Help Sponsors Reduce Risk of Fines and Penalties

Got five minutes? The topic of this blog post is covered in our Fiduciary Five Podcast series hosted by Chuck Hammond of the 401(k) Study Group. The Fiduciary Five Podcast…your fiduciary questions, answered in about five minutes.  To listen to the related podcast, click here.

Adage – a proverb or short statement expressing a general truth.

If you will forgive us for being risqué, there is a well-known, old adage, “Sex sells.” Relating this to the clearly non-sexy retirement plan world, the closest proxy we have are the salacious headlines regarding multi-million-dollar judgements and out of court settlements. Large lawsuits continue to dominate headlines, Philips settles for $17M. We have all seen and read these headlines, and may have even forwarded the information on to clients and prospects in an attempt to help them fully appreciate the importance and potential liability they face as fiduciaries for their plans.

More recently, some plan advisors have also found themselves named as parties to lawsuits as well. In fact, at the recent NAPA 401(k) Summit in Nashville, Tom Clark, a partner with The Wagner Law Group, indicated that he is currently closely tracking around 150 lawsuits. Of those, five in particular involve the plan’s advisor. We would be remiss if we didn’t mention that at least one of these headline making suits involving an advisor is being brought by Schlichter, Bogard, & Denton, the firm who has had much success litigating previous cases and is considered the architect of qualified plan litigation.

For many plan sponsors and advisors a more appropriate adage would be, “An ounce of prevention is worth a pound of cure.” Most plan sponsors are far more likely to suffer an administrative or operational failure resulting in fines and penalties than to be beset with a class action suit resulting from improper investment oversight or reasonableness of fees.

The Department of Labor (DOL) has ramped up compliance audits over the last handful of years and could post their own headlines when one considers that in 2017 the Employee Benefit Security Administration (EBSA) closed 1,707 civil investigations with 1,114 (65.3%) resulting in recoveries of $1.1 Billion. See DOL Fact Sheet 2017. This does not include actual labor hours spent internally working through the audit and correction (which can take months) or fees paid to ERISA attorneys and other professionals to assist with the resolution. Also, advisors to these plans can plan on investing a substantial amount of time assisting their clients through the process as well.

In looking to assist plan sponsors, what are some action steps that retirement-centric advisors can take? Most breakdowns are likely “sins of omission” versus willful acts. To answer, we suggest another known adage “know your client.” This takes on two different aspects and advisors are in a unique position to evaluate both areas.

First, are there specific areas related to the plan that may cause breakdowns? A few quick examples would be:

  • Rapid growth – large numbers of newly eligible employees
  • High turnover – properly distributing annual notices
  • Many different classifications of employees and how they are paid – ensuring that the proper definition of compensation is being used
  • Filing 5500 timely – yes, I know it was provided signature ready (see strength of team below)

Second, how strong is the internal team at the plan sponsor? Many advisors have probably had the pleasure of working with larger investment committees comprised of fully engaged members with strong teams that are responsible for the day-to-day operations of the plan. However, many have likely experienced the flip side as well. It is in these instances where it is important to assess the skill set of the team and build out necessary processes around this group. In building out these processes it is important to evaluate what you as the advisor or other team members profitably wants to take on and what areas you would want to outsource to service provider partners.

In doing this, the advisor can bridge gaps that exist to ensure the success of the plan. This allows advisors to continue to develop relationships with their plan contacts, highlight their value and spend more time focusing on the real success metric that matters, increasing the percentage of participants that are on track for a funded retirement.

We look forward to the opportunity to help you and your clients bridge the gap on all aspects of plan management and participant retirement readiness.

Jay Hunt, AIFA
Institutional Retirement Consultant
(859) 422-0488 |

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