It is a well-known fact that employers who sponsor qualified retirement plans for their employees, such as 401(k)s (403(b)s for nonprofits), must act as fiduciaries on behalf of those participating in the plan. In simplest terms, acting as a fiduciary means placing the needs and interests of the plan’s participants and beneficiaries ahead of other considerations. The fiduciary is obligated to act in the best interests of the participants and beneficiaries, even if these interests conflict with those of the trustee or other parties.
For qualified retirement plan sponsors, this means, among other things, that the plan sponsor must do all possible to ensure that the plan is operating for the best benefit of its participants. The Internal Revenue Service, which oversees qualified retirement plans, includes the following responsibilities among those expected of qualified plan fiduciaries:
- acting solely in the interest of the participants and their beneficiaries;
- acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
- carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters;
- following the plan documents; and
- diversifying plan investments.
One of these items can be particularly troublesome: “defraying reasonable expenses of the plan.” This means that plan sponsors must consistently work to ensure that the fees and other expenses paid to operate the plan are reasonable and in line with those being charged for similar plans. Failure to appropriately scrutinize plan fees and expenses, in other words, if it can be proven, can constitute a lapse in fiduciary responsibility that can create the basis for legal action by plan participants.
A recent US Supreme Court ruling may, in the opinion of some observers, make it easier for employees to bring lawsuits against their employers for lapses in fiduciary duty. In April, the court rendered a decision in a case brought by employees of Cornell University. The employees alleged that Cornell violated the Employee Retirement Income Security Act (ERISA, the legislation that created qualified plans like 401(k)s and 403(b)s)) by causing “two retirement plans to engage in prohibited transactions with third-party service providers that delivered retirement plan investment options, platform access, and a recordkeeping services by paying allegedly excessive fees.” In other words, the suit alleges that Cornell failed to exercise its fiduciary duty to scrutinize and control fees and expenses.
While most retirement plan litigation has focused on giant and large sized plans, this decision may have a far-reaching effect on retirement plan sponsors including smaller to mid-sized plans. Most experts agree that this decision heightens the importance for plan sponsors and fiduciaries to have a process in place to review service providers including services and fees.
Fortunately, for plan sponsors, it is possible to engage with service providers to delegate some of the fiduciary responsibilities associated with sponsoring a qualified retirement plan. It is important to note that plan sponsors cannot fully eliminate their fiduciary responsibilities; delegation may help alleviate some of the duties, but it still requires the prudent selection and ongoing monitoring of any service providers.
JFS Wealth Advisors is one such provider and can serve as a fiduciary investment advisor, offering expertise in investment monitoring, management, and oversight. A fiduciary investment advisor also helps navigate the complexities of retirement plan governance by providing actionable strategies around optimizing plan design, periodically reviewing and benchmarking of plan fees and expenses, reducing costs, limiting fiduciary exposure, providing Fiduciary training to plan sponsor committees, and supporting better retirement outcomes for employees.
Fiduciary responsibility is not something to take lightly as it carries significant legal and ethical obligations. By helping employers keep their plans in good standing, a fiduciary investment advisor allows business owners to focus more on what they do best: running a business that supports their workforce. In turn, such fiduciary care can help to keep employer-sponsored plans running smoothly, supplying employers with a valuable tool for retaining and recruiting top talent.
If you are considering implementing a qualified plan for your business, JFS Wealth Advisors can provide the information and guidance you need to make well-informed decisions. If you have concerns about fiduciary responsibilities and your plan, we can offer the support and insight needed to give you greater peace of mind. To learn more about how we help employers offer high-quality, competitive qualified retirement plans, please visit our website.
