Res Ipsa Loquitor - Safe Harbors By: Diana PowellESQ.

“The purpose of government is to enable the people of a nation to live in safety and happiness. Government exists for the interests of the governed, not for the governors.”
—Thomas Jefferson

Liability is the state of being responsible for something—legal liability, in particular, tends to create a feeling of unease. According to Investopedia, in business liability is defined as a company’s legal debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. It is in the goal of corporate retirement committees to provide the best options for their employees while limiting their corporations’ liability.

Before President Bush signed the Pension Protection Act (PPA) into law in 2006, employers were hesitant to adopt automatic enrollment options for employees’ 401(k)-type pension plans due to fear of legal liability for “market fluctuations and applicability of state wage withholding laws.” (DOL) After the PPA was signed and corporate liability was reduced, more companies began to offer plans that included an automatic enrollment option, which has led to an increase in employee participation. This increase in participation was the goal of the Department of Labor’s regulation. 

A safe harbor is a “legal provision to reduce or eliminate liability as long as good faith is demonstrated” and was created under ERISA to “protect management from liability for making financial projections and forecasts made in good faith” (Investopedia). The DOL states a Qualified Default Investment Alternative (QDIA) is a safe harbor investment created by the PPA. 

According to the IRS, a safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to make contributions for each employee. The safe harbor 401(k) eases administrative burdens on employers by eliminating some of the complex tax rules ordinarily applied to traditional 401(k) plans.

QDIAs and safe harbor plans were created in the Pension Protection Act of 2006 to encourage employers to offer automatic enrollment options by limiting the liability of the plan sponsors by affording them legal protections under the safe harbor regulations. If the conditions outlined by the PPA are met, then it is possible for plan sponsors to find relief from fiduciary liability. However, plan sponsors are not relieved of liability for the prudent selection and monitoring of a QDIA. (DOL) 

Even with the implementation of the Pension Protection Act of 2006, experts warn that liability can arise for plan sponsors due to their failure to fully comprehend the conditions set forth in the PPA. (InvestSense,LLC) As Fred Reish has been often quoted, “the vast majority of plans believe that they are 404(c) compliant, …, very few of them satisfy all of the 404(c) requirements.” (Reish, InvestSense, LLC)

Therefore, plan sponsors who believe they are not liable because they are covered under a safe harbor, may in fact have liability due from their inability to meet all of the conditions set forth under 404(c). 

The goal of creating QDIAs by the PPA of 2006 was to provide relief from liability for investment outcomes to fiduciaries, thereby encouraging plan sponsors to offer the option of automatic enrollment to employees who did not otherwise choose to participate in the pension plans. Experts are studying the long-term effects of QDIAs. However, researches caution, “most pension-related research has focused on individuals’ behavior – whether workers participate in a 401(k), how much they contribute, and how they make investment choices. Even the discussion surrounding automatic enrollment has focused on how it benefits employees by increasing their pension coverage and ultimately their retirement savings. Comparatively little is known about employer decisions regarding retirement plans, yet employer actions surrounding these plans substantially affect future retirement security. … Employers might respond to the surge in retirement plan costs associated with automatic enrollment by trimming match rates to 401(k) plans or reducing other compensation” (Butrica and Karamcheva, November 2012). 

"Plan sponsors who believe they are not liable because they are covered under a safe harbor, may in fact have liability due from their inability to meet all of the conditions set forth under 404(c).”


Diana K. Powell

Diana K. Powell, Esq. joined Westminster Consulting in September 2012 as Senior Legal Advisor. Previously she was a sole practitioner who advised educational organizations, government bodies and private corporations. Diana was responsible for negotiating agreements for high-tech software corporations...

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