Converge, Volume 15: Fiduciaries: “Can someone just tell me what to do?”

Understand Governing Entities for Each Pocket of Risk

September 13, 2017 | Retirement Plans

Shelby George

Senior Vice President, Advisor Services

Eight of ten employers say they’re concerned about an increase in fiduciary litigation. And more than a quarter listed fiduciary liability and litigation as their top 401(k) concern.

Employers’ concern is understandable. Although most employers would confidently say they have the best intentions of fulfilling their fiduciary responsibility to “act exclusively in participants’ best interest,” it is challenging to know specifically what that means. Who can blame a fiduciary for thinking, “Can someone just tell me what I have to do?” Most often, the unfortunate answer is no. Even the most exhaustive compliance checklist closes with a disclaimer that the list is neither comprehensive nor legal advice.

So where should a concerned fiduciary start? Set the checklist aside for now and begin with a higher level of review. Most plan decisions fall under one of six broad categories:

  1. Hiring plan service providers
  2. Designing the plan
  3. Administering the plan
  4. Selecting the plan’s default investment
  5. Selecting additional plan investment options
  6. Educating the participants

Fiduciaries can start by understanding the guiding principles for each of the six categories, and what happens if lines are crossed. The guiding principles and common areas of risk are shaped in part by the entity or entities that govern each category. There are three governing bodies that create and enforce these principles: plaintiffs’ lawyers, Department of Labor (DOL), and the Internal Revenue Service (IRS). Each entity has a different mission.

  • In the context of 401(k) class action lawsuits, Plaintiffs’ lawyers are responsible for representing their clients (i.e., participants). They do this by filing a claim against fiduciaries alleging inappropriate decisions that caused participants harm.
  • The DOL protects the rights of workers. DOL investigations are designed to ensure fiduciaries do not abuse their authority by making decisions to benefit themselves or the company, rather than participants. Their mission is broader than plaintiffs’ lawyers; the DOL investigates and enforces possible breach of fiduciary duties regardless of whether the breach has caused actual harm to a participant.
  • The IRS is another enforcer. The primary purpose of the IRS is the collection of individual income taxes and employment taxes, not the protection of participants. The IRS does, however, regulate 401(k) plans to ensure businesses and individuals (particularly highly compensated individuals) are not taking unfair advantage of the tax shelters retirement plans provide.

With an understanding of each entity, fiduciaries can go back to the six categories of plan decisions and assess their decision making-process.

For example, selection of the plan’s investment options (categories 4 & 5) are high priority issues for plaintiffs’ lawyers and the DOL, but not a high priority for the IRS. Fiduciaries should ensure their due diligence process identifies the needs of plan participants, includes investment solutions that best meet participant needs, and the selected share class or vehicle is available at the lowest cost to participants. In contrast, plan design (category 2) is important to the IRS because, per their policies, plan design should not offer highly compensated participants inappropriate tax deferral opportunities. Although fiduciaries are required to administer the plan in accordance with the plan document, the specific plan design decisions are generally not a central issue for plaintiffs’ lawyers or the DOL.

Arming yourself with a better understanding of plan roles is a key step to manage risk. For more information and a useful resource to document plan decision-making, download our Fiduciary Guide at


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