What are an Employer's Fiduciary Responsibilities?
A lawsuit was recently settled for $62 million in which the employees accused their employer of mismanaging their 401(k) plans. The employees claimed their employer hid excessive fees and invested in conservative investments resulting in diminished returns for plan participants.
The Supreme Court will soon hear arguments in many other cases where others argue their retirement and health plans have been mismanaged and were imposed excessive fees.
These cases and the many others that continue to appear highlight the seriousness of the fiduciary responsibilities of those acting on behalf of plan participants and their beneficiaries. Your employee benefits packages are a key aspect of hiring and retention efforts. But, with the rise of lawsuits alleging breach of fiduciary responsibility, it’s becoming increasingly more risky to sponsor group retirement and health plans. The Employee Retirement Income Security Act (ERISA) sets standards of conduct for those who manage private-sector retirement plans and its assets (called fiduciaries). Under the law, the basic fiduciary responsibilities applicable to retirement plans include the following:
Duty to act prudently:
Because fiduciaries act on behalf of plan participants, it’s their responsibility to exercise good judgment, care, and wisdom. They need to be experts in a variety of functions such as investments, or hire someone with that expertise. If outsourcing, it’s vital to document the process to demonstrate duty of care. Fiduciaries also need to regularly monitor the service provider’s performance, evaluate notices received, check on fees charged, and address employee complaints.
Duty to follow the plan documents:
The plan document is the guideline for day-to-day plan operations, outlining key elements such as eligibility, contribution limits, vesting, and distributing plan assets. Fiduciaries need to be familiar with plan documents and make sure those documents stay current. Failing to amend a plan document in a timely manner for changes in federal tax laws can affect the plan’s tax-qualified status. Plan documents should be reviewed annually with a third-party service provider who has expertise in this area.
Duty to diversify plan investments:
Employers have a fiduciary responsibility to act in the best interest of their employees by offering a variety of investment options in their plans. Giving employees choices gives them the opportunity to tailor their investments to their lifestyle, budget, and retirement needs. Fiduciaries should also provide employees with adequate and timely information about their investment options so they can make smart decisions and minimize losses.
Plan participants can sue employers who fail to comply with these regulations set forth by the ERISA. Even if the case has no merit it’s going to be costly and time consuming to defend.