Fiduciary Responsibility

June 23, 2016

Fiduciary responsibility for a company’s retirement plan ultimately rests upon Plan Sponsors.  Although an Investment Policy Statement (IPS) is required, the requirement does not specify it be in writing.  For the best protection, your IPS should be in writing, easy to follow (consider how it will integrate into your company culture and procedures) and monitored regularly.  Upon examination, your IPS will be the first document requested by the IRS or the DOL.  Without it, you may be considered a negligent fiduciary of your Plan and risk further inquiries from the examiners.

A well-written IPS should be in line your company’s investment philosophy and outline your Plan’s purpose and objectives.  Plan Trustees and other advisors should plan on meeting regularly, at a minimum annually, to monitor Plan investments, their performance and any fees charged for Plan management.  A comprehensive Investment Policy Statement should also include the following details:

  • Plan oversight – those responsible for overseeing the plan should be clearly identified, and their roles should be clearly defined.  The specific roles of any third parties involved in Plan management should also be described in detail.
  • Investment fees – carefully assess all Plan investment fees, how appropriate they are for the services being rendered and if the fees are commensurate with industry standards for similar services.
  • Selection of investments – be sure to state which types of investments are allowed into the plan, those not permitted into the plan, and which groups of shares the plan will invest in.
  • Monitoring performance – if an asset is under-performing relative to similar investments, include details for when or why you might decide to put an investment on a “watch list”.
  • Criteria for evaluating investments –the reasons for removing an investment from your portfolio should be included, as well as the procedures that will be followed if you choose to replace it with an alternate investment.
  • Transparency in revenue sharing – the revenue sharing agreement should be fully accessible and disclosed to Plan participants.  In addition, the agreement should be evaluated by the Trustees, and the fees should be carefully structured to reflect the services provided.

When it comes to fiduciary responsibility, exposure for Plan Sponsors in the event of a lawsuit is the same, regardless of the size of the Plan or the number of participants.   In Minnesota, trustees for a smaller-sized plan (under 125 participants, and assets just under $10M) are currently facing a class action lawsuit involving allegations which include a breach of fiduciary duty under ERISA.  The charges include improper oversight over excessive plan investment fees; the careless selection of mutual fund classes when suitable lower-cost classes were available; and the selection of assets which were more costly than alternatives in similar industries.

The outcome of this particular lawsuit is still to come, but it is a good reminder that the fiduciaries of smaller company plans have the same obligations of those of larger plans.  Adhering to a proactive strategy such as a well-written IPS may protect against a reactive cost such as a lawsuit, which could prove to be catastrophic for smaller Plan Sponsors.

To determine if your 401(k) benefit plan is subject to an audit or for a consultation regarding your current 401(k) plan, contact JoAnn today.

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