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Is your company retirement plan in compliance under the legal authority, ERISA? Many business owners are trying to do the right thing and provide retirement benefits to their employees. Unwittingly, they may be exposing themselves to risks and possible lawsuits in worst case scenarios. There are traps to business owners who are the sponsors/ trustees of their company retirement plan. Sit up and take care of these plans so they don’t cause you financial headaches! Here are some potential headaches and remedies:

In your company retirement plan, you may be on the hook for legal liability with the investments!

  1. There are two types of fiduciaries who manage the investments for retirement plans:

    One who is designated as an ERISA 3(21) fiduciary and one who is an ERISA 3(38) fiduciary. The 3(21) fiduciary provides investment recommendations to the plan sponsor/ trustee. The plan sponsor/ trustee has the ultimate responsibility, the legal liability, and accepts or rejects the recommendations. Both the trustee and the fiduciary share the responsibility. The 3(21) advisor does not have discretionary authority. The advisor gives suggestions to the plan sponsor, and the sponsor makes the decisions.

    In a 3(38) fiduciary relationship, the sponsor/ trustee’s responsibility includes the appointment and monitoring of the 3(38) investment manager. The investment management decisions are delegated to the service provider. This is a significantly different relationship compared to the 3(21) investment advisor. The 3(38) fiduciary is a special type of fiduciary who has been specifically appointed to have full discretionary authority to make the actual investment decisions. The 3(38) fiduciary must be a registered investment advisor, bank or insurance company and must acknowledge its fiduciary status in writing.

  2. Plans not following government, ERISA, guidelines:

    Self-directed retirement plans require compliance known as ERISA 404( c) compliance from investment risk: ERISA rules require that all plan participants have a broad range of investment options as well as contain pertinent information to make informed investment decisions. Plans not compliant to 404( c) expose the plans to losses that result from poor investment decisions made by participants. The remedy is to make sure that the plans comply with 404( c) by providing a broad range of investment options for participants.

  3. Funds without a Qualified Default Investment Account

    Plans that do not have a Qualified Default Investment Account could create legal hassles to the sponsor/ trustee. Plan fiduciaries face potential liability for losses that result from investments that have not been directed to a qualified default investment alternatives. With Qualified Default Investment Accounts, if participants fail to provide investment directions for their particular plan, overall plan fiduciaries must select appropriate investment options. By making these decisions prudently, fiduciaries avoid this trap.

These issues and solutions are just a few problems that sponsors / trustees of retirement plans should be aware of and to avoid; potential troubles include legal actions from participants who may file for legal damages as a result of inadequate investment management of their plans.

How To Make The Most Of Your Blog

Be sure to read this blog with the mindset ‘How could this apply to our business.’ Thinking of it that way will guarantee that you get value. Better yet, take notes as you read and commit to having the ideas implemented by the time the next edition arrives. Also, make copies for each team member. To really make sure something positive happens, work with your retirement plan specialist to talk your team through the ideas and how to set a schedule for getting them implemented. We’re here to help you get started.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.