5 Fiduciary Facts the DOL Wants Every 401k Plan Sponsor to Know

April 02
00:33 2013

(The following comes directly from the DOL’s Employee Benefits Security Administration 401(k) Plans For Small Businesses web page.)

Fiduciary Responsibilities – Many of the actions needed to operate a 401(k) plan involve fiduciary decisions. This is true whether or not you hire someone to manage the plan for you or do some or all of the plan management yourself. Controlling the US_Department_of_Labor_300assets of the plan or using discretion in administering and managing the plan makes you and the entity you hire a plan fiduciary to the extent of that discretion or control. Hiring someone to perform fiduciary functions is itself a fiduciary act. Thus, fiduciary status is based on the functions performed for the plan, not a title.

Some decisions with respect to a plan are business decisions, rather than fiduciary decisions. For instance, the decisions to establish a plan, to include certain features in a plan, to amend a plan, and to terminate a plan are business decisions. When making these decisions, you are acting on behalf of your business, not the plan, and therefore, you would not be a fiduciary. However, when you take steps to implement these decisions, you (or those you hire) are acting on behalf of the plan and thus, in making decisions, may be acting as fiduciaries.

Basic Responsibilities  Those persons or entities that are fiduciaries are in a position of trust with respect to the participants and beneficiaries in the plan. The fiduciary’s responsibilities include:

  • Acting solely in the interest of the participants and their beneficiaries;
  • Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
  • Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters;
  • Following the plan documents; and
  • Diversifying plan investments.

These are the responsibilities that fiduciaries need to keep in mind as they carry out their duties. The responsibility to be prudent covers a wide range of functions needed to operate a plan. And, since all these functions must be carried out in the same manner as a prudent person would, it may be in your best interest to consult experts in various fields, such as investments and accounting.

In addition, for some functions, there are specific rules that help guide the fiduciary. For example, the deductions from employees’ paychecks for contribution to the plan must be deposited with the plan as soon as reasonably possible, but no later than the 15th business day of the month following the payday. If you can reasonably make the deposits in a shorter time frame, you need to make the deposits at that time.

For plans with fewer than 100 participants, salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law.

For all contributions, employee and employer (if any), the plan must designate a fiduciary, typically the trustee, to make sure that contributions due to the plan are transmitted. If the plan and other documents are silent or ambiguous, the trustee generally has this responsibility. As part of following the plan documents in operating your plan, the plan document will need to be updated from time to time for changes in the law.

Limiting Liability  With these responsibilities, there is also some potential liability. However, there are actions you can take to demonstrate that you carried out your responsibilities properly as well as ways to limit your liability.

The fiduciary responsibilities cover the process used to carry out the plan functions rather than simply the end results. For example, if you or someone you hire makes the investment decisions for the plan, an investment does not have to be a “winner” if it was part of a prudent overall diversified investment portfolio for the plan. Since a fiduciary needs to carry out activities through a prudent process, you should document the decision-making process to demonstrate the rationale behind the decision at the time it was made.

In addition to the steps above, there are other ways to limit potential liability. The plan can be set up to give participants control of the investments in their accounts. For participants to have control, they must have sufficient information on the specifics of their investment options. If properly executed, this type of plan limits your liability for the investment decisions made by participants. You can also hire a service provider or providers to handle some or most of the fiduciary functions, setting up the agreement so that the person or entity then assumes liability.

Hiring a Service Provider  Even if you do hire a financial institution or retirement plan professional to manage the whole plan, you retain some fiduciary responsibility for the decision to select and keep that person or entity as the plan’s service provider. Thus, you should document your selection process and monitor the services provided to determine if a change needs to be made.(1)

Some items to consider in selecting a plan service provider:

  • Information about the firm itself: affiliations, financial condition, experience with 401(k) plans, and assets under their control;
  • A description of business practices: how plan assets will be invested if the firm will manage plan investments or how participant investment directions will be handled, and proposed fee structure;
  • Information about the quality of prospective providers: the identity, experience, and qualifications of the professionals who will be handling the plan’s account; any recent litigation or enforcement action that has been taken against the firm; the firm’s experience or performance record; if the firm plans to work with any of its affiliates in handling the plan’s account; and whether the firm has fiduciary liability insurance.

Once hired, these are additional actions to take when monitoring a service provider:

  • Review the service provider’s performance;
  • Read any reports they provide;
  • Check actual fees charged;
  • Ask about policies and practices (such as trading, investment turnover, and proxy voting); and
  • Follow up on participant complaints.

(For more information, see Understanding Retirement Plan Fees and Expenses and the 401(k) Plan Fee Disclosure Tool.)

Prohibited Transactions and Exemptions  There are certain transactions that are prohibited under the law to prevent dealings with parties that have certain connections to the plan, self-dealing, or conflicts of interest that could harm the plan. However, there are a number of exceptions under the law, and additional exemptions may be granted by the U. S. Department of Labor, where protections for the plan are in place in conducting the transactions.

One exemption allows the provision of investment advice to participants who direct the investments in their accounts. This applies to the buying, selling, or holding of an investment related to the advice as well as to the receipt of related fees and other compensation by a fiduciary adviser. Because a final rule is pending, check periodically for the publication of the final rule.

Another exemption in the law permits you to offer loans to participants through your plan. If you do, the loan program must be carried out in such a way that the plan and all other participants are protected. Thus, the decision with respect to each loan request is treated as a plan investment and considered accordingly.

Bonding  Persons handling plan funds or other plan property generally must be covered by a fidelity bond to protect the plan against loss resulting from fraud and dishonesty by those covered by the bond.

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on this subject, including how to create an investment policy statement that defines a set of menu options consistent with the “one portfolio” concept (as well as leaving room for those few remaining do-it-yourselfers).

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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  1. Jim Watkins
    Jim Watkins April 02, 09:10

    Thanks Chris. Another excellent post. With pending DOL fiduciary announcement, sponsors need to understand that these core concepts are not going to go away, only get enforced more.

  2. Dale F. Smith
    Dale F. Smith April 04, 11:14

    Chris: thanks for the DOL article. I will add it to my voluminous file. I’ve also bought and studied your excellent treatise (“401(k) Fiduciary Solutions”), although I’ve not yet fully digested all of your many thoughts on THE subject. I do appreciate your comments on Bundled vs Unbundled. Our firm carries a categorization as a “non-producing TPA,” and we’ve lost a lot of clients to the Big Boys (we call them Predators) with their Bundled Bungle during the past couple of years. Their Takeover Teams are well-rehearsed. Like taking candy from a baby; we cannot possibly sit on the front porch of every client and dispell the mis-representations. 408(b)(2) is not yet creating that promised “level playing field.” The Prudent Process of service provider engagment and disengagement is not being practiced. It would appear that the Predators’ legal department has accepted the argument that they can make millions in takeover revenues, to more than offset any possible DOL fines or litigational decisions that may be decided way down the road.

  3. George W Walters
    George W Walters April 08, 21:02

    Excellent summary. I would like to point out, according to our research, there isn’t recourse available against a TPA. We have encountered a few cases where the TPA provided an incorrect amortization schedule for a loan resulting in default. The answer in both cases was the sponsor signed off on the loan therefore the TPA has no liability. Meanwhile the sponsor has to enter the VCP at a minimum cost of $2500. With all the required disclosures and discussion about abuses no one has focused on the TPA. I suggest that may be the source of many problems. They should be regulated like everyone else

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