If you are plan sponsor, business owner, or plan trustee of a 401(k) plan, you are a fiduciary as defined by ERISA; therefore, you have liability exposures.
Not only can the company be fined by the Department of Labor or sued by plan participants, but as a plan fiduciary, you can be held personally liable as well. You are responsible for your actions, and that means your house, bank accounts and personal assets are at risk if you breach your fiduciary duties. Additionally, your personal insurance does not cover this risk.
The Department of Labor defines a fiduciary’s duties as:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carrying out their duties prudently;
- Following the plan documents;
- Diversifying plan investments, and
- Paying only reasonable plan expenses.
Some actions you should be taking to minimize your fiduciary liability include:
Monitor Your Plan’s Cost and Services on a Regular Basis
Unreasonable or excessive fees are the primary reason plan fiduciaries are sued. The fee disclosure rules, 408(b)(2) and 404(a)(5), effective July 1, 2012, will generate more awareness about your plan’s fees. You should regularly benchmark your plan’s cost and fees to other similar-sized plans.
Make Sure Your Plan Complies with ERISA’s 404(c) Provisions
This provision protects fiduciaries of participant-directed 401(k) and profit sharing plans from liability for participants’ poor investment choices. Most plans are not fully compliant with 404(c).
Make Sure You Have an Acceptable Qualified Default Investment Alternative, “QDIA”
If a participant fails to direct how they want their plan assets invested, their money should be defaulted to an acceptable Qualified Default Investment Alternative, as defined in the Pension Protection Act of 2006, thus, limiting a fiduciary’s liability for the performance of these assets.
Create an Investment Policy Statement and Regularly Review the Plan’s Investment Line-up Based on the Criteria Set
An Investment Policy Statements defines the process and criteria for selecting, monitoring, and replacing a plan’s investment options. You should review and document your plan’s investment line-up at least annually to ensure it adheres to the Investment Policy Statement.
Make Sure You Carry Appropriate Levels of Liability Insurance
You should carry an ERISA Bond equal to at least 10% of the plan’s total assets and Fiduciary Liability Coverage to cover any cost that arises from the breach of your fiduciary duty.
If you offer a 401(k) plan and want to minimize your liability, you have to review your plan regularly, hire experts—not friends or personal advisers—to help you when appropriate, and understand how your plan’s cost compare to other like-kind plans.
Disclosures:
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
