401k Lawsuits & 408(b)2: 8 Key Guidelines for Plan Sponsors
Kodak currently has a 401k lawsuit pending against them. A Kodak employee is suing the company's top executives and board members, alleging they failed to safeguard workers' 401(k) retirement plans from the stock collapse. In the suit, it's alleged that "A prudent fiduciary facing similar circumstances would not have stood idly by as (the retirement plans) lost tens of millions of dollars." As a plan sponsor, it is your duty and responsibility to act as a prudent fiduciary. With that said, here are 8 guidelines to help prepare you for upcoming Department of Labor regulations.
1. Take action. Doing nothing is not an option. As a plan sponsor, business owner or trustee, recognize you have a fiduciary duty to ensure, at a minimum, that you are receiving reasonable services for reasonable costs.
2. Hire a third party for an independent review. This means actually doing some due diligence. Many firms charge to do an in-depth analysis and rightfully so. Investigating service providers and digging through the piles of red tape can be time- consuming. However, many companies will begin a preliminary analysis for free.
3. Address all service providers especially regarding hidden or excessive fees. Each service provider should provide you with revised service agreements that include a complete description of the services they provide. A full disclosure of the costs should be included as well. Any direct or indirect compensation should also be outlined. Also make sure to receive information on whether or not that provider assumes any fiduciary responsibility for their fucntion. If the service agreement does not specifically assume fiduciary responsibility for a function, they are unable or unwilling to assume that liability.
4. Figure out what is your true liability exposure. Many plan sponsors fail to truly understand or realize the extent of the liability they are taking on, because they continue to be misinformed and misled by their existing service providers. If your service provider is unwilling to detail in writing the type of coverage you have, meaning the type of fiduciary liability they take on, it’s more than likely they are taking on a lot less or worse yet none of the fiduciary liability you may assume you were paying them for. Plan sponsors have a tendency to believe that the record keeper or third party administrator is acting as a 3 (21) fiduciary and that the broker/ advisor is acting as the 3 (38) fiduciary.
5. Consider outsourcing your fiduciary liability to an independent firm who is licensed and insured. If you weren’t a mechanic, you wouldn’t try to fix your own car. If you weren’t a doctor, you wouldn’t try to practice medicine. Then why is it that plan sponsors, CFOs, business owners, HR professionals, etc., insist on taking on personal fiduciary liability responsibility when they are not an expert and are not prepared for such a task? Not only that, wouldn’t your time be better spent doing what you may do best which is running your business, handling new hires, or budgeting the income and expenses of your firm based on whether you were an owner, CFO, HR personnel or a committee member? Hiring a competent plan fiduciary adviser will relieve you of significant personal liability while bringing discipline to the process of providing quality benefits at reasonable costs to your workforce.
6. Address possible conflicts of interests. Make sure service providers include how any potential conflicts are managed and mitigated. Also make sure to address any possible conflicts within your firm i.e., the CEO’s brother in law is a service provider and also manages the personal assets of the CEO.
7. Investigate any possible prohibited transactions. Click here for a list of my top 10 prohibited transactions.
8. Make sure to have a thorough understanding of 404(a)(5) and how you will furnish plan participants with disclosed fee information you receive from service providers.
As a plan sponsor, you can be held personably liable for overlooking any red flags within your firm’s plan. These can include revenue sharing that has not been fully accounted for, any single fee disproportionate to services rendered or use of retail shares or actively managed funds when institutional shares are available or comparable index funds are available. Your objective should be to provide the best possible plan experience for employees. Rest assured if this is not the case, you could end up like Kodak, Radioshack, Bechtel, or Wal-mart, to name a few, with a 401k lawsuit against you.
About Charles Massimo
Recognized as industry expert and guest speaker at national industry conferences, Charles Massimo is a published author and media subject expert on topics ranging from wealth/asset management to investment and financial planning for high net worth families.