Part 1 of 6., R.E.T.I.R.E.® series by Nathan Fisher

Remove Conflicts of Interest: Making Sure Your Employees Come First

Nathan Fisher

As a business owner, or an HR manager, a controller, or anyone who oversees a 401(k)-style retirement plan, you’re responsible for making decisions on behalf of plan participants and their beneficiaries—that’s current and past employees, and their family—regarding the money they’ve saved for retirement. As such, you are expected to be a good steward of that money, to make prudent and responsible decisions, and to make sure that your employees’ best interests guide the choices you make about things like which service provider to use, or which funds to include a plan. To that end, it’s critical that you seek out any potential conflicts of interest in your plan and work to remove them.

What are Conflicts of Interest in 401(k) terms?

A conflict of interest is anything that might prevent you from acting in the best interests of your plan participants. That might involve a service provider you choose to work with not because it made the most sense for your employees, but because they are an old friend. It could be that your provider offers funds they themselves stand to profit from if your employees choose them.

Much of the way we think about what is or is not a conflict of interest comes back to the Employment Retirement Income Security Act of 1974 (ERISA), the primary piece of legislation defining the retirement industry to this day. In discussing conflicts of interest, ERISA requires that plan sponsors (that’s you, the employer) make “prudent” and “reasonable” decisions, but doesn’t fully define what “prudent” or “reasonable” mean. This is why it’s so critical for employers to be thorough in documenting their management decisions and challenging any aspect of their plan that seems as though it might present a conflict of interest. Documenting this process is the first step to removing any conflicts of interest that should not be present in your plan.

Why Remove Conflicts of Interest?

There are many reasons for employers to actively remove any conflicts of interest that appear in their retirement plan.

1. You want to keep your employees’ trust.

One of the reasons employers offer a retirement plan is to attract and retain key employees. If employees see that a plan is somehow benefitting their employer over them, are they going to trust their employer? Avoiding conflicts of interest helps you to focus on providing a real benefit to employees and, in doing so, build trust and retain them for years to come.

2. You don’t want to get sued.

When conflicts of interest happen, employers can face lawsuits. Within the 401(k) industry, there are lawyers who have made an entire career around suing employers and service providers over conflicts of interest, and that’s just the tip of the iceberg. As more attorneys see that there is money to be made in pursuing these suits, it seems reasonable to expect an increase in these cases.

3. You don’t want to deal with a Department of Labor audit.

When the DOL audits an employer, it can feel a lot like an IRS audit. Some audits of smaller businesses take three hours, while others can take as long as three years. While we can’t say for sure what goes into the algorithm that prompts the DOL to audit someone, it stands to reason that when something about your plan gets flagged as a conflict of interest, it could increase the risk of a lengthy, costly, and stressful audit.

4. You don’t want to be personally liable.

In 2015, the Supreme Court decided a case that sent shockwaves throughout the retirement benefits industry. Tibble vs. Edison set the precedent that a 401(k) plan’s fiduciary has an ongoing duty to monitor the plan’s performance and investments, even if the participant’s original funds were deposited years or decades ago. So, say you sell your business, and 10 years later circumstances have changed so that a conflict of interest has arisen. A plan participant  may be able to take legal action against you as an individual if they can demonstrate the conflict of interest is detracting from the plan’s value for its beneficiaries.

5. It’s the right thing to do.

Beyond all of the regulatory risks, the threat of lawsuits, and the perception of your employees, you should want to remove conflicts of interest from your plan because it’s simply the right thing to do. If you believe, as many business owners and leaders do, that your company is your legacy, and you believe your employees are going to build that legacy for you and carry it on, then it’s important that you give them a truly beneficial retirement plan that’s focused on giving them the comfortable retirement they want.

How to Remove Conflicts of Interest

Once you’ve identified a potential conflict of interest in your plan, it’s vitally important that you immediately both evaluate it and take steps to remedy the issue, or to document your prudent process for allowing the conflict to continue. It’s important to do set up a process to assess conflicts of interest, even if you don’t expect to ever have conflicts of interest. Sometimes, you may not want to remove a potential conflict of interest. But in that case, you would still need to be sure to confirm that you are complying with any applicable requirements under the prohibited transactions rules and related exemptions. Regardless of your choice to remove or not remove a specific conflict of interest, there are several steps you should follow in order to continuously check your plan for potential conflicts, evaluate those conflicts and, if necessary, remove them.

1. Document the conflicts of interest

ERISA doesn’t define what “reasonable” means in the context of your actions managing a retirement plan, and ignorance of conflicts of interest does not exempt you from your responsibility to be thorough in evaluating your plan and making good decisions in your employees’ best interests. As such, the first step to removing conflicts of interest from your plan is to review it in fine detail, taking time to document anything that strikes you as a potential conflict of interest. If you feel like you have serious risks, engage your service provider or find legal help with ERISA experience to make sure you are handling your situation properly.

2. Establish a Prudent Process for Making Changes

When it comes time to remove the conflicts of interest, you’ll be choosing alternatives to the current setup that contains the conflict. If your conflict of interest is found in the funds you offer, for example, you may want to evaluate new funds to include in the plan. Make sure that before you make that choice, you have a prudent process for doing so, and that your process is documented so your choice can be held up against it after the fact. The problem with a lot of plans is that they don’t have a prudent process, or they don’t document the one they do have, so changes made to address conflicts of interest could lead to further conflicts down the line.

3. Use Third-Party Tools to Reduce Risk and Save Time

While it’s true that you need a prudent process, you do not have to establish it for yourself from scratch. There are many third-party tools and resources available that you can adopt to help you think through your plan management decisions and document them properly. These resources will be less risky for you, as they’ve been proven and built by experts in the industry, and will ultimately save you time while being more robust than a process you develop yourself. This is why we created this  R.E.T.I.R.E.SM kit; we’re giving you a process and a method for documenting your plan management activities right here.

4. Document the Entire Process in your Fiduciary Audit File

Once you make your adjustments, document what actions you made and why those actions were prudent and reasonable and in the best interest of your employees. Add that documentation to your Fiduciary Audit File (an example of which is included in the Resources section of this kit) so there’s a permanent record of your responsible actions.

The Service Provider as Fiduciary

While the above process will help you to identify, address, and document any conflicts of interest your plan may have, there is one even easier way to make sure you avoid any and all conflicts of interest from the get-go: select service providers who are fiduciaries. A fiduciary is anyone who is responsible for managing a 401(k) retirement plan, and is legally responsible for acting in the best interests of the employees whose assets are being invested in that plan. If you can select a service provider who will put it in writing that they are going to be a fiduciary for you and your employees, this whole process becomes much simpler. Service providers who act as fiduciaries will already have removed their conflicts of interest, or will be going through an extensive process to do so, and will help you understand fully any potential conflicts of interest you may bring into the equation. By sharing that legal burden of responsibility and prudence with you, your service provider can help you save money on ERISA attorneys and other expensive conflict of interest fixes you may face otherwise, and give you peace of mind that your service provider is being held to the same standard you are.

Part 1 of 6., R.E.T.I.R.E.® series by Nathan Fisher

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