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Fiduciary Responsibilities of Employers

Fiduciary Responsibilities of Employers

Employers (Plan Sponsors) have significant fiduciary responsibilities when managing defined contribution (DC) plans, such as 401(k) and 403(b) plans. Failing to meet these responsibilities can result in serious liabilities, including lawsuits and regulatory penalties.

Key Fiduciary Responsibilities of Employers – under ERISA (Employee Retirement Income Security Act), employers must act in the best interest of plan participants:

Acting in the Best Interests of Participants

  • Employers must manage the plan solely for the benefit of employees and beneficiaries.
  • Decisions must be made with prudence, care, skill, and diligence.

Selecting and Monitoring Investment Options

  • Employers must choose diverse, low-cost, and suitable investment options.
  • Regularly reviewing fund performance and fees to ensure they remain competitive.

Controlling Plan Fees and Expenses

  • Excessive fees can reduce employees’ retirement savings.
  • Employers must regularly (every three to five years) benchmark fees and negotiate with service providers.

Ensuring Compliance with ERISA and IRS Rules

  • Following contribution limits, non-discrimination testing, and timely remittance of employee contributions.
  • Keeping the plan in compliance with changing regulations like the SECURE 2.0 Act.

Providing Proper Employee Communication and Education

  • Employers must ensure participants receive clear, accurate information about their plan options.
  • Failure to provide sufficient education can lead to liability if employees claim they were misled.

Fiduciary Liabilities and Risks for Employers – failing to meet fiduciary responsibilities can result in:

DOL Audits and ERISA Violations

  • The Department of Labor (DOL) can investigate and fine employers for non-compliance.

Employee Lawsuits

  • Participants can sue if they believe plan mismanagement led to financial harm.

Personal Liability for Fiduciaries

  • Fiduciaries can be held personally liable for losses due to mismanagement.

How Employers Can Reduce Fiduciary Risk

Hire Professional Advisors

  • Consulting third-party fiduciaries, financial advisors, or recordkeepers can help mitigate risk.

Establish a Formal Investment Policy Statement (IPS)

  • Outlines criteria for selecting and monitoring investments.

Document All Decisions

  • Keeping records of plan decisions, reviews, and changes helps in case of legal scrutiny.

Regular Plan Audits & Benchmarking

  • Conduct periodic reviews of investments, fees, and compliance measures.

Fiduciary Liability Insurance

  • Protects against personal liability for fiduciaries in case of lawsuits.

If you are interested in learning about how you can mitigate your fiduciary liabilities, contact us. We also offer a complimentary fee analysis so you can benchmark your current plan fees.