Qualified retirement plans can be rewarding and beneficial for both employees and employers. However, plan sponsors, administrators and officials who have discretion over a plan must take care to meet the high standards of conduct for fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA).
Non-compliance with ERISA can expose benefit plan sponsors to serious risk and litigation. In some cases, individuals who play a fiduciary role can be held personally responsible for losses. It is especially helpful to be familiar with ERISA if your organization is a small business or non-profit with limited resources for plan administration.
Here is a basic overview of responsibilities and some tips for limiting fiduciary liability under ERISA.
Four Key Elements of a Retirement Plan
A "qualified retirement plan" is one that meets the requirements of ERISA and the Internal Revenue Code (IRC). Core elements of a retirement plan include:
- A written plan that describes benefit structure and guides day-to-day operations.
- A trust account that holds the plan’s assets.
- A recordkeeping system to track the flow of monies to and from the plan.
- Reports that furnish mandatory disclosures to plan participants, beneficiaries and government.
- Hiring an outside professional ("third-party service provider").
- Forming an internal administrative committee.
- Assigning management to Human Resources if applicable.
- A combination of the above.
- Act solely in the interests of the plan participants and exclusively for the purpose of providing benefits.
- Act "prudently" and document decision making.
- Follow the terms of your plan (except where it conflicts with ERISA) and keep it current.
- Diversify investments to minimize risk of loss.
- Pay only "reasonable" expenses and fees.
- Avoid "prohibited" transactions.
- Participant-directed plans like 401(k) and profit sharing plans.
- Automatic enrollments in default investments.
- Hiring third-party professionals who assume liability for their functions.
- Fidelity bonds on fiduciaries handling plan funds or property.
- Periodic review of plan documents, providers and operations.
- Avoiding conflict of interest and prohibited transactions.
- Hiring a service provider for plan operations.
- Hiring a fiduciary advisor to give investment advice to participants in self-directed accounts.
- Making loans to plan participants.
Who Will Manage Your Retirement Benefits Plan?
Options for managing your retirement plan include:
Six Important Rules for Fiduciaries of Retirement Plans
The Importance of Being Prudent
Acting "prudently" is a central responsibility of fiduciaries. The "prudent man rule" in ERISA requires fiduciaries to carry out their duties with the same "care, skill, prudence and diligence" as would a person who is familiar with the subject and has the capacity to understand the issues would act in a similar enterprise with similar aims. Plan sponsors are expected to monitor their plans and have or obtain the expertise needed to meet fiduciary obligations.
Document Your Process
Plan sponsors, administrators and fiduciaries should document their decision making to demonstrate prudence. For example, if you are selecting a third-party provider, comparing potential providers by asking the same questions and providing the same requirements to each will support your final selection.
Reduce Fiduciary Liability
Other ways to limit your fiduciary liability include:
Avoid "Prohibited" Transactions
Fiduciaries are prohibited from making certain transactions with "parties in interest" -- those persons who are in a position to exert an improper influence over the plan, including the employer, the union, plan fiduciaries, plan service providers, officers, owners defined by statute, and relatives of parties in interest. Prohibited transactions would include sales, exchanges, leases, loans, extension of credit, or furnishing of goods, services or facilities.
The Labor Department grants a number of exemptions for some transactions that would fall under the "prohibited" category, but are deemed necessary and helpful in protecting the plan. Examples of allowable transactions include:
Conflicts of Interest
Fiduciaries must not use the plan's assets in their own interest, or accept money or any other consideration for their personal account from any party that is doing business with the plan.
The size of your benefits plan also impacts your government obligations. For example, ERISA requires an annual audit of plans with more than 100 eligible participants.
Deadlines for Depositing Contributions
If participants contribute to the plan through salary reductions, employers have a fiduciary responsibility to deposit the funds into the plan as soon as possible. Plans with less than 100 participants should deposit contributions no later than the 7th business day following the date of withholding. The rules for larger plans are not quite as clear. The regulations suggest no later than the 15th business day of the month that follows payday, however the Department of Labor has informally indicated that the small plan rules (within 7 days) should be the standard for all plans.
I hope you have found this general overview helpful. ERISA regulations can be complex and each plan and situation is different. Please seek expert consultation for specific concerns and questions. If you have a question about your fiduciary risks and responsibilities, feel free to Contact us today.