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The Changing 401(k) Landscape for Plan Sponsors – Are You In Compliance?

As a retirement plan sponsor, it is imperative that you are aware of some significant changes occurring in the retirement plan landscape.  Foremost among these is the increased scrutiny plan fiduciaries face as a result of recent Department of Labor rulings.  “Fiduciary Liability” refers to your responsibilities as Plan Sponsor, you have personal liability over the assets in the plan as well as the management of the plan itself.  (Not necessary the individual choices your participants make, however). 

To properly fulfill this “duty” you should maintain certain documents.  For example, the Investment Policy Statement (NYSEARCA:IPS), this document outlines how investment choices are determined.  Some of the items that need to be addressed include:  What is your process for adding or dropping an investment option?  Do you offer proper diversification within your plan? Do you have a default investment choice? Though, the law does not require a plan to adopt an investment policy statement (IPS), it can provide a clear road map for the plan fiduciary.. Failure to operate your plan in a responsible manner is grounds for the IRS to revoke its tax-qualified status and could be the basis of a lawsuit for fiduciary breach by any employee and/or the Department of Labor (NYSEARCA:DOL).

Both the Internal Revenue Code (NYSE:IRC) and the Labor Code govern 401(k) plans, and both the IRS and the DOL have jurisdiction to bless or condemn a given plan. When plans don't comply with the law - even if the noncompliance is minor or inadvertent - you may find yourself with a significant liability. Both the IRS and the DOL have decided to direct substantial resources to auditing 401(k) plans. In addition, the DOL has publicized its interest in responding to participant complaints about misuse of plan funds.

Noncompliance can involve violations of IRC regulations, DOL regulations, or both. The DOL is responsible for making sure that the employees' retirement rights are not violated, and that the 401(k) funds are not being misused. The ERISA Act gave the DOL substantial authority in this regard, including the right to sue the company or those responsible for the proper operation of the plan in federal court. In some cases, a violation of the Labor rules results in criminal liability. Equally alarming is a recent case in Texas where the Supreme Court of that state allowed the first judgment in favor of an individual seeking damages resulting from his employer’s mismanagement of his 401(k) account.  Additional cases are already being tried across the country, and the floodgates could open if the market continues on its downward course.

It is vital to focus on opportunities to lower the costs of a 401(k) plan, improve investment performance through the use of professional money managers, and strive to upgrade the level of service you receive.   These factors may also determine how likely it is that your Plan is in violation of the DOL and/or ERISA standards.