401k: Service Provider Selection?

When you sponsor a retirement plan at your business, one of your most important responsibilities is the selection and monitoring of all service providers for the plan. It is critical, for example, to conduct research and benchmarking, ensuring you are carefully considering what is best for your plan and participants. Also, you must carefully document the process you use to arrive at service provider decisions. Then, you must monitor the services—and document your related actions. Read on for a refresher on the expectations from the Department of Labor and the Internal Revenue Service related to your fiduciary obligations in selecting and monitoring service providers. 

Plan Sponsors Retain Fiduciary Responsibilities…

As the Internal Revenue Service (IRS) underscores, ERISA retirement plan sponsors can never fully eliminate the inherent fiduciary obligations that accompany retirement plan sponsorship: “Even if you hire a financial institution or retirement plan professional to manage your plan, you retain some fiduciary responsibility for the decision to select and keep the service provider. You should document your selection process and monitor the services provided to determine if you need to make a change.” 

Specifically, before selecting retirement plan service providers, the IRS recommends that plan sponsors carefully consider (and document):

• Information about the firm’s affiliations, financial condition, experience with 401(k) plans, and assets under their control;
• A description of how the firm will invest plan assets or how it will handle participant investment directions, and its proposed fee structure;
• Information about the identity, experience, and qualifications of the professionals who will be handling the plan’s account such as:
  • any recent litigation or enforcement action that has been taken against the firm;
  • the firm’s experience or performance record;
  • whether the firm plans to work with any of its affiliates in handling the plan’s account; and
  • whether the firm has fiduciary liability insurance.

Confirming that “As sponsors of 401(k) and other types of pension plans, business owners generally are responsible for ensuring that their plans comply with Federal law – including the Employee Retirement Income Security Act (ERISA),” the Department of Labor (DOL) further underscores that “selecting competent service providers is one of the most important responsibilities of a plan sponsor.”

 For example, plan sponsors are expected to mitigate cyber threats to the plan, and that includes implementing these DOL Tips for Hiring a Service Provider with Strong Security Practices. The Department of Labor’s overall tips on provider selection also include:

• Consider what services you need for your plan – legal, accounting, trustee/custodial,
• recordkeeping, investment management, investment education or advice.
• Ask service providers about their services, experience with employee benefit plans, fees and expenses, customer references or other information relating to the quality of their services and customer satisfaction with such services.
• Present each prospective service provider identical and complete information regarding the needs of your plan. You may want to get formal bids from those providers that seem best suited to your needs.
• Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. Compare the information you receive, including fees and expenses to … More information on pension plan fees and expenses can be…located at www.dol.gov/ebsa. 
• If the service provider will handle plan assets, check to make sure that the provider has a fidelity bond….

Don’t Set It and Forget It: Monitoring Service Providers

Since retirement plan sponsors retain fiduciary responsibilities to the plan, we can be held personally liable for errors and oversights, including those made by service providers. Ongoing monitoring of all services is key—as is documenting both the steps taken to monitor, and the decisions and actions that follow monitoring. Some of the specific actions recommended by the IRS for monitoring service providers include: 

• Review the service provider’s performance;
• Read any reports they provide;
• Check actual fees charged;
• Ask about policies and practices (such as trading, investment turnover, and proxy voting); and
• Follow up on participant complaints.

Special Considerations for Choosing Financial Advisors

TPSU – The Plan Sponsor University reminds us: “Choosing the right financial advisor for your retirement plan is one of the most important decisions you’ll make as a plan sponsor.  It’s also a fiduciary responsibility under ERISA—meaning you need to show your work when it comes to due diligence.” 

Before selecting a financial advisor for an ERISA plan, it’s imperative for plan sponsors to go the extra mile, and ERISA consultants at the Retirement Learning Center have highlighted helpful and free resources for doing so, such as:  

• Start by requesting Form ADV from the prospective advisor and their firm.  This disclosure document, filed with the SEC or state securities administrators and updated annually, covers everything from fees and services to potential conflicts of interest and any professional disciplinary actions.  It’s designed to provide transparency between advisors and clients, and it’s a must-have for any due diligence file.
• From there, FINRA’s BrokerCheck website offers a wealth of information on brokers and dealers, including employment history, qualifications, customer complaints, regulatory actions, and criminal matters.  All you need is the advisor’s name and firm to look them up.
• FINRA’s disciplinary action database is another helpful resource.  It includes disciplinary actions issued since 2005 that are eligible for publication, as well as SEC opinions and federal appellate court decisions on appealed actions.  Together, these tools give plan sponsors a fairly comprehensive view of an advisor’s professional track record.

ERISA Plan Sponsorship and Personal Liability?

Under ERISA Section 409, plan fiduciaries can be held personally liable to restore any losses to the plan resulting from a breach of duty. The Department of Labor makes this very clear: “Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan….”

What exactly does personal liability look like in practice? It means that if your plan participants sue over excessive fees, poor investment options, or administrative errors, the legal and financial consequences can reach your personal assets — not just your business. It means that if the Department of Labor investigates your plan and finds violations, penalties and restoration of losses can be assessed against you individually.

The vast majority of fiduciary liability cases stem from ordinary oversights — the kind that happen when a busy business owner is managing a retirement plan alongside everything else. Common examples include:

• Failing to monitor plan investments. Did you set up your 401(k)’s investment menu years ago and never revisit it? ERISA requires ongoing, prudent monitoring of all plan investment options. Stale lineups, consistently underperforming funds, or options with excessive expense ratios can all form the basis of a claim.
• Not benchmarking plan fees. Are the fees your plan pays to its recordkeeper, advisor, and other service providers reasonable? Under ERISA, it is your responsibility to find out — and to act if they aren’t. Many small business owners have never conducted a fee benchmarking review, which is precisely the kind of omission that draws scrutiny.
• Choosing the wrong advisor or service providers. You have a fiduciary obligation not just to select qualified service providers, but to continue monitoring them. If your plan advisor turns out to be giving poor advice, or your recordkeeper has a data breach, your decision to hire them — and your ongoing failure to evaluate their performance — may come back to you.

Keep in mind that the ERISA Fidelity Bond that federal law requires you to carry does not protect you personally. It protects the plan’s assets from theft and fraud. For protection against the far more common risks plan sponsors face — fiduciary errors, administrative mistakes, lawsuits from participants, regulatory actions — you need fiduciary liability insurance, as accounting professionals at Adams Brown confirm: “A fidelity bond protects against loss from fraud or dishonesty by an individual or individuals involved in managing the plan. Fiduciary liability coverage protects against loss that stems from the way the plan is run.” 

Colonial Surety Company has built a protection package specifically designed for retirement plan sponsors — including small businesses that need comprehensive, affordable coverage without the complexity of working with multiple providers and tagged on fees.

The Colonial Surety Company ERISA Bundle combines three essential protections in one seamless package:

• ERISA Fidelity Bond — Fulfills your federal mandate to protect plan assets from fraud and dishonesty
• Fiduciary Liability Insurance — Provides up to $1,000,000 in coverage for legal defense costs and penalties arising from fiduciary errors, administrative oversights, and participant claims
• Complimentary $50,000 Cyber Liability Insurance — Protects your plan and company against regulatory actions following a data breach, addressing the DOL’s cybersecurity guidance directly by including expert response services.

Don’t wait for a participant complaint, DOL inquiry, or cyber threat to find out what you’re missing. 

Get an instant quote on Colonial Surety Company’s ERISA Bundle today — and protect your plan, your business, and your personal assets in one smart move.

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