When I meet with CEOs, CFOs, and human resources directors, there’s a recurring theme that leaves me feeling shocked, amazed, and deeply concerned. No matter the industry or size of the company, many employers seem to be making the same big mistake: They aren’t as concerned about fiduciary liability related to their retirement plan as they should be. Sooner or later, it’s going to cost them.

Based on recent changes made by the Department of Labor (DOL), many of these companies face being sued by employees, getting audited, paying huge fines for mismanaging their retirement plans, or all three. Before I go into why employers should be paying attention to fiduciary issues, let me elaborate.

What most CEOs, CFOs, and HR professionals don’t realize is that they are a plan fiduciary. The assumption that if you’re not a named fiduciary, such as being a trustee, you don’t carry the fiduciary label is incorrect. The definition of a fiduciary is broad enough to include anyone who has discretion over the retirement plan. Many plan fiduciaries don’t even realize they are a fiduciary, and are therefore highly exposed. In effect, many CEOs, CFOs, and HR professionals are personally liable for any non-compliance found by the DOL.

Francesca Federico

Francesca Federico

But there’s a way to mitigate this personal liability: make sure your plan adviser is a named fiduciary. What many plan sponsors don’t realize is that traditional brokers are not fiduciaries. This means they don’t share any responsibility if something goes wrong with the plan — instead, it’s all on you.

To prevent this from happening, you have two options: 1) hire an adviser that is an ERISA 3(21) fiduciary, which means that the adviser has fiduciary responsibility with the plan sponsor to monitor the plan’s investment performance and make recommendations, but it’s still the plan sponsor’s responsibility to act on those recommendations; or 2) hire an adviser that is an ERISA 3(38) fiduciary, which means that the adviser assumes the discretion over the responsibility regarding the plan’s investments. This second option may be appealing to many plan sponsors who are not comfortable with the approval and complexity of the investment process.

In order to assume fiduciary responsibility under ERISA 3(21) or 3(38), the adviser must be a Registered Investment Advisor (RIA), bank, or insurance company. A plan adviser that is a named fiduciary is responsible for choosing and monitoring a robust lineup of investment options to offer plan participants, monitoring how reasonable the fees are, and educating employees.

By now, you may be thinking, “Do I have the right plan adviser to help me alleviate my personal liability? Where do I start?” Here’s a simple list of things you can do in 2016 to mitigate fiduciary liability:

  1. Look at your service agreement (every qualified retirement plan should have one, it’s a requirement) and check to see if your plan adviser is a named fiduciary — either an ERISA 3(21) or ERISA 3(38) — and not just a broker.
  2. If your plan adviser is a broker, obtain a copy of your 408(b)2 Fee Disclosure from your recordkeeper to verify the adviser’s fees are reasonable.
  3. Find a fiduciary adviser and ask them to perform a fiduciary review of your 408(b)2. It’s basically a gap analysis to figure out where you’re protected and where you’re not.
  4. If this due diligence process reveals you are not fully protected, hire a fiduciary adviser that will ensure you are as soon as possible.
  5. Follow the DOL’s best practices as outlined on their website.

Here are some of the things a fiduciary adviser should look for when they do a plan review: Are all the funds in the plan proprietary? Has plan governance been established, and is it being followed? Is there an investment policy statement? Although it’s not required, we highly recommend having one in case you’re audited and the DOL asks for documentation that shows how you select and monitor funds in your plan — if you don’t have one, it’s a huge red flag.

Is the plan being put out for a Request for Proposal (RFP) every 3-5 years? It’s a rigorous process, but necessary in order to be compliant. Is the plan sponsor doing a Request for Information (RFI) at least once a year to benchmark how reasonable the fees are? If you have a fiduciary adviser that provides this scope of services, you can be confident that your plan is fully compliant.

As outlined earlier, the DOL has ramped up compliance audits over the past few years. In 2013, the DOL hired 1,100 additional auditors; their goal is to audit every qualified retirement plan in the United States within the next five to seven years. In 2015, the DOL recovered $693.3 million in fines (up $100 million from 2014). The Employee Benefits Security Administration (EBSA) says they are “charged with protecting more than 141 million workers, retirees, and their families covered by an estimated 684,000 private retirement plans, 2.4 million health plans, and other welfare benefit plans which together hold more than $7.8 trillion in assets.”

According to a third-party administration firm, more and more companies get audited by the DOL every year. In 2015, 40 different New England companies this particular TPA works with received letters. Keep in mind, audits can last between 8 to 15 months and the amount of information asked for is overwhelming. It’s a misconception that the DOL only targets large companies; they don’t discriminate by size or type. Whether you’re a private corporation or a union, in manufacturing or technology, have 5 employees or 5,000, you could be subject to an audit by the DOL.

It’s the job of a fiduciary adviser to make sure your plan is DOL-compliant and to cover you personally with a fiduciary blanket. Getting a second opinion on your company’s qualified retirement plan from ERISA specialists on a regular basis makes good fiduciary sense. It’s like getting your car serviced — it should be part of the regular maintenance of your plan.

Francesca Federico, AIF®, CDFA® is an ERISA 3(38) fiduciary and co-founder and principal of Twelve Points Retirement Advisors. She specializes in working with companies on their corporate retirement plans.

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