Current Thinking

Is Your Company Overlooking These Common Fiduciary Duties?

A blog by Pete Swisher, CFP®, CPC Senior Vice President, Pentegra Retirement Services

Most employers overlook many of the following duties of retirement plan fiduciaries. More often than not, these are examples that result from ignorance more so than willful disobedience, combined with a mistaken belief that third-party administrators (TPAs) are handling everything for them. Smaller employers (i.e., most employers) are especially likely not to know or follow the rules. It’s easy to do—you are focused on running your business, and running your business can take priority over the day-to-day intricacies of retirement plan administration. But consider this—if your business and board serves as your retirement plan fiduciary, the fiduciary responsibilities detailed below are breaches and/or disqualifying plan events. While many assume the greatest source of retirement plan liability is the plan’s investments, in reality the vast majority of lawsuits and regulatory actions involve failures in administration.

SPDs are Not Included in Enrollment Kits
The Employee Retirement Income Security Act of 1974 (“ERISA”) Sections 102 and 104 require the plan administrator (the fiduciary administrator as defined by Section 3(16), not the third party or contract administrator) to follow specific rules for delivering Summary Plan Descriptions (SPDs) and Summaries of Material Modifications (SMMs). Generally speaking that means an SPD should be included with every enrollment kit, yet the industry-standard practice is that the non-fiduciary vendors who serve the employer do not include SPDs in the kits-instead they email an SPD in PDF form to the employer and expect them to follow the Department of Labor’s (DOL’s) delivery rules. As a practical matter this means the rules are commonly violated.

Stragglers Miss Out
All companies have a process, however formal or informal, for processing new hires, and benefit enrollment is part of the process. But there are always stragglers—individuals who miss one or more phases of the process for a variety of reasons. In many cases this means they never receive the appropriate disclosures and arguably have not been given the opportunity to enroll as defined by the IRS-a plan defect that must be corrected under the Employee Plans Compliance Resolutions System (EPCRS) at significant cost to the employer.

The DOL’s Document Delivery Rules are Not Followed
The DOL lays out specific rules for distributing plan documents to employees, and the rules do not permit the employer to simply post notices on a bulletin board or leave them in the break room. Nor can documents be delivered electronically unless strict criteria are satisfied. As a practical matter, most employers’ compliance with document delivery rules is far short of 100%.

Hardship Distributions are not Scrutinized
Hardship rules are trickier than they appear. There are safe harbor and non-safe harbor methods and an employer must read the plan document to know which approach the plan follows. There are two fiduciary certifications required-the existence of the need and the amount of the need-and there are two different protocols for how the certifications can be made. Again the method is dependent on the plan document. And there are usually other complexities that can make processing hardship requests difficult for employers. The reality is that most employers would be hard-pressed to produce documentation for all hardship distributions for the previous two years showing proper procedures were followed-and this is exactly what DOL auditors ask for.

Beneficiaries, Alternate Payees, and other Interested Parties are Overlooked
It is not enough to mail documents to active participants or employees; there are other groups who must receive various documents by law. Occasionally a participant dies and there are a variety of actions that must be taken with respect to the beneficiaries. Participants get divorced, creating one or more “alternate payees” for whom special steps must be taken. Eligible employees who are not participants must receive certain notices but not others. Terminated participants are in a class of their own. Disabled participants require special treatment if they are not legally competent. And certain notices must be sent to all “interested parties.” But what often happens is that the TPA emails a PDF file to the employer with delivery instructions and leaves it up to the client, with inconsistent results.

Legal Documents are Not Reviewed and Approved
Retirement plans involve remarkable volumes of paper. The way most plans work is that the TPA prepares the myriad legal documents and sends them to the employer for review, approval, and execution. The employer is told to consult ERISA counsel; something no small company ever does, read the document carefully, and get back to the TPA with corrections or approval. In reality, what happens is that the employer returns the document to the TPA without reading a word. In the vast majority of cases this creates no hardship, but the exceptions can be painful. In one situation I have come across, an employer did not read a document that had been incorrectly prepared by his TPA and simply executed it, leading to a compliance failure that cost $100,000 in legal fees (to avoid over $500,000 in corrections). The TPA paid none of the legal fees.

Documents are Not Updated When Fiduciaries Change
In most plan documents, the employer is designated as the named fiduciary and administrator, but one or more individuals are often named trustee(s). When a trustee retires or is otherwise terminated, it is quite common for the employer and the trustee both to forget to update the plan documents. One case I learned about years ago from a TPA colleague involved a business owner who sold his company via installment sale only to have the buyer sell or steal the company’s assets and disappear before making a single installment payment, leaving the hapless entrepreneur with no company, no money, and a retirement plan from which he had forgotten to remove himself as trustee and to which the company owed six months’ worth of employee deferrals the thief had never deposited. The trustee was required to come up with the deferral money.

Fee Disclosures are Not Vetted
The DOL’s participant disclosure regulation requires the administrator (again, generally the employer, not the TPA) to make the correct disclosures to participants. While vendors do the work of preparing the documents the employer remains responsible. This is rarely a problem but it can backfire, and in point of fact I have seen several incorrect or incomplete fee disclosures.

The consequences of making mistakes
All of the failures above result in fiduciary breaches and/or disqualifying defects that must be corrected. Usually these mistakes go unnoticed, but occasionally they turn bad and cost the employer money as well as the time and headaches associated with the correction.

Outsourcing eliminates the problem
There is a simple solution—fiduciary outsourcing. Hiring a firm to serve as an institutional named fiduciary, trustee, and 3(16) administrator can solve the problems and ensure that you are addressing these many details of retirement plan administration. The easiest way for an employer to avoid overlooking a duty is not to have that duty in the first place, which is what outsourcing is all about. It transfers work and responsibility to others.

About the Author
Pete Swisher is the author of 401(k) Fiduciary Governance: An Advisor’s Guide, a textbook for the ASPPA Qualified Plan Financial Consultant credential, and serves as National Sales Director for Pentegra, where he can be reached at pete.swisher@pentegra.com.



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