It’s Personal: ERISA Requirements for Plan Sponsors

When you sponsor a retirement plan for employees, such as a 401k, you exercise discretion whenever you make decisions about the plan’s management. That’s why, under the Employee Retirement Income and Security Act, you are considered a fiduciary, and can be held personally responsible for errors and oversights that negatively impact the plan and participants. Key to avoiding errors is knowing the four core duties you owe to the plan as a fiduciary. 

Sponsoring a 401k: Four Core Fiduciary Duties

Business leaders who sponsor a 401k plan are doing a great thing—and the vast majority of plan sponsors are well intentioned, and would never knowingly commit or allow acts of fraud or theft against the plan. (And in the event of an act of fraud or theft, the plan assets would be protected by the required ERISA Bond.) The problem, for most plan sponsors, is what they don’t know. As the ERISA Advisory group points out: 

• Most plan sponsors and Plan fiduciaries we speak to are conscientious people. They take their responsibilities seriously, they want to do right by their employees, and they generally assume their plan is in reasonable shape. That assumption is often where the trouble starts….It sounds like a straightforward question, but research suggests more than half of 401(k) plan sponsors and fiduciaries are not fully clear on what ERISA requires of them personally. And “personally” is the key word — fiduciary liability under ERISA is not just a corporate issue. It can follow you individually.

• ERISA’s personal liability provisions are unusually strict compared to most areas of employment law. A fiduciary who breaches their duties can be held personally liable for any losses the plan suffers as a result, and for any profits they made from the breach. There is no corporate shield — the liability sits with the individual.

In the face of audits, investigations, regulatory actions or litigation, specific examples of what a retirement plan sponsor can be held personally accountable for as an ERISA fiduciary include:

• Decisions: Do you have the right advisor, and investment options? 
• Cost control: Are the plan fees reasonable and services solid?
• Compliance: Do operations adhere to the plan document, and government regulations? 

Most plan sponsors delegate and outsource much of the work of the retirement plan, but under ERISA, the sponsor retains fiduciary obligations that can never be eliminated. For example, the decision to outsource, and the selection of vendors ultimately rests with you, as does your obligation to continuously monitor all plan service providers. 

Preventing errors and oversights in the performance of your duties requires a fundamental understanding of your core fiduciary responsibilities. Here’s how the independent fiduciaries and consultants at the ERISA Advisory Group explain the four core fiduciary duties sponsors need to apply to every action taken on behalf of the retirement plan:

1. The duty of loyalty requires fiduciaries to act solely in the interest of plan participants and their beneficiaries — not the employer, not the service providers, and not themselves. Decisions must be made with the exclusive purpose of providing plan benefits and defraying reasonable plan expenses.

1. The duty of prudence requires fiduciaries to act with the care, skill, prudence and diligence that a knowledgeable person familiar with such matters would use in similar circumstances. Crucially, this is an objective standard — it is not enough to have good intentions. The process by which decisions are made matters as much as the outcome.

1. The duty to diversify requires fiduciaries to spread plan investments across a range of asset classes to minimize the risk of large losses, unless it is clearly prudent not to do so in the circumstances.

1. The duty to follow the plan document requires fiduciaries to act in accordance with the plan’s governing documents, provided those documents are themselves consistent with ERISA.

Important To Do: Obtain Fiduciary Liability Insurance

A harsh reality for retirement plan sponsors is that even with great diligence, it’s still possible to get caught up in costly and disruptive ERISA litigation. “There is nothing a plan sponsor can do to prevent a lawsuit from being filed.” That’s the bottom line, according to Eric Dyson of 90 North Consulting. As Dyson points out, when it comes to ERISA lawsuits, proof of wrongdoing is not even necessary to make a claim: “Plaintiffs’ firms do not need proof of wrongdoing. They need public data and a plausible theory. Form 5500 filings are mined every year. Recordkeeping fees are calculated per participant. Share classes are compared. Investment menus are reviewed online. Many complaints quote directly from publicly available filings.”

Unfortunately, defense in an ERISA lawsuit costs over $600—per hour. This is an out of pocket expense for plan sponsors, and adds up quickly. To help every retirement plan sponsor protect themselves, Colonial Surety Company offers an efficient solution.

For a few dollars a day, Colonial Surety Company provides a Fiduciary+Cyber Liability Insurance bundle which arms retirement plan sponsors with:

• $1,000,000 for Defense and Penalties if faced with alleged or actual breaches of fiduciary duty.
• $50k of Cybersecurity Coverage for the business and plan, which addresses Department of Labor recommendations, and includes expert response services to curtail damage after an incident. 

Upgrade your ERISA Bond today, by adding protection for the sponsor and the business: 

Fiduciary+Cyber Liability Insurance Bundle

What Fiduciary Liability Insurance Covers:

• Administrative Errors: Mishaps such as improper enrollment, failing to process participant changes, or incorrect termination protocols.
• Investment Mismanagement: Claims regarding negligent investment selections or poor financial advice offered to participants.
• Excessive Fees: Lawsuits stemming from a failure to monitor and negotiate third-party service provider fees.
• Cybersecurity Breaches: Failure to adequately mitigate cybersecurity threats or monitor vendor data security protocols.

Why Choose Colonial Surety Company?

• Trusted & Reliable: U.S. Treasury Listed, Rated “A” (Excellent) by A.M. Best Company, and in business since 1930.
• Direct & Digital: Skip the middleman. Quote, purchase, and download your full protection package entirely online in minutes.
• The Carrier, Not a Broker: No agent markups, no waiting for a callback, and no unnecessary fees.
• National Reach, Local Support: Licensed nationwide with a knowledgeable, US-based customer service team ready to assist you.

Colonial Surety Company solves the complex puzzle of ERISA compliance and protection by putting all three essential coverages into one seamless, affordable bundle:

1. ERISA Fidelity Bond: Fulfills your federal mandate to protect plan funds from dishonesty. 
2. Fiduciary Liability Insurance (FLI): Shields your personal assets, covering up to $1,000,000 in legal defense costs and penalties for administrative errors or oversight omissions.
3. Complimentary Cyber Liability Insurance: Provides vital protection for the plan and company against regulatory actions following a data breach, directly addressing the DOL’s response plan recommendations.

Protect your retirement plan, your business, and your personal assets in one smart move: upgrade to Colonial Surety Company’s bundle.

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