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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