When you sponsor a retirement plan, like a 401k, you are ultimately responsible for ensuring that participants receive all required information in a timely manner. This is true even if you outsource administration, including notifications to a third party: you must verify that information is complete, understandable and on time. Read on for a refresh on your obligations related to notifications.
Summary Plan Document and More
Although the Summary Plan Document (SPD) is likely the most well-known of the notifications required for retirement plan participants, it is far from the only one. In
Meeting Your Fiduciary Responsibilities, the Department of Labor (DOL) reminds us that the Employee Retirement Income Security Act (ERISA) specifically requires plan information to be given to participants, and, accordingly, spells out the documents that “must be furnished to participants and beneficiaries,” which include, but are not limited to:
- The summary plan description (SPD) — the basic descriptive document — is a plain language explanation of the plan and must be comprehensive enough to apprise participants of their rights and responsibilities under the plan. It also informs participants about the plan features and what to expect of the plan.
- The summary of material modification (SMM) apprises participants and beneficiaries of changes to the plan or to the information required to be in the SPD.
- An individual benefit statement (IBS) provides participants with information about their account balances and vested benefits. Plans that provide for participant-directed accounts must furnish statements on a quarterly basis. Individual account plans that do not provide for participant direction must furnish statements annually.
- An individual benefit statement provided by a defined contribution plan also must include two illustrations of a participant’s account balance as a stream of estimated monthly lifetime payments (as a single life annuity and a qualified joint and survivor annuity), at least annually. Model language is available.
To assist retirement plan sponsors in fulfilling their obligations related to keeping participants and beneficiaries properly informed, many pension professionals, ERISA defense attorneys, and third-party administrators offer guidance and even detailed calendars highlighting the timing of notifications. For example, Watkins Ross provides a helpful chart (Basic Plan Participant Disclosure Requirements for Defined Contribution Plans) and underscores: “It is extremely important that you follow the notices and required disclosures rules set forth by the U.S. Department of Labor (DOL), the Internal Revenue Service (IRS), and the Employee Retirement Income Security Act (ERISA). If you fail to provide them (or fail to provide them correctly), you may find yourself facing various legal, financial and operational consequences.” Examples of the consequences for plan sponsors who fail to fulfill notification requirements include:
The DOL may impose civil penalties for:
- Failing to provide required disclosures
- Providing incomplete information
- Providing incorrect information.
- For example, failure to provide a summary plan description (SPD) within the prescribed time frame could result in a fine of up to $110 per day for each violation.
Legal and Fiduciary Liability
Fiduciary Breach
Plan fiduciaries like you have a legal duty to act in the best interest of plan participants. If you fail to provide required notices, it could be seen as a breach of fiduciary duty. You could be subject to lawsuits or claims by participants, as well as enforcement action by the DOL or IRS.
Participant Lawsuits
Participants may choose to sue the plan sponsor, plan administrators, or fiduciaries. In these cases, they may seek damages for any losses suffered as a result of the failure to provide timely or accurate information.
Other potential consequences of errors and omissions related to the notification responsibilities of retirement plan sponsors include triggering IRS audits, reputational damage, and, importantly, loss of participant trust. Keep in mind that clarity builds trust, whereas sloppy, jargon filled, and poorly generated communications (word salad anyone?) are a detriment to plan participants. Relatedly, attorney Ary Rosenbaum urges plan sponsors to take the responsibility of actually communicating with participants ever more seriously:
Let’s be blunt: failing to communicate with participants isn’t just bad practice, it’s a potential fiduciary breach. ERISA requires sponsors to act prudently and in the best interests of participants. That doesn’t only mean picking low-cost funds or hiring a competent recordkeeper. It means making sure participants understand the benefit. Think about it: what good is a diversified investment menu if participants don’t know how to use it? What good is an employer match if employees don’t know it exists? Fiduciary duty isn’t abstract. It’s real, and it’s lived out in the day-to-day experience of participants. Saving a few basis points in fees doesn’t justify the erosion of trust. The irony is that many sponsors don’t even realize how much damage a lack of communication does until it’s too late. Employees stop participating. They complain to HR. Worse; they sue. Communication is the cheapest insurance against participant dissatisfaction and potential litigation.
High Expectations
ERISA sets high expectations for retirement plan fiduciaries, including plan sponsors. Even with extreme diligence, and excellent third-party services, mistakes are likely to occur. When they do, defense against ERISA investigations and allegations is costly, averaging upwards of $600 per hour.
Retirement Plan sponsors can never fully eliminate the risk of being held personally accountable to the plan, participants and beneficiaries. Outsourcing plan services does not free you from these risks: as a sponsor, you choose the service providers and remain ultimately responsible, and personally liable, for meeting ERISA standards.
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. Colonial Surety Company offers an efficient and affordable Fiduciary+ Cyber Liability Insurance bundle specifically to protect retirement plan sponsors. For an annual fee that’s less than just one hour with a defense attorney if trouble strikes, you’ll be armed with:
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