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The stock market's loss of over half its value in just over half a year devastated many people's 401(k) plans. 401(k) plans represent the retirement hopes of many small business owners and their employees. With values having plummeted and more employers deciding to stop matching plan contributions, small businesses should make sure they understand their fiduciary duties in administering 401(k) plans.
Unfortunately, many people have found out that their 401(k) plan wasn't quite as conservative as they believed. In recent years, "target date" funds have become popular 401(k) plan investments. As explained by Investment News, target date funds are intended to mix investment allocations based on the participant's target retirement date. For example, in a 2010 target date fund, one would expect a conservative allocation weighted toward equities rather than riskier stocks. Except this hasn't really been the case. Investment News suggests that the magnitude of target date fund losses may be because varieties of funds were labelled "target date."
According to Investment News, Senator Herb Kohl, the Labor Department and the SEC have suggested that the asset allocation behind many target date funds was much less conservative than many participants expected. Senator Kohl's probe into target date funds may result in more regulation of how 401(k) plans are managed.
Though tanking 401(k) plans hit many small business owners personally, they also need to be aware of their fiduciary duties to participating employees.
In February of 2008, the Supreme Court ruled than an individual could sue their employer for mismanagement of a 401(k) plan based on losses to that individual's account, rather than to the plan as a whole. In that case, the employee allegedly instructed his employer to make certain changes to his account's investments. The employer never made these changes and the employee claimed $150,000 in lost profits.
So, what are an employer's 401(k) fiduciary duties? According to the Department of Labor, they are:
This all begins with the 401(k) plan itself. Care should be taken in setting out of the plan's details, including the options and obligations of both employer and plan participant.
One way to limit liability is to give the investment decision-making power to plan participants. Provided they receive adequate information about their options, this can prevent employer liability for the participant's investment decisions.
Of course, many small businesses hire professionals to help with aspects of designing and administering a 401(k) plan. It's a good idea to have a service agreement with such professionals that assigns fiduciary liability for their actions to them. Keep in mind, however, that the act of hiring and retaining an investment professional to help with a 401(k) plan, in itself, is a fiduciary act. It is imperative to regularly monitor the management of the plan. In particular, the diversification of investments and fees taken by any service provider should be watched. Service provider fees have been a hotbed of 401(k) litigation.