What’s the biggest concern most 401(k) plan sponsors have about their fiduciary duty? It’s not making sure deferrals occur on a timely basis (they hire good people to make sure that happens).
It’s not making sure their employees invest enough for retirement (yeah, that worries them, but it’s not at the top of the list). It’s not even that they’re paying too much in fees (let’s not even go there).
No, the cause for high anxiety among 401(k) plan sponsors – whether they say it out loud or keep it to themselves – is the gnawing worry they’ve allowed the wrong investments to populate their plan’s menu options. Here’s the irony: This is the easiest portion of their fiduciary liability to mitigate (see “The Easiest Way to Reduce Personal Fiduciary Liability for Plan Sponsors and Other Non-Professional Trustees”).
It really takes only two steps to accomplish this, and most 401(k) plan sponsors either are already doing the first one or are under the mistaken impression they are already doing the first one.
Here’s what I mean. From what the legal folks tell me, under both the Uniform Prudent Investor Act and the DOL regs, someone serving as a plan trustee (or fiduciary) who does not have the credentials to be considered an “expert” regarding selecting investments, can allay their fiduciary liability for this function, but only if they hire a recognized professional to take on that specific fiduciary role.
In other words, if you’re a doctor, a lawyer or an Indian Chief (i.e., a non-expert when it comes to picking investments), you reduce your personal fiduciary liability for picking plan assets by hiring a professional investment advisor to assume the job of selecting and monitoring plan investments.
There, that was easy.
Or was it?
Notice the caveat in there. In order for the plan sponsor to lower his own fiduciary liability, he needs to hire another fiduciary. Thanks to dual registration, this can be a confusing distinction. The plan sponsors needs to make certain the individual (or firm) he hires will accept the role as a fiduciary. Fortunately, we know all SEC-registered investment advisors are, by definition, fiduciaries.
The same, unfortunately, is not true for other financial service professionals, including brokers who are dually registered as investment advisors. In the case of hiring a dually registered investment advisor, the plan sponsor must ask the vendor which hat he’s wearing – and then make sure the investment management agreement specifically states the advisor is acting as a fiduciary as defined under ERISA.
Anything less than that, and the plan sponsor cannot say with certainty he has hired a fiduciary And if the plan sponsor cannot say with certainty he has hired a fiduciary, he cannot say with certainty he has lowered his own personal fiduciary liability. And that, my friends, is the whole point, isn’t it?
I said there were two easy steps. The second step, while often neglected, is, again, fairly simple. It comes down to one word: documentation. This article is too short to provide a thorough explanation of what is required of documentation, but suffice it to say the plan sponsor needs to document all his investment processes, including those involving the hiring and monitoring of the investment advisor and those involving the selecting and monitoring of underlying investment options.
The DOL has long said, rather than picking the “perfect” investment menu, it's more concerned with insuring plan sponsors have well defined processes and that they execute them consistently.
And it’s easier to comply with this than most 401(k) plan sponsors allow themselves to believe.