Investment Choices: Up To Participants?
No! The fiduciary responsibilities of retirement plan sponsors don’t stop with offering varied investment options and hoping participants get good results. Fiduciaries must exercise prudence with the options offered—and continuously monitor. Inaction comes with consequences. Remember too: the DOL requires “extreme caution” for crypto.
Fundamentals: A Refresher
As the Employee Benefits Security Administration (EBSA) reminds us, “The Employee Retirement Income Security Act of 1974 requires plan fiduciaries to act solely in the financial interests of plan participants and adhere to the standards of professional care in considering investment options for participants in 401(k) plans.” JD Supra explains that although specific investment options are not dictated by ERISA, the law “instructs fiduciaries to show the care, skill, prudence, and diligence that a prudent person would exercise when choosing an investment option to minimize the risk of large losses.”
Lawsuits continue to place intense scrutiny on how the investment options offered participants are selected, benchmarked, and, if warranted, removed from the plan. Allegations against fiduciaries include not just failure to prudently monitor, but also failure to act by promptly removing poorly performing investments from the options provided to participants. Inaction in the face of poorly performing investment options is proving to be costly. For example, Plan Sponsor has reported on a fiduciary breach lawsuit which required the company, its board of directors and its 401k investment and administrative committees to seek defense.
Summing up, experts at Nelson Mullins Riley & Scarborough LLP remind us: “Simply put, fiduciaries cannot shift their responsibility to participants to identify and avoid impudent investment options. Retirement programs like 401(k) plans offer investment option menus that participants can choose based on their risk appetite, financial goals, and retirement timelines, but a plan fiduciary is duty-bound to take independent and ongoing actions to ensure the prudence of those options. Most plan participants are not equipped to make fully informed decisions on plan options.”
As plan sponsors, no matter how diligent we are in reviewing investment options, we can never fully eliminate the risk of being held personally accountable for a breach of our fiduciary responsibilities. Defense against even an allegation of a breach is costly. Why take chances? With Fiduciary Liability Insurance from Colonial Surety, defense costs and penalty limits up to $1,000,000 are covered in the event of a lawsuit. We even include Basic Cyber Liability Insurance. Our annual premium costs less than just one hour with an ERISA lawyer if you are faced with a lawsuit. Get protected in minutes, now: Fiduciary Liability Insurance Here.
Though retirement plan participants—and service providers—may be pressing plans to add crypto options, the DOL has advised “extreme caution” with these options. Underscoring the potential volatility, security concerns and nascent regulatory environment, the DOL is establishing an investigative program to closely monitor plans that provide crypto options. Summing up the DOL’s “Compliance Assistance Release 2022-01” legal experts point out: “The Release’s strongly worded warning specifically targets plan fiduciaries. The Employee Retirement Income Security Act (ERISA) sets an elevated standard of conduct and care for retirement plan administrators. How elevated? “The highest known to the law” says the DOL. Under ERISA and other law, fiduciaries must act solely in the financial interest of plan participants. Any breach of that duty and those fiduciaries may be personally liable for any related losses.”
Because of the fiduciary risks they face regularly, protection is a best practice for plan sponsors. Colonial’s three point coverage package offers the greatest value, protection and efficiency. Conveniently, Colonial provides: the required ERISA bond to protect the assets of the retirement plan from theft; Fiduciary Liability coverage to protect you and your assets from personal liability; and, Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach. If you already have your ERISA bond, you can easily add on the Fiduciary-Cyber liability protections.
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