Types of ERISA Fiduciaries

Under ERISA, there are several named classes of Fiduciaries, first and foremost of which is the Plan Sponsor. All qualified retirement plans have at least one named Plan Sponsor. The Plan Sponsor adopts the plan, and only employees (or beneficiaries thereof) of the adopting Plan Sponsor (or sponsors) may participate in and benefit from the plan. Since many Plan Sponsors of qualified retirement plans like to limit their fiduciary risk when it comes to the investment and disbursement of Plan Assets, it is possible for Plan Sponsors to mitigate their fiduciary liability by naming specific entities or individuals as fiduciaries. This article takes a look at determining who is a Plan Administrator, at investment advisors as fiduciaries, and the benefits of naming specific parties as certain types of named fiduciaries.

Plan Administrator under ERISA 3(16)

The Plan Administrator is responsible for the day to day duties of the plan, including determination and transmittal of contributions; distribution and loan review, approval and processing; annual compliance testing and the preparation of Form 5500 and related schedules. A Plan Sponsor can certainly hire outside service providers to handle most of these tasks, but unless the service provider specifically accepts Fiduciary status under ERISA Section 3(16), the Plan Sponsor or other specifically named parties are still considered the Plan Administrator, with all of the related Fiduciary Liability. To determine who is a Plan Administrator under 3(16), first review the Plan’s document. The Plan Administrator will be the individual named in the document. If the document does not name an individual, then the Plan Sponsor is the Plan Administrator. In the case where there are multiple employers, then the association, committee, joint board or trustees or other similar group of representatives of the parties who establish and maintain the plan may be named Plan Administrator. Some service providers are beginning to offer these services, for a fee, specifically accepting the title of 3(16) Plan Administrator.

Investment Advisors as Fiduciaries

A qualified plan financial adviser (or investment advisor) is a term for professionals who sell, advise, market or support qualified retirement plans. According to the U.S. Financial Industry Regulatory Authority (FINRA), terms such as financial adviser and investment advisor are general terms or job titles used by investment professionals and do not denote any specific designations.

ERISA 3(21) Fiduciaries

An investment advisor may be appointed as a fiduciary under 3(21) of ERISA directly by the Plan Sponsor. Persons can be deemed a 3(21) Fiduciary to the extent that they meet the following criteria; if they:

  • Exercise discretionary authority or control with respect to the management of the plan and the disposition of plan assets
  • Render investment advice for a fee or any other direct or indirect compensation; or
  • Have any discretionary authority or responsibility over the administration of the Plan

 Fiduciaries accepting 3(21) responsibility share that responsibility with the Plan Sponsor and Plan Administrator; however the Plan Sponsor retains the ultimate responsibility and must monitor the performance of the 3(21) fiduciary. For instance, an investment advisor accepting ERISA 3(21) responsibilities may recommend a potential menu of investment options for the plan, but it is up to the Plan Sponsor to accept or reject those investment options, and to ensure that the investment policy is enforced.

ERISA 3(38) Fiduciaries

A fiduciary who falls under 3(38) of ERISA must be a registered investment advisor, bank, or insurance company. This type of fiduciary has all of the responsibilities of a 3(21) fiduciary, however they must agree in writing to assume the liability of selecting and monitoring the investments of the Plan. A 3(38) fiduciary has full discretion for selecting and monitoring plan investments and must make judicious decisions when making their investment choices. This type of fiduciary assumes the legal responsibility and liability of investment decisions. Bringing forward our previous example, the investment advisor accepting ERISA 3(38) responsibilities may recommend a potential menu of investment options for the plan, however neither the Plan Administrator nor the Plan Sponsor would have a say in the ultimate investment of the funds.

Benefits of Naming a Fiduciary

From investments to the day to day management of the plan, it is not always possible for a Plan Sponsor be an expert in all aspects of a qualified plan. Hiring experts to help with these important and sometimes confusing requirements is not only prudent but may help limit the overall liability a Plan Sponsor is exposed to. For smaller plans, however, it may cost prohibitive to appoint an outside fiduciary. As the assets of the plan grows, so does the potential fiduciary liability and therefore the potential need for a named outside fiduciary. Ultimately, it is up to the Plan Sponsor to evaluate their own need and determine the scope of such an undertaking. More importantly, the Plan Sponsor also has the responsibility to monitor the fiduciary, as it would any other service provider, and make prudent decisions in selecting a 3(16), 3(21) or 3(38) fiduciary. The act of hiring such a fiduciary is itself a fiduciary act, so there is no way to eliminate all fiduciary liability. By making sensible, well documented decisions, and monitoring the results of the decisions, a Plan Sponsor can best defend themselves against any potential future litigation. The Sponsor must also take steps to ensure that the services received are commensurate with the cost of those services. There is no requirement under ERISA that any plan costs must be the cheapest around, only reasonable.

Meeting your fiduciary obligations under ERISA can be nuanced and not always obvious. You may also want to read our blogs in our fiduciary series, Are You a Fiduciary? and Fiduciary Responsibilities for Benefit Plans under ERISA.

 If you have questions about your particular responsibilities or risk, feel free to Contact us today.

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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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