In Practice

Navigate the Minefield of Fiduciary Liability as a 401(k) Plan Sponsor

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Robert C. Port is a partner with the Atlanta law firm of Cohen, Goldstein, Port & Gottlieb, where he practices business and securities litigation. He is editor of the recently published book,
Robert C. Port is a partner with the Atlanta law firm of Cohen, Goldstein, Port & Gottlieb, where he practices business and securities litigation. He is editor of the recently published book, "Georgia Business Litigation," published by Daily Report Books. Port acknowledges the assistance of Scott Pritchard, managing director of Advisors Access in Atlanta, for his helpful comments on this article.

The media regularly carries stories of the struggles faced by those trying to save for a secure retirement. Employers are rapidly shifting away from defined benefit plans, in which employees were assured a certain level of retirement benefits based on years of service, in favor of defined contribution plans, such as 401(k) plans, in which an employee's retirement income will be derived from the accumulated contributions made to their account. Many defined contribution plans are self-directed, meaning it is the employee who selects the investments for the account, usually from options selected by the employer.

Realistically, however, many Americans lack the discipline to regularly and systematically save for retirement. Even those who do save and plan for retirement often have no meaningful understanding of how to manage their investments. In addition, investors are faced with an often volatile stock market, lack of transparency on the fees and costs to which their retirement dollars are being subjected and poor investment management and advice by supposed Wall Street experts. Efforts to address some of these systemic issues are often met by vigorous resistance by the financial industry - witness the continuing failure to implement regulations requiring that a uniform fiduciary standard apply to all financial professionals who provide personalized investment advice.

One small victory for retirement savers did occur, however, in July 2012, when the Department of Labor (DOL) issued its final rules under ERISA §408(b)(2) requiring that any service provider (i.e., insurance companies, investment firms) for retirement plans covered by ERISA (defined benefit, profit sharing, 401(k) and some 403(b) plans, but not IRAs, Simple IRAs, SEPs, or 403(b) plans) provide written disclosures about the services provided to the plan, the direct costs of those services (those paid by the plan) and indirect costs (those paid by any source other than the plan or the plan sponsor). Those disclosures are provided to the plan sponsor (the employer) who in turn shares it with plan beneficiaries (employees).

The rule also required that plan beneficiaries be provided with investment-related information in a chart or similar format designed to facilitate a comparison of each investment option available under the plan. The information to be provided includes (i) performance data for one-, five-, and 10-year periods; (ii) benchmark information for an appropriate market index over one-, five-, and 10-year periods; and (iii) fee and expense information, expressed as both a percentage of assets and as a dollar amount for each $1,000 invested.

This rule is a necessary complement to Section 404(a)(1) of ERISA, which requires that when plan fiduciaries (the employer, the plan administrator, and plan trustee) select and thereafter monitor service providers and the plan's investments, the plan fiduciaries act prudently and solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.

The worthy goal of the DOL regulations was to provide plan fiduciaries with information necessary to make informed decisions on whether the service provider's compensation is reasonable, to identify any conflicts of interest that may have an impact on the ability of the service provider to act in the best interests of the plan, and to provide plan participants with the information to make better informed decisions for the management of their individual accounts.

Disclosure is great—then what?

Fulsome disclosure of the service provider's services, fees, and the extent of their fiduciary status is laudable—as Justice Louis Brandeis famously said, "sunlight is said to be the best of disinfectants." But unless plan fiduciaries have or secure the knowledge to make meaningful use of these disclosures, the interests of those whose interests they are charged with protecting—the employee participants in the plan—might suffer.

The reality is that the vast majority of 401(k) plans are offered by small employers, who may have no meaningful understanding of the fiduciary responsibilities they and their plan administrator have taken on by offering the plan. Unless a 401(k) is administered by a firm or individual independently obligated to act as a fiduciary (those firms and individuals subject to the Investment Advisor's Act or 1940), or administered for the employer by someone who has the interest, expertise and knowledge of the fundamentals of investing, this information will likely be filed away, after cursory review, in whatever folder or file contains the rest of the employer's plan documents. After all, the employer has a business to run, and is not running an investment advisory or consulting firm.

Litigation risk

Those charged under ERISA with having fiduciary responsibilities respecting the 401(k) should have the expertise and skill set to independently determine, both at the initial selection of the plan, and in periodic subsequent reviews, whether the plan provider's services, fees, and investment offerings are reasonable and appropriate for the plan and its beneficiaries.

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