A lot of buzz has been generated over the past few years regarding fiduciary responsibility for plan sponsors. Once barely talked about, hardly understood, and loosely followed, fiduciary responsibility has now taken center stage thanks to the highly publicized collapse of Enron in 2001. While governmental employers are not subject to the guidelines imposed by ERISA, it is the only substantive body of regulatory guidance that addresses fiduciary responsibility and serves as a best practices approach for employers to follow. The approach provides a process to ensure that the employees’ supplemental retirement plan is being managed appropriately.
Plan sponsors, retirement plan providers and financial representatives must understand the overall issues involved if serving in a fiduciary role and provide solutions to ensure that they are complying and managing their retirement plan in a prudent manner.
In general, a fiduciary is anyone with discretionary authority or control over a retirement plan or the investments offered in the plan. A fiduciary assumes liability with respect to employees who participate in the plan – and their heirs.
So, who is a fiduciary exactly? Plan sponsors and trustees are normally plan fiduciaries. And, generally speaking, the people who oversee the management of the retirement plan are plan fiduciaries. Others may be named fiduciaries, including investment committees or other oversight committees if utilized. In the end, two things determine fiduciary status: a person’s title within the organization and his or her function with respect to the retirement plan.
Plan fiduciaries have five primary responsibilities:
Act solely on behalf of the plan participants – The Exclusive Benefit Rule
Exercise the care, skill, prudence and diligence of a “prudent” person in similar circumstances – The Prudent Man Rule
Diversify assets to help minimize risk – The Diversification of Investments Rule
Administer in compliance with the written plan documents
Control plan expenses
These responsibilities should not be taken lightly, but they also should not cause undue fear. Although fiduciaries may not “give” the responsibility away, they can hire professionals to provide expertise in managing the responsibility.
One of the best protections for fiduciaries is a good understanding of the components of their fiduciary responsibility. As it pertains to the investments in the plan, the fiduciary’s responsibility is to follow the ‘Four Ps:
Policies – Written investment policy statement (IPS) with fund selection and retention standards. The Investment Policy Statement is a road map to follow in making investment decisions.
Processes – Decision system for analyzing and selecting plan investments. Whether the investment committee is selecting investments for the plan or hiring a bundled solution from a provider, a decision process should be implemented or investigated.
Procedures – Quarterly reporting for oversight of ongoing plan investment performance that is based upon the standards set forth in the IPS. This quarterly review gives a quick update on how the investments in the plan are doing compared to what they are expected to do.
Practices – Remediation methods for management of the funds performing in a manner that represents an exception to the stated objectives of the plan. This outlines what should happen if an investment in the plan is underperforming according to the objectives set out in the IPS, including freezing, removing, or mapping investments to a replacement investment in the plan.
Investment liability risk is reduced when following prudent investment practices and procedures that are documented. Plan sponsors and investment committee members should perform at least an annual checkup of their plan’s investments and follow the road map set out in their IPS.
Implementing a ”best-practices” model is always a good idea for decision-makers, not only to offer fiduciary protection but also to ensure that the organization’s plan is being prudently managed.
If you haven’t done so already, it may be a good time to get a fiduciary checkup for your retirement plan.
For more information, contact Richard Wells with Security Benefit at 1-785-438-3408 or firstname.lastname@example.org.
Editor’s Note: The information contained in this article is a general discussion of the covered topics and is not intended as legal advice covering particular factual situations. For legal advice covering a specific situation, you should contact knowledgeable counsel.
Richard Wells with Security Benefit