Retirement plan sponsors may find some consolation from knowing that they are not alone in their fears of being swept up in ERISA litigation, despite their diligence. Unfortunately, analysis finds that when fear results in a reduced menu of investment options, the account balances of plan participants are negatively impacted.
Overly Protective?
In reaction to the wave of costly allegations over “inappropriate investments” in 401 k plans that began in 2006, many plan sponsors have sought to reduce risk by limiting investment menu options. However, one ten-year analysis of 401k savings has found that reduced options is not a magic wand for plan participants and their retirement savings:
On average, having access to…higher-volatility investment options increased participants’ retirement wealth by roughly 3%. For individuals who did not have access to mid-cap funds…the average account balance in a 401(k) plan was roughly $75,000, controlling for salary, age and other factors. But for individuals who did have access to these funds, they had a much higher average account balance of more than $100,000.
Of course, when more volatile investments are available to participants, success is no guarantee, either, especially if allocations do not reflect a careful balance of funds. Because plan sponsors retain their status as fiduciaries, even when plan services are outsourced, risks can never be fully eliminated, but they can be significantly reduced via liability insurance. At Colonial, a whole year of Fiduciary Liability coverage is less than a few dollars a day, and we even include Cyber Liability coverage to further protect the business and retirement plan.
Armed with Colonial’s liability coverage, 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. Protect yourself and your business, for a few dollars a day, now:
Obtain Fiduciary With Cyber Liability Insurance Right Here
Good To Know
ERISA litigation from 2006-2015 predominantly involved allegations that “plan sponsors were violating their fiduciary duty by including ‘inappropriate investments’ in their plan,” whereas more recent litigation has “tended to allege excessive fees from a particular investment product, such as target-date funds.” Under the high standards of ERISA law, one important way for plan sponsors to demonstrate the fiduciary duty of prudence is through regularly benchmark the 401k’s service providers and fees. Although this can be time consuming, AI is making benchmarking easier.
As AI is leveraged to make work easier, it remains critical for 401k plan sponsors to fully understand their fiduciary responsibilities and utilize the compliance assistance offered by the U.S. Department of Labor. Since mistakes and oversights can occur despite diligence, best practice includes periodic plan audits. When oversights are discovered in a timely way, the DOL’s voluntary correction procedures, made easier under SECURE 2.0., help plans attend to them, before errors escalate into investigations and allegations.
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