Are You a Prudent Expert? Or Can You Hire One?
More and more businesses are choosing to provide a 401(k) for each employee as part of their benefits package. If you include a 401(k) for your employees, you may have found it’s made your company an appealing job prospect and increased employee satisfaction. But it’s important not to ignore the responsibilities you’ve taken on by this decision.
As the person managing your employees’ investments, you are the fiduciary of those policies. Anyone who controls assets for a plan or uses their own discretion to manage those assets is a fiduciary, and is therefore liable for the decisions they make. However, if you appoint or hire someone else to manage the plan, they become the fiduciary–with one caveat: your decision of whom to appoint is itself a fiduciary decision. You are liable for your selection. It’s your responsibility, as the person entrusted with your employees’ investments, to choose someone competent and ethical.
Your responsibilities are outlined in the Employee Retirement Income Security Act of 1974 (ERISA). An update to this rule in 2014 clarified that a fiduciary must act, not only as a prudent person, but as a prudent expert would.
According to ERISA, a fiduciary must:
- Carry out their duties with the care, skill, and diligence of a prudent expert
- Defray reasonable plan expenses
- Act in accordance with the plan documents
A fiduciary must not:
- Engage in transactions that involve a conflict of interest
- Use plan assets for their own interest
- Act for a party whose interests are adverse to the plan participants
- Receive compensation from a party dealing with the plan
As mentioned above, it isn’t enough to attempt to manage your employees’ investments properly. You have to act as a prudent expert would, which means making wise decisions with the investments you manage. That includes diversifying the investments and doing your best to limit unnecessary losses. You will also need to monitor investments frequently for changes and make sure your employees aren’t paying excessive fees.
What happens if you fail in your fiduciary duties? You can be financially liable to make up any losses your employees experience–but only if you failed to act as a prudent expert would. You aren’t liable for the vagaries of the market.
Again, if you hire or appoint someone else to manage your employees’ investments, you are liable for that decision.
ERISA lawsuits are common and the payouts can be enormous. If an employee loses money on your plan, and it’s because you failed to manage it properly, you can be sued–and lose, even if you meant well.
Getting Expert Help
Most small business owners aren’t investment experts. With all these complex requirements, and the legal demand to act as a prudent expert would, it’s no wonder so many business owners turn to a professional to manage their employees’ retirement accounts.
However, it’s not enough to hire someone–it has to be someone competent to handle the requirements. Why waste your money on an investment manager if they don’t do any better than you can? Simply outsourcing the work to your insurance broker or a large mutual fund company might not be enough.
There are two kinds of experts you can hire to be your plan’s fiduciary for you. A 3(21) fiduciary is a person who advises you in your responsibility as primary fiduciary. They can make recommendations, but legally, you are still the main fiduciary. In contrast, a 3(38) fiduciary is an actual investment manager. They become the main fiduciary, reducing your liability.
If your business takes up most of your time and energy, so that you don’t want to take on the additional work of managing your employees’ investments, a 3(38) fiduciary is a wise investment. Your liability becomes reduced only to the decision of hiring that person. Advice Chaser partners with 3(38) advisors who can take on this responsibility for your company. If you don’t have an advisor for your fiduciary responsibilities, or you don’t know what kind of advisor you have, give us a call. We can connect you with an expert who can help you decide what kind of help you need.