Discretionary Trustees vs. Directed Trustees

Trustees Catherine Ripley and Ken Gibson
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Plan sponsors need to understand that their service provider does not, ordinarily, assume any fiducisry liability. Many service providers use a marketing gimmick to sell plans by making empty promises. If you read the fine print a ‘fiduciary warranty’ offers virtually no protection.

Perceptions and Reality
A directed trustee is the most common kind of trustee associated with plan assets. The functions assigned to the trustee in most standardized plan documents and trust agreements such as prototype plans are those of a directed trustee. In many cases, a directed trustee is a trust company that provides an asset custody service as part of a mutual fund family that offers bundled record-keeping services such as the case with Fidelity Management Trust Company and the Fidelity investment arm in DeFelice, and Merrill Lynch Trust Company and the Merrill Lynch investment arm in WorldCom.The perception that trust companies and other such entities ordinarily provide legal protection to plan sponsors for the selection, monitoring, and replacement of plan assets is wrong. While the custodial and trustee services offered by trust companies and other such entities are valuable, even a directed trustee under ERISA, such as a trust company, cannot offer plan sponsors legal cover simply because their agreements with these sponsors make sure that the sponsors–not the directed trustee–remain ultimately liable for plan assets, in accordance with the law of ERISA.

As I’ve noted in previous columns, mother always said to read the fine print. So once again, I’ll remind advisors to remind their fiduciary clients to read their agreements with trust companies and other such entities because it is usually these documents that will govern the ultimate legal liability of their clients, not oral sales representations or written sales brochures.

Plan sponsors need to understand the difference between marketing gimmicks and actual transfer of risk.

Please comment or call to discuss how this affects you and your company retirement plan.

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Retirement Plan Sponsors’ 401(k) Perceptions vs. Reality

Fiduciary Trust Building
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Your company sponsored retirement plan is a benefit to your employees. This benefit is seen by your employees as second only to health insurance. Your responsibility in this matter is huge and can be outsourced.

Most plan sponsors don’t feel the urgency of fulfilling their fiduciary responsibility to their defined contribution plans. There are three main reasons these business owners stick with their current plans, even if the plan has flaws that cost their employees. However, these reasons rest on mistaken assumptions.

1. Unaware of fiduciary status. These plan sponsors say, “What’s a fiduciary? Who? Me?” Sometimes the fiduciaries’ identities should be obvious because they’re named in plan documents. Sometimes, identifying fiduciaries requires familiarity with the term’s definition. You are a fiduciary if you exercise control over the plan, provide advice to the plan or its participants, or select or supervise other plan fiduciaries. This broad definition embraces many employees at the plan sponsor who may never have heard the word “fiduciary.”

2. Believe theyve offloaded their responsibilities. Some brokers and service providers parade under the misleading title of “co-fiduciary.” They may say, “We recommend these great funds,” giving the impression that they’re fiduciaries, even when they’re not. However, in reality, the company sponsoring the retirement plan (generally identified in the plan documents as the “named fiduciary”)—not the co-fiduciaries—still bears full responsibility and liability when it works with a co-fiduciary. A plan sponsor can delegate fiduciary responsibility, but only to a fully qualified fiduciary.

3. Too busy to bother. Sometimes plan sponsors say, “This demands extra, time-consuming work. It won’t grow my company. Why should I bother?” This attitude is reinforced by the failure of many companies to comply with their fiduciary responsibility. However, this is an increasingly risky path. Lawsuits and employee complaints are likely to rise in 2012 as the Department of Labor requires greater disclosure of plans’ effectiveness for employees in terms of costs and investment returns.

The Good News: An Independent, Fee-Only Financial Advisor Can Help

An independent financial advisor who’s knowledgeable about fiduciary issues can shift much of the burden―in both time and legal liability―from the plan sponsor.

Remember by offering retirement plan that will help employees and yourself successfully retire you will attract and retain talented employees.

Please comment or call to discuss how you can reduce your risk and workload. In many case for lower cost.

  • Why Should 401k Plan Sponsors Care What Others Think About the Fiduciary Standard? (401kplanadvisors.com)
  • Action Can Reduce Fiduciary Risk When Stock Markets Swoon (401kplanadvisors.com)
  • Reducing Fiduciary Risk (401kplanadvisors.com)
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Top 10 Hidden Liability Pitfalls That Retirement Plan Fiduciaries Should Avoid

Internal Revenue Service (IRS)
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Many retirement plan sponsors do not realize the fiduciary risks they carry when providing a plan for their employees. This may be the result of being sold by an financial representative who is unaware of the risks themselves. These risks can be easily minimized. The results would be a much better plan for employees.

Being a retirement plan fiduciary such as a plan sponsor or a plan trustee is like being a homeowner. Homeowners see their homes as a serious financial accomplishment and an important investment. Homeowners are unaware of the hidden liability pitfalls that homeownership entails, like lawsuits for those injured on their property or the liability to trespassers who are injured because of an attractive nuisance like a swimming pool. The same can be said of a plan sponsor or a plan trustee that is unaware of the hidden liability in their roles as plan fiduciaries.

Retirement plan fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: acting solely in the interest of plan participants and with the exclusive purpose of providing benefits to them; carrying out their duties prudently; following the plan documents; diversifying plan investments; and paying only reasonable plan expenses. While these duties seem pretty straightforward, there are certain instances where a plan sponsor is unaware that their action or inaction puts them at risk to liability from either plan participants or governmental agencies such as the Department of Labor (DOL) and the Internal Revenue Service (IRS). For plan trustees, that liability may be personal liability. This article details pitfalls that plan fiduciaries are usually unaware of, that exposes them to potential fiduciary liability.

The plan sponsors must realize that 80% of the baby boomer generation do not have enough saved to comfortably retire. The baby boomers will be looking for solutions. They may look at their company sponsored retirement plan for a cure to their problem.

Please comment or call to discuss how you can address this.

  • Why Should 401k Plan Sponsors Care What Others Think About the Fiduciary Standard? (401kplanadvisors.com)
  • ERISA §3(38) Fiduciaries and the Flavor of the Month (401kplanadvisors.com)
  • Action Can Reduce Fiduciary Risk When Stock Markets Swoon (401kplanadvisors.com)
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