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
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
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 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;
- 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
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
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
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
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
- 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.
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 timely manner.
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.
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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