Companies that offer a 401k plan under the provisions of the Employment Retirement Income Security Act of 1974 (ERISA) have a fiduciary duty to their employees. Living up to these fiduciary responsibilities is essential to prevent legal actions against the company and to protect its reputation among potential employees in the labor pool.
Working with a qualified 401k advisor can provide some protection for companies against allegations of failure to uphold their fiduciary duties.
Performing regular due diligence, however, is still necessary to ensure that the administration of 401k plans is conducted in compliance with the company’s fiduciary duties.
What Is a Fiduciary?
In the corporate world, a fiduciary is defined as someone who is required to act on behalf of another person or persons and to represent their best interests financially and in other ways. Employers typically serve as fiduciaries for their employees in dealing with 401k management and other financial matters on their behalf. This relationship brings with it certain duties that must be upheld to remain in compliance with all provisions of ERISA law.
The Basics of Fiduciary Duty
The fiduciary responsibilities of employers include the duty of care, the duty of loyalty and the duty of prudence:
- The duty of care requires companies to act in the most prudent way possible when acting on behalf of their employees. This includes the activities involved in 401k management and staying in compliance with ERISA law. Most financial authorities interpret the duty of care to include regular reviews and evaluations of the performance of their 401k management strategies. If an outside 401k advisor is designated to take on these fiduciary responsibilities, the employer is still obligated to conduct periodic reviews to ensure that the fees charged for these services are reasonable and that the performance of the 401k portfolio is comparable to or better than that achieved by other companies that offer the same services.
- The duty of loyalty can more succinctly be described as the avoidance of conflicts of interest when companies manage their fiduciary responsibilities. Outsourcing management for 401k plans can often provide sufficient distance between the company and the financial transactions conducted on behalf of its employees to ensure that this duty is not compromised by the company. 401k companies typically take additional steps to ensure that the decisions made for their stakeholders are conducted solely for the benefit of those they serve.
- The duty of prudence requires that companies use ordinary and reasonable care when handling 401k investments or outsourcing them to another company. This typically has been interpreted to require that those making investment choices for the 401k must have experience and expertise in this field. This applies to in-house advisors as well as 401k advisors from outside investment firms. If an outside company is selected as the administrator for the 401k plan, employers will typically need to show the reasoning behind their decision and to document the process of choosing that firm. Conducting and documenting regular reviews of the options available in the 401k management industry is also necessary to ensure full compliance with ERISA law.
Other fiduciary duties assumed by companies that provide 401k options for their employers include the duty of confidentiality, the duty of disclosure and the duty of good faith. These requirements are intended to ensure that companies act in the best interests of their employees when handling personal data, providing information to their staff members and arranging for the management of their 401k funds and financial matters both in-house or through an outside firm.
Fiduciary Responsibilities and 401k Plans
The U.S. Department of Labor provides information for employers on their fiduciary duty and how to manage 401k plans in compliance with ERISA law. In general, 401k plans must include the following elements:
- A fund that will hold the financial assets of the plan
- A system of recordkeeping to record all money going into and out of the 401k plan
- A written document that provides clear and detailed information on the benefit structure and the regular operations involved in the plan
- Documentation that can be provided to the federal government and to the employees who participate in the plan
These elements must be present whether the 401k plan is administered within the company or by an outside firm. If an outside company is enlisted to manage 401k funds, the employer remains responsible for fulfilling its fiduciary duty to its employees. This generally involves monitoring the performance of the fund and checking on the fees charged by the investment management company on a regular basis.
Responsibilities of Fiduciaries
Along with the primary duties of a fiduciary, 401k administrators also are required to perform certain other tasks on behalf of participants in these plans:
- Fiduciaries must act solely in the best interest of plan participants to ensure that they receive the highest possible benefits from their investments.
- They must follow the instructions outlined in the plan documents.
- Plan investments must be diversified to provide added protection for the financial investments in these funds.
- Fiduciaries must continually ensure that the fees paid for administering 401k funds are reasonable compared with those charged by other companies in the financial marketplace.
Failure to adhere to these requirements could potentially have significant negative consequences for employers, including lawsuits brought by employees or by the Department of Labor on behalf of workers at the company. The Employee Benefits Security Administration offers assistance to workers and employers in navigating the legal requirements of ERISA and the responsibilities of fiduciaries in managing 401k plans.
Why 401k Fiduciary Duties Matter
A properly managed 401k plan can provide added security for employees and can inspire added confidence among those who may be planning to retire soon. This can often enhance the reputation of companies who perform the necessary due diligence and go the extra mile on behalf of their employees. One of the most important reasons for companies to remain diligent when managing 401k funds, however, is the threat of serious financial consequences if legal action is taken by employees or by the Department of Labor under ERISA law.
Consequences of Failure to Meet Fiduciary Responsibilities
If companies fail to live up to their obligations as 401k fiduciaries, they could be leaving themselves open to legal action by their employees. This could result in significant financial awards and damage to the company’s reputation in the competitive marketplace. Companies may be required to pay both compensatory and punitive damages for failure to fulfill their fiduciary duties to employees when administering or outsourcing 401k plans on their behalf.
Compensatory Damages
As the name suggests, compensatory damages are intended to compensate employees for losses sustained because of improper management of their 401k funds. This may include repayment of excessive fees and financial compensation for money lost because of mismanagement and improper investment of 401k funds.
Punitive Damages
In addition to simple compensation to employees for funds lost through mishandled 401k management strategies, employers may also be liable for punitive damages that can add up to much more than the amount lost by employees. The financial outlay represented by punitive damages can be devastating for smaller companies with tighter profit margins.
Damage to Reputation
Actions by the U.S. Department of Labor and lawsuits brought by federal authorities and employees can damage the reputation of companies in the employment marketplace. This could potentially limit interest from the most qualified and experienced candidates and could reduce the ability of companies to compete effectively in the modern marketplace.
Taking steps to ensure that 401k fiduciary responsibilities are handled appropriately can help companies avoid these negative consequences. At Quintes, we specialize in providing practical assistance to companies in managing their fiduciary duties to their employees.
The Right Help for Your Company
At Quintes, we can provide your company with the most practical strategies for avoiding litigation and the best advisor services for your 401k plan. We can create a comprehensive administrative 401k management plan or can provide a la carte advisor services that suit the needs of your company.
- The administrative services offered by Quintes are designed to provide end-to-end solutions for your company. We provide employee education, professional guidance and comprehensive oversight to ensure that your 401k plan is administered in compliance with ERISA law and the highest standards of fiduciary responsibility.
- For companies that require just a little-added help in maintaining compliance with ERISA and other fiduciary responsibilities, Quintes offers advisory services that can be customized to suit the needs of our clients. This can optimize the 401k management process while allowing greater control on the part of the companies we serve.
Our experience and expertise can ensure that your company navigates the legal requirements for 401k plans and fiduciary responsibilities in the most effective and practical way.
If you want to avoid the legal issues involved in the failure to live up to your company’s fiduciary duty, Quintes can provide the most practical solutions to keep you on the right side of ERISA law. Call us today at 831-759-3402 to consult with one of our 401k management specialists.