401(k) Plans And The Fiduciary Standard

37682886_sMy daughter Maeve has started to babysit. It’s hard for me to believe, as I still think of her as my baby. Nevertheless, she has been asked by family friends to start watching their kids. Before she said yes, Jill and I talked to Maeve about how babysitting is a huge responsibility. We drilled it into her head that her job does not end once the kids go to bed. We explained that parents place a lot of trust in babysitters and rely on them to keep their kids safe, even after the hard work has been finished. To put it simply, we told Maeve that she needs to stay alert and continue to check on the kids even after they have gone to bed. We explained that she has an ongoing responsibility to the parents and their children that does not end until she is home. Maeve is in a position of trust.
While Maeve may understand her responsibilities, I find that many folks who are in a position of trust do not always fully understand their responsibilities.Let me give you an example. Employers are often placed in a position of trust with respect to their company’s 401(k) plan. Unfortunately, until recently the responsibilities associated with that position have not been fully understood.
Well, that is about to change.
With the decline in company pension plans over the past 35 years, the 401(k) has become the “go to” vehicle to fund retirements. It is also one of the easiest vehicles by which an investor can enter the complicated investment world, since there is usually little choice and limited flexibility allowed with a 401(k).
With a 401(k), the plan sponsor or employer must exercise prudence when selecting a specified list of investments for the employees to choose from. That selection is frequently made with the “help” of an advisor and often consists of mutual funds. Usually, employees then simply decide how much they want to funnel into their plan, with little understanding of market cycles and downside risk management.
Many business owners believe they have fulfilled their fiduciary duty with respect to their offered 401(k) plan by exercising diligence when selecting those investment options. But some may be surprised to learn that a plan sponsor also has a continuing duty to monitor those investments and to remove imprudent ones. Their responsibilities are not fulfilled merely by carefully selecting the investment options.
In a recent ruling, the US Supreme Court defined the duties of employers with respect to their company’s 401(k) plan. Among other things, employers must choose investments that they believe are the best possible selections for the plan and they must be prepared to defend those decisions. Furthermore, they must actively monitor the performance of those investments to ensure that they continue to be the best selections.
Let’s talk about how this lawsuit began. Back in 2007, employees of a California-based utility filed a lawsuit claiming that the company failed in its fiduciary duty to workers when selecting six mutual funds for the company 401(k) plan. As a fiduciary, that California-based utility/employer was under a duty to be sure those six mutual funds were the best available options for its employees, rather than simply being acceptable options. The workers in the California case referenced above argued that their employer breached its duty by choosing more expensive retail-class mutual funds when nearly identical and cheaper institutional-class funds were available.
This case draws attention to the ongoing responsibility required of a fiduciary, and holds companies accountable for meeting that fiduciary standard with respect to their 401(k) plans. Not only must the investment options be in the employees’ best interest at the time they are selected, but as mentioned above, they also must be monitored as time passes to ensure they continue to be in the best interest of the plan participants.
All employees should have the opportunity to invest their 401(k) savings in strategies that are both cost-efficient and designed to protect and grow their savings through downside risk management. Because markets move in cycles and new strategies become available, employers must fulfill their ongoing responsibility to plan participants by monitoring their retirement plan selections and strategies.
Now, before you go storming into your HR department demanding they meet the fiduciary standard, I want to be clear about something. Many employers are doing this already. This ruling simply affirms what the appropriate action is, and potentially increases the liability exposure for those companies not acting this way.
If you are a business owner, think of it this way: you are the babysitter. Your job does not end once you set up your 401(k) plan. You are in a position of trust and must continue to evaluate whether you offer the best choices for your plan participants. Just as we told Maeve to stay alert and to continue to check on the kids even after they have gone to bed, so must you. Remember, you are in charge.
Be vigilant and stay alert, because you deserve more.