If you read my writings, you know that fiduciary liability is one of the plan sponsor’s more important concerns as a plan fiduciary. Since participant-directed plans under ERISA §404(c) are supposed to limit a plan sponsor’s liability, I have consistently reiterated the need for plan sponsors to develop an investment policy statement (IPS) with their financial advisors, consistently review the funds against said IPS, and provide participant education. Otherwise, plan sponsors can be subject to liability from participant lawsuits.
A plan sponsor’s adherence or disregard for ERISA §404(c) is no guarantee that the plan sponsor will not get sued or will get sued. While fiduciary liability is a great topic these days because plan sponsors have been named defendants in lawsuits by participants more frequently today than in the past, fiduciary liability isn’t usually what gets plan sponsors into trouble
Retirement plans are highly technical, tax-deferred, and qualified entities. Retirement plans have so many different moving parts with so many discrimination tests, buffeted by a plan document that can be difficult to understand for most people. So my rule of thumb is that if an Internal Revenue Service agent or Department of Labor agent wants to look for something wrong, they will find it. It may not be a huge plan error like a plan document that hasn’t been updated in 10 years, it can be as simple as not allowing participants to change their 401(k) salary deferrals according to the terms of the plan
Plan errors can come in all different shapes and sizes and a plan sponsor can detect these errors through the use of an ERISA attorney or their third-party administration firm. By finding these errors on their own, a plan sponsor could self-correct if the error doesn’t require an IRS submission. Larger errors or errors discovered on a plan audit by the IRS and/or DOL may require submission to their respective voluntary compliance programs.
Unfortunately, plan errors are a common fact of the day-to-day administration of a retirement plan error. With the right team surrounding them, plan sponsors can mitigate potential plan defects. Yet if they have plan errors, there is enough room for the plan sponsor to correct them without large penalties or the risk of plan disqualification.