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Fiduciary Liability Created in 401k Plans

Fiduciary Liability can be created by those who neglect the 401k Plan.  Behavioral science tells us things about ourselves that we simply try to suppress or ignore, and Fiduciary Liability falls into that category.  One of the biggest impediments to human productivity can be complacency. Complacency around retirement plan administration, fees, and investments can rapidly escalate into management issues.  At a Plan Sponsor University (TPSU) Program at Virginia Tech there was an astounding realization.  Over half of the plan sponsors reported that one of the biggest problems in their own plan was “inertia”.

Call it procrastination, inertia, laziness, or absence of inspiration – the result can be the same.  Plan fiduciaries are creating Fiduciary Liability.  It’s also commonly thought to be the deciding factor between “winners” and “losers”.  When it comes to running a defined contribution plan, changes come slowly for many plan fiduciaries and companies.

“Unless the house was on fire, we would not make any changes”, joked a CFO for a mid-sized company about the company retirement plan. While the comment was made in jest – a show of hands revealed surprising results.   Over half of plan fiduciaries concede that their plans are plagued by complacency and “lack of interest” by executive management.

There is a long list of sad tales that begins with the words, “the plan was running well, we did not see the problems coming”.  In this group of a few dozen plan sponsors, the majority of problems arise out of poorly executing plan oversight duties.  Plan fiduciaries need to pay  attention to the details and flawlessly execute processes on their plan.

The top problem being reported by plan sponsors was attributed to complacency around failing compliance and testing issues.  Sponsors reported that they had missed employee enrollments and failed to make proper deferrals.  In one case, the plan neglected to enroll several employees…for a period of over two years.  A routine audit flagged the problem and further investigation revealed the practice of missing enrollment dates was the tip-of-the-iceberg.

In that case it took six months of auditing by regulators to complete the evaluation and an additional two months of intense work to devise a response to correct the errors.  The cost in fines, resources, time, and compensation to the excluded employees was significant, not to mention the reputation damage.

To ensure that there was never to be a repeat, the company instituted a routine that utilizes a checklist to complete processes.  The company created a checklist around the following data points:

  • auto enrollment;
  • auto escalations;
  • annual re-enrollments;
  • mandatory quarterly education plans; and
  • a compulsory periodic log-in to record keeper web page

A company-sponsored retirement plan is no longer a once a year funding event.  The retirement plan is a serious benefit that can distinguish you from your competitors and help the firm to win the recruitment battle.  Beating competitors for talent acquisition is only part of it – as the retirement plan carries increased fiduciary liability when ignored.

Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk

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