ERISA Tips: Limiting Liability

Editor’s Note: ERISA Tips is a feature provided with you in mind — to make the newsletter more useful to you! If you have any content for ERISA Tips or the 403(b) Advisor that you would like to contribute or suggest, please contact John Iekel, editor of the 403(b) Advisor, at [email protected].

The following information is derived from “Meeting Your Fiduciary Responsibilities,” a publication of the Department of Labor’s (DOL) Employee Benefits Security Administration.

Potential liability is part of having and fulfilling fiduciary responsibilities. Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plans assets resulting from their actions.

However, fiduciaries can demonstrate that they have carried out their responsibilities properly by documenting the processes used to carry out their fiduciary responsibilities.

And there are ways a fiduciary can reduce possible liability.

Some plans, such as most 401(k) 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 also must 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 plan losses that are a result of automatically investing participant contributions in certain default investments. There are four types of investment alternatives for default investments as described in DOL regulations, and an initial notice and annual notice must be provided to participants. Also, participants must have the opportunity to direct their investments to a broad range of other options, and be provided materials on these options to help them do so.

A fiduciary also can 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 adviser, the employer is responsible for the selection of the manager, but is not liable for that manager’s individual investment decisions.

However, note that:

• An employer that hires and investment manager is required to monitor the manager periodically to assure that it is handling the plans investments prudently and in accordance with the appointment.

• While a fiduciary may have relief from liability for the specific investment allocations made by participants or automatic investments, the fiduciary retains the responsibility for selecting and monitoring the investment alternatives that are made available under the plan.