- Introduction
- Who or What is a Fiduciary?
- Fiduciary Duties
- Consequences of a Fiduciary Breach
- Steps to Limit Liability
- Documenting Decision-Making Process
- Monitoring Plan Expenses
- Letting Participants Direct Their Accounts
- Avoiding Prohibited Transactions
- Bonding and Insurance
- Administrative Responsibilities
- Timely Deposit of Employee Contributions
- Reporting and Disclosure Requirements
- Conclusion
Many employers establish retirement plans without being
fully aware of their fiduciary responsibilities. It is imperative to know
whether you are a fiduciary and, if so, what your responsibilities are because
there are risks for the unwary. A fiduciary that breaches any obligation or duty
can be held personally liable to make good any losses incurred by the plan
resulting from the breach, even if the breach was made unknowingly. Pleading
ignorance or inexperience will not be adequate defense.
The Employee Retirement Income Security Act of 1974 (ERISA) imposes rigorous
standards for fiduciaries—those who manage a retirement plan and its assets.
Therefore, it is important that all fiduciaries be aware of their
responsibilities and understand and comply with ERISA’s fiduciary provisions.
Following is a general overview of who the plan’s fiduciaries are, their
required duties and steps to limit liability.
You become a fiduciary under ERISA by title or by action including the
following:
- Being named in the plan document or being appointed as a fiduciary;
- Exercising discretionary authority or control over plan assets and/or
the management of the plan; or - Providing investment advice for a fee.
Every plan must have at least one fiduciary named in the plan document
(either a person or an entity). Many times the plan sponsor is the named
fiduciary. If the plan sponsor keeps some or all of those duties, its officers
or principals who perform those duties are ERISA fiduciaries.
Further, 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. Typically it is the board of directors or corporate president
who appoints the fiduciaries. As a result, the board members or the president
are also fiduciaries.
In general, professional service providers offering legal,
accounting/auditing or third-party administration services are not considered
fiduciaries because they do not exercise discretion or control over the plan.
The primary duty of all ERISA fiduciaries is to act in the sole interest of
the plan and its participants and beneficiaries. You must:
- Act with the care, skill, prudence and diligence of a prudent person who
is familiar with retirement plan matters; - Follow the plan documents;
- Pay only reasonable plan expenses;
- Diversify plan investments; and
- Avoid conflicts of interest and self-dealing in directing plan
transactions.
Expertise in a variety of areas is required of fiduciaries. Fortunately, you
can act to limit potential exposure by relying on competent outside advisors to
assist with complicated matters. Your obligations do not end with the selection
of a service provider because ERISA imposes an ongoing duty to monitor with
reasonable diligence the providers in order to ensure that they are meeting the
plan’s expectations.
Consequences of a Fiduciary Breach
In addition to being held personally liable for a fiduciary breach, you may
be personally liable to restore plan losses resulting from violations as well as
forfeit any realized profits. The DOL will also assess a civil penalty against
you and, in extreme cases, you may be subject to criminal penalties.
You can be held liable for both your direct actions or for the actions of
co-fiduciaries. If you become aware of an improper action on the part of a
co-fiduciary and do nothing, you also become liable for that breach.
Regardless of how well the fiduciaries in a plan perform their duties, it is
inevitable that mistakes can be made. Several self-correction programs are
available for correcting errors. However, self-correction is not available for
all violations.
There are actions that can be taken to demonstrate that your responsibilities
were carried out properly as well as other ways to limit liability which are
described below.
Documenting Decision-Making Processes
In order to demonstrate that you acted prudently, you should fully document
in writing the process used in making fiduciary decisions.
For example, an Investment Policy Statement can provide important
documentation that demonstrates you are meeting your responsibilities regarding
plan investments. It is a written guideline which outlines the process for
selecting, reviewing and changing the plan’s investments. Although ERISA does
not specifically require an Investment Policy Statement, it is one of the first
things that the DOL will ask to see when they audit a plan and will want proof
that it was followed.
The prudent fiduciary must understand what expenses are being charged and
what services are being provided for those fees. Thanks to the fee disclosure
regulations, you are no longer in the dark about how much compensation plan
providers are receiving from various sources, directly or indirectly. It’s a
great thing because you have the duty to only pay reasonable expenses and that
was often hard to analyze when the plan providers didn’t have to disclose their
fees.
The problem is that with this added information comes added responsibility.
So it’s not important enough to get the fee disclosures—you have to benchmark
your fees to determine whether they are reasonable. You are not required to pay
the lowest fees, but you have to determine whether the fees you are paying are
reasonable for the services you are provided.
Letting Participants Direct Their Accounts
Another way to limit liability is to allow participants to direct their own
accounts. ERISA Section 404(c) allows fiduciaries to transfer investment
responsibility to participants who direct the investment of their accounts.
Generally, you are not liable for losses resulting from the participant’s
exercise of investment control if all of the ERISA 404(c) rules are satisfied.
However, you retain responsibility for the selection and monitoring of the
investment alternatives that are made available to the participants.
Much of the recent litigation in this area has involved the fiduciary’s
failure to monitor investment menus after initial selection. Therefore, you
should review the menu on an ongoing basis and document your actions in the same
way the initial selection was documented.
There are a number of 404(c) requirements including offering a broad variety
of investments so the participant can diversify; giving the participants
sufficient information to make informed decisions about their investments; and
participants must be able to transfer money between options at least quarterly.
There are also very specific disclosure requirements including general plan
information about how to manage and change their investment options and full
disclosure on any plan administration and/or individual expenses that might be
paid out of their account.
Avoiding Prohibited Transactions
ERISA prohibits fiduciaries from engaging in a variety of transactions that
are inherently tainted by conflicts of interest. Specifically, you may not
engage in transactions with the plan in which you use plan assets for your own
interest, act for a party whose interests are adverse to the plan or plan
participants or receive compensation from a party dealing with the plan.
ERISA requires that every fiduciary of the plan and every person who “handles
funds or other property of such a plan” are required to be bonded. The amount of
the bond is 10% of the amount of the plan’s assets as of the beginning of the
plan’s fiscal year. Unless the plan holds company stock, the maximum amount of
the bond is $500,000. The bond protects the plan, not the fiduciary, against
loss by reason of acts of fraud or dishonesty on the part of persons required to
be bonded.
You can obtain fiduciary liability insurance that provides coverage for
expenses such as legal defense or monetary judgments. These policies differ
based on features such as deductibles, exclusions, etc., so it is important to
work with a property and casualty agent who understands the nuances of ERISA
fiduciary liability.
Administrative Responsibilities
Fiduciaries are responsible for overseeing the administration of the plan and
should be familiar with the plan’s terms, loan policy, etc. There are many
aspects to plan administration including:
- Enrolling and covering the right employees;
- Timely correction of problems with regard to testing failures or
operational issues; - Authorizing distributions and loans;
- Timely deposit of employee contributions; and
- Complying with reporting and disclosure requirements.
Timely Deposit of Employee Contributions
Deposits must be made as soon as they can reasonably be separated from the
company’s assets, but no later than the 15th business day of the month following
the month withheld. The 15th business day of the month following withholding is
not a safe harbor and many times funds can be segregated within days of being
withheld. For plans with under 100 participants there is a “safe harbor”—if the
deposits are made within seven business days of withholding, they are considered
to be timely.
Reporting and Disclosure Requirements
Fiduciaries are subject to a number of reporting and disclosure requirements.
One is the annual filing of Form 5500 with the DOL. Form 5500 is a government
mandated return comprised of a main document and, in some cases, multiple
schedules that report information relating to the plan and its operation.
Other disclosures must be made to the plan participants. A summary plan
description (SPD), which is a “plain English” summary of the plan’s provisions,
must be provided to new participants and, in general, every five years. After
the SPD is distributed, you must continue to make participants aware of material
changes to the plan through explanations called summaries of material
modifications. Also required is a summary annual report which is a snapshot of
the financial schedules attached to Form 5500.
It is important for fiduciaries to focus on all aspects of maintaining the
plan including the selection and monitoring of investments and service
providers; paying reasonable expenses; and overseeing the administration of the
plan. Decision-making processes should be put in place and actions documented in
writing demonstrating that these processes were followed.
Fiduciary duties are myriad and complex. Fortunately, you can seek guidance
from competent outside advisors who have experience with these complex rules.
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