Should Your Small Business Have a 401(k)?
Small business owners often feel that offering a retirement savings plan legitimizes their business and makes them more competitive in the hiring market. Whether or not these perceptions are true, very few small businesses understand the legal implications of offering a 401(k). Before you decide to offer a retirement plan, you should understand the potential liability and how to avoid it.
First, the bad news. The law that governs employee benefit plans is the Employee Retirement Income Security Act of 1974 (“ERISA”). By offering a 401(k), the named fiduciary, generally the business owner in a small business, takes on a full set of fiduciary responsibilities, including the duties of prudence and loyalty. The fiduciary responsibilities under ERISA are considered “the highest known to the law.” Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir. 1996). The liability associated with being a fiduciary is not limited by your corporate structure. It attaches to the fiduciary in his or her personal capacity. As a result, the decision to operate a 401(k) plan without proper planning and advice can create substantial risk and liability to a business owner. These problems have solutions, including fiduciary insurance, the advice of an experienced attorney, and proper planning.
On to the good news. A 401(k) plan can be a great asset to a business and the requirements of ERISA are not problematic for small businesses that follow the necessary steps to avoid unnecessary risk. One important point to remember is that ERISA’s fiduciary duties are more about process than substance. This can be a problem for businesses that do not know how to properly document their decision-making processes. If you keep minutes of your meetings and record the documents you review while choosing a retirement plan, those records can go a long way toward proving you used a responsible, prudent process to make your decision. Obtaining competitive bids is also considered a fiduciary best practice. It is difficult to prove that your decision making process was prudent if you only consider one offer.
The duty of loyalty is relatively straightforward. Are you operating the 401(k) plan according to the plan’s terms for the sole and exclusive benefit of the participants? Are you using plan assets to pay for non-plan related business expenses? The duty of loyalty is intended to protect the plan against dishonest and inappropriate use of plan assets.
Offering a 401(k) to your employees, and for your own use, can be a great way to make your small business a more competitive employer. It can help attract and retain a better caliber of employees. However, the decision to offer a retirement plan is not a decision that should be made lightly. It requires research, consultation with an experienced attorney, and a well-documented process.