Who’s Minding the 401(k)?

A plan’s fiduciaries have the responsibility and duty to conduct ongoing management and oversight of the various moving pieces of a 401(k) plan for the express benefit of the beneficiaries of the plan, the employees investing in it. A critical part of the this responsibility is putting in place a prudent process in conducting due diligence on everything from the recordkeeping provider, TPA, investment options, reasonableness of fees, etc. as well as documenting the due diligence process of monitoring these pieces. Unfortunately, most companies do not have such processes in place, as it can be atypical behavior to document every decision. A recent survey illustrated in Marketwatch.com by Robert Powell found the following:

Only 58% of some 275 plan sponsors maintain minutesOnly 27% use an independent party to analyze plan fees Just 29% had established a “clear chain of authority for their plan’s governance committee.”

The resulting questions included:

1. Is it possible that retirement plan fiduciaries are not doing their jobs?”Absolutely,” said Don Trone, founder of Fiduciary Ethos. “It’s not a trend, but a constant. And, it’s not because of malfeasance.”

2. Is it possible that we may see more 401(k) plan participant lawsuits because of the above? Yes, Trone said.
And others agree.”Could we see more lawsuits due to the lack of a formalized process in committee?” said Chad Griffeth, accredited investment fiduciary and president of BeManaged, which offers fiduciary services to companies. “Would such companies be open to more liability for the lack of said formalized process? Absolutely.”

3. What about the chain of command for the governance committee? “Chain of command” is not a commonly used term, Trone said. But in many cases, he said plan documents and the Investment Policy Statement — the statement that outlines how investments will be selected and monitored — are governing documents.Is this hard to believe? No.

Let’s face facts, most people are given the responsibility or volunteer to be part of a committee that monitors and manages the plan. Unknowingly, people can walk blindly into a responsibility with more liability than they realize. On the other hand, this is often a default role given to such people as the CFO, Finance Executives, Director of Human Resources, and other Executives. If those same people were put in charge of deciding on the purchasing decision for a phone system, software, or other infrastructure staple, it wouldn’t usually require such a diligently documented process.

What’s the big deal about due diligence? Well, let’s pretend you hand someone your retirement money; money you are going to depend on to deliver you a lifestyle once you are able to retire. If you find out that your funds were only average, the plan was costing more than what is considered “reasonable” (tough to define, but the industry is moving fast to clarify), etc. If you learned this was the case, you might be ticked, right? Now, what if you learned that this individual had a fiduciary (legal) responsibility to monitor the entire situation to make sure it was in your best interests. Now it’s more interesting when you consider it as your money (which it is), huh?
Additionally, if the plan fiduciaries cannot act in the role of a “prudent expert”- not just a “prudent man”- they have the duty to seek out guidance on how to do so from an expert firm and/or individual. Fortunately, the growth of fiduciary 401(k) consultants and fiduciary services have evolved to help you lessen, to a minor or major degree, that responsibility. It’s just in time too, as Congress is speeding up in requiring more fiduciary due diligence in 401(k) plans.