Are You a Fiduciary?

Administering a retirement plan and managing its assets requires certain actions and involves specific fiduciary responsibilities. If you make decisions that impact your organization’s retirement plan, you’re likely considered a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). With the current scrutiny over retirement plan litigation, it is imperative that plan fiduciaries understand their responsibilities and adhere to ERISA’s standards. Learn more about who is considered a fiduciary, their fiduciary responsibilities, and how to fulfill their responsibilities to their participants.

Who is a Fiduciary?

ERISA requires every retirement plan to have at least one named fiduciary—essentially, the person or group responsible for the retirement plan operation and decision-making. Sometimes, determining that a certain person, board of directors, committee, or corporate role is a fiduciary is as simple as looking at the plan’s governing document. Plan documents that formally designate someone as a named fiduciary don’t require much more interpretation than that; and many plan documents that name a fiduciary will also specify the fiduciary’s duties.

In other cases, a plan fiduciary designation will depend on the activities the fiduciary performs. ERISA defines a fiduciary as any person or group who:

• Has discretionary authority over the plan’s management, disposition of assets, and/or administration; or
• Provides investment advice to the plan for a fee.

Because ERISA holds fiduciaries to certain rules and responsibilities, it’s crucial for organizations to be able to easily identify their plan fiduciary and ensure that the fiduciary has the necessary support to make and implement plan-related decisions.

Fiduciary Responsibilities / Rules

Fiduciaries must operate under a few general rules of thumb:

The exclusive benefit rule means that fiduciaries are required to carry out their functions to the exclusive benefit of plan participants and named beneficiaries. That is, the fiduciary can’t make plan decisions that aren’t in the plan participants’ best interests. Fiduciaries must do their due diligence to thoroughly investigate and weigh potential investments and defray the reasonable expenses of plan administration.

As a corollary to acting in plan participants’ best interests, fiduciaries must also avoid self-dealing. Using a retirement plan transaction to benefit the fiduciary instead of the plan participants (for example, by investing only in assets that provide a commission or kickback to the fiduciary) is strictly forbidden under ERISA.

The prudent person standard requires plan fiduciaries to perform duties with care, skill, prudence and diligence that would be exercised by a prudent person under similar circumstances. Sometimes, that may mean engaging a third-party expert to properly evaluate or monitor investment options if you don’t possess the knowledge or experience warranted to make decisions over the plan.

Fiduciaries must also ensure their actions comply with plan documents and ERISA requirements. It’s almost unheard-of for a plan sponsor to find themselves facing an official inquiry for following the plan document—as long as this plan document complies with ERISA. But this makes it imperative for plan sponsors to be familiar with ERISA’s requirements and the terms of their own governing document.

Finally, fiduciaries are required to minimize the risk of large investment losses, generally by diversifying plan investments. Fiduciaries are also obligated to continually monitor the service providers and the selected investments to ensure that they still fit within the plan’s focus, dropping low-performing investments and avoiding high-fee funds.

How Can Fiduciaries Meet Their Responsibilities?

Maintaining one’s fiduciary responsibilities in the face of ERISA’s hundreds of requirements can seem overwhelming. But by avoiding a few common pitfalls and keeping close track of changes in investment performance and ERISA provisions, you’ll be able to create a framework that makes keeping up with fiduciary responsibilities easier than you expect.

Establish a Governance Process

By setting forth a standard operating procedure that defines fiduciary roles and creates a step-by-step process for implementing it, you’ll avoid any tumult in your organization when certain key members leave. Certain aspects of the fiduciary role require the exercise of independent judgment, but much of the day-to-day grind can essentially be automated.

Document, Document, Document

In the event your organization is audited, it’s crucial to have clear documentation of every investing and governance decision the fiduciary body has made. Even if you’re never selected for an audit, documenting your processes can protect plan sponsors and participants, as well as make it easier for future fiduciaries to continue to work toward the goals you’ve set.

Create an Investment Policy Statement (IPS)

The IPS is essentially the “North Star” of any investment plan, setting forth the plan’s purpose, goals, and methods for achieving both. Having a comprehensive IPS can take much of the guesswork out of selecting and monitoring investments.

Ensure Employees Are Informed

Many ERISA requirements focus on transparency and employee rights. By providing educational information to plan participants, including fee and plan disclosures, you’ll help ensure that they’re better informed about the options available to them.

How PlanPILOT Can Help

It will be much easier for you and your fellow committee members to understand and fulfill your fiduciary duty when you have everything spelled out so clearly. If you need help mapping out your plan governance or would like expert fiduciary training for your committee, give us a call at (312) 973-4911 or email info@planpilot.com. We are experienced retirement plan consultants who can give you the knowledge your committee needs to protect against breach of fiduciary duty.

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