Fiduciary Responsibilities for Benefit Plans under ERISA

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.
  • Who Will Manage Your Retirement Benefits Plan?

    Options for managing your retirement plan include:

    • 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.

    Six Important Rules for Fiduciaries of Retirement Plans

    • 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.

    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:

    • 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.

    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.

    Exceptions

    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:

    • 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.

    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.

    Audits

    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.

    Additional Information

    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.

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Are You a Fiduciary?

Fiduciaries of qualified retirement plans are held to the highest of federal standards. Fiduciary violations under the Employee Retirement Income Security Act (ERISA) of 1974 can expose you and your employer to risk and litigation. In some circumstances, fiduciaries can be held personally responsible for losses and restitution.

Not all fiduciaries are identified by title. Furthermore, some individuals may play a fiduciary role in some of their functions but not other functions. So how might you know if your position places you in a fiduciary role, or if your actions are subject to ERISA's fiduciary standards?

There are innumerable journal articles, books and court cases that parse the question of who is held accountable for fiduciary conduct regarding benefit plans under ERISA. Here are some commonly held distinctions between a plan fiduciary and a non-fiduciary.

Functions Tell More than Titles

Fiduciary status is based on functions performed, not just titles. Under ERISA, the litmus test is whether you exercise discretionary authority in administering and managing a plan or in controlling the plan's assets. You will be viewed as a fiduciary to the extent of your authority, control or discretion.

Fiduciaries Named in the Written Plan Document

Written plan documents must name at least one official Fiduciary, by name or by office, or through a process described in the plan, as having control over the operation of the plan. The named Fiduciary can include one or more individuals; as well as entities such as an administrative committee or the company's board of directors. Plan fiduciaries may typically include:

  • The Trustee
  • Persons exercising discretion in the administration of the plan
  • Members of a plan's administrative committee (if the committee exists)
  • Persons who select committee officials
  • Investment advisers

Professionals and Fiduciary Responsibility

Professionals providing services are generally not considered fiduciaries when they are acting solely in their professional capacities. Professionals who commonly provide services include:

  • Attorneys
  • Accountants
  • Actuaries
  • Consultants

However, to the degree that a professional exercises authority or control over a plan, he or she can be liable for fiduciary actions. For example, a professional who is given compensation to provide investment advice for the plan or to administer a plan would be performing fiduciary functions.

Business Decisions vs Fiduciary Decisions

Business decisions are not governed by ERISA. Since employers are not required to provide retirement plans for employees, ERISA views the decision to establish a benefits plan as a business decision because the employer is acting on behalf of the business.

Other business decisions can include the determination of:

  • the benefit package.
  • certain features to be included.
  • whether or not to amend a plan.
  • whether or not to terminate a plan

However, once employers (or those hired by them) act to implement a qualified benefits plan, they are acting on behalf of the plan, and their decisions in carrying out the plan are considered fiduciary decisions, subject to ERISA regulations governing fiduciary responsibilities.

Specific Situations

Given the nuances of fiduciary codes, the Department of Labor, which enforces ERISA laws, has demonstrated over the years that final determination of fiduciary liability and responsibility rests on the intersection of the specific circumstances of each situation and the prevailing regulations.

If you have a specific question regarding fiduciary roles, naming a fiduciary, or the delegation of fiduciary duties, it is best to seek professional expertise.

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