You may be helping small business clients manage their 401(k) plans or even contemplating building a practice in this area. But are you taking adequate compliance steps to protect your clients or yourself from potential litigation?
Some plan sponsors and financial advisors acting as fiduciaries are putting themselves at big risk, says James Holland, director of business development for Millenium Investment and Retirement Advisors LLC. The Charlotte, N.C.-based independent employee-owned investment advisory firm provides fee-only consulting services.
The average cost of paid claims on a breach of fiduciary duty case is $994,000 with an average reported defense cost of $364,000, according to the Tillinghast-Towers Perrin 2003 Fiduciary Liability Survey Report, cited by Millenium.
Being ERISA compliant will get even more challenging next January when the U.S. Department of Labor's Rule 408(b)(2) kicks in. Providers and sponsors of plans subject to ERISA will have to clearly disclose services provided, explain fees, reveal conflicts of interest and indicate who's acting as plan fiduciary--a definition currently being re-examined by the Labor Department.
So what should fiduciaries be doing to protect themselves?
Performing due diligence of 401(k) providers to review costs and conflicts, purchasing fiduciary liability insurance, closely monitoring funds and providers, and setting up an ERISA expense account to identify and capture excessive fees are just some of the actions listed on a new mini due diligence worksheet created by Millenium.
The firm, which assumes the role of plan sponsor with limited or full scope fiduciary responsibilities depending on client needs, also includes on its continuously updated worksheet links to current information from various industry, government and financial media Web sites.
To monitor funds and investments, Millenium strongly recommends getting independent reviews on a quarterly basis from a fiduciary or advisor who has no affiliation with the plan provider.
Every plan should use an ERISA budget or expense account to track and pay the record keeper, third-party administrator, broker, independent fiduciary or advisor, and, if the plan has more than 100 participants, its auditor. With an average $10 million plan, Millenium generally finds $100,000 that can be moved into the plan sponsor's ERISA budget account.
Plan sponsors may be able to substantially reduce annual fees by using an institutional share class rather than retail shares if possible; requesting a flat dollar rather than basis-point fee arrangement with a record keeper or fund company; and using open architecture, which keeps all services separate, says Holland.