The 3 top 401(k) fiduciary liability mistakes (and how to avoid them)

Litigation is on the rise around employer retirement plans, with over $100 million in damages claimed through breaches in plan administrator fiduciary duties over the past several years. Even the most respected employers are not safe from legal penalties associated with failed governance over corporate retirement benefits. That’s because plan administrators are easy targets for lawsuits, especially those without fiduciary liability insurance.

With about $4.5 trillion in U.S. retirement accounts, it’s more important than ever for fiduciaries to protect themselves and their employees from financial losses associated with the mismanagement of retirement plans. To avoid potential liability, and to operate in a way that makes for a better outcome if litigation is imminent, plan administrators must understand best practices when governing plans to ensure the best outcomes for their employees.

The below outlines some of the most common fiduciary mistakes and how to avoid them:

#1: Governance: Conflicts of interest

Issues like conflicts of interest and lack of clearly defined responsibilities are common concerns that can lead to liabilities. It’s important that corporate leaders establish a governance structure over their retirement plans with clearly designated responsibilities. These assigned responsibilities should include expert oversight of compliance testing, investment portfolios, and plan analyses. Additionally, someone should be assigned the task of overseeing fees, including keeping track of the amount of fees actually paid, how fees are generated, who pays the fees, and the fairness of the fees. Formal charts defining powers, duties, and methods of operation should be documented alongside all fiduciary thought processes and key decisions and updated regularly based on plan or personnel changes.

#2: Investments: Misunderstandings by plan administrators

While it may seem like a basic responsibility, misunderstanding of plan investments by corporate plan administrators is a major concern. Often, this occurs when a retirement plan offers too many plan options to employees, making it more difficult for administrators to keep track of fund performance, including each of their nuances and compliance needs. It’s important to provide a diversified set of options without creating “choice overload” for participants to avoid costly mistakes. It’s recommended to limit plan choices to no more than 20 investment options. Administrators should also be consistently monitoring under-performance and seeking alternative replacements when the time is necessary. This is made easier and more efficient with less investments to oversee.

3#: Compliance: Not making timely deferrals or meeting filing requirements

Arguably the most important issues for plan administrators to understand are the ways that they can be found non-compliant. Often times, it is the most rudimentary of plan duties that can lead to liabilities and losses if not performed correctly, including:

1. Properly following eligibility requirements: Plan administrators must ensure participants are notified in a timely manner when they become eligible for enrollment.
2. Making timely deferrals: Administrators must make timely deferrals based on employee plan elections, salary, and indicated contribution percentages.
3. Overseeing loans & distributions: It is critical to ensure distributions associated with hardships and loans are made properly and timely according to the plan documents. This also includes making sure loan repayments are set up in a timely manner.
4. Minding basic requirements: While it may seem tedious, tasks like double checking that you are following the filing requirements of the annual Form 5500 and using the proper definition of compensation as noted in the plan document should be held to high importance.

Related: Who’s minding the retirement plan? A 3-pronged approach to protecting plan sponsors

And remember, when it comes to retirement plans, administrators should document everything. This includes retaining minutes from meetings of committees and maintaining an investment file with materials from reviews of investments to protect yourself in any litigation that may arise.  Detailed records are an administrator’s opportunity to demonstrate how they fulfilled their fiduciary duties to mitigate the risk of the employer’s liability.

At the end of the day, it is the fiduciaries’ primary objective to run their plan solely in the interest of participants, and understanding the most common mistakes made by others is a great way to avoid losses for both your employees and your organization.

Todd Klaben, Central New York Regional Managing Partner at The Bonadio Group, has more than 20 years of experience performing and supervising accounting and tax engagements.  

Kevin Testo, Human Services Industry Leader at The Bonadio Group, is responsible for business development, client/project acquisition, geographic expansion activities and determining how clients are best serviced within the industry.