As a plan sponsor, you are placed in a position of responsibility. As employees give you the clearance to invest and manage their savings, there is due diligence you must comply with in order to ensure the best outcome given all possible variables.
Unfortunately, with the volume of responsibilities you often need to be mindful of, it’s easy to let some fall through the cracks, especially when times are chaotic.
As a company that works with plan sponsors to help them benchmark their plans, we are well versed in the various duties you must comply with to reduce your liability. As such, we have compiled a 5-point checklist with the main duties you must fulfill to do due diligence on behalf of your employees in addition to some of the reasons why each task is uniquely important.
1. Being Mindful of ERISA Law
ERISA is an acronym to outline the Employee Retirement Income Security Act,an act that aims to protect individual 401k plans from undue harm. While plan sponsors are often well aware of what ERISA outlines, we recommend further reading on the topic here.
While some of these are addressed in more detail below, understand that our list is non-exhaustive and does not replace the advice you can receive from a qualified financial advisor.
2. Picking Qualified Professionals
There are many instances where a plan sponsor might seek to higher an administrator to shift some of the fiduciary duties away from themselves and onto a third party. While this does work to an extent, the act of hiring a third party does not exempt you from liability.
To begin, there are only three qualified types of third parties you can select from: Section 3(16) Plan administrators, Section 3(21) Investment advisors, and Section 3(38) Investment managers. These three professionals have different levels of clearance when it comes to plan management, so it is important to keep their limitations in mind when choosing the correct individual to monitor the investment options of employees.
When hiring a third party to advise or manage your plans, you are required to vet your candidates and ensure they are responsible, qualified, and are chosen to reflect an investment style that best suits the needs of your employees. As such, choosing a third party advisor is a fiduciary move in and of itself— plan outcome will rest on your choice of management.
As such, it is important to monitor the professionals you select, as we discuss in greater detail in the section below.
3. Monitoring Third Parties and Investments
There are a variety of factors you need to monitor for 401k plans regardless of whether it is you or a third party rendering investment decisions. This is because, as said previously, even when you choose a third party to manage employee plans, it doesn’t completely remove your personal liability.
As such, not only is it your fiduciary responsibility to continually monitor your plan performance, you must also be exacting in your choice of third party investor.
When selecting an investor or plan advisor, you must document the entire process. Be sure to ascertain the investors track record, investment firm performance, in addition to any outstanding or resolved litigation in which they have been involved. Looking for a paper trail of adverse action can help avoid potential liability later on should that individual have a habit of making repeated mistakes.
As times goes on and you work with your selected investor, you must monitor plan performance, fees, and address any complaints your employees may have regarding their portfolio. As always, it is a good idea to document these interactions in a way that can be drawn upon would an employee have questions or in the event of a plan audit. These papers can show that you have done due diligence as a plan provider and, as such, protect you from liability.
4. Educate Employees on their 401k Plan
Part of your job as a fiduciary, whether you are directly involved in the investment process or not, is ensuring your employees are educated on the status of tier retirement plan. This education goes farther than simply communicating fees, instead, you must explain plan assets, diversification, and any fiduciary decisions you are going to make.
A special consideration in the realm of education is any changes made to the plan document. While you are required to adhere to the original plan document, this is true only when the plan is benefiting your employees as much as possible. Plan fiduciaries have discretionary authority to change the plan document to boost plan performance, however, their employees must be part of this decision making process.
5. Portfolio Diversification
In the process of building up a retirement plan’s investments, you will ultimately need to diversify the portfolio. This is to increase the overall safety of a 401k plan by cultivating a balance between high-risk/high-reward investments and low-risk/reliable investments.
Knowledge is Your Best Protection
All the measures you take to protect yourself from a lawsuit are ultimately the same measures that can ensure your employees have a plan that performs as well as possible. As a group in connection with a large network of financial advisors, we know how important it is that you are able to carry out these responsibilities as efficiently and seamlessly as possible.
Reaching out to us is quick and easy. Simply give us a message or call and we can connect you with an advisor that is right for your case.
Are you ready to protect your investments? Benchmark today.