401(k) Fiduciary 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). See also Questions and Answers Relating to Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974.

What Are the Essential Elements of a Plan?

Each plan has certain key elements. These include:

• A written plan 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.

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. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors. A plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities.

The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan or over the assets. A number of decisions are not fiduciary actions, but rather are business decisions made by the employer. For example, the decisions to establish a plan, to determine the benefit package, to include certain features in a plan, to amend a plan, and to terminate a plan are business decisions not governed by ERISA. When making these decisions, an employer is acting on behalf of its business, not the plan, and, therefore, is not a fiduciary. However, when an employer (or someone hired by the employer) takes steps to implement these decisions, that person is acting on behalf of the plan and, in carrying out these actions, may be a fiduciary.

Named Fiduciary

The Named Fiduciary is also referred to as the Plan Sponsor. As found in Department of Labor Advisory Opinion Letter 2012.04A, the term “plan sponsor” is defined in section 3(16) of ERISA as,

1. the employer in the case of an employee benefit plan established or maintained by a single employer,
2. the employee organization in the case of a plan established or maintained by an employee organization, or
3. in the case of a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or another similar group of representatives of the parties who establish or maintain the plan.

Subject to the provisions of the plan (trust) document, the Named Fiduciary can appoint others to provide assistance with the operation of the plan. The Named Fiduciary also functions as a Plan Administrator, Trustee and, if desired or permitted by the plan document, a Named Investment Manager, and Investment Advisor Fiduciary. In all instances, the Named Fiduciary retains the duty, responsibility, and accountability for screening, appointing and routinely assessing the managers and co-fiduciaries of the trust.

Fiduciary Responsibilities

Fiduciaries have extremely important responsibilities and duties under ERISA. Fiduciaries are subject to high standards of conduct expected of fiduciaries, because they are serving on behalf of retirement plan participants and their beneficiaries. These fiduciary responsibilities numerous. Some of these include.

• Anyone serving as an ERISA fiduciary is required to act solely in the interest of plan participants and their beneficiaries;
• Fiduciaries are expected to carry out their duties in a prudent manner;
• Fiduciaries are generally required to follow the provisions of the plan document, although the plan document may grant some degree of exercise of discretion by one or more fiduciaries;
• Fiduciaries charged with the investment of plan assets are expected to diversify plan investments; and
• Plan fiduciaries must ensure that plan expenses would be considered reasonable by an independent third party.

 Standard of Conduct

A fiduciary should be familiar with a wide variety of factors affecting the plan, its participants and beneficiaries, and plan benefits.  These factors may include familiarity with specific investments, general investment principles, general accounting principles, the socio and economic demographics of the plan’s participants, the employer’s hiring practices, the employer’s overall benefits philosophy, current and projected market conditions, and similar factors.

When a fiduciary is short on expertise in any particular area, he or she is expected to employ someone having that professional knowledge who will carry out these and other associated duties on behalf of the fiduciary. The process of selecting and monitoring such an expert is in itself a fiduciary act, and ultimate responsibility remains that of the primary fiduciary – although co-fiduciary liability (between the fiduciary and the expert being selected) often may exists in these situations.

Documentation

Every action step taken by an ERISA fiduciary should be thoroughly documented.  For example, when hiring any plan service provider, a fiduciary should evaluate a number of prospective vendors, thoroughly documenting the selection process.  One popular way of accomplishing this is by using a questionnaire, which may be prepared by the benefits committee or its advisor (for example, ERISA counsel retained by the benefits committee).  The questionnaire is typically broken down into sections, and asks questions relating to services provided, fees charged, the number of plans the service provider currently is serving, the size of their plans, the type of the plans, and other pertinent data.

Once the completed questionnaires have been received back from several bidding providers, they are often compiled into a chart format, so that the various service provider data can be easily compared.  Not only does this help facilitate the selection process, but it serves as a document that helps illustrate the diligence and care that went into the decision-making process.

In any event, it is important that both the process and the decision itself be thoroughly documented, and that records be maintained and kept safe.  For example, electronic storage in multiple locations is highly recommended.

The topic of fiduciary duties and responsibility is exceptionally broad, and a full explanation is beyond the scope of this text. You should consult with an investment expert, employee benefits consultant, ERISA attorney, or similar professional for more specific information.

Operational Review

At reasonable intervals, the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary by the nature of the plan and other facts and circumstances relevant to the choice of the procedure.

Although the DOL does not prescribe a specific procedure for monitoring the performance of trustees and fiduciaries, the DOL does acknowledge that the appointing fiduciary should have a procedure for performing this task.

Of course, a competent review of the performance of investment managers, trustees, and other fiduciaries and service providers involves the collection of information about their performance. It is the view of the Department that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring.

Also, a prudent fiduciary would need to develop a standard to gauge the performance of the fiduciaries. While the quality of the services, as well as their cost, are obvious factors to be evaluated in the monitoring process, the litmus test is whether the services are producing the intended results. That is, are the activities of the fiduciaries effective?

In sum, to satisfy the duties to consider changed circumstances, to act for the exclusive purpose of providing benefits and to monitor on a regular basis the fiduciaries and service providers, a plan’s fiduciaries must regularly review their effectiveness.