Are you a
fiduciary of your company's retirement plan? If you're not
sure, it's time to find out because if you are a fiduciary,
it is important to know exactly what your responsibilities
are.
The Employee Retirement Income Security Act of 1974
(ERISA) imposes rigorous standards on plan fiduciaries, and
a fiduciary who breaches any obligation or duty can be held
personally liable to make good any losses incurred by the
plan resulting from the breach. That means the fiduciary's
individual assets are subject to loss in a fiduciary breach
suit.
Unfortunately, many employers offering qualified plans to
their employees are not fully aware of their fiduciary
responsibilities and the potential personal liability.
Because the stakes are so high, it is especially important
during the current financial market turmoil that all
fiduciaries understand their responsibilities to comply with
ERISA.
Following is a simplified explanation of who the plans
fiduciaries are and their required duties.
Who is a Fiduciary?
A fiduciary is anyone who:
- Is specifically identified in the plan document as a
fiduciary;
- Exercises discretionary authority over the management
and disposition of plan assets;
- Renders investment advice for a fee; or
- Has discretionary authority or responsibility in the
administration of the plan.
When an employer establishes an ERISA plan, it is the
initial fiduciary. Typically it is the board of directors or
corporate president who decides whether to appoint
individuals or committees to be the plan's fiduciaries.
The appointment of a fiduciary is itself a fiduciary act.
So, whoever appoints the officers or committee members has a
duty to prudently select those persons and to periodically
review their work to make sure they are doing their job.
In general, professional service providers offering
legal, accounting or auditing, third-party administration or
actuarial services are not considered fiduciaries because
they do not exercise discretion or control over the plan.
Fiduciary Duties
The primary duty of all ERISA fiduciaries is to act
solely in the interest of plan participants and
beneficiaries and with the exclusive purpose of providing
benefits to them. Other duties include:
- Selecting and monitoring any service providers to the
plan;
- Selecting and monitoring the plan's investments;
- Paying only reasonable plan expenses;
- Following the plan documents (unless inconsistent with
ERISA);
- Making sure participants receive the information
required by ERISA; and
- Filing the necessary government reports.
ERISA prohibits fiduciaries from engaging in a variety of
transactions that are inherently tainted by conflicts of
interest (referred to as "prohibited transactions").
Specifically, a fiduciary may not engage in transactions
with the plan in which he uses plan assets for his own
interest, acts for a party whose interests are adverse to
the plan or plan participants or receives compensation from
a party dealing with the plan.
Fiduciaries can be held responsible for the actions of
co-fiduciaries if they knowingly participate in another
fiduciary's breach, conceal the breach or fail to take steps
to remedy such breach. For example, a fiduciary with
knowledge of a breach by another fiduciary must take action
to correct it or he will also be held liable for the breach.
Selecting and Monitoring Service
Providers
Plan fiduciaries must carry out their duties with the
care, skill, prudence and diligence of a prudent person
familiar with the matter and acting under similar
circumstances. Competent outside advisors can be engaged who
possess the expertise and experience in performing the
required duties such as third-party administrators. However,
the plan fiduciary's obligations do not end with the
selection of a competent service provider because ERISA
imposes an ongoing duty to monitor the provider with
reasonable diligence.
A formal review process should be established and
followed at reasonable intervals to monitor the provider's
performance. Details of these periodic reviews should be
documented in writing.
Selecting and Monitoring of
Investments
ERISA imposes the requirement that plan fiduciaries
invest the assets of a qualified retirement plan in a
prudent manner with proper diversification to minimize the
risk of substantial loss.
If a fiduciary does not have the necessary investment
expertise, an outside trustee or investment manager should
be hired to explicitly take on this responsibility. However,
fiduciaries must exercise prudence in selecting an
appropriate investment manager and have a responsibility to
review performance as well as the fees associated with the
investments on an ongoing basis.
Establishing prudent and diligent written investment
policies solely in the interest of participants and
beneficiaries can significantly reduce exposure to fiduciary
liability.
Investment Policy Statement
An Investment Policy Statement (IPS) is a written
document that provides the plan fiduciaries responsible for
plan investments with guidelines for selecting, reviewing
and changing the plan's investments. Although ERISA does not
specifically require an IPS, it is one of the first things
that the Department of Labor will ask to see when it audits
a plan and will want proof that it was followed.
The IPS is essential in providing the framework for
selection of appropriate investments or, in the case of
participant-directed retirement plans, the selection of
investment alternatives. It also serves as a yardstick for
evaluating and monitoring performance and can provide
important documentation that demonstrates the fiduciaries
are meeting their fiduciary responsibilities.
Investments (or investment alternatives) should be
monitored, at the very least, on an annual basis to ensure
that they continue to be appropriate choices. A detailed
file, including notes from meetings as well as any reports
evaluating investments, will be helpful if a fiduciary ever
is required to defend his decisions.
Participant Directed Accounts
Under ERISA section 404(c), plan fiduciaries may be
relieved of fiduciary liability for investment choices made
by participants if the plan satisfies certain requirements.
Many employers are under the misconception that if their
plans are designed to comply with ERISA section 404(c) safe
harbor requirements, they have no fiduciary liability.
Unfortunately, this is not the case since the plan
fiduciaries are still liable for selecting and monitoring
the investment alternatives that are made available under
the plan.
Poor investment performance is not necessarily a breach
of fiduciary responsibility. On the other hand, offering
participants investment choices that consistently perform
well below their peers may be.
Paying Reasonable Expenses
Plan expenses can generally be paid from the plan assets
as long as they are prudent and reasonable and permitted by
the plan document. Since these fees directly affect
participants' account balances in defined contribution
plans, fiduciaries need to continually monitor plan expenses
to ensure that they are reasonable in light of the services
provided.
Plan Administration and Compliance
While plan investments are at the heart of fiduciary
responsibilities, in practice plan fiduciaries more often
run afoul of ERISA's other administrative and compliance
requirements described below.
Following the Plan Documents
ERISA requires a qualified plan to have a written plan
document. From time to time plan amendments are needed due
to legislative changes and should be adopted promptly.
Fiduciaries are responsible for overseeing the
administration of the plan. They must understand the
provisions defined in the plan document and monitor
compliance with those requirements including the following
functions:
- Verifying that the plan covers the right employees or
does not exclude employees who may be entitled to
participate in the plan;
- Depositing and investing employee contributions and
loan repayments in a timely manner;
- Paying plan benefits;
- Making plan loans; and
- Ensuring the plan is in compliance with applicable
compliance testing.
Participant Communications
Fiduciaries must ensure that plan participants and
beneficiaries receive adequate information regarding the
plan including:
- Summary Plan Description;
- Summary of Material Modifications;
- Individual benefit statements;
- Summary Annual Report;
- Blackout period notice (if applicable); and
- Automatic enrollment notice (if applicable).
Government Reporting
Plan administrators generally are required to file a Form
5500 with the government each year which includes
information regarding the plan's financial condition, number
of participants, fees paid to service providers, etc. For
larger plans an accountant's report is necessary. Penalties
apply for failure to file these forms in a timely manner.
Bonding
As an additional protection for plans, those who handle
plan funds generally must be covered by a fidelity bond
which is a type of insurance that protects the plan against
loss resulting from fraudulent or dishonest acts of those
covered by the bond. In general, the bond must be at least
10% of the value of the plan assets but not more than
$500,000. Certain types of plan investments may increase
bonding requirements.
Since the bond does not protect fiduciaries to the extent
claims are made against them for breaches of fiduciary duty,
a separate fiduciary liability insurance policy should be
considered as added protection.
Conclusion
Don't put your personal assets at risk. Determine if you
are considered an ERISA fiduciary and make sure you
understand your duties. Courts have held plan fiduciaries
who were completely ignorant of their fiduciary
responsibilities personally liable to restore plan losses
for breaching their fiduciary duties of prudently investing
the plan assets.
Fiduciary duties are numerous and complex. Fortunately,
fiduciaries can seek guidance from competent, experienced
outside advisors who have experience with these complex
rules. Procedures should be in place for evaluating and
monitoring these service providers on an ongoing basis.
Having an IPS will greatly reduce the risk of ERISA
fiduciary liability as long as it is correctly drafted,
implemented and followed. In addition, fiduciary insurance
should be considered to provide added protection in case of
fiduciary breach.
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