A common theme from many presenters at employee benefit plan conferences is sponsor liability. These experts focus on the fact that trustees and sponsor liability risks are not as high for what they did as they are for what they failed to do. They also stress the importance of additional disclosure requirements.
We recognize that the employer plans are not your primary business and are provided as a reasonably low cost benefit solely for your employees. These suggested steps may help you to reduce the risk of liability without creating substantial additional costs.
- Investment Policy Statement
ERISA imposes a fiduciary responsibility requiring a plan, among other things, to manage plan assets solely in the interest of participants and beneficiaries and diversify investments to minimize the risk of losses. We recommend that the plan adopt, document, and follow a formal investment policy statement. The investment policy statement provides documentation for the selection, de-selection, and monitoring of a plan’s investment offerings. This is of great importance because fiduciary responsibilities and liability focus so much on the process of making decisions.
- Conduct and Document Meetings
To monitor the investment policy, periodic meetings with investment advisors (at least semi-annually) should be established to discuss investment returns, investment mix, trends, and other factors that may affect investment alternative, and to make any changes to the investment mix or strategy. Not only should these meetings occur, documentation of these meetings and the decisions made and conclusion reached should be prepared. We suggest using checklists to document the meeting and the decisions made.
- Disclosure Requirements
The Department of Labor’s Employee Benefits Security Administration (EBSA) released a final rule with a goal to help employers/plan sponsors and employees/participants make better decisions when it comes to selecting and managing investments held in participant-directed retirement plans. This rule places more requirements and responsibilities on plan service providers, but also requires administrators to effectively review investment fees. It is important to understand how much is being paid in fees, who pays them, and to whom they are paid, in order to evaluate reasonableness of investment returns and costs. As mentioned above, it is also important to document the answers to these questions in order to fulfill your responsibilities as a fiduciary.
- Auto Enrollment Studies suggest that implementing an auto-enrollment feature in a plan can dramatically increase participation rates and significantly increase retirement savings. An automatic enrollment 401(k) plan:
- Emphasizes managements true concern for its employees well-being.
- Helps attract and keep talented employees.
- Increases plan participation among both rank-and-file employees and owners/managers.
- Allows for salary deferrals into certain plan investments if employees do not select their own investments.
- Simplifies selection of investments appropriate for long-term retirement savings for participants.
- Helps employees begin saving for their future.
- Offers significant tax advantages (including deduction of employer contributions and deferred taxation on contributions and earnings until distribution).
- Permits distributions to employees who opt out of participation in the plan within the first 90 days.
For information regarding these topics or audit services for employee benefit plans, please consult Don Towle, Brandi DiGiorgio or your MarksNelson professional at 816.743.7700.