As a retirement plan sponsor, you are hopefully well aware of ERISA lawsuits that are disrupting businesses, grabbing headlines, and setting precedent. While civil litigation continues to present risks for retirement plan sponsors, it is also important to know that civil violations enforced by the Department of Labor’s Employee Benefits Security Administration (EBSA) have real financial consequences. Fines and statutory penalties—often calculated per day, per participant—can be assessed for administrative missteps, failure to file, or technical non-compliance. Read on for examples of civil violations, and tips for protecting yourself.
The Compounding Cost of Regulatory Non-Compliance
EBSA enforces ERISA compliance by imposing specific, non-negotiable monetary penalties for failures across all facets of retirement plan operation—from timely reporting to participant disclosures. The list of offenses is long, and targets everything from incomplete paperwork to fundamental failures in communication. Whether it’s a minor omission on your annual Form 5500 filing, or the failure to provide timely information to an employee, EBSA is empowered to assess fines that accrue daily, and offers these examples of civil violations that can trigger enforcement action and penalties:
- Failing to operate the plan prudently and for the exclusive benefit of participants;
- Using plan assets to benefit certain related parties to the plan, including the plan administrator, the plan sponsor, and parties related to these individuals;
- Failing to properly value plan assets at their current fair market value, or to hold plan assets in trust;
- Failing to follow the terms of the plan (unless inconsistent with ERISA);
- Failing to properly select and monitor service providers;
- Taking any adverse action against an individual for exercising his or her rights under the plan (e.g., being fired, fined, or otherwise being discriminated against);
- Failure to comply with ERISA Part 7 and the Affordable Care Act (welfare plans only).
Civil penalties are a distinct and compounding financial threat, separate from any fiduciary breach lawsuit or even criminal misconduct, and they demonstrate that a simple oversight can quickly become a five- or six-figure liability. The Federal Register lists the Department of Labor’s inflation-adjusted maximum penalty amounts for failures associated with qualified retirement plans, and Ascensus shares this summary of violations and penalties:
- Per day, for failure to properly file a plan annual report (Form 5500 series); penalty rises from $2,670 to $2,739
- Per day, for failure to properly provide a plan black-out notice, or notice of right to divest employer securities (each recipient being a separate failure); penalty rises from $169 to $173
- Per day, for failure to provide DOL-requested documents; penalty increases from $190 to $195 (not to exceed $1,956 per request)
- Failure to properly provide benefit statements and maintain records vis-à-vis former participants and beneficiaries; penalty rises from $37 to $38 per required statement
- Failure of a fiduciary to comply with the prohibition on certain types of distributions from defined benefit pension plans with certain liquidity shortfalls; maximum penalty rises from $20,579 to $21,114 (penalty will be the amount of any distribution, if less)
Given the consequences of compliance failures, ERISA experts at USI Consulting Group offer this advice: “Prudent retirement plan sponsors are proactive: they maintain up-to-date procedures and guidelines, and conduct regular operational compliance reviews, or self-audits. By doing this, they can mitigate potential risks, reduce future liabilities and avoid unnecessary costs.” In the event proactive efforts to monitor the retirement plan reveal errors, it’s helpful to know that the Department of Labor offers a Voluntary Fiduciary Correction Program which may enable you to curtail problems and penalties. It’s also useful to know that noncompliance issues frequently caught by the DOL and IRS include:
- Plan document failures
- Plan eligibility
- Loans, in-service distributions
- Vesting
- Required minimum distributions
- Nondiscrimination and coverage testing
- Missing participants
- Late contributions
Outsourced Retirement Plan Services?
Though outsourcing can reduce some of the risks inherently associated with retirement plan sponsorship, the risks associated with appropriately selecting and monitoring service providers remain with the plan sponsor, who can be held personally liable for shortcomings. Bottom line: If you sponsor a retirement plan at your company, you are automatically a fiduciary under the high standards of ERISA. Errors and oversights, can result in fines and penalties, as well as lawsuits—-all of which put your personal assets at risk. Specific examples of what you can be held personally accountable for as a fiduciary include:
- Decisions: Do you have the right advisor, and investment options?
- Cost control: Are the plan fees reasonable and services solid?
- Compliance: Do operations adhere to the plan document, and government regulations?
As a fiduciary, you can also be held accountable for failing to adequately mitigate cybersecurity threats to the plan, or to curtail the damage from a breach. You can even be held responsible for failure to monitor your chosen service providers for their adherence to cybersecurity protocols. If you face claims that you have failed in your responsibilities as a retirement plan sponsor, the only type of protection that shields you personally is Fiduciary Liability Insurance—-with it, you’ll be armed with coverage for defense and penalties. Without Fiduciary Liability Insurance, your personal assets are exposed.
Help For Retirement Plan Sponsors
Colonial Surety Company offers an efficient and affordable Fiduciary+ Cyber Liability Insurance bundle specifically to protect retirement plan sponsors. For a few dollars a day, you’ll be armed with:
- $1,000,000 for Defense and Penalties if you are faced with alleged or actual breaches of fiduciary duty.
- Cybersecurity Coverage for the business and plan, which addresses Department of Labor recommendations, and includes expert response services to curtail damage after an incident.
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