By Diane L. Jenkins
Kraft Foods. Boeing. International Paper Company. Caterpillar. Lockheed Martin. What do these giants of industry have in common? In recent years, all have been the targets of lawsuits alleging the companies violated their fiduciary duty with regards to their 401(k) plans. And while these lawsuits have focused on larger plans, the fiduciary standards they cited apply to both large and small business retirement plans. In addition, these high-profile cases have emphasized the potential personal liability of individual corporate executives, board directors and 401(k) plan committee members.
This past April, the U.S. Department of Labor issued a final rule defining the term fiduciary. The good news is that this rule, sometimes called the “conflict of interest rule,” does not actually increase your liability as a CFO, company executive or plan committee member. It doesn’t let you off the hook, either. In fact, you still have the same liability—and could be targeted by lawsuits—for investment selection, plan fees and overall plan monitoring under the new rule. Even those with an investment fiduciary as defined by section 3(38) of ERISA won’t see their liability change. What will change for many companies is the amount of help they receive from their plan service provider. It could decrease as those providers avoid anything that would now define them as a fiduciary.
The rule affects investment advisers and brokers providing investment advice to participants and beneficiaries of employee benefit plans governed by ERISA. New language clarifies when a person has made a recommendation and when a person qualifies as a fiduciary. As a result, many providers may pull back some services they used to provide in order to avoid the liability that comes with being an investment fiduciary.
Unless your adviser is serving as an investment fiduciary as defined by ERISA Section 3(38), or is willing to do so, you may no longer receive individually tailored communications from them. They may stop providing selective lists of funds that are appropriate for a particular investor as well. With the rule’s broad definition of a “recommendation”—a recommendation requires that a reasonable person would believe that there was a suggestion to make or hold a particular investment or pursue a particular investment strategy— tailoring communications and providing selective lists could increase their liability.
If you notice this kind of change in the support you are getting, you have a choice to make. Either accept the reduced services from your adviser, leaving your employees with fewer resources to make informed decisions about their retirement savings, or take on those fiduciary responsibilities yourself. If neither of those choices sounds appealing—and they shouldn’t—you could delegate control of your 401(k) plan’s investments to an investment fiduciary that meets ERISA 3(38) standards.
You and your plan committee will still be responsible for making a prudent decision in the process of selecting an adviser to serve as an investment fiduciary. You should take into account the adviser’s participant-directed plan experience, knowledge of the U.S. Department of Labor’s requirements, and other relevant factors.
When selecting a fiduciary, it’s important to focus on their ERISA qualifications more than the adviser’s investment performance. After all, 401(k)-related lawsuits target unfair fees and misguided investment selection, not poor investment performance. And those cases that don’t result in a lawsuit are typically due to errors in reporting, which could be avoided by a qualified investment fiduciary. In 2013 alone, the Department of Labor closed 3,677 such investigations, with 73 percent resulting in monetary fines or other corrective action.1
Once you’ve selected an investment fiduciary, you’ll also be responsible for providing proper oversight and ensuring that their fees are reasonable. But if your committee removes themselves from the investment decision-making process by hiring a discretionary investment manager (under ERISA Section 3(38)), you’ll also reduce your investment fiduciary responsibility and liability.
For some, removing themselves like that may be hard to do. But investment selection and monitoring should be left to the sole discretion of the investment fiduciary, because any input from the plan committee may negate the fiduciary protection you are seeking. The end result will be well worth it. With a qualified investment fiduciary creating your investment menu and making investment decisions on behalf of your company plan, you are not only giving your employees access to professional investment advice, you are limiting the liability of your company and certain individuals in your company—including yourself.