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Five Areas 401k Plan Sponsors Must Address to Reduce Fiduciary Liability

January 18
00:19 2012

Have you ever stopped to consider why most 401k books, articles and seminars are intended solely for employee investors, not employer sponsors? Think about it. There are many more employees than employers, so the numbers suggest 5_Areas_401k_Plan_Sponsors_Must_Address_300publishers could sell many more books by targeting the individual investors as opposed to the plan sponsors. And speaking of numbers, TV and other media are much more likely to interview an author who writes for this broader range of viewers, readers and listeners rather than one addressing the specific concerns of a small niche.

But it gets more compelling when you dig down deeper. You see, by addressing the employee audience, it’s easier (and sometimes convenient), to paint the employer as a villain. But face it, even 401k plan sponsors want to know the secrets of successful investing. That makes them also more likely to buy a general 401k investing “How-to” book instead of a book offering them specific fiduciary solutions. Ironic, isn’t it?

In the maelstrom of regulatory and industry confusion, the most important thing a 401k plan sponsor can use is a “How-to” book on Zen and the Art of 401k Maintenance. (The Zen part is because of all the aforementioned confusion; the Maintenance part is for actually getting the job done; and the Art part is, well, it’s because this whole business is more art than science, no matter what your local friendly neighborhood vendor says.)

Why is this topic “must reading” for every 401k plan sponsor? Because, ultimately, they’re the ones held accountable for any mistakes in the plan. And, as you’ve no doubt noticed from various nefarious headlines, naïve plan sponsors can make tempting targets for both regulators and salivating class-action attorneys. (Remember the part mentioned above about painting employers as villains?)

Rather than shelling out the big bucks for the book, FiduciaryNews, as a convenience to its readers, will now present the Five Areas 401k Plan Sponsors Must Address to Reduce Fiduciary Liability:

  1. Regulatory Compliance – This is where 401k plan sponsors usually start, and not without good reason. The (primary) federal and (sometimes) state regulatory complex lays the groundwork for the basic foundation of the plan. From ERISA to the 2006 Pension Protection Act, the government defines the parameters for creating and maintaining plans. Along the way, tidbits like 404(c) and the Uniform Prudent Investor Act pop up to spice up the specific stylings of your 401k plan.
  2. Service Vendor Conflicts of Interest – Here it’s critical to focus on both the independence of providers (are they watching each other) and the existence of any potential conflicts of interest. Sure fees are important, but sometimes a higher fee can help protect 401k plan investors from far greater worries. This is the area where benchmarking first rears its head. After all, in the end, you want to know how your vendors stack up against their peers and competitors.
  3. Investment Policy Statement – This is the road map for the plan and the plan’s investors. A well written IPS will help guide the plan sponsor to both select appropriate investment options and to frame the investment menu in a manner that best helps employees make the optimal decision (or, at the very least, discourage them from making sub-optimal decisions). The ideal IPS is tied to the corporate vision and mission, has a meaningful and clear objective, is communicated, is measurable and allows for independent due diligence.
  4. Investment Due Diligence – While the IPS lays out the framework, the Investment Due Diligence process represents the sound execution of that framework. It must document both the selection process as well as the monitoring process. It should contain consistent analysis and comparisons. Finally, its critical components should be reviewed periodically (twice a year is fine, but quarterly might be overkill).
  5. Trustee and Employee Education – A well rounded plan with the perfect array of investment choices will die on the vine if the plan sponsor fails to provide adequate education for employees. It’s important this education be consistent and regular and that it be tied to the themes and framework identified in the IPS. It should cover both investment options and plan administration and it makes sense to customize it to the specific demographics of the plan employees. Lastly, don’t forget to provide education to the plan sponsor and its trustees. Often, employees will ask those insiders questions before going to the plan recordkeeper or other service provider.

In the end, you should explore these areas with the objective of discovering something you don’t know (no matter how smart you are, there’s always something you don’t know). It also helps to create a checklist for each area to help you keep score in order to measure how well you’re doing. This checklist also helps kick start any action plan that might be undertaken to improve your 401k plan.

Of course, this little article can’t cover each area with the depth and reach required to be truly helpful (what do you expect from something that’s free). On the other hand, it does point you in the right direction to get started. On the other other hand, if you’re really interested in the book (tentatively titled Fiduciary Solutions – The Best Opportunity for 401k Plan Sponsors to Monitor Plan Compliance, Plan Investments and Share the Fiduciary Burden with Experienced Professionals), e-mail us at and we’ll e-mail you back sometime this April when the book is published.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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