401k Fiduciary Responsibility: What Employers Must Know

As a small business owner, you are likely wearing many hats. You are responsible for the overall success of your business, which includes managing your employees’ retirement savings. One of the most important aspects of 401k fiduciary responsibility is ensuring that your company’s 401k plan is operating in your employees’ best interests.

If you fail to meet your fiduciary obligations under ERISA, you could face significant financial and legal risks. These risks can include:

  • Department of Labor (DOL) investigation and enforcement action: The DOL has the authority to investigate 401k plans that are not being managed properly. If the DOL finds that you have violated your 401k fiduciary responsibility you could face fines and penalties. These fines can be substantial, and the DOL may also order you to take corrective action, such as making restitution to plan participants.
  • Participant lawsuits: Employees who believe that their 401k plan has been mismanaged can file lawsuits against the plan sponsor (your company) and the plan fiduciaries. These lawsuits can be expensive and time-consuming to defend. In addition to financial damages, participants may also seek injunctive relief, such as requiring the plan to make changes to its investment options or fees.
  • Personal liability: In some cases, plan fiduciaries can be held personally liable for breaches of their fiduciary duties. This means that you could be responsible for paying damages out of your own pocket, even if your company is not.

Examples of Regulatory and Tort Cases Involving 401k Fiduciary Responsibility:

There have been many recent cases where 401k plan sponsors have been held liable for failing to meet their fiduciary obligations. For example, in 2018, the DOL filed a lawsuit against a company for allegedly charging excessive fees to its 401k plan participants. The DOL alleged that the company had breached its fiduciary duties by failing to act in the best interests of its employees. The company eventually agreed to pay a $1 million settlement to the plan participants.

In another case, a group of 401k plan participants sued their employer for failing to properly diversify their plan’s investments. The participants alleged that the employer’s investment choices were too risky and that they had lost money as a result. The court ruled in favor of the participants and awarded them damages.

401k fiduciary responsibility.

Exploring the right fit of plan, vendor, and advisor is a crucial step every employer should do at least every 3-5 years.

The Due Diligence Process:

To avoid facing legal and financial risks, it is important to conduct due diligence when selecting and managing your 401k plan. This process should include:

  • Reviewing the plan’s investment options: Make sure that the plan offers a variety of investment choices that reflect the fiduciary duty of providing appropriate options for your employees’ different risk tolerances and retirement goals. Consider factors such as the plan’s investment mix, expense ratios, and historical performance.
  • Evaluating the plan’s fees: Compare the fees charged by your plan to the fees charged by other similar plans. Make sure that the fees are reasonable and that they are not excessive. Look for hidden fees, such as revenue-sharing arrangements or excessive administrative fees.
  • Monitoring the plan’s performance: Keep track of the plan’s investment performance over time. If the plan is not performing well, you may need to make changes to your investment strategy. Consider hiring an independent investment advisor to help you evaluate the plan’s performance.
  • Ensuring that the plan is properly administered: Make sure that the plan is being administered in accordance with ERISA’s rules and regulations to maintain your 401k fiduciary responsibility. This includes ensuring that the plan is properly funded, that participant contributions are being invested in the appropriate accounts, and that the plan is being audited annually.

401k Fiduciary Responsibility: Red Flags That Signal a Need for Change

There are a number of red flags that may indicate that it is time to change your 401k plan. These red flags include:

  • High fees: If your plan is charging excessive fees, it may be time to switch to a plan with lower fees.
  • Poor investment performance: If your plan’s investments are not performing well, you may need to change your investment strategy.
  • Administrative problems: If you are having problems with the plan’s administration, it may be time to switch to a plan that is better managed.
  • Regulatory or legal issues: If your plan is facing regulatory or legal scrutiny, it may be time to make changes to the plan.

The Value of Adding an ERISA Section 3(21) or 3(38) Plan Advisor

One way to help ensure that your 401k plan is being managed properly is to hire an ERISA Section 3(21) or 3(38) plan advisor, like nVest Advisors.  As an ERISA plan advisor, we act as fiduciaries and are responsible for always doing our jobs in the best interests of plan participants.

A fiduciary plan advisor can help you with a variety of tasks, such as:

  • Selecting and monitoring investments
  • Evaluating and negotiating plan fees
  • Ensuring that the plan is properly administered
  • Addressing participant questions and complaints

By hiring an ERISA Section 3(21) or 3(38) plan advisor, you can help to protect yourself and your employees from the risks associated with poorly managed 401k plans.

Climbing financial mountains together.

A 401(k) plan should help your employees reach new financial heights. We’re committed to being their guide.

Take the responsibility seriously, and partner with an advisor to carry the burden for you

As a small business owner, it is important to take your fiduciary responsibilities seriously. By ensuring that due diligence is conducted, plan performance is monitored, and any red flags are addressed, the 401k fiduciary responsibility can be upheld and operated in the best interests of your employees. In addition, It may also be advisable for an ERISA Section 3(21) or 3(38) plan advisor to be hired to help manage the plan.

As a result, by taking these steps, you protect yourself and your employees from the financial and legal risks associated with poorly managed 401k plans.

Most employers, however, don’t want to shoulder all of those fiduciary responsibilities themselves. You have a company to run. That’s why partnering with a plan advisor makes so much sense. You can outsource the majority of the fiduciary responsibilities for the plan and offer your employees a significant benefit at the same time: a personal relationship with a fiduciary advisor to help them manage not only their 401(k), but their entire financial lives

Are we a good fit for your company’s plan?

The first step is a simple and no-cost Plan Q&A Meeting with our team. Let’s examine your needs and see if we’d be a good fit for your company and your team. Book your consultation today!

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