The Wall Street Journal-20080115-Running a Business- Quick Tips- Limiting Liability in Retirement Plans- Online edition
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Running a Business: Quick Tips: Limiting Liability in Retirement Plans; Online edition
From smSmallBiz.com
JAMES LARUE HAS been in and out of court for the past five years pleading his case of lost retirement dollars to just about anyone who'll listen. His situation and the questions it presents are so ponderous that recently even members of the Supreme Court gave a listen.
LaRue is suing his former employer, DeWolff, Boberg & Associates, for improper management of his 401(k) plan, which the Dallas consulting firm denies. LaRue says he instructed DeWolff to sell stocks owned within his 401(k) and move to cash during the tech-stock boom. LaRue contends that his former employer failed to do so, and as a result, he lost $150,000 worth of retirement savings.
The decision before the Supreme Court now is whether or not a single plan participant, in this case LaRue, can sue and receive money for a breach of fiduciary duty. According to the Employee Retirement Income Security Act of 1974 (or ERISA), this so-called "fiduciary duty," which is a legal relationship between two or more parties, requires that the "fiduciary" --typically a business owner or third-party administrator -- act in a prudent manner ensuring that a retirement plan provides retirement income for employees.
If the court rules in LaRue's favor, individuals will be able to bring claims as opposed to only being able to do so when everyone in the plan experienced a loss due to negligence or wrongdoing, which is the current recourse, says Carrie Byrnes McNichols, an attorney at Bryan Cave's Employee Benefits Group in St. Louis. "That could be potentially very costly to the company sponsoring the plan and will likely lead to increased lawsuits and potentially increased liabilities," adds McNichols.
The potential of this case, combined with a greater scrutiny of fees and expenses as well as increased transparency that will soon be required of defined-contribution retirement plans like 401(k)s, makes the onus of properly managing employees' retirement savings all the more important. Here are a few ways to do so and limit your liability in the process:
Unless you own a financial-services firm, it's probably a good idea to tap a financial advisor specializing in retirement plans for advice when considering offering employees a 401(k) plan, suggests Tim Meehan, president of Tim Meehan & Associates, a business and fiduciary consulting firm in Minneapolis. Devising retirement solutions for employees can be tricky and time consuming, as well as highly regulated. And remember, says Meehan, "even small businesses are treated like the big boys as far as regulatory compliance is concerned." The same degree of oversight of 401(k) plans is expected at both large and small businesses.
As a plan sponsor, says Fred Reish, head of the ERISA and benefits practice group at Reish Luftman Reicher & Cohen in Los Angeles, even if you hire an advisor you won't be able to avoid your fiduciary status. However, he adds, it is possible to share your liability. For example, John Hancock Retirement Plan Services, a unit of the Toronto- based Manulife Financial Corp., offers to warrant its investment options while some advisors will act as co-fiduciaries. As per John Hancock's warranty, all 401(k) plan fiduciaries are assured that available investment options and monitoring processes satisfy the prudence requirement established by ERISA. Further, John Hancock promises to restore plan losses and pay litigation costs related to the suitability of this process or its investment lineup. Similarly, a "co-fiduciary" generally offers to share your liability, should an error regarding investment diversity and other investment selection issues arise.
Be sure to settle on a plan provider only after you've had a look at the competition, says Stephen Rosenberg, head of the Boston-based McCormack Firm's ERISA practice group. He suggests seeking out at least three provider proposals. Business owners need to demonstrate that they put forth a reasonable amount of effort in selecting a plan provider. Fiduciaries don't have to make the best choice, he says, but they do have to make a prudent choice.
Additionally, figure out what competitors in your industry are offering in terms of 401(k) plans. Charles C. Ledbetter, the national business leader for defined-contribution advisors at Mercer in Denver recommends looking at benchmark studies for companies your size. He says trade publication PLANSPONSOR magazine and the Profit Sharing/401(k) Council of America, a national nonprofit association of companies and plan participants based in Chicago, are both helpful for identifying benchmarks.
Meehan, the fiduciary consultant in Minneapolis, adds that entrepreneurs need to be able to document their efforts. "It can be as simple as starting a file," he says. "Given the fact that you can't avoid your fiduciary status you still need to be able to substantiate the choices you make." Rosenberg adds that "mistakes get made and since [business owners] can't verify their efforts, they are easily targeted in a lawsuit for not having met their fiduciary liability."
Once you decide what your plan looks like, develop a document that outlines the rules and general framework. One such document, for example, might include among other things, the plan's purpose, responsibilities or various parties, and rules for monitoring and evaluating fund options. In most cases the "vendor," or the plan provider, can help with this, Meehan says. "Vendors have document templates that you can make your own or custom draft a document via an attorney, if you have special circumstances."
Once you have a plan in place, review it annually, quarterly or as often as needed. You'll want to ensure that your company's current investment lineup is consistent with established plan goals and objectives. The key, says Ledbetter, is to identify strengths and weaknesses of the investment program and make changes accordingly.
You might also consider forming an investment committee comprised of key staff members such as a chief financial officer or hiring someone to specifically oversee your company's 401(k). "Just like you would hire a risk manager or a product controller, [having oversight] in place is a part of doing business in our economic and regulatory environment," he says.
The Department of Labor's Employee Benefits Security Administration provides checklists, guidance, as well as ways to reduce liabilities. For the DOL's guidance regarding small businesses and 401(k)s click here.
Additionally, business owners should consider fiduciary liability insurance. This insurance will cover damages owed to employees resulting from a plan sponsor's lack of prudence and protect the insured person's personal assets from being seized in a lawsuit. Premiums, says Meehan, are less expensive for companies that don't offer individual company stock as an investment option within a 401(k).
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Write to Diana Ransom at [email protected].
