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Three Strategies to Help Clients Reduce Plan Sponsor Liability

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In the difficult climate that businesses face today with threats of tax increases and the rising cost of healthcare, what owner would dream that their greatest source of potential business liability is their company 401(k)? The current economic setting and recent litigation concerning defined contribution plans including 401(k)s and profit sharing arrangements may well be exposing retirement plan sponsors to increased fiduciary liability.

According to the recent white paper, “Who May Sue You and Why: How to Reduce Your ERISA Risks, and the Role of Fiduciary Liability Insurance,” by The Chubb Group of Insurance Companies and the ERISA Litigation Practice of Morgan, Lewis & Bockius LLP., “ERISA class action lawsuits are no longer confined to the largest of companies. Employers of all sizes are vulnerable.”

“Business owners and managers need to understand the fiduciary liability exposures they face, especially in an environment where they are likely to reduce staff or employee benefits," said Christine Dart, vice president and manager for worldwide fiduciary liability at Chubb. “Employees who still have jobs may not be inclined to ‘rock the boat,’ but those who find themselves overboard are more likely to take legal action against employers, especially if their 401(k) plans sustained losses before they were terminated. Fortunately, employers can take steps to possibly reduce the threat of fiduciary liability lawsuits.”

Here are three key strategies to assist clients who are retirement plan sponsors in reducing liability:


1.  Help clients know the ins and outs of their role as a fiduciary and what is required of them. Anyone that maintains discretion over the money in the retirement plan is a legal fiduciary. The Department of Labor’s website, lists the duties of the fiduciary among others as:

— Acting solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them;

— Carrying out their duties with skill, prudence, and diligence;

— Following the plan documents (unless inconsistent with ERISA);

— Diversifying plan investments;

— Paying only reasonable expenses of administering the plan and investing its assets; and

— Avoiding conflicts of interest.

2.   Since much of the potential liability comes from excessive fees for service to the plan, retirement plan sponsors must know the fees associated with their plan. Clients should demand full transparency and disclosure from their vendors. On a yearly basis, they should request proposals from outside sources to have an understanding of what the industry standard is for expenses of their plan’s size.


3.  Clients should consider hiring a registered investment advisor (RIA) to take over the full fiduciary duty of the investments in the plan. The advisor must serve as an ERISA section (3)38 fiduciary. All other fiduciaries are in name only and in some cases may not be held liable for the quality of the investments in the plan.

Clients who are plan sponsors and fiduciaries need to continue to be diligent in staying educated on current issues that affect their liability towards their 401(k) or profit sharing arrangements. We at Money Management Services agree with the Chubb report that a “Well-designed, well-executed, and well-administered benefit plans is an important foundation for limiting litigation exposure.”