It is amazing that almost 44 years after ERISA became law, 38 years after 401(k) plans appeared, and 20 years after 401(k)s surpassed defined benefit plans as the most common form of retirement plan for the private sector, approximately half of defined contribution plan executives do not consider themselves fiduciaries.
This lack of knowledge of what makes a fiduciary is dangerous for those executives because fiduciaries can be personally liable for losses suffered by plan participants as a result of breach of fiduciary duties.
Consultants, money managers and plan administrators must step up efforts to enlighten plan executives to the reality that in most cases they are fiduciaries with specific responsibilities. Of course, those responsibilities can be offloaded to the consultants, managers and administrators, but only after a rigorous, well-documented process has been undertaken.
Even then, however, fiduciaries retain some responsibilities. For example, they must continue to monitor the work of those to whom they have delegated other responsibilities and must document that monitoring. Companies might have to bring in Employee Retirement Income Security Act lawyers to drive home the message that being a fiduciary is a heavy responsibility that requires attention, and sometimes even study to keep up with developments.
As reported in the Feb. 5 issue of Pensions & Investments, several recent studies have documented this dangerous ignorance. An AllianceBernstein (AB) LP (AB) survey asked 1,000 DC executives if they were fiduciaries: 49% said no, and 6% didn't know. Based on their duties, all were fiduciaries. Even 48% of the executives from plans with assets of $500 million or more thought they were not fiduciaries.
Perhaps because the executives who were involved with the establishment of 401(k) and other DC plans after the passage of ERISA have retired or are retiring, the level of understanding seems to be getting worse. In 2011, 61% of the respondents to the AllianceBernstein survey correctly identified themselves as fiduciaries.
A similar survey in 2017 by J. P. Morgan Asset Management found that 43% of respondents did not know if they were fiduciaries or believed they were not. In addition, Callan LLC found in a survey that almost a third of plan executives did not know if the consultants they hired recommended changes and left it to plan executives to make final decisions, or whether the consultants implement the changes they recommend subject to monitoring by executives.
That is, they did not know how much of their fiduciary responsibilities they had offloaded to the consultants.
These numbers are disturbing. Plan executives are leaving themselves and their plans open to fiduciary breach lawsuits that could be expensive. In addition, errors by the consultants or money managers who were not properly monitored could financially harm the employees for whom the plans were established.
Companies must ensure that those overseeing 401(k) and other defined contribution plans — that is those who are involved in selecting, hiring or monitoring service providers to the plans — know they are fiduciaries and understand the range of their responsibilities.
Plan sponsors also should have at least annual seminars on the subject of fiduciary responsibilities under ERISA for any executives likely to be fiduciaries, for their protection, for the plan participants' protection and for the companies' protection.