Employers that sponsor 401(k) plans will soon have new responsibilities, and liabilities, thanks to changes in the Employee Retirement Income Security Act of 1974 (ERISA.) These plan sponsors are now under more strict requirements to disclose fees and compensation paid for these group retirement plans.
The changes, slated to take effect July 1st, are significant. Plan sponsors will be given new information about the expenses paid by the plan and will be required to provide the plan participants with this new information. Without a doubt, there are plenty of regulations already surrounding these retirement plans. That said, there is good reason for adding even more. Plan sponsors have a fiduciary duty to ensure they make the best decisions regarding the retirement plan’s products, services and expenses. This new regulation will aid plan sponsors in fulfilling that responsibility.
It is critical for plan sponsors to understand their roles as fiduciaries. Often employees have a role in running or administering the 401(k) plan, but do not consider themselves fiduciaries. Although they may not be officially named as a fiduciary, they are likely considered fiduciaries under ERISA, and are therefore held to the same high standard as the plan sponsor. The most minimal involvement in plan decision- making can mean you are a fiduciary. ERISA has many requirements of plan sponsors, and they must perform these duties thoughtfully and diligently. Failure to comply with these requirements can result in serious punishment, both to the individuals involved with running the plan and the plan as a whole.
One of these requirements mandates fiduciaries act solely in the best interests of the plan participants. Failure to do so means a breach of their fiduciary duty. In turn, this means their personal assets are at risk. Additionally, they could face jail time if found guilty of violating their fiduciary duty. In 2011, the majority of 401(k) plans audited by the Department of Labor were found to be non-compliant and many had to pay substantial fines.
Recently a study by Deloitte showed 71% of plan participants believe they pay nothing to have a 401(k) plan. However, the same study showed 91% of all plan expenses are paid by these same employees. When the employees learn what they are actually paying for the plan, they may get upset. Fortunately, plan sponsors now have enough notice to be proactive and create a communication strategy to prepare themselves for this situation.
If you have questions regarding the upcoming changes, or simply want to ensure your 401(k) plan is currently compliant with regulations, it may be wise to consult a professional. Working with an experienced professional can go a long way in helping everyone benefit from the retirement plan, while at the same time fulfilling any fiduciary duties.
About the author: Pat Mickelson is an independent investment advisor that makes his home in Littleton, CO. He has served the 401(k) community since 1999, and has run his own advisory business since 2004.
Investment Advisor Representative, Stonefield Investment Advisory, Inc., A Registered Investment Advisor. Financial Planning Services offered through Stonefield Investment Advisory, Inc., A Registered Investment Advisor.