Fiduciary
By Thomas J. O’Connor

Most small and mid-sized businesses do not apply the same level of scrutiny and cost-benefit analysis to their employees’ retirement benefits as they do with other facets of their business. This can expose business owners and decision makers (a.k.a. “fiduciaries”) to needless personal/corporate liability exposure on top of excessive fees for the business and its employees.

This blind spot is of particular concern relative to the company’s 401(k) plan. This is significant because ERISA (the Employee Retirement Income Security Act of 1974) imposes many requirements upon fiduciaries that, if not properly and completely fulfilled, can result in corporate and personal exposure.

While most fiduciaries do act in good faith, they are not doing everything they are required to do under the law. We can identify four main culprits:

  • Lack of awareness – Many fiduciaries are unaware of the full scope of their responsibilities;
  • Lack of expertise – Most fiduciaries do not have the time or inclination to become experts in benefit design and fee structures, let alone ERISA;
  • Misplaced trust – With ERISA’s encouragement to delegate to third party experts, most fiduciaries elect to do so; unaware of the third party’s conflicts of interest; and
  • Marketing gimmicks – Many 401(k) vendors have started creating fiduciary compliance tools and warranties. These warranties offer little, if any, protection due to flawed language.

So why is this suddenly an issue even though ERISA has been in place for nearly 40 years? In a nutshell, the environment has changed:

  • In the wake of corporate-governance scandals the government is increasing their enforcement activity on current ERISA regulations and is poised to add new ones.
  • The Plaintiffs’ Bar is increasing its activity as people react to their negative returns and seek to rebound from investment losses.
  • Articles on hidden fees and other financial industry conflicts are now commonly found in the mainstream media.
  • The U.S. Supreme Court LaRue Decision in February 2008 gave individual plan participants legal standing to sue their employer for fiduciary breaches.

The difficulty in discussing this matter with many clients is not only related to the fact that they cannot easily see the problem, but there just haven’t been a lot of headlines that give them a touchstone. So below are some examples.

Example 1: An officer with a company that had a plan with about 100 employees and $7 Million in assets, wanted to take money out of his account in the plan. He did not want to do a 401(k) loan because the weekly payment would have been too large. Instead, he supplied the 401(k) plan provider with a date of termination based on the fact that the plan provider said that they could release his funds if they had a date of termination. He took comfort in the fact that the provider was a trustee – not understanding the significant difference in authority and liability between the provider’s status as a directed trustee and his status as a discretionary trustee. Fortunately this fiduciary breach was discovered by his auditing firm and he was only saddled with a $5,000 Voluntary Fiduciary Correction fine. Had the IRS discovered this breach, the plan could have been disqualified and the employer subject to back taxes and major penalties.

Example 2: For two years in a row, the CPA firm auditing the employer’s 401(k) plan came to the employer at the eleventh hour with requests for information they needed to finish the audit. This may have been simply a case of poor communication between the employer and the CPA firm. Even though it was the CPA firm that didn’t get the job done, it was the employer who was liable for this breach and faced a $100,000 fine ($50,000 per incomplete Form 5500 filing). While this fine was eventually negotiated down to $10,000, the employer was confronted with substantial legal bills, distraction from managing their core business operations and a loss of productivity that would not have occurred had they been more aware of the totality of their fiduciary obligations or had retained a fiduciary consultant to assume that responsibility and liability for them.