As the investment options offered to retirement plan participants continue to undergo intense examination in the face of a swell of lawsuits, experts encourage plan sponsors to consider “layering.” Effective layering on investment menus provides participants with structured choice making opportunities—and clarity.
Fundamentals: A Refresher
The legal team at Nelson Mullins Riley & Scarborough reminds us: “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.” Getting the options offered to participants right, is a big challenge for plan sponsors. ERISA litigation continues to examine how the investment options are selected, benchmarked, and, if warranted, removed from the plan. Allegations against fiduciaries include not just failure to prudently monitor, but also failure to promptly remove poorly performing investments from the menu. Experts point out that too many overlapping choices is risky for fiduciaries—and confusing for participants. This is why layering the options on retirement plan investment menus can be very useful. As Steve Vernon, a consulting research scholar at the Stanford Center on Longevity explains:
The first layer is an asset allocation fund, such as a TDF. From there, the plan sponsor should include three to six investment options for participants who want to allocate on their own. The final layer is a brokerage window where participants can select from any mutual fund, exchange-traded fund, and individual stocks and bonds…An additional benefit of layering is that it could target personalized asset allocations and risk tolerance for participants by accounting for outside assets…“This layering approach lets people have a one-size-fits-all fund which would be target-date fund, or a mix your own assets depending on their overall savings situation…” Among the three to six investment options to allow for diversification without more complexity, plan sponsors could include a broad-based stock fund, a broad fixed income fund, and a stable value or money market fund for principal protection…
No matter how diligent we are in reviewing investment options, as plan sponsors, 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 affordable 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 is less than the cost of just one hour with an ERISA lawyer in the face of a lawsuit. Get protected in minutes, now: Fiduciary Liability Insurance Here.
Important to Remember
Legal experts remind us 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.” Breaches of this duty can result in personal liability for related losses.
Remember too that although some 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.
Given the fiduciary risks inherent in the role, 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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