Does your 401(k) plan expose you to hidden risk?

By Chris Kleman, Affluent Segment Executive, and John Lennon, Retirement Plan Services Leader, First Financial Bank

As a business owner, it’s likely that you have established a 401(k) retirement plan to help your employees prepare for their financial future, and to attract and retain top talent. But is the structure of your plan leaving you open to financial or even legal risk? 

When establishing a 401(k) plan, one of the many forms to complete serves the purpose of assigning fiduciary responsibility to you, the business owner. You become the legal sponsor of the plan. Unfortunately, many business owners do not put enough thought into what it means to serve as a fiduciary, for either the plan or themselves.

Two simple questions can put this responsibility into proper context. As the plan sponsor, can you articulate the selection of funds in the lineup of your plan? And would your explanation withstand scrutiny if the plan is audited?

These questions point to the level of responsibility and liability plan sponsors are accepting, which can have serious implications later. In the most extreme examples, plan  participants have taken legal action against employers over management of a retirement plan or the selection plan or the selection of investment options, and this scenario has become more frequent in recent years.

The issue has its roots in the 1974 Employee Retirement Income Security Act (ERISA), which established the rules for employer-sponsored retirement plans. When you sponsor a retirement plan for your employees, you become the fiduciary for that plan. This means that you carry the responsibility for managing the money in the plan on behalf of your participants and their beneficiaries. Business owners who are fiduciaries can be held personally liable for the decisions they make in the plan.

Like all business owners, you wear many hats and may be less focused on the oversight of your retirement plans. Nonetheless, challenges to the management of these plans are becoming increasingly common. They may come from your employees, or even children of the plan participants, who may object to how the investment decisions in the plan have affected the size of their parent’s nest egg.

Fortunately, there are steps you can take to mitigate the risk you may face as a fiduciary. As the plan sponsor, you have the option to bring in an advisor for the plan, or to appoint a manager to oversee day-to-day decisions about investments in the plan. 

The highest level of protection comes from selecting an investment manager, as called for by section 3(38) of the ERISA law. These 3(38) investment managers assume authority for selecting selecting and changing investments in the plan. As the plan sponsor, you still have fiduciary responsibility and are responsible for monitoring the 3(38) investment manager's adherence to the plan. 3(38) advisors are popular with small businesses who may not have the staff available to oversee a plan.

Another option is to work with an investment advisor, as described by ERISA section 3(21). 3(21) advisors provide investment advice, but unlike 3(38) advisors, the responsibility for ultimately making investment decisions in the plan remains with you, the plan sponsor.

Regardless of which structure you choose, we find that growing businesses benefit simply from talking with an expert about their plans. For example, a 401(k) plan that was established in the early days of the business may no longer have the most appropriate structure after several years have passed. Many business owners are unaware they can adjust variables in the plan, such as eligibility, employer match, profit sharing, and others. To learn which levers to pull, we ask businesses broad questions. Why do you have the plan? Do you use it to recruit? To retain talent? Does it servce as a tax shelter?

Retirement plans should be living, breathing documents that change as your business changes. Diving in to all of these questions – from fiduciary responsibilities to individual features within the plan – can help to ensure that your plan is continuing to meet the needs of your business as it grows.

For more information, contact Chris Kleman at Chris.Kleman@bankatfirst.com or 513-979-5876. Contact John Lennon at John.Lennon@bankatfirst.com or 513-979-5872.

First Financial Bank is a Goering Center sponsor, and the Goering Center is sharing this content as part of its monthly newsletter, which features member and sponsor articles.