Plan sponsors are avoiding a safe harbor

Upon implementation of the Pension Protection Act one year ago, sponsors of 401(k) plans gained the opportunity to limit their liability for advice given to participants under eligible investment advice arrangements. But I have yet to see a single EIAA, and I don’t expect many to be adopted, even after the Department of Labor provides anticipated guidance on the subject.

The problem with the EIAA safe harbor is that it forces a plan to take a thorough top-to-bottom look at itself, an experience I equate to standing in your underwear in front of a full-length mirror and examining your flaws under the unforgiving glare of a battery of fluorescent lights.

The safe harbor holds the plan sponsor blameless for the investment advice participants receive if something bad happens despite the sponsor’s good-faith efforts to select and monitor the advice giver (a fiduciary adviser) wisely. To select and monitor the fiduciary adviser properly, the sponsor must think about the fiduciary fitness of the whole plan.

Advice provided under an EIAA is based upon processes the sponsor and/or the fiduciary adviser have put in place to address:

 Proper asset allocation.

Sound due diligence to select and monitor investments.

Consideration of the participants’ risk tolerances and return expectations.

Consideration of investments held outside of the plan by participants.

The reasonableness of fees and expenses.

Potential conflicts of interest among financial service providers.

Even if the plan sponsor doesn’t recognize the importance of taking a comprehensive view and putting the proper processes in place, the financial adviser had better understand the need to do so. The adviser is a co-fiduciary to the plan. If the products and providers supporting the plan are lousy, the only good advice he or she may be able to give is to stay away from the plan until it is improved. In that case, by the way, the financial adviser should probably follow the same advice.

The Pension Protection Act helps ensure conformity with the terms of the EIAA safe harbor by requiring an annual audit of the advice arrangement between the financial adviser and the sponsor. That’s an issue for self-conscious sponsors: The prospect of an annual audit conjures up images of an in-your-skivvies review. Hiring an independent auditor to bear witness annually as to whether everyone’s good intentions have been accompanied by faithful action is probably enough to prevent all but the most well-managed plans from entering into an EIAA.

In my view, the EIAA safe harbor yields two significant benefits for plan fiduciaries who adopt it. First, it gives them added confidence that they are doing what is expected of them under the Employee Retirement Income Security Act as fiduciaries. It also serves as notice to participants — and potential litigants — that the plan is proactively managing its fiduciary responsibilities.

Aside from being the right course for participants, proactive fiduciary management makes plans less vulnerable to claims of negligence or malfeasance. Other safe harbors offer these same benefits if their requirements are faithfully fulfilled. The unique audit feature of the EIAA is meant to help make sure that a plan’s fiduciary fitness is maintained.

Despite the temptation, a decision to forgo the EIAA and the attendant fiduciary audit won’t help a plan meet its responsibilities — just as closing your eyes won’t make you look better in front of the mirror. The safe harbor provides a disciplined means of reaching a necessary end, which is prudent management of plan assets for the exclusive benefit of participants and beneficiaries.

Of course, a plan can opt to save the administrative expense of formally implementing the safe harbor. But those that elect to do so must recognize that the core fiduciary responsibilities must still be met, and audits should be conducted.

None of us wants to look bad in front of the mirror. But the first step in addressing our flaws is taking an honest look at them.

Blaine F. Aikin is president and CEO of Fiduciary 360 LP in Sewickley, Pa.