What Does It Mean to Be a Fiduciary for a Pension Plan?
According to the Employee Retirement Income Security Act (ERISA), a fiduciary is anyone who exercises any discretionary authority over the management of the plan or the management or disposition of plan assets. A fiduciary provides or has the responsibility or authority to provide investment advice for a direct or indirect or other compensation. A fiduciary has discretionary authority or discretionary responsibility related to the administration of the plan.
In general, fiduciaries are those individuals who have discretionary control over the management of the plan or plan assets. Fiduciary status can arise from an appointment or assignment of responsibilities, or it can be based on the functions a person performs for the plan. If an individual exercises discretion in administering the plan or has control over plan assets, that person will be an ERISA fiduciary to the extent of the discretion of control. ERISA fiduciaries help make a retirement plan safe and functioning for your employees. Within ERISA, there are several types of fiduciary roles, as follows:
- Named Fiduciary – Each plan must have a named fiduciary who is the “go to” person with regard to operation and administration of the plan. This person is responsible for choosing and monitoring other plan fiduciaries and service providers. Often, the named fiduciary is the plan sponsor.
- Trustee -Unless certain exceptions apply, plan assets must be held in trust, making the role of a trustee necessary. A trustee is the person or group of people who are responsible for managing the assets in the trust, including oversight of contribution processing, investment transactions, financial statements, and fees and expenses.
- Plan Administrator – A plan administrator is responsible for the day to day decisions and operation of the plan. Unlike an ERISA 3(21) or 3(38) fiduciary that focus on the investments in a retirement plan, the role of a 3(16) fiduciary relates to administrative duties. Some duties that a 3(16) may perform include the monitoring, hiring, and firing of service providers, filing Form 5500, monitoring plan operations, distributing annual notices, and approving distributions and loan requests.
- Investment Advisor – This fiduciary recommends investments for the plan but does not have discretion to implement those recommendations. The 3(21) fiduciary will also monitor the plan’s investments and suggest modifications as needed. The plan sponsor maintains responsibility for the investment decisions.
- Investment Manager – This type of fiduciary has full discretion to choose, manage, or remove investments within the employee benefit plan. This includes ensuring that the plan offers a lineup of investments from which participants have the potential to create a well‑diversified portfolio to help minimize the risk of larger losses. The plan sponsor/company has less liability in this relationship, because they offload the fiduciary risk of the investment to the advisor; however, employers still carry a fiduciary duty to monitor the advisor.
As a fiduciary, you are held to a higher ethical standard of care than non‑fiduciaries. In ensuring that the plan provides the participants and beneficiaries with the benefits due to them and in defraying reasonable plan expenses, a plan fiduciary must comply with several responsibilities, as follows:
- Loyalty: Usually loyalty lies on the shoulders of the plan’s trustee. Because a trustee is responsible for overseeing money, they must act solely in the best interest of the beneficiary.
- Documentation: Communication and clear documentation with your service provider and plan provider will help ensure your plan document is written to comply with all requirements in the Internal Revenue Code. This method will also ensure that a plan is carried out in a strategic operational fashion.
- Prudence: According to ERISA, actions made for a retirement plan must be made with care, prudence, skill, and diligence. To protect employees and their money if a company cannot carry out the fiduciary responsibilities, they must hire someone that can work with prudence.
- Diversification: Generally, a well‑diversified retirement account can provide less risk for plan losses. A fiduciary must assess a particular investment or investment course of action to determine if it is designed to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain associated with such investment.
- Reasonable Plan Expenses: Reviewing your current plan and measuring the costs and expenses against the services provided are an important part of ensuring you’re handling your retirement accounts properly.
As the fiduciary, you’re also responsible for handling or overseeing administration duties according to the rules laid out in the plan document. These rules include essential information about:
- Compensation – The type of compensation that’s eligible for 401(k) deferrals, i.e. salary, wages, commissions, bonuses, etc.
- Eligibility – Must adhere to any age and service requirements that have been put in place, i.e. age 21 of years and/or one year of service (1,000 hours worked).
- Deposits, Loans and Distributions – These are some of the most common 401(k) financial transactions you will deal with, and it is up to you to ensure that they are in compliance with the plan document and IRS regulations, i.e. timely remittance.
- Plan Document – Ensure that the plan document is up‑to‑date and in accordance with the latest IRS regulations, which are announced regularly.
- Annual Compliance – Oversee the annual compliance work required at the end of each completed plan year, i.e. putting together the year‑end census, ensure all required nondiscrimination tests are completed and failures are properly corrected, preparing, signing and timely filing an annual Form 5500.
- Record Retention – Record retention is a huge part of dealing with a pension plan. Whether during a DOL/IRS audit or your scheduled annual audit, an auditor always asks for documents and records, so being diligent and organized is crucial.
- Maintain Fidelity Bond Coverage – Since you are in charge of other people’s money, your plan must be covered by a Fidelity Bond, which protects pension plan participants in the event of theft of plan assets. Generally, the minimum coverage must be 10% of plan assets, or $500,000, whichever is less.
- Selecting and Overseeing Service Providers – By using a fiduciary service provider, you can outsource a fair amount of tedious and time‑consuming work, as well as the legal responsibility for fulfilling ERISA‑mandated duties. However, the ULTIMATE responsibility is still on the plan sponsor. The plan sponsor has to make sure that the fiduciary is doing their job correctly, which is sometimes easier said than done.
As a fiduciary, you are personally liable for any claims against the mismanagement of the plan or plan assets. In other words, your personal assets could become the target of litigation regardless if you have hired a third‑party administrator, consultant or service provider. Additionally, you must be aware of any co‑fiduciaries serving the plan. You can be held liable for any breach of duty a co‑fiduciary makes that you either participated in, attempted to conceal, or did not strive to correct. To protect yourself from personal liability, you can purchase Fiduciary Liability Insurance. This is not to be confused with an ERISA Fidelity Bond, which protects the plan not the individual from losses of an insured plan resulting directly from dishonest or fraudulent acts committed by a named fiduciary. Fiduciary Liability Insurance is custom‑made to safeguard your personal assets. It covers fiduciaries from claims of breaches in fiduciary duties, standard of care, and allegations of wrongful acts. Though it is not required, it is recommended as an important component of a fiduciary risk management policy.
Contributing author: Joseph Chemotti, CPA, CCIFP, is an audit partner at Dannible & McKee, LLP. Joe has over 22 of experience providing auditing, accounting and consulting services to a wide range of privately-held companies. He has extensive experience providing auditing services on a variety of employee benefit plans ranging from defined contribution, defined benefit, and health and welfare plans. Joe also oversees the firm’s ERISA employee benefit plan audit practice. For more information on this topic, you may contact Joe at firstname.lastname@example.org or (315) 472-9127.