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Fiduciary Liabilities – Yes, You DO Have Them

Introduction: At L4SB, we’re blessed to have many great clients in many industries. Some of our clients serve the business-to-business market, just as L4SB does. When appropriate, we may permit a client to publish a blog article, if we feel the information is relevant and helpful to our website audience and clients. The following article was produced by Sklar Capital, a L4SB client. L4SB asked Sklar Capital to produce a blog article that we could publish, to help our respective business clients better understand the issues with 401(k) management and the US Department of Labor’s increased scrutiny of such employer-based benefit programs. Specifically, many small businesses — as employers — don’t fully appreciate what ‘fiduciary responsibility’ means from a legal liability perspective, especially as it relates to the benefits programs they maintain for their employees.

L4SB has no relationship to Sklar Capital, other than providing legal services. L4SB makes no recommendations or opinions as to the information contained herein.


One of the most common misconceptions that we have come across in our experience with business owners/plan sponsors of company sponsored retirement plans is that they do not believe that they have any fiduciary liability. The most common response we receive when we ask a business owner if they are aware of their fiduciary liabilities is, “I do not have a fiduciary liability because the participant accounts are self-directed and the participants control their own accounts.” The purpose of this post is to clear up some of the most common misconceptions so that business owners/plan sponsors are aware of their fiduciary liabilities, what the repercussions could look like if they do not meet their fiduciary liabilities and to help business owners/plan sponsors gain the knowledge to begin the process of getting their fiduciary liabilities in check.

Common Misconceptions: It’s What You Don’t Know That Will Hurt You

  1. Participants control their accounts so I have no fiduciary liability: Although participants having their own self-directed accounts may lessen your liability because you are not making investment decisions for the participants, it does not mean that all of your fiduciary liability is relieved. A business owner/plan sponsor still has the fiduciary liability of ensuring that the investments that are available within the plan for participants to choose from are adequate. When we say adequate we mean that they have been monitored on an ongoing basis for things like, risk, performance, cost and how they compare to similar investment choices that could be used in their place.
  2. The longer the business owner/plan sponsor has been working with their service providers and the longer the plan has been in place means that everything is perfect: This may be one of the biggest misconceptions in the company sponsored retirement plan arena. We have heard too many times to count things such as, “I have been working with my advisor for 20+ years and our plan has been in place for 25 years, we have never had a problem and I am sure everything is fine.” The old saying is, “if it ain’t broke, don’t fix it.” The problem is that does not apply to your company sponsored retirement plan. Over the years things have progressed and the Department of Labor (DOL) has become more and more aggressive on how company sponsored retirement plans should operate, what fees are reasonable and what business owners/plan sponsors should be doing to comply. So, the company sponsored retirement plan may not be “broke” from something going wrong but it very likely is “broke” if things have not been adjusted in many years.
  3. The service providers for my company sponsored retirement plan handle everything so my fiduciary liabilities are relieved: This is a very dangerous misconception. In our opinion it is almost, if not entirely, impossible for a business owner/plan sponsor to be 100% relieved of all of their fiduciary liability. There are many different levels of fiduciary liability that service providers can accept and some of them will take a lot of the fiduciary liability off of the business owner/plan sponsor’s plate, but it is important to know what liabilities are being accepted by which service provider and which are retained by the business owner/plan sponsor. Even if the business owner hires service providers that accept almost all the fiduciary liability and that is understood by all parties, the business owner still has the fiduciary liability of monitoring the service providers to ensure their services and fees are adequate. So, there is never a situation where a business owner/plan sponsor is ever 100% relieved of their fiduciary liability.

Potential Repercussions: What Is At Risk Of Not Meeting Fiduciary Liabilities

  1. There have been many lawsuits in the past decade around the investments that are available within the company sponsored retirement plan for participants to choose from. One example is a participant of a company sponsored retirement plan sued the plan for using a certain share class of an investment when a lower cost share class of the same investment could have been used. The end result was that the business owner/plan sponsor had to pay back the difference of fees to participants that were using the investments with the higher share class even though the lower cost share class was available. This pay out could amount to hundreds of thousands of dollars depending on the size of your plan, how many participants are invested in the higher cost share class investment and the time period in which the higher cost share class investment was used instead of the lower cost share class investment.
  2. If a business owner/plan sponsor is not consistently monitoring and making the necessary adjustments to different areas of the company sponsored retirement plan as things change over time, they are putting themselves at risk of penalties, fees and lawsuits. One example would be that the business owner has been using the same financial advisor for 20 years. That advisor’s fee has always been 1% of the assets that are in the company sponsored retirement plan. Since the business owner/plan sponsor and the advisor have become such close friends, the business owner has never questioned the fees paid to the advisor and has not kept up with fee schedules over the years or what is considered reasonable based on what that advisor is providing to the plan. If the DOL considered the 1% fee “excessive” and stated that a reasonable advisor’s fee is 0.50%, then a business owner/plan sponsor may have to pay back 0.50% of the assets of the plan to the participants for the number of years that the 1% fee was considered excessive which could equate to hundreds of thousands of dollars that are due back to plan participants depending on the size of your plan and the time period in which the 1% fee was considered excessive. There have been many cases where the DOL completed an audit and found issues that then required the business owner/plan sponsor to pay back participants as well as many cases where lawsuits have been filed by plan participants because they believe that they have been paying too much.
  3. The failure to monitor service providers can also lead to significant penalties and fees to the business owner/ plan sponsor. The DOL wants to see a process for the company sponsored retirement plan, that is being followed in an ongoing manner and that the plan is being operated efficiently. One example is that a business owner has a record keeper for the plan who he believes is responsible for sending all the participant’s their annual disclosures. However, the record keeper is only responsible for generating the document and making it available to the business owner/plan sponsor. Since the business owner was unaware that they were responsible for sending out the disclosure each year to all eligible participants of the plan, they have not been doing so. If the DOL came in, completed an audit and found that the disclosures were not properly sent out, the business owner/plan sponsor is now liable for penalties and fees that are accessed by the DOL. It is very important to know what services are being provided by which service provider and to know what the business owner/plan sponsor needs to be doing on their end to keep up with their fiduciary liabilities.

Best Practices: Steps To Ensure Fiduciary Liabilities Are Met

  1. 1. Ask your financial advisor to show you their process for monitoring all the investments in the plan. If they do not have a process, find an advisor who will complete a free assessment of the investments. The assessment should include all of the current available options in the plan and should have guidelines as to what makes the investment acceptable or not. Anything that is considered unacceptable should be replaced with an acceptable alternative and documented immediately. The monitoring of the investments (new and old) should be an ongoing practice.
  2. Ask your advisor what their fees are, why they are what they are, how they compare to other advisor’s fees and what services are provided by the advisor for those fees. Also, ask your advisor and third party administrator if your plan is as efficient as it can be. Is it in compliance with all the new laws and regulations within ERISA and if not, what adjustments need to be made? Immediately make the necessary adjustment and document them. It is never a bad idea to get a second opinion from an unrelated third party advisor to ensure objectivity and accuracy of information.
  3. Have your advisor complete a request for proposal (RFP) from at least three different service providers on your company sponsored retirement plan. It is considered a best practice by the DOL to have a RFP completed at least every three years. The RFP will allow the business owner/plan sponsor to see what options are available and should outline the fees and services provided by the record keepers, financial advisors, and third party administrators. Again, it is never a bad idea to have a third party advisor complete the RFP for you to ensure accuracy of information and objectivity.

This article was produced by Sklar Capital, a L4SB client. They are an independent Registered Investment Advisor (RIA) based in Albuquerque, NM, providing financial planning and wealth management to business leaders and their businesses.

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