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4 Liability Reducing Strategies for Today’s 401k Plan Sponsor (Part II)

June 21
22:08 2010

(The following is the second of two parts summarizing a keynote speech given by the author to a focus group on fiduciary concerns in Buffalo, New York on June 9, 2010.)

Last week we outlined the following regulatory issues 401k plan sponsors need to know right now: 1) The 401k Investment Advice Rule; 2) A Universal Fiduciary Standard; and, 3) The Modification of 12b-1 Fees (Will 401k World Change by Fall? June 15, 2010). These three issues linger like a ticking time bomb. They’re out there. They’re going to go off at some point. We just don’t know when. Plan fiduciaries need to get ready for them. Many 401k plan sponsors appear to have taken an “ostrich” approach. Unfortunately, ignorance is no excuse for the law. Plan sponsors need to know what’s going on, lest they risk a troubling surprise. These are serious issues and the astute fiduciary can prevent unanticipated future liabilities by taking action right now.

What can the typical 401k fiduciary do to better prepare for the possible consequence of these impending regulatory changes? Here’s the straight-forward advice: Be aware, or beat risk.

Here are four liability reducing strategies for today’s 401k Plan Sponsor:

  • Understand the duties and responsibilities of being a fiduciary. The first plan is to understand what it means to function as a fiduciary. Too often, people who act as fiduciaries don’t recognize they are fiduciaries. Essentially, anyone in any position that has an impact on somebody else’s assets serves as a fiduciary. It’s not just the named trustee, the company’s owners or its top executive officers. Fiduciaries can include HR personnel, a member of the investment committee, someone who works with or hires the recordkeeper, and, in fact, just about anybody who holds the authority to hire and fire any of these employees.
  • Familiarize oneself with the appropriate DOL literature. The second strategy you’ll want to undertake is familiarize yourself with the DOL literature. The DOL does not replace the normal professional advice fiduciaries often seek. It does, however, begin to frame the important issues and suggest the types of questions the 401k plan sponsor ought to ask these professionals. At the very least, the DOL literature represents an excellent source of training. For a list of some of these links, take a peek at the “Government Resources” tab in the lower part of the right-hand column on the Home Page of Fiduciary News.

  • Keep up with the news and any regulatory changes. There’s a lot of news, ideas and issues coming from any variety of sources, not just the DOL. Such information can be obtained from journals, news agencies, professional societies and even local chambers of commerce. Much of this is available for free on the internet. If you’ve got a favorite site, please share it with other readers by entering a comment below this story.
  • Conduct a preliminary plan diagnostic and review to check for any fundamental compliance exposures. The fourth item represents the most comprehensive strategy. It includes these seven steps:
  1. Identify, document and understand the true cost of all plan services. These costs can be borne by the employer, plan, and participant. The DOL currently considers costs a big issue. Benchmark plan costs against fellow employers in comparable peer groups.
  2. Secure improved financial disclosure from plan service providers, including the identification of any potential conflicts-of-interest. If you’re paying 12b-1 fees, you need to know that. If one of your current service providers is affiliated with another of your service providers, you need to know that. It’s not necessarily going to get you into trouble if this situation exists – at least right now – but you ought to know of these facts.
  3. Create, implement and maintain an Investment Policy Statement (IPS) that is consistent with compliance standards. If you don’t have an IPS, make one. If you’ve got one and you haven’t looked at it recently, take a look at it and see if it needs to be updated.
  4. Create, implement and maintain an Investment Due Diligence process that is consistent with the compliance standards set forth in your IPS. Again, this isn’t something that you just do once. Unlike the IPS, which you might look at every few years, the Due Diligence process is ongoing and generally documented at least on a semi-annual basis. These plan-level reports check to make sure the investment choices are still consistent with the plan demographics that you placed into the IPS.
  5. Create, implement and maintain a participant and trustee education framework that is consistent with compliance standards. Part of this process includes what you, as a plan fiduciary, are doing right now (if you’re paying attention, you’ll see this article falls under the “Education” category of Another part of this process involves participant education. This can come from your enrollment meetings, regular employee meetings and even be a part of your plan’s implementation of the Investment Advice Rule. There are lots of different options available when it comes to participant education.
  6. Upgrade, implement and maintain an employee Investment Advice policy consistent with the new DOL compliance standards. While this may seem to be pre-mature since the DOL has not finalized its rule, in fact, the Pension Protection Act was passed in 2006 and the Investment Advice “Rule” has existed, at least informally, since then.
  7. Create, implement and maintain a system to keep track of recent news on compliance issues and continually monitor plan investment options. This may sound similar to the third strategy, but this item represents the formalization of that process.

Once adopted, the three pressing regulatory changes outlined last week can and will require 401k plan sponsors to re-evaluate their retirement plan’s service providers. The burden will likely be placed on plan trustees and fiduciaries to uncover, disclose and probably even eliminate all forms of conflicts of interest. If there’s one thing you should take away from this series, it’s this: Change happens and it happens continually in this industry. As a fiduciary, you don’t want to be surprised by this change. So, the best thing to do is to be prepared.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Jimmy Masters
    Jimmy Masters July 09, 15:02

    Great article and information Chris. Thanks for this.

  2. Isaac Dixon
    Isaac Dixon July 21, 12:50

    Very helpful information Chris (written in plain English). Thank you!!

  3. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author July 21, 13:45

    Jimmy & Isaac – Thanks loads for the kind words.

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