A watchful eye: closer scrutiny being paid to the management of 401(k), pension plans.

• Author: Vogelzang, J. Daniel
• Position: RETIREMENT PLANS

More than 40 million employees in the U.S. work force rely primarily on their 401(k) plan for retirement. But in today's investment environment, how safe are the investments within your company's plan--and who's responsible for monitoring them?

A recent survey by Financial Executives International and Duke University indicates that retirement funds may not be so safe as 47 percent of the CFOs surveyed indicated that the 401(k) plan at their company includes funds that have been tainted by the recent mutual fund scandal.

That does not mean all is lost. The good news is that across all companies surveyed, including those that have not been affected by tainted funds, half are considering changes in their plan investment options. This means more companies are considering the ramifications of fiduciary liability under the Employee Retirement Income Security Act.

Under ERISA, a fiduciary can be held personally responsible for shortages in the benefit plan's assets resulting from a breach of fiduciary duty, such as offering imprudent investment choices.

But how accountable is the sponsor company for the plan's performance? And what processes can be followed to ensure the best performance for the plan?

According to ERISA, plan sponsors must act "for the exclusive benefit of the participants" and follow the "prudent process rule." Not complying with these requirements can result in a huge liability for the employer.

There are four significant components of ERISA, which requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of participants and their beneficiaries.

Among other things, this means employers must:

1. Establish a prudent process for selecting investment alternatives and service providers;

2. Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided;

3. Monitor investment alternatives and service providers; and

4. Select investment alternatives that are prudent and adequately diversified.

A PRUDENT PROCESS

Fiduciaries, defined as the person or persons having discretionary authority or exercising authority over the management of the plan or plan investments, must conduct a search for a plan provider or investments in a systematic and prudent manner with the ultimate selection made in the best interest of plan participants.

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