It can happen innocently enough. The variations are endless. But here are some common scenarios:
- I started a small business. We had some success. My employees began asking for benefits, and we decided to offer a 401(k) plan. Yes, you’re a fiduciary.
- I joined a company in the HR Department. Now one of my responsibilities is to oversee the 401(k) plan. Yes, you’re a fiduciary.
- I went to a participant-education session about my company’s 401(k) plan and asked a couple of questions. Afterward, the HR Manager asked if I wanted to be on the Investment Committee. It sounded interesting, so I said, “Sure, why not?” Yes, you’re a fiduciary.
What is a Fiduciary?
What exactly is this role that you have adopted, intentionally or not? The Internal Revenue Service (IRS) defines a Retirement Plan Fiduciary as “a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity.” By law, fiduciary responsibility falls upon anyone with discretionary authority or control over a retirement plan or the investments offered in that plan. It is important to remember that your fiduciary status is established by the functions you perform, not by your title or position in the company.
The Employee Retirement Income Security Act of 1974 (ERISA) defines the actions that result in fiduciary duties and the extent of those duties for retirement plans.
Basic fiduciary responsibilities include:
- Acting solely in the interest of the participants and their beneficiaries.
- Controlling plan expenses.
- Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters in question.
- Diversifying plan investments to minimize risk.
- Following the guidance of the plan documents.
Trust Point can assist you as the Plan Sponsor in identifying and documenting all the Fiduciaries involved with your retirement plan. When you become a Retirement Plan Fiduciary, you assume the responsibility as an individual. It is a personal liability, not associated with your role in the company. You are liable whether you are the CEO or a junior staffer.
What to Do Now?
Confused? Scared? Before you decide to resign your position on the Retirement Plan and Investment Committee, let’s talk about some best practices surrounding the fiduciary role, and how you can stay out of trouble.
Acknowledge Your Role as Fiduciary
The simple fact that you understand that you are a fiduciary of the retirement plan is a big step. Many organizations require plan fiduciaries to acknowledge their status in writing. This ensures that people taking on fiduciary responsibility are aware of the fact. It also allows the organization to show regulators that there was no confusion as to who performed what roles with respect to the retirement plan.
Safeguard Participants’ Assets
The company should purchase both a Fidelity Bond and Fiduciary Insurance. The Fidelity Bond is required by the U.S. Department of Labor and the IRS to make sure that plan participants’ assets are safeguarded. People often confuse these two items or think they are the same thing. In fact, they are distinct and different.
Fidelity bonds are designed to protect the participants’ contributions from a fraudulent activity from the time those contributions are withheld from their earnings until the funds are deposited into the plan’s trust account. If someone were to steal the money during this transaction period, the fidelity bond would cover the loss. The fidelity bond’s value must be equal to 10% of the plan’s assets, not to exceed $500,000. IRS Form 5500 has a question that asks if this bond is in place and what value it has.
Fiduciary insurance, on the other hand, is purchased to protect the individuals who are acting as plan fiduciaries. This insurance covers costs associated with potential litigation and breaches of duty. The policy should be reviewed carefully so that you clearly understand what is covered and what is exempt.
Establish a Retirement Plan and Investment Committee
Once the appropriate coverage is in place, the Retirement Plan and Investment Committee (“the committee”) can be established. The committee’s size usually is related to the size of the plan and the company. In our experience, small plans, with assets less than $3 million, often include only the company owner and a key HR employee on the committee. Medium-sized plans, with $3 million to $10 million in assets, tend to expand the committee to include more key HR personnel and other high-level management employees. Large plans, with assets in excess of $10 million, typically have the company owner, key HR personnel, other senior-management people, and some employees representing different labor pools within the organization.
Provide Fiduciary Training on Several Topics
When the committee is formed, the very first action should be to provide fiduciary training. Trust Point routinely provides Fiduciary training to client investment committees explaining duties and best practices.
This training should cover what caused each member to qualify as a fiduciary, and explain each of the primary responsibilities, such as the following:
Acting solely in the interest of the participants and their beneficiaries.
This means that when members enter a committee meeting, they may not consider what is in their own or even the company’s best interests. They must focus only on the plan participants’ best interests.
Controlling plan expenses.
This doesn’t mean that the committee must find the least expensive options available. It does mean, however, that all fiduciaries must understand what the plan fees are, how they are allocated to participants, and how this compares to industry averages.
Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters.
Fiduciaries do not all need to become experts in retirement plans or investments. But, they must understand and document the needed areas of expertise, and they must have methods to monitor and evaluate any outsourced functions.
One critical area that may be outsourced is the role of the Retirement Plan Trustee. Many plan providers in the industry will try to convince Retirement Plan Sponsors to act as their own trustees. (Warning: Remember, this is a personal liability.) If a sponsor balks, these providers sometimes suggest that they (the providers) could act as Directed Trustees. This arrangement still requires the sponsor’s committee to sign-off, as fiduciaries, on any actions taken with respect to the plan.
If your committee can find a plan provider that is willing to act as Discretionary Trustee without Sign-Off, you will lessen the risk of your fiduciary liability. A Discretionary Trustee without Sign-Off is automatically a functional fiduciary of your retirement plan. Trust Point acts as a Discretionary Trustee without Sign-Off for all the plans that it works with!
Diversifying plan investments to minimize risk.
A well-diversified portfolio of institutional share classes of no-load mutual funds will fulfill this responsibility. Avoid proprietary funds, since they normally have additional costs. The investment choices offered to participants should include both active and passive options, and it should include equity funds, fixed-income funds, and allocation or target-date funds.
Following the plan documents.
All committee members should be familiar with the Adoption Agreement for the plan and with all rules associated with the plan. They also should be familiar with plan operation policies, such as a loan policy, QDRO checklists, etc.
While not required by ERISA, an Investment Policy Statement (IPS) is considered a best practice. If a plan is ever audited, it will be very beneficial to be able to show that an IPS is in place and being followed. The IPS generally covers these bases:
- Identifies all involved parties and their roles.
- Establishes frequency of reviews.
- Establishes reporting requirements and benchmarks for performance.
- Establishes participant-education standards.
Once the committee is trained, has determined its responsibilities, understands how the plan operates and has an IPS in place, it must meet on a regular basis to review the plan’s status. The meetings should include all committee members, key vendors, and industry experts, as needed. Trust Point prepares a comprehensive “Plan and Investment Review Booklet” for each of its clients. This booklet contains the following information: a summary of the plan assets and their movement for the time period in question, investment option performance, current Investment Policy Statement, plan recommendations and legislative review, plan demographics including participation rate, average deferral percentages, employer contributions, average account balance, and loan/hardship distributions, and finally a plan benchmarking review. Minutes of committee meetings should be kept and maintained as an official plan document.
Take Advantage Of This Opportunity!
In acting as a Retirement Plan Fiduciary, you are fulfilling a very important role. It is only with the help of properly trained, skilled professionals that a plan can operate efficiently and effectively. When you are presented with this opportunity, step up and help your colleagues. You will find it both challenging and rewarding.
