Retirement plan analysis suggests rampant fiduciary breaches

At a time when the importance of price transparency and fiduciary responsibility have never been more pronounced across the employee benefits space, a recent analysis reveals alarming breaches in retirement savings plan stewardship. It also suggests that most plan sponsors and participants are overpaying for the fees they are charged.

Nearly 84% of U.S.-based retirement plans have at least one likely fiduciary violation under the Employee Retirement Income Security Act (ERISA), according to Abernathy Daley 401k Consultants. The plan administration and employee education consultancy suggested that more than 600,000 American companies are at risk for fines, legal penalties and fiduciary failure based on red-flag warnings found in the latest Form 5500 filings for 764,729 plans.

The violations uncovered were described as "infractions, fineable offenses, fiduciary failure, or plan malpractice." They fell into two categories: Regulatory infraction red flags and egregious plan mismanagement red flags.

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"Plan sponsors and employees are not only overpaying for their retirement plans on a widespread scale; they are also being underserved and exposed to unplanned and potentially damaging legal, compliance and financial risks," according to Steven Abernathy, the company's CEO. 

Matthew Daley, the company's president, believes the findings "show that administrators are not keeping plan sponsors out of harm's way and plan sponsors are not offering their employees a bulletproof retirement plan." 

However, one high-profile industry leader casts doubt upon their conclusion. Tim Rouse, executive director of the SPARK Institute, says his nonprofit organization that helps shape national retirement policy doesn't agree with the findings or methodology of their analysis. For example, he notes that it classifies not including automatic enrollment as a fiduciary violation "when in fact the decision to include automatic enrollment, while perhaps a best practice, is not a fiduciary decision in the first place."  

Rouse goes on to say plan sponsors that work with recordkeepers and other SPARK members "in our experience do a very good job of managing their plans." They also play a critical role in helping manage their plans prudently by offering sophisticated products and services that help employees achieve great outcomes, he adds. Another benefit he cites is providing fiduciary training to ensure employers understand their responsibilities and benchmarking data for them to review with their advisers.

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The federal government has been cracking down on these violations. Legal proceedings initiated last year by the Employee Benefits Security Administration restored nearly $1.4 billion to employee benefit plans, participants and beneficiaries. Criminal investigations resulted in 68 indictments and 161 convictions or guilty pleas. In one such high-profile case earlier in the year, Vanguard agreed to pay more than $100 million in fines to the Security Exchange Commission for misleading investors about their target date funds, along with $40 million in fines to 401(k) plan participants. 

Abernathy-Daley surmises that most corporate plan sponsors have not had their 401(k) or 403(b) plans benchmarked by an independent third party over the past three or more years. As such, the firm recommends benchmarking audits to ensure compliance and deliver the optimal solutions and choices to employees. 

"In our opinion, the employee has the right to know every detail regarding the integrity and efficiency of the benefit they have been offered, which is supposed to allow them a retirement at their desired date and income level," Daley explains. "Simply put, if it is not serving this essential need, then it is not serving them."

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These findings present a valuable opportunity to remind plan sponsors about the importance of having fiduciary standards and processes in place, as well as qualified service providers and consultants to ensure compliance and risk management, observes Jamie Greenleaf, founder and managing director of OneVision.

Noting how "the devil is in the details," she explains that prudent experts are essential for avoiding fiduciary breaches given ERISA's complexity. "Mistakes happen in benefits administration, but what truly matters is how quickly they are identified and resolved," she says. "Form 5500 filings reflect past data, and in many cases, corrections may already be in progress." 

Adds Andy Banducci, senior vice president of retirement policy at the ERISA Industry Committee (ERIC): "Frivolous litigation and more red tape only serve to discourage plan sponsors from offering these valuable benefits."