Considering Private Assets For The 401K?

Will private credit and other alternative investments become part of the menu for your 401k plan? For ERISA retirement plan sponsors, as options become available, understanding and diligently adhering to a prudent decision making process is essential. While 3(38) advisors can provide expertise, the plan sponsor remains a fiduciary, responsible for the selection and monitoring of the services provided. What questions should plan sponsors be asking as prudent fiduciaries? Read on for professional guidance. 

Prudent Decision Making: 5 Questions

Properly done, outsourcing to experts, including 3(38) advisors is generally a wise—and even prudent—move for plan sponsors, given the standards of the Employee Retirement and Income Security Act (ERISA). Don’t get confused though. As Andrea Pine of CWG Advisors reminds us, while retirement plan sponsors can delegate work, they retain fiduciary responsibilities: “One responsibility always stays with you as the plan sponsor: hiring and monitoring the vendors who touch your plan.”

For plan sponsors, deciding on vendors and periodically reviewing the providers you have chosen is a responsibility that should always be taken seriously, and the stakes are getting higher. At Plan Sponsor, fiduciary governance experts, Tamiko Toland, CEO of the 401(k) Annuity Hub, and Patrick Williams, co-founder of Fiduciary In A Box, underscore: “As private assets make their way into managed accounts and target-date funds, plan sponsors retain fiduciary responsibilities they cannot outsource, no matter who is managing the money…” Though many plan sponsors are accustomed to “evaluating mutual funds or collective investment trusts by their daily net asset value and a standard benchmark comparison, private assets introduce a new set of questions that require a different framework entirely.” 

Toward prudent decision making, what are the questions all plan sponsors now need to ask (and be ready to answer) when considering the addition of  private credit or other alternative assets to the plan’s investment menu? According to Toland and Williams, the five questions a prudent retirement plan sponsor “should be prepared to answer and ask when private credit or other alternative assets become part of their investment menu,” are:

1. How are the underlying instruments valued, and who performs the valuation?
2. How does liquidity factor into fund mechanics?
3. How is this investment benchmarked, and is that comparison appropriate?
4. What is the all-in cost, including any payments to the adviser or recordkeeper?
5. Has anything changed since our last review?

Documenting Prudent Process

While the responsibility of sponsoring an ERISA retirement plan can feel daunting, plan sponsors can take courage from knowing that they do not have to become experts. Related to private and other alternative assets, for example, Toland and Williams remind us that we don’t have to become valuation experts. What we must do is: “Understand who is making these determinations, how often and whether the methodology is consistent with industry standards. Any change to valuation practices, including a shift in frequency, a new methodology or a change in the party performing the valuation, should be treated as a red flag.” Remember too, that documented vigilance is an essential practice for retirement plan sponsors:  

At the end of the day, any investment may not perform as expected or hoped, but that is not the standard to which plan sponsors are held. The introduction of new asset classes to the mix does not alter the fundamental procedures that plan sponsors use, though it does warrant new questions that reflect differences in the new asset classes….The strongest tool in the plan sponsor’s tool kit remains the same as it ever was: documentation of a prudent process that tracks both investment selection and ongoing monitoring. 

Good To Know: Embedded 3(38)? 

According to Plan Sponsor, the term “embedded 3(38)” is being used more often in reference “to an investment manager not directly hired by the plan sponsor but nested inside of an investment strategy such as a target-date fund or a fund within a managed account portfolio.” Note however, that “even when a 3(38) investment manager assumes the highest degree of responsibility,” the plan sponsor must still “ establish and monitor factors that allow it to identify red flags suggesting investment drift or other changes….In short, the plan sponsor never relinquishes the role of fiduciary.” 

Attorneys at Cohen & Buckmann P.C. have found that failing to understand what service providers can and cannot be responsible for increases the fiduciary liabilities of ERISA plan sponsors, and underscore: “Fiduciaries who educate themselves about their real fiduciary liability exposure can take more proactive steps to reduce their exposure. These steps should include establishing written governance procedures allocating responsibilities and documenting their compliance procedures. Educated fiduciaries can also make sure that they have adequate fiduciary liability insurance coverage. Forewarned is forearmed.”

Fiduciary liability insurance is the only type of insurance that includes defense for retirement plan sponsors in the face of ERISA investigations and lawsuits. Absent fiduciary liability insurance, defense is an out of pocket cost that adds up quickly for retirement plan sponsors, averaging $600 per hour. 

To ensure retirement plan sponsors from businesses of every size can protect themselves with fiduciary liability insurance, Colonial Surety Company continues to provide affordable coverage, and even includes cyber liability insurance at no extra cost. 

For a few dollars a day, Colonial Surety Company’s Fiduciary+Cyber Liability Insurance bundle 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.
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• 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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Frequently Asked Questions (FAQs)

Does an ERISA bond protect the business owner?

No. An ERISA Fidelity Bond solely protects the retirement plan’s funds from internal theft or embezzlement. It provides zero financial protection for the business owner or plan sponsor against lawsuits, administrative oversights or regulatory actions.

What happens if I don’t report an ERISA bond on Form 5500?

Leaving the fidelity bond section blank or reporting an insufficient coverage amount (less than 10% of plan assets) is an immediate red flag for the Department of Labor. It significantly increases your risk of triggering a costly DOL audit or enforcement action.

Is Cyber Liability included in standard Fiduciary Insurance?

Generally, no. However, because the DOL now obligates plan sponsors to mitigate cybersecurity threats as part of their fiduciary responsibilities, Colonial Surety Company includes $50k of complimentary Cyber Liability Insurance within its ERISA protection bundle to shield your company and plan from data breach liabilities