In recent years, there have been a significant number of lawsuits by 401(k) plan participants against both their employers and their plan’s services providers. Historically, the lawsuits have focused on the use of revenue sharing and the costs incurred by the plan and its participants. They have even argued that the use of mutual funds was improper. A lot of the earlier lawsuits were dismissed by the courts as having no merit. These dismissals have led to a re-examination by attorneys, and therefore by participants, of the 401(k) plans and the procedures followed by the employers in maintaining the plan. As a result, the more recent lawsuits have focused on service provider compensation, as well as the share classes of mutual funds and whether there are cheaper alternatives available, but disregarded.
401(k) plan fiduciaries often do not consider themselves responsible for their 401(k) plan decisions, because they offer a broad selection of investment options. However, in accordance with the Employee Retirement Income Security Act of 1974 (ERISA), decisions in this regard must be made objectively and in the best interests of the plan participants. As such, it is important that plan sponsors utilize investment advisors who have the requisite knowledge to identify the costs in the retirement plan solutions they offer their clients, and that they implement and adhere to an identifiable process for making decisions relative to investment options and service provider evaluation.
Plan Management Responsibilities
As mentioned, investment advisors and 401(k) plan fiduciaries need to be mindful of their responsibilities to plan participants. The following list of practices, while not exhaustive, will assist them in meeting those responsibilities:
• Fiduciaries must monitor fees and revenue sharing arrangements pursuant to a process that demonstrates that the employer’s decisions are in the best interest of plan participants;
• Fiduciaries must document the process of evaluating investment alternatives through the use of an investment policy statement (IPS);
• Fiduciaries must avoid the payment of service provider compensation that exceeds the market costs for such services;
• Fiduciaries should review custody statements monthly, compare manager performance quarterly, evaluate service provider quality annually; and
• While it is important to maintain an IPS, it is even more important to follow the IPS. Failure to follow the processes and procedures maintained in an IPS may lead to additional problems and liability.
If you have any questions about meeting your fiduciary responsibilities, please do not hesitate to contact your Schneider Downs & Co., Inc. representative.
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