Business Owners, Executives, and HR Professionals Liabilities under ERISA Regulations

Mark N Levin, CLU, CFP® AIF ®

If you are a business owner, senior executive or senior HR manager at a company with a 401k or other retirement plan, you may have significant liabilities that you are not aware of. Most business owners and executives are completely unaware of the Federal Regulations and requirements placed on “plan fiduciaries” of qualified retirement plans, namely 401k, 403b pension and profit sharing plans. And this year even more changes are coming. ERISA was enacted back in 1974 in response to the collapse of many unfunded and under funded retirement obligations of companies that failed. Many workers dedicated their lives to companies only to be told there were no funds to pay their retirement obligations. ERISA, (Employee Retirement Income Security Act) places significant requirements on sponsors (companies) who have qualified retirement plans. In consideration for following the regulations, Employers and Employees are granted many advantages for retirement savings plans, not limited to tax deductible contributions and tax deferred growth. The Department of Labor (DOL) states “ERISA does not require any employer to establish a plan. It only requires that those who establish plans must meet certain minimum standards.” There is a wealth of information on the DOL website under the EBSA (Employee Benefit Security Administration) section. (http://www.dol.gov/ebsa/) The first thing a plan sponsor should look for is the booklet “Meeting Your Fiduciary Responsibilities”. Print it out and read it. Included in the retirement plan documents are listed at least one plan fiduciary. It may be the business owner, maybe an officer and sometimes a manager or HR specialist. In many cases, these individuals do not fully understand the responsibilities they are accepting when signing this document. They are held to the highest fiduciary standards, and as such can be held personally liable for actions or judgments against the plan. It can be even more troubling if they get the responsibility without the interaction of working with the plan providers directly. Fiduciaries of the plan are not only named, sometimes by actions they are deemed fiduciaries. If a business owner appoints someone other than themselves to act as the plan fiduciary it does not abdicate the responsibility. The fact that they have the discretion makes them a fiduciary. Being included on an investment committee or determining policy of the plan may deem one a fiduciary and signing a document like the 5500 form can create fiduciary status. An advisor that gives ongoing investment advice to the plan may be deemed a fiduciary. But the guidelines suggest that all fiduciaries be named and accept their role in writing.

So what is the significance of being a fiduciary? Generally people have a very unclear picture of what a fiduciary is, and what responsibilities come with that title. From the DOL handbook: “Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;

• Carrying out their duties prudently; • Following the plan documents (unless inconsistent with ERISA); • Diversifying plan investments; and • Paying only reasonable plan expenses”

Most of the time, retirement plans are viewed simply as employee benefits and as such become a line item expense. In some cases they are considered a valuable item, sometimes a necessary evil, and other times just a nuisance. However purchasing them like any other employee benefit can cause much bigger problems. The DOL did a survey in 2005 and found that many times advisors that sold retirement plans had a significant conflict of interest and thus created an advisory sheet named “Selecting And Monitoring Pension Consultants - Tips For Plan Fiduciaries” (http://www.dol.gov/ebsa/newsroom/fs053105.html) Also in Jan 2010, the Center for Due Diligence put out a paper suggesting that most small employer plans are being serviced by generalist who lack the knowledge to properly support plan sponsors in meeting their fiduciary responsibilities. The DOL suggests that plan sponsors hire prudent professionals to meet these requirements. But who do you turn to? In most cases these plans are purchased through agents and brokers who have little or no understanding of the requirements of ERISA. Sometimes they are purchased directly from a mutual fund company, a bank or a life insurance company. The plan sponsors have had the misconception that any problems or violations would fall on these plan providers or the agents and brokers that sold them. Furthermore, when you think you are saving money by going “direct” you may have created a bigger problem for yourself. Remember that the plan sponsor is responsible to monitor costs, investment performance, and pay only reasonable expenses. Banks, Insurance Companies and Mutual Fund companies will explicitly tell you they are NOT acting as a fiduciary for your plan. This is like expecting the fox to guard the hen house. They have no obligation to lower costs or benchmark the investments for you. Their reporting is generally service in nature and does not qualify as a thorough review of costs and benefits. Most of the time they are profiting from the investment fees charged in the plan. Their duty is to make money for their shareholders. And that is why you need a qualified objective investment advisor to help you monitor the costs and expenses of your plan.

This person should have extensive experience, knowledge and objectivity. They are typically paid a fee based on the amount of assets in the plan, or flat fee for the scope of the work to be done. The Fiduciary Investment Advisor should have the resources and tools to deliver objective reports on the investment fund performance, benchmarking the performance to peers, and validate if a fund should be considered for replacement. These resources should be independent of any plan provider or investment company. This person should have no direct connection to any provider of services other than a representative agreement. Their allegiance should be exclusively to the plan participants. They should also be well versed in preparing an investment policy statement and coordinating that document with the plan investments. The investment policy statement is the roadmap for guiding plan decisions. What will be the criteria for adding, deleting or merging investment options? How will the decisions be made and who are the committee members? What is the timeline, and other operational decisions? The DOL suggests that you have your Investment Advisor become a fiduciary advisor to the plan. Under the regulations, only Registered Investment Advisors (RIA) can become advisors to retirement plans. Again, most plans have been purchased though agents and brokers who are not a RIA and in the cases where they do have an affiliation with an Advisory Firm that firm will not allow them to become a fiduciary advisor to the plan. Thus you must do your own due diligence if you want to be sure you are working with someone QUALFIED to advise you on the plan. Again refer to the DOL website and the follow the “Tips for Selecting and Monitoring a Pension Advisor”. An organization that promotes and trains Fiduciary Excellence is Fi360. You may look them up on the web at http://www.fi360.com/main/home.jsp and there is a list of Accredited Investment Fiduciaries (AIF® and AIFA®) available in your area. Lastly, keep all plan relationships at arms length. It is a conflict of interest to give your retirement plan to an agent or company just because they are a friend or relative, you like them or they send business to you. Even more a problem if they provide you with better terms for their services because you are doing business with them. (banks) You can do business with some of these people, but only if they demonstrate that they are providing unbiased advice, reasonable fees, full disclosures and quality professional support. Mark N Levin, CLU, CFP®, AIF® is an Accredited Investment Fiduciary (AIF®) and an independent investment advisor representative with LPL Financial. Offices located in Fla.and Ma. 888-821-5750 Email mnlevin@financialpartners.net