A warning to all 401(k) plan sponsors who assume too much – Carosa
Plan sponsors who don’t read the ingredients of their service providers might just be saddled with liabilities they expected to have mitigated.
Many years ago on a family vacation in Florida, my wife bought me and my son matching Hawaiian shirts. We knew our young boy would eventually outgrow his shirt, but we figured we had at least the next summer to enjoy wearing them. Alas, after the first washing it was I who could no longer wear his shirt. It did, however, fit the boy.
Sometimes we never realize the expectation of a purchase. It’s not because we got duped. It’s more likely because we never bothered to read the ingredients.
Had we paid closer attention to the blend of cotton in those shirts, we might have gotten more time posing as those Schwarzenegger/DeVito “Twins” posters. Instead, my son got two shirts — one too small and one just right. I just get stuck paying the bill.
Making a mistake as a parent with matching apparel is one thing. Making the same kind of mistake as a plan sponsor for your retirement plan is quite another (see “The One Topic Every 401k Plan Sponsor Must Know Right Now: Fiduciary Education Curriculum (Part III),” FiduciaryNews.com, May 21, 2019). Plan sponsors who don’t read the ingredients of their service providers might just be saddled with liabilities they expected to have mitigated.
ERISA makes it very clear what pieces need to be in place for plan sponsors to relieve themselves of at least a tiny bit of fiduciary liability. Really, it’s not that hard. And the benefits can be quite enticing.
In the 1990s, a state-led initiative began to upgrade the “Prudent Man Rule” to a “Prudent Investor Law.” At the time, lay-trustees were concerned they’d be on the fiduciary hook for the trusts they served. These weren’t professional trustees (i.e., the kind you find in bank trust departments or, in some states, law firms). These were everyday people, friends and families who were only trying to help. They didn’t want to be saddled with a liability they couldn’t define.
Hence, while it started one by one in state legislatures, the Prudent Investor concept became universal. All these nonprofessional trustees had to do in order to mitigate the liability associated with managing trust investments was to hire a professional to manage those investments.
ERISA adopted a similar provision with its “Prudent Expert” definition. Like those innocent trustees of the Prudent Investor era, plan sponsors could alleviate fiduciary liability association with plan investments by hiring an investment professional.
Actually, it’s a little more than that. They must give that professional discretionary authority regarding plan investments. It is only when investment discretion shifts to the service provider that the associated liability also shifts. Otherwise, the liability stays with the plan sponsor.
Again, it’s not a difficult rule, but it’s a nuance too often overlooked. It’s as though some plan sponsors aren’t reading the ingredient label on the package they’re buying.
And if things go wrong, something a lot more than a 100% cotton shirt will shrink.
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