For sponsors of 401k plans, failure to take action when investments underperform can result in allegations of a fiduciary breach. Indeed, failure to properly monitor funds is the claim at the center of litigation unfolding in courtrooms around the country. Typically, lawsuits name both the business, and the fiduciaries, including the sponsor.
Personally Responsible for Decisions?
Although “fiduciary” may not be the title used on your business card, as a retirement plan sponsor, you are indeed a fiduciary, and as such, you are ultimately personally responsible for decisions like: the selection of service providers; the investment options offered to participants; fees; and, adherence to plan rules. Under the high standards of ERISA law, a single mistake can lead to lawsuits that target your money and assets. In fact, companies and their fiduciaries continue to be sued, and the average cost of resolving an ERISA allegation is over $1.2 million.
Two areas of plan sponsorship that have come under particular scrutiny in recent years are: investment performance and plan fees. The sheer volume of litigation has opened the floodgates for copycats. One of the 401k-fiduciary-breach-suits filed this year offers a reminder to plan sponsors about their obligation to monitor investment performance and take action accordingly:
A suit alleging fiduciary breaches says that sustained underperformance and massive fund outflows provided signals that plan fiduciaries ignored….Specifically, the suit…claims that “Defendants failed to appropriately monitor the Plan’s investments, resulting in the retention of unsuitable investments in the Plan instead of prudent alternative investments that were readily available at all times Defendants selected and retained the funds at issue and throughout the Class Period. Since Defendants have discretion to select the investments made available to participants, Defendants’ breaches directly caused the losses alleged herein.”
“When an investment option’s track record is so poor, as is apparent here, defendants should necessarily investigate and replace the fund in the plan with an alternative that has demonstrated the ability to consistently outperform the benchmark, or, at the very least, in such an efficient segment of the market, retain an alternative that tracks the benchmark.”
Of course there is no magic wand for investments, but periodic benchmarking and documentation of the resulting actions taken is essential. As the plan’s ultimate decision maker, don’t make the assumption that limiting investment options is a way to minimize your fiduciary liabilities: arguments are also being made related to how pared down investment menus can negatively impact the retirement savings of participants over time.
Protect The Company, The Plan and Yourself
The serious obligations and risks associated with being a plan sponsor necessitate serious attention. Remember, the ERISA Bond required by the Department of Labor does not cover your personal exposure as a fiduciary. Additionally, cybersecurity breaches are not “just a tech thing”: they can quickly escalate into fiduciary breach allegations, especially if you do not have an expert response plan in place.
Don’t shoulder unnecessary risks alone. Colonial Surety Company makes it efficient and affordable to add Fiduciary and Cyber Liability Insurance to your ERISA Bond, ensuring protection for the plan, the company and yourself, as the plan sponsor. When armed with our cost-efficient Fiduciary+Cyber Liability Insurance, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. Plus, the Cyber Liability Insurance provides breach response services, ensuring implementation of obligatory investigation and notification procedures, and offering coverage against lawsuits and regulatory actions.
It only takes a moment to quote and obtain affordable protection. Click here and get covered before another day goes by:
Fiduciary and Cyber Liability Insurance Here
Serving customers since 1930, Colonial Surety is the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time. Colonial Surety Company is rated “A Excellent” by A.M. Best Company, US Treasury listed and in business all across the country.