Ways to Limit Your Fiduciary Liability as a Plan Sponsor

Small Business Financial Article
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Ways to Limit Your Fiduciary Liability as a Plan Sponsor

Ways to Limit Your Fiduciary Liability as a Plan Sponsor

If, as an employer, you offer your employees a qualified retirement plan, such as a 401(k), SIMPLE or SEP IRA, you are by default the plan’s fiduciary. As fiduciaries, plan sponsors are held to account for every aspect of their plan’s management, from the appropriateness of its design, to the selection of investment options, down to its effectiveness in helping plan participants to become retirement ready. With so many moving parts to manage in an employer-sponsored retirement plan, something is bound to go wrong. However, even when things go wrong, plan sponsors can limit their fiduciary liability by strictly following these 5 best practices of plan management:

Ensure Proper Diversification of Fund Array

Plan fiduciaries should clearly understand how to compose a properly diversified fund array. A well-diversified portfolio is the key to achieving stable, long-term returns. Over-diversification (too many funds) can backfire due to fund overlap or choice paralysis. Under-diversification (too few of the right asset classes) can increase exposure to volatility in any one asset class. Also, the fund array should be reviewed periodically to ensure investment options reflect the demographics of the participant group.

Ensure Reasonableness of Investment Fees

Among the more heavily scrutinized fiduciary responsibilities of retirement plan sponsors is their oversight and management of [plan fees], especially those associated with the investments inside the plan. Excessive fees can cost participants thousands of dollars in investment returns and can be especially harmful in market declines. Fees are excessive when those paid for a particular fund are more than those paid for a similar fund that can be obtained for the plan. Plan fiduciaries must maintain a constant vigil over plan fees to ensure their participants are paying what prudence deems is reasonable.

Ensure Participants have Access to Sound Investment Advice and Education

Plan sponsors who fail to improve the financial literacy of their participants and make them aware of their retirement readiness, open themselves up to fiduciary liabilities. Having the most well-conceived, diversified fund array doesn’t ensure its proper use by plan participants unless they are well-equipped to use it. Plan sponsors must ensure that the necessary resources are available to educate and advise plan participants on their investment choices and planning for retirement.

Ensure Your Investment Advisor is also a Fiduciary

If your plan’s investment advisor is not a fiduciary, he or she is not legally obligated act in a fiduciary capacity. Advisors registered with the Securities and Exchange Commission (SEC) as Registered Investment Advisors are legally bound to the strict fiduciary standards imposed upon them by the Investment Advisors Act. The difference, as it applies to plan sponsors is that advisor fiduciaries are able and willing to assume fiduciary responsibilities for investment decisions which can limit a plan sponsor’s liability, while non-fiduciary advisors cannot and will not.

As a plan sponsor, it’s important to have a clear, 360 degree view of your employer-sponsered plan, especially when it comes to fulfilling your fiduciary responsibilities. Small to medium sized companies are often disadvantaged in this regard as their level of responsibilities and tasks can be disproportionate to their plan management capabilities. That’s why it often makes sense for smaller plan sponsors to engage the services of a third party service provider, which in and of itself is a critical management decision requiring thorough due diligence and a clear understanding of its role in the management of your plan.


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