Top 10 fiduciary misconceptions among 401(k) plan sponsors

These may be more problematic than fiduciary mistakes

Sep 25, 2019 @ 5:37 pm

By Fred Barstein

The level of confusion about ERISA fiduciary liability among employers that sponsor defined-contribution plans with less than $250 million in assets cannot be overstated.

That's not judgmental — it's just reality. It's not surprising that generalist human resources or finance professionals who have little to no training and are juggling 10 jobs wouldn't be fiduciary experts. That's why they rely on providers and advisers to help.

While mistakes may result in fines and penalties, misconceptions can lead to bad results for the organization and its employees. Bad advice from a plan sponsor's trusted third party, whether intentional or negligent, can produce inertia and a lack of trust in the entire system.

Here are the top 10 fiduciary misconceptions based on importance or what is most common, in reverse order.

Good results trump process.

If the plan is successful and employees are on track to retire, who cares if a prudent, documented process is not followed? The Department of Labor, for one. Maybe the judicial system for another. Great performance from risky investments doesn't mean much if those investments aren't properly diversified and proper fund share classes aren't utilized — this will likely cause fiduciary problems even if results are outstanding.

A prudent process trumps results, whereas results don't overcome the lack of prudent process. Courts and regulators are reluctant to second guess plan sponsors in hindsight if they follow proper procedures.

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It's always better to encourage terminated employees to leave the plan.

Not necessarily. The larger account balances of retiring employees can make the plan more attractive to providers and advisers who base pricing on assets, with costs being driven by active participants. Sure, plan sponsors may want to get rid of troublesome ex-employees who may be hard to locate in the future, especially those with small account balances. But it wouldn't be accurate to make a blanket policy for all plans. Plus, fiduciary liability plus costs can be managed.

Auto plan features increase my fiduciary liability.

Though auto features done right do not result in increased fiduciary liability, plan sponsors are still wary of them, whether they are concerned about being paternalistic or about incurring fines if mistakes are made (like not enrolling eligible employees). Greater costs resulting from more match contributions are a big issue, too.

If my adviser is a co-fiduciary, I am protected.

Put another way: All fiduciary advisers are created equal. First, there's different level of protection for a 3(38) versus a 3(21) investment fiduciary (or a discretionary versus a nondiscretionary investment adviser to an ERISA plan). Secondly, the fiduciary adviser may not have the experience or qualifications, which ultimately comes back to the plan sponsor that selected them. If the adviser is not part of an organization with deep pockets or does not have proper insurance, the plan sponsor might be on the hook even if it did everything right. No one said ERISA was fair.

I can't accept lower record-keeping pricing if proprietary funds are used.

This truism seems logical but there's nothing wrong with negotiating lower administrative fees in exchange for using a provider's proprietary funds — with a couple of caveats. The funds must pass the plan's investment policy statement on their own merits and the provider must not be a fiduciary.

Cheaper is better — I have to choose the low-cost provider.

With a hyper focus on fees, it's easy to understand why plan sponsors can become confused, especially when it comes to index funds. Some elite plan advisers still tout their ability to beat up providers on costs. But the courts and the DOL will not question a reasonably priced fund or provider chosen through a documented, prudent, periodic process. Which leads to…

Price is not important.

This is also not true, especially when it comes to share-class optimization. This should now include a comparison of collective investment trust funds that use the same investment strategy. Price paid should be a function of the quality of the service received based on the relative buying power of the plan.

All 3(16) fiduciaries are created equally.

Administrative 3(16) plan fiduciaries technically have the power to hire and fire providers and advisers. So how can a record keeper, third-party administrator or adviser be a 3(16)? They are limited 3(16)s — they're only able to sign and process documents and notices. This is still important, but confusing.

3(38) fiduciaries are always better than 3(21).

There's greater protection with 3(38) services but some plan sponsors may not want to delegate decision-making because they think they know what's best for their employees. Plan sponsors can rely on the recommendations of a 3(21) fiduciary but they cannot rubber-stamp them. Which leads to the granddaddy of all ERISA fiduciary misconceptions ...

I can outsource all my fiduciary liability.

The statement "I have to be a prudent expert myself" is equally false. Plan sponsor fiduciaries can select third parties like advisers and providers to help them fulfill their duties — which is, by the way, a fiduciary decision. But they can never, ever relieve themselves of all fiduciary liability. Even if they hire a 3(38) and full 3(16), plan sponsors are responsible to make sure that the third party is qualified and is fulfilling its duties.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews' Retirement Plan Adviser newsletter.


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