Fiduciary Risk Management for Retirement Plan Sponsors

Fiduciary Risk Management for Retirement Plan Sponsors

March 27, 2024

Excess fee lawsuits are down for plan fiduciaries, but new forfeiture use lawsuits are on the rise.

Being sued because your employees are dissatisfied with their retirement plan’s performance and fees is not something any company wants, especially if they claim lack of fiduciary oversight. In 2023, nearly 50 class action lawsuits accused employers of violating the Employee Retirement Income Security Act (ERISA), and a record 42 others were settled. The majority claimed damage from excess fees, but forfeiture use lawsuits are on the rise. In fact, a half dozen cases were filed in California alone last year alleging misuse of forfeiture funds.

Retirement Plan Forfeiture

When an employee leaves a company without being fully vested in their retirement plan, the monies left in the account are forfeit. Forfeitures are common, and plan administrators must use that money in accordance with the plan’s documentation and policies, and Department of Labor (DOL) and ERISA rules. In general, forfeitures must be used to benefit all employees, and in accordance with plan documents, usually to reduce or add to employer contributions, or pay plan expenses.

Who is a Fiduciary?

In forfeiture lawsuits, claims of fiduciary imprudence, mismanagement or lack of oversight are at the crux of the litigation. Fiduciaries have a special relationship of trust, confidence, and legal responsibility, a duty of care to learn and understand information provided to them before making a decision, and a duty of loyalty to place the interests of the beneficiaries of the retirement plan before their own interests.
Several parties may be at risk of being sued for improper use of forfeiture funds, with fiduciary responsibilities to varying degrees depending on the plan’s design. As listed in plan documents, fiduciaries can include trustees, anyone who exercises discretion and authority over the plan, appoints another fiduciary, or renders investment advice. Investment/retirement committee members, company officers and directors might be considered fiduciaries.
Typical roles and responsibilities in a retirement plan include:

  • The plan sponsor establishes and maintains the retirement plan for employees.
  • An advisor/consultant provides investment advice, monitors investment options, creates and reviews investment policies, and may assist with vendor selection, monitoring and education.
  • A third-party administrator manages regulatory aspects of the plan, like DOL compliance, discrimination testing, and IRS filings.
  • A recordkeeper manages the plan’s daily operations: integrates payroll, contributions and trades, maintains participant records and statements, reconciles data with the trustee/custodian, and can provide education.
  • The custodian/trustee safeguards plan assets for participants, and executes trades.
  • An investment manager manages assets for the participants, provides investment vehicles like mutual funds, collective investment trusts, and stable value funds.

Remember, fiduciary risk management and professional retirement plan monitoring is the ultimate responsibility of plan sponsors, i.e., employers who provide retirement plans. Unless specifically documented in writing, entities other than plan sponsors, like financial advisors, do not act as fiduciaries and are thus not responsible to act in the best interest of the plan.

Mitigating Forfeiture Lawsuit Risk

As plan sponsor, what can you do to reduce fiduciary risk associated with forfeiture use lawsuits?

First, understand that you cannot legally delegate complete fiduciary responsibility to third parties. Some responsibilities, and thus some risk, can be shifted. But the duty to monitor third parties still adheres.

Next, find an advisor or consultant that will act as fiduciary – and get it in writing. Many advisors don’t have to – and won’t – because they don’t want the risks themselves. Others say they follow fiduciary best practices, but won’t put their acceptance of fiduciary responsibility in writing. ALWAYS have the advisor or consultant you expect to be a fiduciary acknowledge their status in writing to confirm they are acting in the plan’s best interest AND that they will accept some liability if sued.

Finally, follow best practices, including having and understanding plan policies, reviewing investment performance quarterly, and reviewing third-party advisors and/or administrators annually. Adherence to best practices won’t absolve any fiduciary of potential penalties or damages, but the courts have dismissed some cases because the plan sponsor demonstrated that they followed plan policies and best practices.

REDW’s Retirement Plan Sponsor Scorecard

Reducing fiduciary risk for potential forfeiture litigation as well as other performance and fee lawsuits comes with better understanding of your risk. So, take advantage of REDW’s Retirement Plan Sponsor Scorecard. This complimentary, 14-question assessment helps determine how well you are fulfilling your duties and uncovers any gaps in compliance. You’ll know where you stand in your current operations, adherence to accepted best practices, and how much risk you’re taking that you may not know about.

You’ll also rest easier knowing you have a better understanding of what’s required to run a successful retirement plan. Our experienced Wealth Advisors will provide an independent assessment of your plan’s investment and organizational processes according to the Global Fiduciary Standard of Excellence established by the Center for Fiduciary Studies. What’s more, our team of Accredited Investment Fiduciaries (AIF®) can offer an action plan to discuss with your current provider to improve your score, as well as training on improving employees’ knowledge of plan features so they can make better-informed investment decisions.

As a bonus, REDW Wealth can act as an ERISA 3(21) co-fiduciary or ERISA 3(38) discretionary fiduciary manager, so you have the option as to how much fiduciary risk you want to retain or share with us.

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© 2024 REDW Wealth LLC. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. Information and instruction shared in the article above do not guarantee outcomes, performance, or quality of services provided to REDW Wealth Management clients by REDW Wealth Management or its employees. Adherence to our fiduciary duty is not a guarantee of client satisfaction or any particular outcome. Advisory, Assurance, and Tax is offered through REDW LLC. Wealth Management is offered through REDW Wealth LLC.

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