Everyone makes mistakes and that’s just part of being alive and ticking. Nonetheless, retirement plan sponsors have to try even harder to avoid mistakes: that’s because we are responsible for the retirement savings of plan participants (and their beneficiaries too). As fiduciaries, it’s truly best to “leave no stone unturned” when it comes to identifying and addressing the possibility of errors. Read on for advice about common mistakes and how to avoid them.
Making and Monitoring Decisions About Money
As ERISA fiduciaries, retirement plan sponsors are obligated to be even more careful with the funds entrusted to us by employees than we are with our own money. That’s a big responsibility–and one that it is wise to take seriously. Of course, as Steve Sansone of Sage View Advisory points out: “Even the most well-intentioned Plan Sponsors can make mistakes that may result in costly consequences, such as increased plan expenses or potential legal liabilities. By understanding and addressing these pitfalls, Plan Sponsors can significantly improve their fiduciary oversight, reduce risks, and ultimately offer a better retirement plan for their employees.”
Neglecting the Investment Policy Statement (IPS) for the retirement plan is one of the errors that Sage View Advisory finds that plan sponsors frequently make. Plan sponsors can lean into the importance of the Investment Policy Statement by both ensuring it is comprehensive and up to date, and actively implementing it:
An IPS is a crucial document that guides the selection, monitoring, and replacement of plan investments. It should outline the purpose of the IPS as well as the Plan, the responsibilities of the various parties involved in the investment selection and monitoring process, the investment choices including the selection of the QDIA, the criteria for selecting and evaluating investments including both the quantitative and qualitative factors used for that selection, the ongoing evaluation methodology and monitoring process for the investment policy, and fund performance, to name a few. The IPS is another key component of demonstrating how plan fiduciaries are meeting their responsibilities, as well as seeking ways to continually improve the plan. The only thing worse than not having an IPS is having one, but not following its policies and procedures. It is important for plan fiduciaries to review the IPS periodically to ensure that it is being followed.
Benchmarking the features, services, and fees of the retirement plan against what is available on the market is another essential area of responsibility that plan sponsors tend to fall short on, according to Sage View Advisors, who point out: “The Retirement Plan Industry and its Service Providers are in constant motion. Three years can be a lifetime when it comes to features offered, services provided and fees charged to the plan….Unfortunately, all too often, Plan Sponsors do not take the necessary time to benchmark their plan on any of these levels and participants end up missing out on newer features or plan designs available or by higher costs paid.” Pointers from Sage View Advisors about when and how to benchmark the retirement plan include:
- There are essentially three ways to benchmark your plan – a paper based version comparing similar type/size plans to published data, working with an Advisor to perform a limited-scope review of the top 3-5 Plan Providers in the industry, or conducting a full scope Request For Proposal (“RFP”) process that includes preparing the questions for Service Providers to respond to, reviewing those responses, narrowing the field down to several candidates, and holding one or more rounds of presentations before deciding on a winner.
- Some form of review needs to happen every 3-5 years to ensure that your plan remains “fresh” and current from plan design to investment offering, and costs paid.
- Failing to benchmark, review, and substantiate reasonable fees can cause an erosion of the value held by plan participants, as well as be a fiduciary and compliance issue if fees are found to be excessive.
Legal Precedent+ AI: More for Plan Sponsors to Worry About
Courtroom wins and settlements brought against plan sponsors on behalf of retirement plan participants have created a highly litigious environment—-and a lucrative path for plaintiff attorneys. With AI making it easier and faster to identify possible mistakes vis a vis the exceptionally high standards of ERISA law, retirement plan sponsors have little room for even minute oversights, as risk management expert, Dick Clarke underscores: “Entrepreneurial-minded attorneys are flocking to uncover breaches of fiduciaries’ ERISA duty, statutory prohibited transactions, or other statutory violations, hoping to access the trillions of dollars held in private retirement plans. Opportunistic attorneys even go fishing for ERISA violations by casting their litigation netting far and wide.” In fact, defense attorneys at Jackson Lewis are now describing ERISA litigation as a “bet the company” concern for businesses nationwide.
Though allegations and investigations against plan sponsors are not automatic indications of errors or wrongdoing, mounting an ERISA defense is disruptive and costly: “For SMBs, a $200K compliance penalty or settlement can be devastating. For individual fiduciaries, it can be catastrophic, with legal defense costs averaging about $600 per hour.” Dangerously, many business owners continue to forgo protection, not realizing that as ERISA fiduciaries, they can be held personally liable. Traditional business insurance coverages do not provide defense against ERISA allegations, prompting experts to stress: “Fiduciary liability insurance is an indispensable measure to ensure sponsors and their businesses are protected with defense costs and penalty limits. Without such protection, plan sponsors are on the hook for costs….”
Colonial Surety Company makes it efficient and affordable for retirement plan sponsors to obtain Fiduciary Liability Insurance, and for further protection, we even include Cyber Liability Insurance at no extra cost. When armed with our Fiduciary+ Cyber Liability Insurance bundle, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000. Plus, the Cyber Liability Insurance provides breach response services, ensuring implementation of obligatory investigation and notification procedures, and offering coverage against lawsuits and regulatory actions.
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Serving customers since 1930, Colonial Surety Company is the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time. Colonial Surety Company is rated “A Excellent” by A.M. Best Company, US Treasury listed and in business all across the country.