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Ruling Cites Business Owner Responsibility to 401(k) Plans

Memo from the U.S. Supreme Court to business owners: Be sure your 401(k) plan operates efficiently and in participants’ best interests, or suffer the consequences. In LaRue v. DeWolff, Boberg & Associates, the court ruled that plan participant James LaRue could sue the plan administrator for breach of fiduciary duty after he lost about $150,000 when the plan didn’t carry out investment instructions for his account in the 401(k) plan.

Before this case, a plan couldn’t be held liable unless losses affected a large number of plan participants. Now, even though the ruling requires LaRue to show misconduct on the part of the plan administrator—and does not specifically involve investment advice or results—an individual can sue, and this ruling could lead to an explosion in lawsuits from disappointed employees.

To protect your business, the first step is to accept responsibility for your retirement plan. That doesn’t mean you must handle all aspects of the plan yourself. You can still hire a plan administrator, and you may need a consultant to oversee the administrator. But as the owner of the business, it’s ultimately your job to make sure the plan operates as it should for your employees. And that means educating yourself about 401(k) plans and investments, and about arrangements with outside businesses to help run your plan.

Here are several of your most important responsibilities:

Don’t dawdle. You must submit employee and employer plan contributions within seven business days of deducting the contributions from your employees’ salaries. Holding 401(k) funds too long could hurt the performance of employees’ investments and increases the potential for fraud in the eyes of the U.S. Department of Labor. To safely manage your fiduciary responsibility, it is good practice to submit employee 401(k) contributions simultaneously with your withheld payroll taxes.

Have a clear policy. Your investment advisor for the plan needs?to create an investment policy statement that fits the demographics of your work force. In other words, the investments in your plan should make sense for the people working for you.

Enforce transparency. Require your plan’s investment advisors to reveal all revenue they receive for making plan recommendations. This may include revenue-sharing arrangements and 12b-1 fees.

Be compliant. Section 404(c) of the Employee Retirement Income Security Act of 1974 (ERISA) spells out requirements for compliance (and some immunity from employee lawsuits): offer at least three diversified investment options with different risk and return characteristics; let participants transfer assets among the options; provide enough information to help participants make educated investment decisions; and produce statements no less frequently than quarterly. Going beyond these minimum requirements will further protect you. Rather than offering three investment options, try to offer 10 or more, diversified by both investment category and fund company.

Ensure insurance. Make sure your plan advisor and other consultants have the proper type and amount of insurance to handle potential losses.

Keep an eye on results. Monitor how the investments in your 401(k) are performing compared to an appropriate benchmark. Sit down at least once a quarter with an outside advisor to review, and make this information available to plan participants.

Help your workers. Hire an expert to advise your employees upon setup of the plan and at least once a year to minimize potential investment mistakes.

Remain at the wheel. Don’t allow your 401(k) plan to run on automatic pilot. Keep checking to make sure all consultants are doing their jobs.

Shake things up. Every two or three years, put the plan administrator job out to bid. This will keep your administrator on his toes, educate you about industry trends, and it could save you money.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.


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