Retirement plan sponsors have a continuing fiduciary duty to plan participants in a defined contribution plan. Navigating the fiduciary waters can be overwhelming, however, in the wake of all the DOL and SEC hubbub. The incessant wave of news stories about who’s suing who isn’t helping matters, either.
When employees allege the employer or plan sponsor has not acted in the sole interest of the participants or followed the plan requirements, the plan sponsor may be liable for losses and damages which result. By following the best practices for defined contribution plan fiduciaries, plan sponsors can avoid litigation and limit potential losses.
The Department of Labor has issued guidance for plan fiduciaries to meet their ERISA responsibilities, which include the following “best practices”:
Diversifying Investments
A fiduciary has a responsibility to reduce the risks of heavy losses by diversifying plan investments. Each investment is part of the plan’s portfolio and should be considered in light of the overall investment strategy. To avoid allegations that the fiduciary put plan assets into an overly-risky or unsound investment, a fiduciary can limit their own liability by documenting their evaluation and investment decisions at the time of the investment.
Defraying the Reasonable Costs/Fees of Plan Administration
Fees and expenses charged for administering plans should be “reasonable.” What may be reasonable may depend on the types of services covered. It is also important for fiduciaries to monitor fee changes and expenses. When fees are no longer reasonable, the fiduciary should respond accordingly. Fiduciary prudence dictates seeking a request for proposal on the cost of plan administration from multiple recordkeepers every few years to ensure the fees being paid are still reasonable in relation to the overall market.
Monitoring Investment Performance
The duties of a fiduciary are ongoing. This includes monitoring investment performance and reviewing replacement investments or services. Changes in fees or returns should be evaluated for the overall benefit to plan participants. Again, monitoring and decision-making should be well-documented to protect the fiduciary from future liability in the event of fiduciary ERISA litigation. All things being equal, courts have routinely found that the process in the decision-making is paramount to the overall outcome of the investments’ future performance.
Avoiding Conflicts of Interest
Transactions between parties in interest may be prohibited and could lead to fiduciary liability. Prohibited transactions include sales, exchanges, loans, or furnishing goods between the plan and any party in interest (including the employer, plan fiduciary, or owners).
Keep Participants and Beneficiaries Informed
ERISA generally requires regular updates and informing participants and beneficiary of plan changes. Participants and beneficiaries are to be provided the summary plan description (SPD), summary of material modifications (SMM) and regular individual benefit statement (IBS).
Following these best practices for defined contribution plan fiduciaries and avoiding common mistakes of plan sponsors and fiduciaries can help avoid costly litigation and reduce fiduciary liability.
Corey F. Schechter, Esq., partner with Butterfield Schechter LLP, specializes in Employee Benefits Law, Employee Stock Ownership Plans, Pension, Profit Sharing and 401k Plans, ERISA Litigation, ERISA Fiduciary Liability, Business Law and Qualified Domestic Relations Orders (QDROs).