Meeting Your Fiduciary Responsibilities

Offering a retirement plan can be one of the most challenging, yet rewarding, decisions an employer can make.  The employees participating in the plan, their beneficiaries, and the employer benefit when a retirement plan is in place.  Administering a plan and managing its assets, however, require certain actions and involve specific responsibilities.  To meet their responsibilities as plan sponsors, employers need to understand some basic rules, specifically the Employee Retirement Income Security Act (ERISA). ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries).

What are the essential elements of a plan?

Each plan has certain key elements. These include:

  • A written plan document that describes the benefit structure and guides day-to-day operations;
  • A trust fund to hold the plan’s assets;
  • A recordkeeping system to track the flow of monies going to and from the retirement plan; and
  • Documents to provide plan information to employees participating in the plan and to the government.

Employers often hire outside professionals (called third-party administrators) to manage some or all of a plan’s day-to-day operations. In addition, there may be one or a number of officials with discretion over the plan. These are the plan’s fiduciaries.

Who is a fiduciary?

Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control.  Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.  A plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation.

What is the significance of being a fiduciary?

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following the plan documents;
  • Diversifying plan investments; and
  • Paying only reasonable plan expenses.

 

The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA . It requires expertise in a variety of areas, such as investments.  Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.  Prudence focuses on the process for making fiduciary decisions.  Therefore, it is wise to document decisions and the basis for those decisions.

Limiting Liability

With these fiduciary responsibilities, there is also potential liability. Fiduciaries that do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions.

However, fiduciaries can limit their liability in certain situations. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities.