3 Types of Fiduciary Risk and Ways to Mitigate Them

Posted by PlanFees on Sep 2, 2022 8:07:56 AM

Fiduciary responsibility compels plan providers to maintain a safe, fair and prudently managed plan for participants. Advisors should communicate openly to plan sponsors about their responsibilities and risks, which can vary depending on several factors including whether they’re engaged as a 3(21) or 3(38) fiduciary. Here are three types of fiduciary risk that your plan sponsor clients should be aware of, plus some ways to help mitigate them.

Cybersecurity Risk

According to the Department of Labor, plan fiduciaries “have an obligation to ensure proper mitigation of cybersecurity risks.” Because most retirement plans are now managed online, it’s important that the plan provider use up-to-date protocols. Many plans are targeted because of their sheer size, which means the consequences of fraud or theft in a retirement plan can be significant. The Department of Labor suggests that to mitigate the risk of cyberattacks and theft, advisors should first ensure that the provider has a detailed cybersecurity plan in place. That plan should include regular security auditing, periodic cybersecurity awareness training, secure cloud storage and more. Advisors should make sure that plan sponsors are aware of the importance of cybersecurity, and that they stay abreast of evolving threats and security measures.


Compliance Risk

ERISA is a highly detailed federal law that dictates nearly all aspects of plan management. Because of its complexity, and the numerous factors at play in most qualified employer-sponsored retirement plans, ERISA violations and penalties are common. To avoid costly errors, sponsors must be knowledgeable about the details of their plan. Regular documentation reviews can decrease the likelihood of ERISA violations. Clearly written plan documents, with a defined investment policy statement and management process that’s kept up-to-date and in writing, can help sponsors avoid errors they might not otherwise have been aware of. Sponsors should also know exactly where their responsibilities do and do not overlap with those of a third-party administrator or the advisor.


401(k) Lawsuit Risk

While 2020 saw the largest number of ERISA lawsuits so far, the number of suits filed in the years since has also been high. In 67% of cases involving ERISA violations, employers were required to pay fines and take corrective actions. Many of these lawsuits allege that sponsors and advisors failed to protect participants from paying excessive fees. Regular plan benchmarking can help avoid these suits by allowing advisors to make regular comparisons between current plan providers. PlanFees enables you to conduct a fee checkup in between a three- to five-year live bid benchmark, potentially alerting sponsors to comparatively high fees that may require attention.


Communication Is Key

Advisors have a duty to help ensure that participants are receiving fair, ERISA-compliant benefits. One of the best ways to do that is to make sure your clients are well-informed about their risks and responsibilities. A fast and convenient benchmarking report is a great tool for helping plan sponsors mitigate risks associated with excessive fees and produce better plan outcomes.



Topics: ERISA, Financial Professionals