401k Liability for Plan Sponsors

As a small business owner, I am getting a lot of questions from my employees regarding their 401(k) investments. I feel uncomfortable offering “advice”, but at the same time I want what is best for them. What is my responsibility in these situations?

With the recent market volatility, many employee’s are questioning their 401(k) statements and employers often find themselves in a quandary: They want to help their employees with their investments, but by offering investment advice, they open themselves to liability should the employee make an investment that results in a financial loss.

The solution was provided by the Pension Protection Act of 2006. The PPA allows plan sponsors and fiduciaries to appoint qualified advisors to provide investment advice. As long as certain statutory requirements are met, sponsors are not liable for investment performance resulting from that advice.

The Department of Labor describes a plan sponsor’s role as follows: “The duty to act prudently is one of a fiduciary’s central responsibilities… It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” (www.dol.gov). Perhaps more importantly, having a trusted adviser means you can focus on what really counts – running your business!

Most 401k providers DO NOT offer this type of protection, since they are just salespeople. It is important to choose an investment firm that is a Registered Advisor, so you can get the investment expertise, and the fiduciary liability removed.