Unless you’ve been hunkered down under a rock the past few years, you recognize that the landscape has changed as far as employee benefits are concerned, as well as how companies providing those benefits are impacted. Especially if your company sponsors a qualified retirement plan for your business and employees, it is critically important that you are confidently aware of the important issues that encompass your fiduciary responsibilities as a business owner.
The Department of Labor deems company owners who sponsor a qualified retirement plan under the Employee Retirement Income Security Act to be plan fiduciaries and imposes many fiduciary responsibilities, including an ongoing obligation to prudently select and monitor the investment options they have chosen for the plan menu.
ERISA Section 404(c) was created to protect plan participants and beneficiaries against fraud and mismanagement of plan assets. It gives participants and beneficiaries the ability to exercise control over their plan assets.
DOL regulations under ERISA Section 404(c) also allow employers who sponsor a qualified plan to shift the responsibility of investment selection to the participants and beneficiaries. If the requirements of Section 404(c) are met, employers will have substantially reduced liability for the investment portion of the retirement plan.
Under 404(c), participants and beneficiaries must exercise control over plan assets. To achieve this, employers must provide the participants and beneficiaries:
• A broad range of investment alternatives consisting of at least three materially diversified investment categories, not including company stock
• Diversified investments among the investment categories
• Adequate information to make informed investment decisions
• The ability to transfer investments at least on a quarterly basis
Perhaps you should consider utilizing ERISA 404(c) for this reduced fiduciary liability if you sponsor a 401(k), profit sharing, or 403(b) plan.
In addition, the following are a few key points for business owners who currently have a qualified retirement plan in place to consider:
Your retirement plan design may need to be reevaluated.
• Have you had a change in ownership since your original plan was put into place?
• Are owners and highly compensated employees able to defer the maximum allowable?
• Is your plan “top heavy”?
• Has your business outgrown your SIMPLE plan?
• Would you like some features not available in a standardized prototype document, such as a last-day rule?
• Does your plan have Internet access and daily valuation?
You should be cognizant of your fiduciary responsibilities. To help you address your potential liability, are you taking advantage of the following?
• Does your plan have an Investment Policy Statement?
• If you are already utilizing ERISA 404(c), what is your plan doing to fully meet the requirements?
Other service provider considerations:
• Does your record-keeper and your third party administrator provide general support you deem to be sufficient?
• Does the financial adviser or broker assigned to your plan provide specific information, counseling or educational opportunities for plan participants?
• Does the financial adviser or broker assigned to your plan provide face-to-face meeting options for your plan’s participants, or is their access for help through a toll-free number or website?
• Does your firm have a feedback loop for your employees to comment on their satisfaction in or negative issues with your plan’s service providers?
Clearly, there is a lot at stake. Industry studies show that a retirement plan is highly valued by employees, second only to health insurance. Because of the importance of these benefits, your organization’s total benefit program can be critical to your ability to recruit and retain high-quality employees. However, the structural details of the benefit products within the program can be complicated, making it challenging for employers to evaluate their effectiveness.
And here is the rub: Balancing the costs of providing a total benefit program against the benefit to the firm of providing one in the first place is more important than ever in this period of global economic difficulty. Nevertheless, by not making it a priority to examine that balance and ascertaining the ongoing risk to the company of not fulfilling the fiduciary requirements of ERISA is an untenable position.
Ultimately, the cost of not completing a thorough review of your firm’s success at meeting the fiduciary requirements of ERISA for your firm’s qualified retirement plan is too high to consider. But many firms are lax in their oversight because of all the other critical business issues. Given the importance to the employees within your firm, and the governmental imperative to do so, perhaps this is the most critical item of all.
This column was written by Joel Lund, a financial adviser with Waddell & Reed.
This article is meant for general information only and is not intended to provide specific investment or financial advice. It is suggested that you consult your financial professional, attorney or tax adviser with regard to your individual situation prior to making any financial decisions. Waddell & Reed does not provide legal or tax advice. Please remember that the investments inside of a retirement plan involve market risk, including the possible loss of principal.