threats is to establish a 401(k) plan oversight committee. Members should consist of officials from the plan trustees and administrators; the firm’s human resources, legal and finance teams; and employee representatives.
Another safeguard is to tap an industry-leading quality review consultant who specializes in evaluating retirement plan financial intermediaries for potential red flags in their policies, processes, personnel and technology. Yet another option is to outsource the governance of the plan to a qualified third party.
Most small- to mid-size sponsors have not spent the past year thinking through the nuances of financial intermediary oversight. Fortunately, an assortment of industry experts is available to help sponsors uphold their fiduciary duties. For sponsors that have not done so already, now is the time to course-correct on these crucial issues and join forces with a trusted third party.
Jeff Atwell is Senior Vice President of Fiduciary Services at FiduciaryxChange, an AmericanTCS business.
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