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New Rules Heighten Focus on 401K Plan Sponsor Duties

Business owners who offer a 401(k) plan are required to comply with the Employee Retirement Income Security Act (“ERISA”), a complex Federal statute designed as a consumer protection law.  Failure to comply with ERISA exposes business owners and other employees who make important decisions about the plan (like general counsel, the CFO or the Human Resources Director) to personal liability. Often employees who are delegated plan administrative duties know nothing about ERISA or the personal liability to which they are now exposed.  This is neither appropriate nor the best way to help employees prepare for retirement.  Because plan fiduciaries can be sued personally for imprudent plan decisions, understanding 401(k) fiduciary responsibility is one of the best ways to protect them from personal loss.


This article provides a summary of the new 401(k) rules, common areas of non-compliance and best practices for administering a 401(k) plan.




Plan participants (employees who participate in the 401(k) plan) often pay much, if not all, of the plan’s investment and administrative services.  Plan participants pay fees directly from account deductions or through the investments’ expense ratios (those ongoing fees a mutual fund or other investment product charges to manage that product).  Because plan fiduciaries dictate how much plan participants pay for services, plan fiduciaries are held responsible for those decisions.  ERISA requires plan sponsors to ensure plan expenses are reasonable.


Historically, however, 401(k) plan services and fees have confused plan sponsors.  Poor performance reports, misleading sales statements, convoluted fee disclosures and other reports often fail to provide information in a way that helps a plan sponsor assess services and fees.


As a result of poor reporting, poor service and overpaying for many services, the U.S. Department of Labor (“DOL”) recently enacted new rules to help plan sponsors better assess services and fees. The new DOL rules require every plan service provider to give a fee disclosure (“Fee Disclosure”).  Because the DOL’s enforcement authority is similar to that of the IRS, failure to comply with these rules can result in serious consequences.  Moreover, lack of familiarity with the new rules may be just the tip of the noncompliance iceberg.  The DOL’s new rules highlight a trend toward heightened scrutiny of plan administration, fees and decisions.  As employees near and enter retirement, they too will scrutinize the prudence of plan decisions more closely.


The New DOL Rules


The new DOL rules require every plan sponsor to obtain and analyze Fee Disclosures from every plan service provider.  The deadline for obtaining the Fee Disclosures was July 1, 2012. Failure to have obtained the appropriate Fee Disclosures violates ERISA.  If a plan sponsor has requested, but not obtained, a Fee Disclosure, the plan sponsor was required to notify the DOL that the service provider failed to provide a Fee Disclosure and inform the DOL whether the service provider has been terminated.


Once obtained, the plan fiduciaries must examine the Fee Disclosures focusing on whether the fees are reasonable.  Plan sponsors commonly assess fees in one of two ways.  First, the plan sponsor can have other service providers regularly bid on the servicing the plan.  Second, the plan sponsor can obtain through a third party a “benchmarking” report that compares the plan’s fees to those paid by similar plans.  Failure to objectively assess fees opens the door to argue that the fees are not reasonable.


Hiring Fiduciary Help (or not)


When it comes to the investment decisions, the DOL provides guidance.  In its publication “Meeting Your Fiduciary Responsibilities,” the DOL advises that if a plan sponsor lacks investment expertise, “a fiduciary will want to hire someone with that knowledge to carry out the investment . . . functions.”  In its Fact Sheet entitled, “How to Tell Whether Your Adviser is Working in Your Best Interest: A Fiduciary Guide for Individual Consumers,” when advising individual investors in the “crucial decision,” of paying someone for investment advice, the

DOL states, “You want to make sure the adviser you select is working in your best interest . . . .” Hiring a fiduciary advisor over a non-fiduciary is prudent advice for 401(k) plan sponsors, as well.


Hiring a fiduciary advisor and understanding for what they are (and are not) responsible is important to understand a plan fiduciary’s personal risk.  Unfortunately, many plan fiduciaries wrongly believe that when they hire an investment company, a bank, a Wall Street firm or an insurance company, they need not pay attention to ERISA requirements. Those entities and their sales reps can put their own interests above the interests of plan participants, contrary to what ERISA requires.


For example, plan sponsors who use an investment company for services choose to use the company’s investment products for most (if not all) of the plan’s investments.  Using a bank often results in the bank’s own products being offered in a proportion that is not in line with the quality of the funds. Using companies that are incentivized to sell certain products often results in investment choices that are not in the plan participants’ best interests. This violates a plan fiduciary’s duty to offer only the best investment solutions to its plan participants.


Some plan fiduciaries hire a “financial advisor” to help choose investments. However, a “financial advisor” is no fiduciary.  They are often highly incentivized by money, bonuses, or trips to sell plans certain investment products. Accordingly, relying on a “financial advisor” for fiduciary help can be harmful.  A plan fiduciary may believe the “financial advisor” offers some investment expertise, when the “financial advisor” is simply selling certain products in their own best interest without regard to the product’s quality.


While the big company or sales rep may make it seem like they are helping, they may be enticing plan fiduciaries to ignore their duty to establish and use a procedure for choosing the best investment options. Accordingly, accepting biased recommendations from a non-fiduciary entity or advisor (without a comparative analysis) is not likely prudent.  This defies ERISA and subjects the plan fiduciaries to risk.


All is not lost, though, despite biased offerings, plan fiduciaries can protect themselves. ERISA requires prudent decisions.  Using investment options from only one company may be prudent, but that must be demonstrated in order to protect the plan fiduciaries. Plan fiduciaries must develop and use a process for investment selection – that duty falls 100% on the plan fiduciaries


– not on a biased seller of products. While cost is a factor in this decision, it is only one factor. When the plan fiduciaries examine those factors deemed appropriate, both the decision and the decision-making process must be documented.  If the funds perform poorly, it is the documentation in the files that will demonstrate that a prudent decision was made.  Winning a “prudence” argument is nearly impossible without documentation.  Importantly, monitoring each investment option is an ongoing duty.


Hiring fiduciary help is easy, though.  Registered Investment Advisors are legal fiduciaries who, like the plan fiduciaries, always act in the best interests of the plan participants.  They should declare their fiduciary status in writing and have a documented procedure to choosing and monitoring the investment choices.


Fiduciary investment advisors are 100% responsible for investment decisions, but may not relieve the plan fiduciaries of that responsibility.  Some fiduciary investment advisors are co- fiduciaries: they share the responsibility for investment decisions, which does not relieve the plan fiduciaries of any responsibility.  Other fiduciaries take full fiduciary responsibility for investment decisions, relieving the plan fiduciaries of any liability for investment options.


Hiring a fiduciary is more problematic than one might think.  It often leaves plan fiduciaries with the impression they are responsible for nothing.  This is a serious legal disconnect because ERISA imposes on plan fiduciaries many duties beyond investment choices.  For example, plan fiduciaries often fail to realize that they must monitor the plan service providers using the new DOL Fee Disclosure rules.  They must also provide disclosures to plan participants about fees, plan information and investment performance. Meeting every aspect of ERISA is important.

Failure to follow Federal law appears sloppy and makes an argument that decisions were prudent more difficult.




ERISA is a complex Federal law that exposes knowing and unknowing plan fiduciaries to personal liability.  The risks are many, and service providers often provide no compliance help whatsoever, no matter what they may imply.  Protecting personal wealth goes hand in hand with providing the best services and products for your plan participants and providing better retirement outcomes. This is an area getting more scrutiny from Congress, the DOL, attorneys, the press and employees.  Failure to understand responsibilities under and comply with ERISA may have dire, personal consequences for plan fiduciaries and participants alike.


By Kurt Winiecki, founder of Winiecki Wealth Management


Kurt Winiecki practiced law for ten years at some of the largest firms in the world including DLA Piper and Reed Smith.  In 2007, he began his financial services career at a Wall Street firm then moved to the fiduciary advisory industry.  In 2011, he founded Winiecki Wealth Management, a REGISTERED INVESTMENT ADVISOR firm that helps 401(k) Plan Sponsors reduce fiduciary risks and improve investment outcomes by incorporating best 401(k) investment and management practices into their plans.

  • 12 Feb, 2014
  • Posted by Tracy Campbell
  • 1 Tags