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
- 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.
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
- 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
- Making sure participants receive the information required by
- 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
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
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
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
- 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
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).
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
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
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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