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How to Manage Your Fiduciary Liability

How to Manage Your Fiduciary Liability

| October 10, 2017
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The role of a Plan Sponsor is a difficult one. These days, it’s critical to have an advisor that specializes in retirement plans on your team to meet your Fiduciary responsibilities. Below are the areas that are especially important when it comes to managing fiduciary liability.

ERISA Safe Harbor Rules

Plan sponsors need to utilize as well as understand the ERISA safe harbor rule requirements that are present in today's landscape. There's a number of them that you will want to take a look at and understand what guidelines the Department of Labor provides to plan sponsors to help maximize these safe harbor features.

Plan sponsors will want to make sure that they have a due diligence process to review investments, administration duties, payroll, eligibility, plan testing, notifications, and disclosures, etc. Further processes should include reviewing plan enrollments, holding plan enrollment meetings, educating participants on the plan features, reviewing plan participant contributions and employer contributions. This also includes repayment of loans as well as any kind of distributions that might take place during the year. Participants should have access to proper plan education and a good understanding of the plan to make their decisions.

Implement a Risk Management Process

It’s crucial that all plan sponsors track and document their due diligence process for all things compliance related. As to be expected, most plan sponsors find this task to be overwhelming when stacked on top of their countless other duties. So, what do they do?

Typically, many plan sponsors rely on those around them. Commonly this includes third-party administrators, their record keeper, relationship manager or their financial advisor that handles their plan. Whoever it is that assists in this process plan sponsors must make sure all documentation reports are loaded up in a fiduciary vault. This is a wonderful way to source all relevant information and have a good historical file for any kind of surprises that may pop up in the future. It is a prudent process but necessary for the benefit of plan participants.

Use Legislation

The government has articulated its view on retirement plans but there are no defined standards by the Department of Labor. There is, however, plenty of guidance and legislation created on what a plan sponsor needs to do. It's up to plan sponsors to make sure that they drive that process, report on that process and make sure that they document their results. Any issues should be aided with immediate action items that will ultimately improve their plan.

Making sure they implement a sound practice to monitor their plan is crucial often relying on an advisor with an embedded process to assist in the management of plans is a great way to start. Ultimately these areas listed above will address your plan governance expectations and help, give, and provide you the suitable processes and steps to having a comprehensive plan and managing your fiduciary liability.

Bring in a Co-Fiduciary Advisor

If plan sponsors do hire an advisor, it’s crucial that they ensure the advisor accepts a co-fiduciary status whether it's 3(21) or 3(38). A 3(21) is a nondiscretionary co-fiduciary status. A 3(38) is an investment discretionary status. 3(38) is the highest level that you could appoint an advisor on and one that should be looked at carefully. It’s also important to make sure any retirement advisor chosen understands and works within the new federal regulations that went in place in June of 2017.

Ensure the Right Advisor

If plan sponsors currently have an advisor, it’s a good idea for them to ask and understand the following.

Do they have education in this area? Do they have a background in working with record-keepers and on retirement plans? What kind of technology do they use to manage your plans? What kind of process do they employ? What kind of training do they employ? What kind of third party resources do they have such as education, background, and technology? Do they have an investment committee that can help them choose other investment managers and do the proper due diligence? Do they have a process for auditing their own plan processes and the required documentation and systems in place to help manage their client's plans?

Adhere to the Plan Document

This is another big one. Plan documents stipulate how plan sponsors handle loans, their eligibility, age requirements, etc. Making sure that the 401(k) matches up with payroll as well as their plan document is critical. So, making sure loans, the rules to loans, the rules for compensation, the rules for eligibility, and the rules for distributions are all in sync with each other.


Every plan sponsor should check in with their record keeper or TPA on items such as auto-notifications for eligibility, auto-notifications for Qualified Default Investment Alternative(QDIA), fee disclosures, fund changes, safe harbor notices, and automated mailing/e-mailing of notices. Implementing automatic features can remove heavy administrative burdens from plan sponsors.

Setting up automated processes can also ensure that benefit claims are processed appropriately and timely. Set it up so that the TPA or the record-keeper can automatically approve hardships and loans on behalf of the plan sponsor. Plan sponsors can completely outsource and automate fund change mailings on behalf of their record-keeper. The plan sponsor can also automate and rely on the record-keeper or the TPA for government reporting and making sure proper forms are being filled out and processed.

Auto-enrollment with auto escalation is a great way to help participants increase their deferral rate on an annual basis. Making sure you have a QDIA in place where investments will actually be deferred to if participants don't pick or choose their own investment selections.  

Review Demographics

When it comes time to enroll, plan sponsors should make sure that they’re reviewing demographic savings rates, deferral rates, and participation rates. These are great ways to focus on areas that can be most impactful.

It's also a good idea that plan sponsors review their testing data thoroughly. In non-safe harbor plans, it's the highly compensated who are directly affected because they often have deferred too much than the plan allows, thus resulting in the returning of excess contributions to the plan. This review could provide some ideas and some gateways for strategies on helping increase deferrals so refunds are mitigated or potentially evaluate other plan designs outside of the 401(k) plan.

Establish a Stellar Plan Committee

Plan sponsors will save a lot of heartache and ensure a more promising future if they invest in their plan committee.

Each member should be fully aware of what their duties are, when they need to meet and review the plan, and show attendance for those reviews. And if they're not, it’s up to the plan sponsor to catch up with plan updates later so they're on the same page with the other committee members.

A plan sponsor should receive formal fiduciary training either through their advisor’s resources or from the record-keeper or a third-party administrator. These trainings can be delivered to the committee incrementally through various meetings, webinars, mailings, and phone calls.

Take the next step and ask your Advisor to provide you with a detailed plan and process to help manage your Fiduciary Liability.

For Plan Sponsor Use Only - Not for Use with Participants or the General Public Investing in mutual funds involves risk, including possible loss of principal. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

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