J. Saunders Wiggins, CFP®, AIF® CEO/President
As the sponsor of an employee retirement plan, it’s critical that you understand the concept of fiduciary duty. Fiduciary is a fancy word that conveys a simple concept: You are legally required as a fiduciary to put the interests of plan participants first in all the decisions you make about your company’s retirement plan.
The ERISA Fiduciary Standard
In the context of retirement plans, the fiduciary standard of duty is articulated in the Employee Retirement Income Security Act of 1974, also known as ERISA. To meet the ERISA standard of a fiduciary, you must act prudently and in the sole interest of plan participants at all times.
The fiduciary standard of duty applies to sponsors of all types of retirement plans, not just 401(k) plans — including pension plans and profit-sharing plans. The fiduciary for a retirement plan is usually named in the plan document. However, if a fiduciary is not named in the plan document, the fiduciary can be appointed via the plan document’s design.
In short, the fiduciary of an employee retirement plan is the person who exercises discretionary control over the plan or its assets.
This can be the plan sponsor, or the plan sponsor may appoint someone else to serve as fiduciary of the plan.
Keep in mind that the fiduciary duty involves more than just choosing investments for the plan. A person is a fiduciary to the extent that he or she:
- Exercises discretionary authority over the plan or management of the plan assets,
- Renders investment advice for compensation with respect to plan assets, or
- Has any discretionary authority or responsibility for plan administration, including payment of benefits from the plan.
What Are Retirement Plan and 401(k) Fiduciary Responsibilities?
Retirement plan fiduciaries face a number of specific responsibilities, including the following:
1. Adherence to the exclusive purpose rule — This rule states that fiduciaries will always act solely in the best interest of plan participants and beneficiaries. For example, as a fiduciary you can’t choose investment funds just because they would benefit you. Every decision you make must be the best decision for participants, with no self-interest in your decisions.
2. Avoidance of prohibited transactions — These are detailed in the Internal Revenue Code. For example, a 401k plan may not acquire real property and lease a portion of it to a trustee of that plan or to a contributing employer.
3. Offering participants a diversified selection of funds — Participants should be able to choose from among a selection of funds with a wide spectrum of risk options that appeal to all potential participant demographic profiles.
4. Following the terms of the plan document. The plans document is a legal document, so you must follow its terms to the letter in order to comply with your fiduciary duties. This tends to be the fiduciary responsibility that is most often violated by plan sponsors.
5. Following the “prudent expert” standard. ERISA requires a fiduciary to use “care, skill, prudence and diligence” and to act in the same way that an individual who is “familiar with such matters” would act. In other words, whoever assumes the role of a fiduciary must be qualified to perform the duties required.
How to Limit Fiduciary Liability
Retirement plan fiduciaries can face legal liabilities for failing to meet their fiduciary duties. In fact, litigation by plan participants against plan sponsors for failing to meet their fiduciary duties has been accelerating at a rapid pace in recent years.
Here are a few ways you can limit your liability as a fiduciary:
- Clearly understand what your fiduciary responsibilities and expectations are.
- If you aren’t capable of meeting the prudent expert standard, delegate fiduciary duties to someone else who is. Then continue to monitor the duties performed by the fiduciary and document the due diligence process that went into all decisions.
- If you do assume fiduciary duties yourself, perform as you’re expected to by following the guidelines listed above on a consistent basis.
- Provide adequate participant communications and offer them the opportunity to attend participant education meetings.
Choose Your Retirement Plan Specialist Carefully
Another key to properly managing your plan is to work with a retirement plan specialist who is experienced not only in plan design and administration, but who can also help you understand your fiduciary responsibility. The ERISA code consists of about 70,000 pages, so you need to work with a plan expert that understands these complexities.
ACG is uniquely qualified to serve in this role. Contact us to learn more about how our guidance can help you meet your retirement plan and 401(k) fiduciary responsibility.
With over 30 years of experience assisting plan sponsors, you can have the confidence that we understand how important your role as a fiduciary is.