We finally got clarity about when 401(k) contributions must be deposited when the Department of Labor (DOL) on February 28 announced a proposed safe harbor of 7 business days. But it’s the DOL’s directive in Field Assistance Bulletin (FAB) No. 2008-01 on fiduciary responsibility for collection of delinquent contributions that will have more impact on fiduciaries.
I blogged about this FAB back in February in my post, In the shadow of LaRue, Department of Labor Issues a Directive on Fiduciary Responsibility for Collection of Delinquent Contributions. Looking back at it, it may have been a situation akin to someone asking me what time it was, and me telling them how to make a watch.
But Jim Farley, Director Retirement Research, Lord Abbett & Co., got to the heart of matter better than did I in his Guest Article, Contribution Timing and Collection Responsibility, a Q&A, for 401(k) Help Center. Here is an excerpt from about collection responsibility in Q&A format:
What must a plan sponsor do to fulfill its responsibility?
Essentially a plan sponsor must take action. The FAB points out that "authority over a plan’s assets subject to the trust requirement of Section 403(a) of ERISA…must be assigned to i) a plan trustee with discretionary authority over the assets, ii) a directed trustee subject to the proper and lawful directions of a named trustee, or iii) an investment manager." The trustee, especially in small plans, is often the business owner.
What if the fiduciary has not assigned responsibility?
The FAB answers this directly: "[I]f no trustee or investment manager has the responsibility, the fiduciary with authority to hire the trustees may liable for plan losses due to a failure to collect contributions because the fiduciary failed to specifically allocate this responsibility."
What about plans such as a SIMPLE IRA or SEP IRA that have no trustee?
The FAB answers this question via a footnote that states, "In the case of SIMPLE IRAs and SEPs, the plan sponsor generally will be a named fiduciary because the documents establishing the plan provide the employer with the authority with respect to management and administration of the plan…"
What happens when one trustee, who has no direct responsibility for collecting contributions, knows that contributions are delinquent?
ERISA has a section, 405(a) (3), that makes one trustee (fiduciary) liable for the breach (failure to perform assigned duties) of another trustee (fiduciary) if the trustee has knowledge of the breach of another unless the trustee makes a reasonable effort to remedy the situation.
The FAB points out various actions that could be taken including contacting the DOL, notifying other fiduciaries that contributions are delinquent or seeking a court order. It then says, "The documents and instruments governing a plan cannot serve to absolve a co-fiduciary from liability for failing to take steps to remedy a known breach of another fiduciary."
You can read Jim’s complete article by clicking here.