Fiduciary Liability: 2 Ways Plan Sponsors Can Protect Themselves Against 401k Lawsuits
With the implementation of New Department of Labor Disclosure Regulations, the fact that so many business owners and plan sponsors are uninformed, and the increasing attentiveness of plan participants to their diminishing retirement balances, it’s no surprise that 401k lawsuits has increased 23% year over year for the past 3 years.
Wal-mart, Caterpillar, Edison International, and more recently Bechtel Corporation and Kraft Foods are just a handful of firms that have been defending themselves against 401k lawsuits brought on by unhappy employees and plan participants dissatisfied with lackluster management of 401k plans. As a plan sponsor, business owner or trustee of a 401k plan, you have 2 primary objectives. The first is providing first-rate benefits to plan participants at a reasonable cost and the second is to take on minimal fiduciary liability for you and other plan sponsors, trustees, committee members, etc. Even if there is no settlement against you and your firm, the average cost of simply having to defend your firm against such a lawsuit as mentioned above can be upwards of $365,000.
In order to avoid such costly litigation, there are 2 ways that a plan sponsor, trustee, business owner, or committee member can protect themselves against 401k lawsuits.
The first is to invest in Fiduciary Liability Insurance.
Plan sponsors can file claims for lawsuits regarding breach of fiduciary duty, failure to fund benefits, failure to act in a timely manner, failures regarding benefits communication or benefits eligibility, ERISA violations and the list goes on. However, purchasing fiduciary liability insurance can be very expensive costing upwards of $5,000 per million of coverage per covered employee. Also, this type of coverage is very difficult to qualify for. The applications can be very detailed and plan sponsors must perform a series of tasks, many of which they normally don’t perform anyway, in order to get coverage. Even if you do receive coverage, if the plan sponsor fails to maintain any of the required procedures, the policy will not pay. That makes fiduciary liability insurance a carrier’s dream because the coverage turns out to be mostly profit since they rarely pay out on the policies.
The second way for a plan sponsor to protect themselves is to outsource their fiduciary liability to an independent firm who is licensed and insured.
Look for a firm that has the ability to handle all DOL subpoenas; any notices regarding the IRS and that can assist in IRS Department of Labor CPA audits. Also look for a firm that will set policies in place so that you can avoid conflicts of interest, prohibited transactions and identify parties of interest.
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?
What’s even more mind boggling, is many of these individuals 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.
More often than not, this couldn’t be further from the truth. Don’t wait until the Department of Labor or IRS comes knocking on your door! Don’t wait until an ex-employee notices the excessive fees coming out of his plan and decides to start a 401k lawsuit! Be proactive and consider the additional funds you could have going into the 401k plan because you reduced costs; bear in mind the content employees you could have if you take the time to explore ways to not only improve your existing plan, but to reduce or virtually eliminate your liability while at the same time reducing costs thereby having a better experience for all involved. lastly, think of the worry free time you will have to put back into your business now that you’ve hired an independent fiduciary to do what they do best.
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.