401(k) fiduciaries have many embedded legal and ethical responsibilities that they should be aware of to ensure they are meeting their obligations.
Are you a 401(k) plan fiduciary? If you are, you have specific responsibilities and are subject to standards of conduct, because you act on behalf of the participants in the plan. This position of trust has many embedded legal and ethical responsibilities you should be aware of to ensure you are meeting your obligations.
Some of these responsibilities include:
• Acting solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them
Carrying out their duties with skill, prudence and diligence
• Diversifying plan investments
• Paying only reasonable expenses of administering the plan and investing its assets
• Avoiding conflicts of interest
• Selecting the investment providers and the investment options, and monitoring their performance
As the fiduciary, your responsibility decreases and you’re not liable for losses because of the participant’s investment decisions if the plan is properly set up to give participants control over their investments. Should your participants have control over their investments, the Department of Labor (DOL) gives guidance so that participants can make informed decisions.
What if a plan fiduciary fails to carry out its responsibilities?
Fiduciaries who do not follow the required standards of conduct may be personally liable. If the plan lost money because of a breach of their duties, fiduciaries would have to restore those losses, or any profits received through their improper actions.
For example, if an employer did not forward participants’ 401(k) contributions to the plan, they would have to pay back the contributions to the plan as well as any lost earnings, and return any profits they improperly received. Fiduciaries also can be removed from their positions as fiduciaries if they fail to follow the standards of conduct:
1. Not having a plan investment committee and regular meetings
ERISA requires that the named fiduciary make decisions regarding the plan that are in the best interests of plan participants and beneficiaries. The regulations also state that if you lack the required expertise to make these decisions, that you enlist the support of those who have it. Part of the responsibility is meeting regularly with your expert to oversee things are in order.
2. Not paying deposits on time employees and owners
The IRS and DOL have strict rules regarding the timing of deposits. According to the IRS 20% to 25% of plans examined are not in compliance with these rules. Since you are often in the trusted position of depositing money that doesn’t belong to you, penalties are steep for failing to comply with these simple fiduciary responsibilities. If you don’t already have an automated process for making these deposits, consider talking to your professional advisors to ensure this process is automated and accurate.
3. Not following your plan document
Recent and frequent law changes can leave your plan document out-of-date; make sure your plan document is updated regularly to remain in compliance with the IRS and other governing bodies. Once you ensure it is up-to-date, follow the plan document.
If your document doesn’t allow for loans or self-directed accounts and, in reality, the participants engage in this activity, then you should update your document or change company practice to ensure actions match what is codified. Don’t forget to notify employees, vendors and tax professionals of these changes. Change is acceptable, but institutional practices without documenting and informing participants isn’t.
4. Not keeping good records
It is safe to say that you probably do not understand or want to understand the complexities associated with recordkeeping the assets that you have accumulated in your 401(k) plan. Ironically, even in today's age of technology, recordkeeping is still a labor intensive endeavor, particularly if your records have to be generated for many years.
Given these very extensive and complicated regulations, virtually none of the retirement plan providers will provide investor-friendly statements. Instead, they tend to generate what the law requires. Unfortunately, what is required by the law is not necessarily what you need in order to make a financial assessment of your investment strategy.
In order to evaluate performance, you need to know on a monthly basis:
— What your beginning account balance is
— How much you and your employer contributed to your retirement plan account
— The amount of any transfers or withdrawals that you made during the period
— The amount of any gains or losses that you experienced and your endings balance
Since your record keeper probably does not provide this information to you in a user-friendly way, you will most likely have to take the information from your monthly or quarterly statements, and build a spreadsheet that you can use to track your information. Once you have properly compiled the information, you will then need to manually calculate your annualized rate of return in order to conduct a thorough analysis and review. This process should also produce easy to read participant statements for your employees.
5. Not getting the most out of your 401(k)
Unfortunately, the cost structure of various investments can be confusing. According to the GAO, the company that administers the 401(k) "may also be receiving compensation from mutual fund companies for recommending their funds. ... As a result, participants may have more limited investment options and pay higher fees for these options than they otherwise would."
The bottom line: Funds could get into 401(k) s because they provide the most advisor compensation, not because they are the best option for your plan. The good news is that 2012 changes require plan fiduciaries to provide information to participants and beneficiaries about the existence of self-directed brokerage accounts if offered by the plan, fees related to accessing that account and, at least quarterly, the amount of fees charged against participant’s account.
6. Not appraising alternative investment valuations
With a self-directed account it is important for the fiduciary to understand and trust the valuations received for alternative investments. The valuations are pertinent when disclosing the overall plan assets.
A valuation of a small business or real estate holding is not always exact and can vary significantly depending on who conducts the valuations as there are several approaches that look at cost, comparables and income to determine the value of a business. In addition, there are discounts for marketability and non-controlling interest that can alter the value of a business. The fiduciary, when possible, should vet the appraiser to make sure the appraiser has the appropriate qualifications and skills to accurately value the alternative investments.
7. Not researching advisors
Not all advisors are created equal. It is necessary to evaluate and review the advisors before selection and once annually thereafter. There are several questions that need to be addressed before making a decision:
— Does the advisor have the experience and credentials necessary?
— Is this in their area of expertise or is this a small side service the advisor provides?
— Is there a dedicated team of experts?
— How does one advisor compare to another?
— Are there any conflicts of interest?
— Can the advisor help educate the fiduciary and the plan participants?
— What are the fees and agreement terms?
8. Not following the terms of the plan document
Retirement plans develop certain patterns or routines that may not, over time, remain consistent with the terms of the plan. This is true especially if you are using a plan document prepared by a provider that may accommodate that provider’s approach, but not how you administer the plan now. It’s a good idea to do a document and process audit every few years to make sure the document reflects how you are actually operating and administering the plan.
9. Thinking your plan qualifies for 404(c) protection
Many plan sponsors think their plan meets the standards of ERISA 404(c) and therefore believe they are shielded them from being sued for participant investment decisions, so long as certain conditions are met. However, industry experts are nearly uniform in their assessment that very few, perhaps no plans meet those standards. Even if you think your plan does comply, double check, and remember that the DOL thinks you’re responsible for every participant investment decision, except those behind the 404(c) wall.
Deborah Helton, CPA, is a Director at BiggsKofford, CPAs, a Colorado based accounting and consulting firm. Mrs. Helton specializes in assisting physicians align their goals with simple tax strategies and business coaching to eliminate surprises and assess risk. Mrs. Helton can be reached at (719) 579-9090 ext 212, or via email at DHelton@BiggsKofford.com.
Mrs. Helton is a proud member of the National CPA Health Care Advsiors Association. The HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide solutions to the accounting and financial needs of physicians and physician groups. For more information please contact the HCAA at email@example.com.