Company retirement plans are covered under the Employee Retirement Income Security Act (ERISA). Employers and the individual fiduciaries tasked with the responsibility of plan stewardship must adhere to certain standards of conduct and fiduciary responsibilities specified by ERISA law and enforced by the Department of Labor (DoL).
While employers often rely on the expertise of qualified outside service providers to avoid common plan mistakes, ultimately compliance and proper plan management is the employer’s responsibility.
It can be difficult to interpret what specifically warrants a violation of ERISA law, but below is a list of common mistakes employers make that could lead to situations that may increase their exposure to liability.
- Inappropriate hiring decisions: Most financial advisors are compensated directly or indirectly through assets in the company retirement plan – assets that do not belong to the employer. Hiring a retirement advisor or other service provider based or influenced by blood ties or personal relationships to the employer or plan administrator, rather than professional qualifications, is a common mistake. Employers should avoid the appearance of any potential conflict of interest when hiring service providers to manage their retirement plan.
- Poor investment oversight: Not appointing an investment committee is a common mistake of many employers. Appointing an investment committee, ideally led by a qualified professional, and conducting periodic investment reviews is a prudent way to ensure appropriate investment option availability and effective monitoring of investments for all participants. Documenting a process of investment selection and oversight can help protect your company and plan fiduciaries from potential liability.
- Failure to conduct periodic plan reviews: New and important fee disclosure regulations required by the DOL, such as 408(b)(2) and 404(a)(5) provide fee “transparency” to both employers and those who participate. But knowing your fees is not the same as verifying those fees are reasonable. Conducting a periodic plan review or benchmarking process, preferably with an independent and qualified professional outside of your current plan management relationship, can help ensure fees are reasonable and that the plan is providing positive outcomes for those who participate.
Failure to take required action in a timely manner: Whether discovered through an independent review as noted in item #3 or through another method, knowing you might have compliance, investment, plan expense, or other significant plan related problems but failing to take action in a reasonable time frame can result in significant penalties and/or personal liability for the employer and/or fiduciaries.
Failure to possess, update or adhere to the Investment Policy Statement: The investment policy statement (IPS) is the roadmap or blueprint for the employer sponsored retirement plan, often provided and maintained by the retirement plan consultant and/or investment committee. Yet many employers do not have an investment policy statement or do not periodically review or update this important document to reflect the current guidelines and status of the company retirement plan.
Participant education and communication: Having a proactive retirement plan benefit(s) education and communication plan can increase deferrals and ensure proper asset allocation for participants and make a tremendous difference in the overall success of the retirement plan benefit. Employers should demand a comprehensive education and communication plan from the retirement plan consultant or service provider.
Failure to update or understand terms in the written plan document: The investment policy statement (IPS) is the roadmap or blueprint for the employer sponsored retirement plan, yet many employers do not have an investment policy statement, or do not periodically review and update this important document to reflect the current guidelines and status of the company retirement plan.
Payroll communication errors: Having a proactive retirement plan benefit(s) education and communication plan can increase deferrals, ensure proper asset allocation for participants and make a tremendous difference in the overall success of the retirement plan benefit. Employers should demand a comprehensive education and communication plan from their retirement plan consultant or service provider.