Over the past few years, the 401(k) industry has seen several extensive changes take effect, each of which has altered the core dynamics of how employees’ retirement plans are administered. New government regulations have modified how the industry is monitored for the betterment of employees. The following are three of the biggest changes that have affected plan sponsors, providers and participants.
Effects of the Department of Labor’s (DOL) fiduciary rule
During 2017, the Fiduciary Rule (or “Best Interests Rule”) was introduced by the DOL with key aspects of this rule implemented on January 1, 2018. The key aspects and their effect on 401(k) plan sponsors and their administrators are as follows:
1. All financial professionals who provide advice on retirement plans are considered to be fiduciaries and may only provide strictly educational instruction to plan participants
2. Employer plan administrators are responsible for ensuring vendors act with the clients’ best interests in mind.
3. Health Savings Accounts, Medical Savings Accounts and 401(k)s are covered by the rule.
Brokers who previously worked on commissions are majorly impacted by this rule. As brokers are now considered fiduciaries, they must act in the best interest of their client and cannot prioritize their own financial benefits. The one exemption in the rule (effective July 2019) is termed the “Best Interest Contract Exemption” (BICE) – but it must be agreed upon by the client first.
Shifting lawsuit environment
Litigation relating to 401(k) plans has increased substantially in recent years, and all signs indicate these increases will continue in the future. In August 2017, the U.S. Supreme Court made a landmark decision (after decades of activity) that made it easier for 401(k) participants to sue administrators. In this decision, the U.S. Supreme Court ordered a plan sponsor to pay $13.1 million in damages as a result of that plan sponsor breaching its fiduciary duty by investing in retail rather than cheaper institutional share classes of mutual funds in its 401(k) plan.
Lawsuits against large companies/providers are common, however, small and middle market providers are vulnerable to lawsuits as well. These providers have the same fiduciary responsibilities and must abide by the same rules as large ones. The number of lawsuits against these smaller companies also continues to rise.
Increase in plan audits
To determine if plan sponsors are in compliance with the rules related to retirement plans, the DOL is steadily enforcing its rules through increasing its number of plan audits. During 2016, they closed over 2,000 civil investigations with over 1,300 of those cases (65%) resulting in monetary penalties/additional contributions. They may ask to review plan provider contracts, fiduciary meeting minutes, educational material provided to participants and investment policy statements.
Please contact author Ashley Frey via e-mail or phone (502.882.4316) for suggestions that may help you avoid a DOL audit.