According to professionals in the retirement industry, most
new sponsors of small or micro plans are unaware of the duties of prudence, loyalty
and diversification of investments that a fiduciary to a plan assumes—or that
the Employee Retirement Income Security Act (ERISA) decrees they are a fiduciary. And, surveys have shown
many small-plan sponsors are confused about their fiduciary role.
Many are also unclear that, while they have no investment
committee—the individual making plan-level decisions, in essence, is that committee and must perform much the
same functions the committee of a mega plan does.
For the unwary plan sponsor, this disconnect could be costly,
says Jim Phillips, president of Retirement Resources. “Whether its investments
or plan design or operational decisions—those are held to the prudent expert
standard, so there is no defense of ‘Gee, I did my best, I didn’t know any
better, it’s just a small plan, it’s only me’—none of those excuses work.
Someone is obligated to operate the plan up to the prudent expert standard,” he
Small-business owners are usually spread thin. “He’s probably
the salesperson, the service person, the accounting person, the maintenance person.
He may work 80, 90 hours a week, and the 401(k) is an afterthought,” says Jim
Sampson, founder and managing principal of Cornerstone Retirement Investors.
Sometimes, too, the sponsor’s lapse may be a result of more
than his other priorities. Phillips points to a void in any formal
communications—from the Department of Labor (DOL), Internal Revenue Service
(IRS) or vendors selling plan products—to tell new 401(k) sponsors what ERISA
demands. “Unless at some point along the sales process that pops up as a
discussion point, it’s entirely possible that person will not know about his
fiduciary duties,” he says.
He recommends a variety of free resources such as pages on
the DOL website written specifically for plan sponsors and T. Rowe Price’s
guides on fiduciary compliance in running an ERISA-governed plan. Classes, too,
such as those through the Plan Sponsor University, can be found online and in
local colleges—although Sampson, an adjunct lecturer on the topic, has found
that small business owners, as a group, do not attend.
However they attain it, once armed with full knowledge of
their fiduciary status, small-plan sponsors must come to terms with their
capabilities—to what extent they realistically can play, or must delegate, the
investment committee role—and the plan’s
Most owners adopt the investment committee role,
as they are already sole decisionmaker for their firm. “‘I own the place, I’m
just going to make the decisions,’” Sampson says. This arrangement can better serve
the company—appointing other employees exposes them to liability while
accomplishing little, Sampson says. Many just rubberstamp the owner’s vote to
avoid his displeasure. “One man, one vote” also quickens the process, he tells