3(16) Fiduciary Services & Plan Administrator

FIDUCIARY FAQ

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  What is a fiduciary?

  The employer, as fiduciary of the plan, has basic responsibilities for sponsoring a retirement plan. In order to meet these responsibilities, employers need to understand the rules, specifically with regard to the Employee Retirement Income Security Act of 1974 (ERISA). ERISA sets standards of conduct for those who manage an employee benefit plan and its assets.

  These responsibilities include but are not limited to:

  • Acting solely in the interest of the participants and their beneficiaries, and with the exclusive purpose of providing benefits to them
  • Carrying out duties with care, skill, prudence and diligence
  • Following the terms of the plan documents — including but not limited to:
    1. Proper determination of eligibility for enrollment
    2. Timely deposits of contributions
    3. Fulfillment of compliance testing requirements

  • Paying only reasonable expenses
  • Diversifying investments

  The Department of Labor (DOL) recognizes that plan fiduciaries will almost certainly need to hire service providers willing to take on some of the fiduciary duties on their behalf. The most commonly known co-fiduciaries are:

  1. 3(16) — An individual that is the named plan administrator, who agrees to take responsibility for all the daily plan operations or may limit his or her responsibility to only certain functions
  2. 3(21) — An individual that has discretionary authority or control with respect to management of the plan or disposition of its assets, renders investment advice for a fee or has discretionary authority or responsibility for the administration of the plan
  3. 3(38) — An individual that agrees to be an investment manager for the plan, who has the power to manage, acquire or dispose of any of its assets
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  Who is a fiduciary?

  A fiduciary is constituted by many of the actions involved in operating a plan. Using discretion in administering and managing or controlling the assets makes that person or entity a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.

  A plan must have at least one fiduciary (a person or entity) named in the written document — or through a process described in the plan as having control over its operation. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors.

  A plan’s fiduciaries will ordinarily include the trustee, investment advisors, all individuals exercising discretion in the administration of the plan, all members of its administrative committee (if it has such a committee) and those who select committee officials. Attorneys, accountants and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.

  A number of decisions are not fiduciary actions; rather, they are business decisions made by the employer. For example, the decision to establish a plan, to determine the benefit package, to include certain features, to amend a plan and to terminate it are business decisions not governed by ERISA. When making these decisions, an employer is acting on behalf of the business, not the plan; therefore, he or she is not a fiduciary. However, when an employer (or someone hired by the employer) takes steps to implement these decisions, that person is acting on behalf of the plan, and in carrying out these actions, he or she may be a fiduciary.

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  Why is a fiduciary important?

  Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries.

  These responsibilities include:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
  • Carrying out their duties prudently
  • Following the plan documents (unless inconsistent with ERISA)
  • Diversifying investments
  • Paying only reasonable expenses

  The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking this expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions. Prudence focuses on the process for making fiduciary decisions; therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, he or she can document the process and make a meaningful comparison and selection.

  Following the terms of the plan document is also an important responsibility. The document serves as the foundation for operations. Employers will want to be familiar with their document — especially when it is drawn up by a third-party service provider — and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, said document must be updated to reflect that change.

  Diversification, another key fiduciary duty, helps to minimize the risk of large investment losses to the plan. Fiduciaries should consider each investment as part of the plan’s entire portfolio. Once again, fiduciaries will want to document their evaluation and investment decisions.

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  Learn how to limit liability

  With these fiduciary responsibilities, there is also potential liability. Fiduciaries who do not follow the basic standards of conduct may be personally liable for restoring any losses to the plan, or for restoring any profits made through improper use of its assets resulting from their actions.

  However, fiduciaries can limit their liability in certain situations. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to do so.

  There are other ways to reduce possible liability. Some plans, such as most 401(k) plan options and profit-sharing plans, can be set up to give participants control over the investments in their accounts and limit a fiduciary’s liability for the investment decisions made by the participants. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under DOL regulations, there must be at least three different investment options so that employees can diversify investments within an investment category — such as through a mutual fund — and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants must also be allowed to give investment instructions at least once a quarter — and perhaps more often if the investment option is volatile.

  Plans that automatically enroll employees can be set up to limit a fiduciary’s liability for any losses that are a result of automatically investing participant contributions in certain default investments. There are four types of default investments as described in DOL regulations, and an initial notice and annual notice must be provided to participants. In addition, participants must have the opportunity to direct their investments to a broad range of other options and be provided with necessary resources about these options. (See “Resources” for further information.) However, while a fiduciary may have relief from liability for the specific investment allocations made by participants or automatic investments, he or she retains the responsibility for selecting and monitoring the investment alternatives that are made available under the plan.

  A fiduciary can also hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. If an employer appoints an investment manager that is a bank, insurance company or registered investment advisor, the employer is responsible for the selection of the manager but is not liable for the individual investment decisions of that manager. However, an employer is required to monitor the manager periodically to ensure that he or she is handling the plan’s investments prudently and in accordance with the appointment.

  A fiduciary should be aware of others who serve as fiduciaries to the same plan because all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals it or does not act to correct it, that fiduciary is liable.