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Basic Due Diligence Process for ERISA 403(b) Plans

This article originally ran on April 28, 2015.

By Diane D. Capone

Advisors working in the ERISA 403(b) marketplace are often asked to provide guidance and consulting services to plan sponsors to help them meet their fiduciary duties under ERISA. This service enables advisors to add to their value with plan sponsors who so often know very little about the ERISA 403(b) plan that they have in place for their employees. This is true in particular for small non-profit 501(c)(3) organizations. This article will give some basics on the process that an ERISA fiduciary plan sponsor needs to follow in order to comply with their obligations to the plan.

Section 403(b) plans of governmental employers, church-sponsored retirement plans and certain plans of 501(c)(3) organizations that have only elective deferral contributions and limited employer involvement are examples of retirement plans that are exempt from the provisions of ERISA. However, it is important for these plans to review, with their legal counsel, any fiduciary responsibilities they may have under state law. These plan sponsors can benefit from having knowledge regarding ERISA and utilizing some of the provisions that would be beneficial to their plan.

DOL and IRS Guidance

The Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) is hosting five fiduciary responsibility seminars in locations across the country. The “Getting It Right — Know Your Fiduciary Responsibilities” seminar series aims to increase awareness and understanding about basic fiduciary responsibilities when operating a retirement plan. More information and how to register is here.

The DOL website offers many helpful publications for ERISA plan sponsors including the booklet titled "Meeting Your Fiduciary Responsibilities." ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. There is a need for education of employers regarding their status as fiduciaries. The DOL publication provides an overview and answers questions such as:  

  • What are the essential elements of a plan? 
  • Who is a fiduciary under ERISA? 
  • What is the significance of being an ERISA fiduciary? 
The DOL publishes a Reporting and Disclosure Guide for Employee Benefit Plans with information on various disclosures to be delivered to plan participants and also information on the annual Form 5500 filing requirements.

The IRS also provides guidance with their 403(b) Checklist of plan requirements which can help with the annual review of their plan and the various operational rules to keep their plan in compliance. 

Basic Areas for Review

Some basic areas for review by plan sponsors in order to keep their retirement plan in compliance consist of the following:

  • Maintain an IRS-approved plan document and update as necessary for legislative changes.
  • Maintain an updated summary plan description which is provided to plan participants and includes information on the plan’s eligibility, contributions, distributions and other important aspects of the plan.
  • Review the plan provisions and verify that they are being handled properly in operation.
  • Ensure that the plan complies with the testing under the various Internal Revenue Code provisions.
  • Provide educational meetings for plan participants to discuss the plan, investment options and retirement readiness.
  • Provide plan participants with information as required by the DOL regarding plan investment options, investment returns, operating expense of the investments, fees that are charged to the participant and how the participant can get further information.
  • Maintain the proper ERISA fidelity bond (which is a mandatory requirement), and consider fiduciary liability insurance.
  • Implement a written investment policy for the plan and review it annually.
  • Maintain broad, well-diversified investment options with different risk/return potential that are reviewed at least annually with the plan investment committee to confirm that they still meet the investment policy statement guidelines.
  • Review the service provider fees associated with the plan and the plan’s investment options to confirm that they are reasonable for the services provided. 

The above information touches just briefly on the duties of a retirement plan fiduciary. The plan fiduciary should work closely with their ERISA counsel and their plan service providers to verify that all of the various IRS and DOL requirements are being met. ERISA’s prudence standard for plan fiduciaries is not just that of a “prudent layperson” but rather that of a prudent expert in retirement plan matters. 

This can be accomplished with good plan procedures, documentation of the various administration and reporting requirements, selection and monitoring of all service providers and selection and monitoring of investments in the plan.

Diane D. Capone, CEBS, TGPC is a member of the NTSA Communications Committee and Sr. Retirement Compliance Consultant for Lincoln Investment Planning, Inc. She is a Registered Investment Advisor, Broker/Dealer and member, FINRA/SIPC. 

Please note that this article is for general informational purposes only and is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article. 

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.