GuidePost - Vol. 4, Issue 5 2008

The GRABot BAG
by Sherrie E. Grabot, CEO

May 2008
Responsibilities, Risks, and Reminders

At the risk of being too obvious, the state of the economy is on everyone’s mind these days. Officialdom struggles to avoid mentioning the “r-word.” But with or without a recession, the situation looks pretty grim for both consumers and companies – or as we view the world, for retirement plan participants and sponsors. And unlike previous crises, the downturn is putting pressure on both of retirement investors’ major assets at the same time: their investment accounts and their home prices.

The most obvious macroeconomic risk for fiduciaries is simply financial health. Nobody wants to tell participants that one of their investment funds went under, or worse, their entire plan provider. And while this nightmare scenario is highly unlikely, more mundane issues such as excessive fees, transaction delays, and allocation errors loom much larger when investors are already spooked by falling account balances.

Legal complications
Into this tense situation comes a recent Supreme Court ruling allowing individual participants to sue plan sponsors for breach of fiduciary responsibility. This decision has already caused much hand-wringing about a potential wave of lawsuits, especially if they are allowed to gain class-action status. From a more thoughtful perspective this is hardly the end of the world, but rather a timely wake-up call to remind us all of our responsibilities. Nonetheless, it’s scary to many – perhaps because they never considered those responsibilities much in the first place.

At the same time, some experts expect that more participants will be cashing out of their plan accounts in the next few years, largely because a wave of Baby Boomers will be reaching retirement age. Perceptions seem to change once people actually need the money. And that leads to greater scrutiny, litigiousness, and insecurity.

The experts sound off
So what are the experts saying in various parts of the K-plan universe? An of “the industry’s most influential retirement plan consultants” cited above found that fiduciary responsibility is the number one issue for plan sponsors. Fee transparency was next, (which by the way was also the fastest-growing concern), followed by plan costs. The report did not say why, but it also noted that this group sees a trend among employers toward evaluating and switching plan administrators more often. Cause, or effect?

On the regulatory side of the retirement community, the final recommendations from three separate ERISA Advisory Council working groups have recently been published as a  sort of three-pack, for people who enjoy reading such things in quantity. The reports deal largely with the ongoing impact of the 2006 Pension Protection Act – and fiduciary responsibility is high on the list of concerns here as well.

Counsel, please
All this should make a prudent fiduciary run, not walk, to their nearest compliance counsel. A recent Legal Times article (featured here) points out that the specific issue at stake in LaRue v. DeWolff – failure to execute a requested transaction – is only the tip of the compliance iceberg.

Simple delays in moving employee contributions into the plan are also dangerous, not just for breaking the rules, but because market fluctuations during the delay might create a liability issue. Other hot spots include monitoring the amounts of transactions, earnings, and loans; understanding plan fees and comparing them to the market; and conducting (or commissioning) both a financial audit and a compliance audit of the plan.

If all this sounds daunting, it is. But plan sponsors should recollect that simply hiring a 401(k) provider in the first place is a major fiduciary decision; everything that follows is just part of the package deal. Jumping through the legal and regulatory hoops of fiduciary responsibility is one of those areas where HR-speak rhetoric about how “people are our greatest competitive asset” meets reality. Like any other asset, a workforce involves significant costs, management responsibilities, and risks. These days some of those risks are just a little more obvious.

Helping Employers Get It Right
In keeping with the renewed focus on compliance in the retirement marketplace, the DOL is offering a series of free seminars entitled “Getting It Right: Knowing Your Fiduciary Responsibilities.” The seminars are intended for employers, fiduciaries, and providers, but especially small and mid-sized companies – whose organizations often lack extensive HR and legal resources, and are potentially most at risk.

This effort is part of a large nationwide campaign, in partnership with the American Institute of Certified Public Accountants, the Society for Human Resource Management, the National Federation of Independent Business, and the U.S. Small Business Administration. The next seminar is on June 10 in Denver.

~~ Sherrie