There is a laundry list of responsibilities that 401k plan fiduciaries have to be aware of and can be personally liable for when managing their plans. Below are two common breaches that I have seen.
Not hiring an independent third-party advisory group
The biggest mistake is normally not hiring the right providers to expertly handle the plan. Small, midsize, and often times large companies fail to hire an independent third-party advisory group in an effort to keep costs low. What they normally don’t know is that their costs could be higher without one!
The advisor could be the most important part of the puzzle because their role is to work with the plan sponsor to monitor the costs of the recordkeeper, the investments and to create a process of documentation to protect the decisions fiduciaries are making. Most companies do not have the resources to hire a fully licensed and dedicated individual to monitor the providers they hire. So this role of monitoring falls right at the feet of typically the owner, head of HR, or the CFO. They ultimately end up relying on their recordkeeper which is where their plans investments, website, and statements come from. Often times recordkeepers will quote and deliver a “low cost” fee direct to the plan sponsor and then charge or take revenue from higher fees which are internally charged to the plan and come out of employees’ accounts. Most fiduciaries are unaware of this as digging through fee disclosure statements takes an expert eye, which is the role of the independent third-party advisor.
Not fully understanding how fees are being charged
Not fully understanding how fees are being charged is probably one of the biggest breaches of fiduciary responsibility. Higher fund fees to reduce recordkeeping and or administrative costs is also one of the leading sources of litigation by plan participants in the industry.
Often times hiring an independent third-party advisor that is an expert in the corporate retirement space will help reduce fees enough to offset the cost of the advisor. They also will help to make sure employees are making informed decisions on the investments they choose.