7 Ways a 401(k) PlanFiduciary Neglects Their Job

How to Ensure You Are Meeting Your Responsibilities

CONTENTS

[ 3 ] What is a fiduciary?

[ 4 ] As a manager or executive, you are a fiduciary

[ 5 ] Seven ways a 401(k) plan fiduciary neglects their Job [ 5 ] #1: Not reviewing the Plan Document [ 6 ] #2: Not remitting contributions on time

[ 7 ] #3: Not limiting and not reviewing participants’ investment choices [ 8 ] #4: Not ensuring your investment advisor has the expertise to advise the plan

[ 9 ] #5: Not auditing participant elections forms and employee files consistently

[ 10 ] Example of what can happen with incorrect contributions

[ 11 ] #6: Not understanding the plan fees

[ 11 ] #7: Not selecting the correct service providers

[ 12 ] Conclusion

[ 12 ] Disclaimer

What is a fiduciary?The word fiduciary seems somehow old-fashioned. It reminds us of someone sitting in a stiff, high-backed chair in a room with lots of books on the shelves and maybe wearing a monocle or something. Why? Because the word comes from a Latin word (fidere) and was first used in English in the 1600s and means “of, relating to, or involving a confidence or trust.”

Even though the word is over 300 years old, “fiduciary” has found a resurgence.

“Company stockholders sued him last year for breaching his fiduciary duty to the company and shareholders and unjustly enriching himself.” — Lorraine Mirabella, baltimoresun.com, “Years in the making, construction of controversial Port Covington project finally underway in South Baltimore,” 8 Nov. 2019

“As future CEOs, our charges must manage the conflicting demands placed on firms by myriad interested parties while still fulfilling their fiduciary duties to shareholders.” — The Economist, “The future of management education,” 2 Nov. 2019

In your company, then, a fiduciary is anyone that has employees, shareholders, and peers placing their confidence and trust in them.

[ 3 ]

“Wait!,” you say. “I’m not the one in charge of the Retirement Plan.”

Here’s the deal: The fiduciary is not just the individual who is in charge of administering the retirement plan for the employees. Everyone on the management team is a fiduciary. And because the Board of Directors appoints fiduciaries, those people are responsible for the actions of the fiduciaries as well. The court case in South Baltimore above) means you are a fiduciary, which suggests you can be held personally liable for any losses or expenses and could also face criminal punishment if you breach your fiduciary duty. Here’s How the Department of Labor (DOL) defines fiduciary responsibility:

The Department of Labor (DOL) has taken a stand. It states that “the primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.” The DOL is looking to see that the fiduciaries oversee the plans properly.

It’s not fair, but it’s real-world.

By being on the Board of Directors or simply being in management for a company, you might think it is unfair to be held responsible on the one hand, but employees have had some problems with their pension plans.

There are ways to avoid having a problem.

In the day-to-day world of administering a retirement plan for companies we advise, we have found seven areas in which the Retirement Plan administrators (and fiduciaries) are neglecting some basics.

Fix these, and you’ll be in much better shape and a better fiduciary for when your kids ask you what you did at work today.

As a manager or executive, you are a fiduciary

7 Ways a 401(K) Plan Fiduciary Neglects Their Job

Not reviewing the Plan DocumentWhen was the last time you reviewed the plan’s Plan Document? More importantly, when did you examine the Plan Document and not just amend it to satisfy the most recent ERISA (Employee Retirement Income Security Act of 1974) requirements? The Plan Document shows the details of how the Plan should operate. These include, among other items:

• Exactly what compensation is (or is not) included in the calculation for contributions • Participant loan requirements, • Distribution requirements, • Eligibility for participation in the Plan If you are not following the Plan Document, then the Company, and possibly the fiduciaries, will be held liable for not adhering to the Plan.

#1

[ 5 ]

Not remitting contributions on timeTrue or False? The government’s rule for remitting contributions and participant loan repayments says an employer can wait until the 15th business day of the month following the one in which the employer withheld the contributions from the employee’s paycheck to remit contributions to the plan.

It’s False.

The rule is that you should remit the contributions as soon as administratively possible, and at the earliest date when you, the employer, can reasonably segregate these amounts from your general assets.

The Department of Labor takes an irritatingly inflexible approach to timing. They have even said that if you remit the contributions to the plan custodian on the same day as the payroll date, that sets a precedent so that any other remittances during the year that are over zero days would be considered late. We believe that is pretty extreme, and during our audits, we would not define a couple of days after the payroll date as late. However, we do warn every company about this, and we remind people that the DOL could come back and pronounce that the contributions were late. Maybe don’t start out making contributions right on the payroll date to give yourself a little wiggle room.

Here’s what can happen: When there are late contributions, the company has to remit lost earnings on the late contributions and pay the excise tax on those lost earnings. There are multiple ways to calculate lost earnings, and we can help in determining the best way for your company.

#2

Not limiting and not reviewing participants’ investment choices Variety: It is a good idea to offer enough variety of investments to ensure that the plan is adequately diversified. However, we recommend limiting the number of investments so that the Plan administrators can keep track of them all. Also, offering too many alternatives makes it difficult for people to choose one over another.

“Too many choices can overwhelm us and cause us to not choose at all. For businesses, this means that if they offer us too many choices, we may not buy anything.” – Sheena lyengar, author of “The Art of Choosing”

Quarterly review: In addition, you should review the Plan portfolio at least quarterly for any underperforming stocks, bonds, or funds. If there is a downward trend, it might be time to switch from that offering. However, many companies do not have the type of expertise to ensure that the plan is offering the correct investments.

Third-party advisors specializing in retirement plan portfolios: We recommend that the company use an investment advisor or third party administrator to help with the Plan’s investment portfolio review. LSL does not offer these services, but we know many different advisors and can guide you in the right direction. You should make sure your auditor has the expertise to audit the plan because retirement plans are very specialized and require particular knowledge in this area.

#3

[ 7 ]

Not ensuring your investment advisor has the expertise to advise the planThe best way to protect yourself against paying the penalties for errors in retirement plan offerings and calculations is with a 3(38) Investment Manager. A 3(38) Investment Manager is a codified investment fiduciary on a retirement plan as defined by ERISA (Employee Retirement Income Security Act of 1974) section 3(38). This fiduciary’s responsibilities include the following:

• Create and manage an investment policy statement • Form an investment committee • Hold investment committee meetings • Prudently select plan investment options • Report on investments regularly • Benchmark investments • Replace funds and update models as needed

The 3(38) Investment Manager can be an employee of the company or the position can be outsourced. The outsourced alternative may cost more or less than an employee 3(38) Investment Manager, depending on the exact duties performed. Outsourcing fiduciary roles could also reduce the cost, risk, and work associated with sponsoring an employee retirement plan. It’s worth some research.

If you have the resources available, you may choose to hire outside. Alternatively, you can pay for an existing employee to obtain the Investment Manager 3(38) license or certificate to keep the administration of the retirement plan under your own roof.

The HUGE Benefit to the 3(38) Investment Manager:

Whether the 3(38) Investment Manager is an employee or from an outside firm, they’re the ones that take on the whole responsibility for the plan’s performance and execution. If say the company ever gets sued, it wouldn’t be on the trustees of the company. It would be on that 3(38) Investment Manager.

Don’t scrimp on this expense. (But still, don’t neglect the other six points.)

#4

Not auditing participant elections forms and employee files consistentlyYou should always ensure that the percentage withheld from the employees matches the participant election forms. Many times, there are differences between those two. If this is the case, then the company will be liable for that difference, along with the possible matching contribution and lost earnings. For a highly paid participant, this could be a significant amount of money. Multiplied by several employees over the number of years that the difference has accrued could be devastating. See calculation on next page.*

We recommend that the company audit the retirement plan’s withholdings internally throughout the year. A good practice would be to take 10 to 20 employees each month (or whatever is enough to get through the entire employee complement in one year) and compare the percentage on each employee’s election form to what is actually being withheld from the employee’s paycheck.

In addition, many plan participants choose to make online elections. When you get changes in percentages emailed from the plan custodian, print that email and include it in the participant’s file. If you ever were audited by the DOL, you will have this information readily available for them, and there will be no questions asked.

#5

[ 9 ]

*Example of what can happen with incorrect contributions

Assumptions: An employee who has worked at the company for five years makes $50,000 per year and elected a 5% contribution level. There is a match of 50% of employee contributions and an average of 6% earnings on investments over the five years. If the company accidentally withheld 2% instead of 5%, the company is on the hook for the difference, along with the match and lost earnings.

The correction would be $11,925 for this one employee: $50,000 Compensation of employee × .03 Difference between the 5% elected and the 2% withheld = $1,500 Yearly difference × 5 5 years employed with the difference = $7,500 Employee contribution amount owed × .5 50% match missed = $3,750 Employer contribution amount owed $7,500 Employee contribution amount owed + $3,750 Employer contribution amount owed = $11,250 Total contribution amount owed × .06 6% average rate of return = $675 Lost earnings + $11,250 Add total contribution amount owed

= $11,925 Total amount the company is liable for

Bottom line: These ‘tiny’ percentage errors can add up, and could destroy your company if there were several of these.

Not understanding the plan feesIt is crucial to understand the fees that are charged to the plan. Understanding the fees associated with the investments, individual transactions, custodians, trustees, and advisors is a significant part of your fiduciary responsibility. Ultimately, the participants pay these fees through the plan, and as a fiduciary, you are partially responsible for the plan’s returns . You need to ensure that the charges are reasonable in relation to the size of the plan.

You’re in the plan. Your return on your investments will be reduced if the administration costs are above where they should be. Fees and fine print are areas where people without scruples can take advantage of the fiduciaries’ inattention.

Not selecting the correct service providersAs mentioned above, it is critical that you use an investment advisor in your plan, preferably a 3(38)-certified Investment Manager. You should ensure that they are reviewing the investments held by the plan at least quarterly. In addition, many companies will hire the auditor based solely on fees.

While it is a good idea to save your company some money, you are playing with fire. If the audit fees are under $9,000 for a company with approximately 100 employees, then the auditors are not auditing your plan correctly. They are likely cutting corners, and you will fail under a DOL audit. If that happens, then you have to hire a new auditor and pay for interest and penalties for a late audit. These charges can pile up to be a substantial amount of money, all because you tried to save your company some money without looking at a CPA who has expertise in this area.

#6

#7

[ 11 ]

ConclusionIt’s a bad idea to neglect one’s fiduciary responsibilities. It goes beyond adhering to the DOL rulings and making sure you’re not making any of the seven mistakes. There’s a bigger issue. It’s doing the right thing.

People who work for you want to trust that you will handle their pension fund correctly. They want to wake up after decades of employment and see that they can retire with their savings intact. Fiduciary implies trust, and neglecting some of the basics means possibly jeopardizing your employees’ golden years. Or your own.

In 2019, the true meaning of a fiduciary role is supported by a philosophical shift underway at the Business Roundtable, a corporate lobbying outfit that had its beginnings in 1981. A November 2019 Wall Street Journal piece about corporate guru Ira Millstein resurrected this quote on Corporate Responsibility: “the long-term viability of the business sector is linked to its responsibility to the society of which it is a part.”

Everyone needs to feel we can trust our leaders -- business or otherwise. “Fiduciary” is an old word that implies trust, but there’s a growing need for more faith in our systems and institutions. Creating confidence in your company is an excellent place to start.

If you have any questions on your retirement plan or need assistance with anything, LSL is always here to help. We are focused on your retirement plan needs.

DisclaimerThis material is not a substitute for consultation with a legal or tax advisor and should only be used in conjunction with professional analysis.

Lance, Soll, & Lunghard, LLP | CPAs & Advisors | contact.us@lslcpas.com | 714.569.1000 | lslcpas.com