This article is the first in a two-part series examining retirement plan trends and current events that may have created the need for an independent fiduciary consultant.

A series of events over the past few years has made proper oversight of 401(k) and other retirement plans increasingly difficult for employers.

These events have created an unprecedented perfect storm of liability problems for retirement plan sponsors, leaving them with two choices: Navigate an increasingly complex retirement plan world on their own or retain an independent co-fiduciary consultant to help lead the way.

It never has been an easy task for plan sponsors to properly manage retirement plans themselves.

Among other things, prudent plan management requires a thorough understanding of the Employee Retirement Income Security Act, fiduciary responsibility, retirement plan providers, mutual funds and fee arrangements. Increasing the complexity of effective plan oversight are confusing new rules related to the Pension Protection Act, an increase in 401(k)-related lawsuits and the bear market of 2008.

The duties and knowledge required of plan sponsors to run a successful retirement plan have become a virtual minefield where missteps can lead to angry employees at best, or a lawsuit at worst.

Past is prologue

The demise of Enron and the bear market of 2000-2002 marked the emergence of increased scrutiny of retirement plans.

Innocent plan participants lost millions of dollars during this period and, as a result, regulators, Congress and litigators began focusing their attention on plan sponsors and fiduciaries.

Many companies began to realize for the first time following Enron's collapse that retirement plan fiduciaries had real liability.

Fiduciaries are personally liable for the plan, and any mistake or breach in the management of the plan could potentially put the fiduciary's personal wealth at stake.

Then, beginning in the fall of 2006, a series of lawsuits were filed against plan sponsors for claims of excessive or unreasonable fees charged to plan participants in their retirement plans.

These lawsuits, expected to increase amid the economic downturn, claim that the plan sponsor and plan fiduciaries breached their fiduciary duty by allowing the excessive or unreasonable fees to be charged, for failing to understand the fees being charged and for failing to monitor the fees being charged.

The problem for plan sponsors is that failure to understand the fees being paid is considered a breach of fiduciary duty.

More than ever, plan sponsors need to ensure that the fees associated with plan investments are reasonable and competitive.

As litigation began to tick upward, the Pension Protection Act of 2006 created a series of new regulations and safe harbors that has made the retirement plan management process even more difficult and confusing for plan sponsors.

As a result, plan sponsors now are required to have a thorough understanding of matters such as automatic enrollment, qualified default investment alternatives (QDIAs), QDIA notice requirements and fiduciary safe harbors.

Present and future concerns

Proposed legislation expected within the next year will require plan sponsors to disclose a great deal of information regarding plan fees and performance to plan participants.

Though there currently is a debate over the content and timing of this legislation, it is clear that if passed, plan sponsors should expect an onslaught of questions from employees as a result of the new disclosure requirements.

Among other things, the Department of Labor's "Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans," as currently proposed, will require plan sponsors to disclose:
•    Fee and expense information. Investment expenses expressed as an expense ratio and any other type of fee charged to a participant account — sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, purchase fee, and mortality and expense fees.

•    Performance data, including the total return of each investment option over the one-, five- and 10-year periods, including the performance of an appropriate benchmark or index.

•    A comparative format. The information must be provided to participants in a way that facilitates comparison of the investment options to relative benchmarks.It is highly likely that these disclosure requirements will expose underperforming plan investment choices, as well as excessive investment expenses.

As a result, plan sponsors should be aware that these requirements may accelerate further litigation.
Furthermore, as plan participants enter into a deepening despair over the retirement income losses experienced in one of the worst bear markets in memory, plan sponsors should expect that participants will be scrutinizing the investment choices made available to them in their retirement plans.

Although participants are responsible for directing their own investments, they are forced to choose from a list of options assembled by their employer.

This bear market will shine a spotlight on problematic investments and raise scrutiny of plan fees paid by participants as they endure the fallout of terrible investment returns.

Clearly, plan sponsors do not have control over the performance of the capital markets. However, if underperforming investment options are allowed to linger in retirement plans, the plan sponsor is opening the door to potential problems. If the participants are paying plan fees that may be considered excessive or unreasonable, plan sponsors are more likely to face complaints and/or a potential lawsuit in a bear market environment.