401k and EmployersBack in July, we discussed how Jed Clampett of Mama’s Fried Pies caused his VP of marketing Elly May to suffer exorbitant taxes due to a deferred bonus that he offered.  This month, Jed finds himself again in the grease with his employees – this time with his 401(k) plan. Unfortunately Jed and his company’s plan administrators were not paying attention to 401(k) plan costs. Jed was told that the fees in the retirement plan made it extremely competitive. However, federal disclosure documents showed the fees are more than three times higher than other plans available to comparable companies. Is that a problem for Jed and his fellow Mama’s Fried Pies employees charged with administering the plan? If so, what’s the downside risk to Jed.

Yes. According to a Supreme Court of the Unites States opinion earlier this year, Mama’s Fried Pies, as the plan sponsor, owed a duty to conduct proper due diligence – a fiduciary duty – which would have revealed that they were paying too much in fees. Since they did not do the proper research, the plan administrators and Mama’s Fried Pies breached their fiduciary duty to their employees. Jed and his plan administrators were held responsible not only for repayment of the excessive fees to each employee’s plan account but also for interest, penalties and sizeable attorneys’ fees. Hiring someone else to do handle their 401k plan was not nearly enough.

The dilemma is that Jed and his fellow employees at Mama’s Fried Pies are not in the business of setting up or maintaining 401k plans. They don’t know much about saving and investing. They relied upon someone else – their expert. Although Jed’s expertise is not setting up 401k plans for his workers, Jed and his plan administrators still have a fiduciary duty to investigate and to examine the 401k – to carefully shop around and to check it regularly. What about the outside financial adviser upon whom the company relied? That expert may be responsible, particularly if the plan was marketed as being “extremely competitive.”

What does “fiduciary duty” mean?

While a fiduciary duty may be created by statute, as in the case of the employee benefit plans mentioned above (ERISA, etc.), it is often best described by trust law. Who is NOT a fiduciary (but may think or say that they are)? Generally speaking, bankers, accountants, insurance and real estate brokers, architects, engineers, doctors, dentists, teachers and certified financial planners (at least so far… stay tuned) do not owe their customers a fiduciary duty. While they may owe their customers a duty, none of these owe the highest duty in law, being a fiduciary duty. Any damages caused by these relationships are tied to very different duties, often looking more like garden variety negligence.

Saying that a fiduciary owes the highest duty known to the law is perhaps better understood in the context of relationships such as husband-wife, general partners, executors and trustees. More than caring for the assets as if owned by the fiduciary, the fiduciary must care for them in the manner best suited for the beneficiary. The penalty for not acting in the beneficiary’s best interest … The fiduciary loses and must pay to the beneficiary: any increase in value that was reasonably expected and any decrease in value, whether expected or not. Additionally, the fiduciary must reimburse the beneficiary for interest, penalties, fees and, frequently, punitive or exemplary damages.

Tilting the Scales in Your Favor

How do you prove that your company undertook proper due diligence? Whether it be a 401k compliance committee or a bonus plan, ask plenty of questions, ask them on a regular basis and get expert advice from someone other than who is selling you the product. Give both the proper attention. For example, if your 401k compliance committee and executive committee or board of directors often meet on the same day, with the board meeting getting all of the time, plan the 401k compliance committee meeting for a separate day. Allow plenty of time, ask questions and insist on detailed reporting. If your employee bonus plan extends beyond your current fiscal year, insist on an expert opinion ensuring the plan will pass IRS muster. Only your tax attorney or tax accountant knows for sure!

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