Hidden Hazards in Providing Your Company's 401k Plan

By Greg Chesney

As a Business Owner, you should be commended for providing a Retirement Program or 401k. However, this is not without risk. When you take on this responsibility, you now have a fiduciary relationship with your employees because they have entrusted their assets to you. Whether you hire someone to manage the plan for you, or do it yourself, you are personally and legally responsible to those employees. It may be in your best interest to hire an expert, such as a Registered Investment Advisor.

Basic Responsibilities

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

1. Acting solely in the interest of the participants and their beneficiaries;

2. Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;

3. Carrying out duties with the care, skill and diligence of a prudent person familiar with such matters;

4. Developing the plan documents, including the Investment Policy Statement;

5. Diversifying plan investments and managing the investment selection committee.

There are specific rules that the fiduciary must abide by.  Current changes to the tax law require a complete plan document restatement by April 30, 2010. If you do not restate your retirement plan within the specified time frame, you will no longer be in compliance with the federal tax law’s plan qualification requirements.  That means your plan will no longer qualify for favorable tax treatment for both the company and its employees and you both would be subject to additional taxes, interest, and penalties.

Since fiduciaries that do not follow basic standards of conduct may be personally liable to restore any losses to the plan, the Department of Labor does allow plan sponsors and trustees to purchase Fiduciary Liability Insurance. Litigation can potentially drain your personal assets and your company assets, yet few companies purchase more than the required ERISA Bond. Premiums for this coverage begin under $200 per year.

Limiting Liability

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's responsibilities cover the process used to carry out the plan 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. A fiduciary will need to 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. 

Beware of Co-Fiduciaries When Hiring a Service Provider

Frequently, a service provider will offer to become a co-fiduciary of the plan, implying that they at least share in the liabilities associated with the plan. This is not the case. A co-fiduciary only has a duty to act when it knows the plan fiduciary has breached its duty. While it is useful to the plan sponsor to mitigate their own fiduciary responsibility, the act of being a co-fiduciary only limits the exposure of the service provider.

Benefits of Registered Investment Advisors

Hiring a Registered Investment Advisor (RIA) will limit your exposure. As provided under the Investment Advisors' Act of 1940, you may assign the investment selection to the RIA. If you do hire an RIA, have them document their fiduciary duties specifically in a service agreement and keep in mind that you retain some fiduciary responsibility for the decision to select and keep that person or entity as the plan’s service provider. So, you should monitor the services provided to determine if a change needs to be made.

Hiring an RIA is not expensive; it frequently costs less than handing your plan over to an insurance company or uninterested third party administrator (TPA). The piece of mind in partnering with someone who has a legal obligation of trust can generate returns for you and your employees

About the Author
Greg Chesney is the Managing Member of Chesney Financial Services, LLC, a Registered Investment Advisor. Chesney Financial Services provides Open Architecture Retirement Plan services to businesses allowing plan sponsors to reduce their individual fiduciary liability. Greg can be reached through his website at www.chesneyfs.com .