Those who operate a retirement plan face significant potential liability and risk, cautions a new Lockton report, “Fiduciary Risk Mitigation: Six Best Practices for Retirement Plan Sponsors.” Two of the independent and privately owned broker’s retirement plan consulting experts, Steve Kjar and Jessica Skinner, co-authored the report, which identified six best practices that can help both plan sponsors and individual fiduciaries avoid risk and reduce their liability. 

Retirement plan sponsors obviously count on brokers and advisers to help them understand and meet their fiduciary responsibilities and obligations, as well as mitigate the risks associated with these fiduciary standards, observes Kjar, vice president and retirement plan consultant for Lockton Financial Advisors, LLC in San Francisco.

Producers also need to “help implement processes and oversight to meet these obligations,” he says, noting that those who document those efforts on an ongoing basis “are protecting plan fiduciaries and mitigating these risks.” Plan evaluations extend to investments, administration, payroll procedures, expenses, services and revenues.

Kjar and Skinner suggest six best practices:

  1. Get help. Plan fiduciaries need to seek assistance from dedicated retirement plan advisers if they lack the necessary expertise to fulfill their expected responsibilities. Experts should possess the following characteristics: specialization, experience, expertise, a willingness to accept fiduciary responsibility and vendor knowledge.
  2. Form a Retirement Plan Committee (RPC). Members of the committee have the power to act on behalf of the plan and are expected to hold regular committee meetings, as well as document all of their discussions and decisions.
  3. Write an Investment Policy Statement (IPS). An IPS provides a roadmap for the RPC to select, monitor and replace funds.
  4. Understand your contracts, services, expenses and revenues. Plan fiduciaries are advised to read and understand the services provided under vendor contracts; benchmark fees and ensure they are reasonable; and track revenues that investments pay to recordkeepers and compare them to plan expenses.
  5. Know your plan. Administration must follow the plan document and staffers are expected to understand the plan. It’s also vital that contributions are made on a timely basis and an attorney is hired to amend the plan if it does not meet the sponsor’s objectives.
  6. Are you a fiduciary? It’s critical to know not only what is required to be a plan fiduciary, but also who the co-fiduciaries are and that the plan is following a documented process. One other necessary step is to obtain the appropriate fiduciary insurance and ERISA bonds.

Personal liability

Increased government oversight, including a recent U.S. Department of Labor plan to broaden the definition of a fiduciary for the purpose of dispensing investment advice, could have a significant personal impact on benefit advisers.

Kjar explains that “some consultants currently accept a level of fiduciary responsibility. Many do not. The proposed changes could force those that do not to accept fiduciary responsibility with their retirement plan clients.

“The question then becomes,” he continues, “will your broker-dealer permit you to accept this responsibility? Do you have a documented process that makes you comfortable with this additional responsibility? There is additional potential liability for the consultant who accepts this responsibility. Consultants who are not comfortable with this additional risk place their retirement book of business in jeopardy and consultants who do accept the responsibility increase their liability and the oversight responsibility they have with their clients.”

The report also cited several high-profile lawsuits and settlements as evidence that “there is significant potential liability for a breach of fiduciary duty.” They include a federal judge’s ruling that Edison International failed to negotiate lower plan fees with the company’s 401(k) plan vendor, as well as settlements over excessive fees at Bechtel ($18.5 million), Caterpillar ($16.5 million) and General Dynamics ($15.1 million).

In addition, a recent U.S. Supreme Court decision was noted for how it now enables individual participants to sue plan fiduciaries in stark “contrast to the historical practice of courts only allowing classes of individuals or individuals representing the plan as a whole to bring suit against a fiduciary.”

Kjar and Skinner conclude that “fiduciary risk mitigation, simply put, is the application of best practices in the administration of your plan. Implementing these best practices will reduce the liability of the plan sponsor and individual fiduciaries, while at the same time creating a more efficient and effective plan for you and your participants.”

Lockton provides a range of retirement plan consulting and advisory services to more than 800 qualified and non-qualified plan sponsors with more than $12 billion in assets under management. The firm, which employs more than 3,800 professionals, is the world’s largest privately held insurance broker and 9th largest overall.

— Bruce Shutan is a freelance writer based in Los Angeles.

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