06.15.11

Many of the actions involved in operating a retirement plan make the individual or entity performing those actions a fiduciary. Accordingly, fiduciary status is based on the functions performed for the plan, not just an individual’s title. Fiduciaries may be “named” by the plan or they may be “functional”. The key to determining whether an individual is a fiduciary is whether they are exercising discretion or control over the plan. Whether a named or functional fiduciary, there are four key fiduciary duties:

• Loyalty

• Prudence

• Diversification

• Follow plan documents

Mitigation of fiduciary risk should be an important principle for all plan sponsors and fiduciaries in helping evaluate, understand and identify responsibilities and duties attributable to a fiduciary.

Test Your Knowledge

Test your basic knowledge on fiduciary responsibility for retirement plans by answering the following questions:

1) The various fiduciary roles for qualified retirement plans as defined in the Employee Retirement Income Security Act (ERISA) include the following six general categories of fiduciaries:

• Named fiduciary

• Plan administrator

• Trustee

• Investment manager

• Investment advisor

• Others that owe a duty of loyalty or act with discretion or authority "to any extent."

a) True

b) False

 

2) Of the thousands of civil investigations conducted by the Employee Benefits Security Administration during fiscal year 2010, what percentage resulted in monetary damages or other corrective actions imposed on plan fiduciaries?

a) Less than 50%

b) Greater than 70%

 

3) Federal courts have ruled which of the following can now sue their employer for breaches of fiduciary responsibility?

a) Individual employees

b) Plan participants part of a class action lawsuit

 

4) Of the two types of fiduciaries: (1) named fiduciaries - those who are specifically named in the plan document or otherwise by the plan sponsor according to procedure established in the plan document, and (2) functional fiduciaries – those who act in a fiduciary capacity based on their job duties or responsibilities with respect to a plan. Which of the following are generally assumed to have at least functional fiduciary status?

a) CEO

b) CFO

c) HR Director

d) Controller

e) All of the above

 

5) A fiduciary has a basic responsibility for which of the following?

a) Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.

b) Carrying out their duties prudently.

c) Following the plan documents (unless inconsistent with ERISA).

d) Diversifying plan investments and paying only reasonable plan expenses.

e) All of the above.

 

6) A fiduciary that breaches their responsibilities may be held personally liable?

a) True

b) False

 

7) Which of the following is one of the ways a fiduciary can limit their liability?

a) Document the processes used to carry out their fiduciary responsibilities (example: maintaining minutes for the Plan).

b) Provide participants with control over their investment elections while providing participants with a broad range of investment options.

c) Appointing an investment manager, bank, insurance company, or registered investment advisor to make investment decisions for the Plan.

d) All of the above.

 

8) A fiduciary has no potential liability for the actions of any co-fiduciaries?

a) True

b) False

 

9) What are the fiduciary responsibilities regarding timely remittance of employee 401(k) contributions?

a) Deposit participant contributions in the plan no later than the 15th business day of the month following the payday.

b) Deposit participant contributions in the plan no later than 7 business days after payday.

c) Deposit participant contributions in the plan as soon as it is reasonably possible to segregate them from the company’s assets.

d) None of the above.

 

10) Fiduciaries should monitor service providers. When monitoring service providers, the employer should:

a) Review the service providers’ performance.

b) Read any reports they provide.

c) Check actual fees charged.

d) Ask about policies and practices, such as trading, investment turnover, and proxy voting; and follow up on participant complaints.

e) All of the above.

 

The following are several best practices that plan sponsors should consider adopting to properly meet their fiduciary obligations and thereby mitigate fiduciary risk to both plan sponsors and individual fiduciaries:

• Document that plan fiduciaries have been identified and their responsibilities have been clearly defined and performed.

• Establish and follow written policies and procedures to preside over plan operations. Include a fiduciary process in developing such procedures.

• Enable participants to have control over their investment accounts and educate participants on investment options. The fiduciary remains responsible for selecting and monitoring the providers of a plans investment options and the options themselves, but not for the participants’ investment decisions.

• Monitor plan expenses and understand all fees. Gain an understanding of how recordkeeper services may be offset or subsidized by the revenue sharing from the investment funds.

• Hire a service provider(s) to handle fiduciary functions. Establish an agreement so that the service provider(s) assumes liability for those selected functions. However, a sponsor is required to periodically monitor services providers to assure that the services providers are handling the plan’s transactions prudently.

• Monitor other plan fiduciaries as all fiduciaries have potential liability for the actions of their co-fiduciaries. If a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, both fiduciaries are liable.

• Establish a fidelity bond for those who handle plan assets. A fidelity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond.

Answers: (1) a (2) b (3) a (4) e (5) e (6) a (7) d (8) b (9) c (10) e

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Should you have any questions regarding fiduciary responsibilities and retirement plans you may contact Ed Plunkett or Amy Thorn.

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