What Every Business Owner Must Know About 401(k) Liability

I was completely shocked when I uncovered the full scope of the responsibility that my team and I had when offering a retirement plan to the employees here at Oak Harvest Financial Group. Even more shocking than the scope of the responsibility were the potential consequences civilly from regulatory agencies and even our personal assets potentially being jeopardized in some type of civil suit when it comes to breaching the responsibilities that we have when offering a retirement plan to the employees. If you’re in the HR department, an executive at your company, or the business owner, this may be the most consequential video you watch all year.

If you offer a 401(k) plan, a 403(b), an ESOP, a profit sharing plan, a defined benefit plan, any type of qualified retirement plan to your employers, you have two distinct fiduciary responsibilities. The first one is to administer the plan in their best interest. The second is a fiduciary responsibility with respect to the investment offerings inside that plan. In this video, I’m going to cover at a high level some of the fiduciary responsibilities you have from an administrative standpoint and also an investment standpoint, and cover some of the consequences that we’re seeing in the industry for HR professionals, for executives at companies, and also business owners.

We’re also going to cover some alarming trends that could impact you and your company. I’ve also made available a free report, which you can access the link in the description to download, where we go into much greater detail, and you can read on your own time.

I want to start with your responsibility from an investment management standpoint. You have a fiduciary duty to offer low-cost or reasonably cost funds inside your plan when compared to their peer group, as well as funds that perform the best relative to their peer group. You’re supposed to benchmark this and check this every single year. Many of you think you don’t have any responsibility when it comes to the funds that are offered inside your 401(k), but you not only have a responsibility to choose the best ones for your employees to offer, but you have a fiduciary duty to do this.

One quick example is UnitedHealth was recently sued, and they settled for $69 million because they offered one class of target date funds that, for years, was one of the poorest performing in its peer group. They ended up settling, the employee sued, and settled for $69 million. Now UnitedHealth is a very big company, but what we’re seeing in the industry right now, which is quite alarming, is that attorneys, opportunistic attorneys, are sifting through all of your publicly available information and finding those of you who are offering funds that do not meet their performance targets with respect to their peer group, as well as have hidden or excessive fees above the industry averages.

They’re either filing suit or they’re sending demand letters out to small and medium-sized businesses with the thought process that it’s going to be much easier for you to settle ahead of the actual lawsuit being filed as opposed to going through the headache and all the costs of the lawsuit, and then potentially losing some type of judgment. What these attorneys are doing is actually recruiting your employees or your former employees in some type of class action suit or to make a claim against you that you cost them money by not acting in their best interest in your role as a fiduciary.

To summarize, your fiduciary duty when it comes to investment management, and this is regardless of whether you have any investment experience or not, but you have a fiduciary duty to every single year, manage the funds inside your retirement plan, the ones you offer to your employees and make sure that they are the lowest cost and best performing relative to their peer group. If you don’t do this and you don’t have a record of benchmarking these, you are potentially victim of some opportunistic attorney or a full lawsuit or even the Department of Labor through their EBSA division, the Employee Benefit Security Administration, their enforcement division, potentially levying fines and penalties.

In addition to these civil penalties and potential lawsuits, the Department of Labor, which oversees all retirement plan administration in this country, has a focus on those employers who are in breach of their fiduciary responsibilities, either from an investment management side or an administrative side. You also have the threat of regulatory action, enforcement action against your company. Now, here’s the kicker. If you’re the plan sponsor or the person who signed the 5500, and you need to identify who this is, you sign that 5500 every single year, not only is the company in jeopardy of potential fines and civil litigation, but your personal assets could also be named in a lawsuit.

I want that to sink in for just a second. This is one of those rare instances where your personal assets are not insulated from the activities that take place in your company. If you sign that 5500, if you’re in the HR department or you’re an executive at your company, you bear this civil liability personally, as well as the company professionally. This was the case at our company before we made these changes to remove the fiduciary responsibility from our plate. I was the plan sponsor, and our compliance officer signed the 5500. Both of us were in jeopardy, not just professionally, but our personal assets.

If something happened, we could lose our personal investments, our personal savings, because of the actions that took place, because we offered a 401(k) plan. The worst part was we did not have any idea the scope of the responsibility or the potential consequences for a breach of the fiduciary duty because we didn’t fully understand all of the fiduciary duties that came with offering a retirement plan. Not only were we able to remove the fiduciary responsibility entirely from our shoulders from an administrative standpoint, but we were also able to reduce the cost that our employees paid for the 401(k) plan.

Many of you may not be aware, but when you start a 401(k) plan, you have to choose if you want to pay the cost yourself or have the cost deducted from the plan. This is how a lot of the record keepers and third party administrators and different people who have their hands inside your plan, this is how they get paid. Those expenses, when they come out, they’re very, very difficult to identify. The plan, the record keepers, the administrators, the people that you hire, maybe it’s Voya or ADP or Hancock or any number of the providers out there, they fill out those forms for you, they submit them annually, and you sign them under penalty of perjury.

You have a responsibility to make sure that the information that they’re putting on those forms is accurate, that the cost that they’re reporting is accurate, because you have the fiduciary responsibility to actually oversee the people that you hire to offer these services to your employee. We were able to completely remove this from our plate, and we were able to do it at a lower cost than our employees were paying to the 401(k) providers, and we didn’t have to change any of the 401(k) providers that we had. We were able to reduce the cost, remove the fiduciary duty, and do so without changing 401(k) providers. The process was very, very simple.

The second fiduciary duty you have is the administrative duty. Now, if you’re like me, not only did I not fully understand all the tasks that I was responsible for and my team was responsible for, but I wasn’t aware that I had to oversee the administrators that we hired to manage our 401(k). In addition to that, I was completely unaware that it was my responsibility to not only identify the costs that our providers charged, but then each year compare those costs to other providers in the marketplace to make sure that what my employees were paying was reasonable given the service that they were receiving and how other benefit providers in the marketplace compared.

Some of these administrative responsibilities are signing the 5500. I want you to check your 5500. You have to know where this document is, but whoever signed that does have these fiduciary responsibilities along with the plan sponsor, but making sure that all of that information is filed accurately, managing hardship withdrawals, loans from the 401(k), amending the documents whenever there are legal changes, but most importantly, making sure that the providers who are doing this service a lot of times for you, that they’re doing it accurately and at a reasonable cost.

Typically, your providers will provide a list of services and what we’ve seen is that they don’t clearly communicate the responsibilities a lot of times that you still have on your plate. If something is not done either accurately or on time, you, the plan sponsor, or the person who signed the 5500 is ultimately responsible. Again, it’s not just the company that could be financially in trouble, it’s your assets personally that could be jeopardized.

I hope this information was as eye-opening for you as it was for us. Once we uncovered it, we took immediate action to remove that fiduciary responsibility, and we were able to do so while also creating a savings from our plan with respect to all the costs that we were paying, that we had no idea that we were paying. The Department of Labor actually recommends it is their guidance for you to hire outsourced fiduciaries. In our research and understanding of the outsourced fiduciary marketplace, we quickly learned that not all outsourced fiduciaries were the same.

You have what is known as a 3(16). Some of them will or will not remove all of the fiduciary responsibilities. Some of them will sign the 5500. Some of them will not. Some of their agreements with you, they may sign the documents and take that fiduciary responsibility, but they may limit through some type of arbitration clause or an indemnification clause, their financial responsibility if you get sued. You have the 3(16). Not all of them are created equally. You have a 3(21), a 3(38), and most importantly, you have what’s called a 402(a).

I’ve made available to you a free report that you can access in the description by clicking on the link that goes into greater detail to help you understand what you can do right now, the actions that you can take to protect yourself and your company from the dangers that exist.