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Fiduciary Rules and Practices

Fiduciary Duty: A Refresher

John Iekel

Retirement plans have garnered heightened scrutiny. And that, suggests a recent blog entry, highlights the importance of fulfilling fiduciary duties and not committing a fiduciary breach. 

The IRS and DOL have increased the number of plans they audit, note Justin M. Pisellini, President, and Joel G. Clousing, Chief Plan Consultant, both at The 457 Consulting Group, in a recent blog entry. And lawsuits brought against plan sponsors by participants is part of the reason for that. “Significant consequences can result from a fiduciary breach,” they warn.

Fiduciaries and Not

Pisellini and Clousing remind that a fiduciary is anyone who performs the following functions:

  • has discretion over plan assets and plan administration;
  • provides investment advice for a fee;
  • makes decisions concerning investments;
  • is appointed to a committee that oversees the plan;
  • chooses and terminates service providers;
  • can enter into contracts on behalf of the plan sponsor; and
  • establishes policies and procedures for the plan.

In short, they say, a fiduciary person acts in a fiduciary capacity when he or she handles money or property on behalf of others. That means exercising responsibility and control regarding choosing the plan and recordkeeper and the investments from which participants choose, while:

  • control of the investments and responsibility for them resides with participants, and 
  • the plan sponsor is primarily responsible for:
    • maintaining the plan;
    • complying with regulations;
    • educating participants;
    • prudently selecting and monitoring investment options and service providers; and 
    • controlling the plan. 

Pisellini and Clousing also note that transferring fiduciary functions and duties does not mean that one therefore no longer has fiduciary responsibility; similarly, simply not making decisions does not mean that one is not fiduciary; as long as one has the authority to make decisions, one is a fiduciary. 

Addressing Fiduciary Liability 

Pisellini and Clousing offer tips regarding how a plan sponsor can address its fiduciary liability. 

Groups and Experts
 

  • Create a Board of Trustees. Such a group can be as simple as just two or three top decisionmakers or a body composed of representatives from each department. 
  • Hire help. Hire a fiduciary plan consultant, and/or a fiduciary advisor to monitor investments on an ongoing basis. 

Processes

  • Create a process. A process is vital in limiting liability; if it is followed correctly, there can be no mistake that you did your fiduciary duty. 

Administration

  • Plan itself. Develop plan objectives. Create an investment policy statement. 
  • Compliance. Make sure you are in compliance with ERISA Section 404(c). 
  • Documentation. Document every step taken during the process. 
  • Education. Conduct fiduciary training; also provide participant education. 
  • Investments. Limit the number of core investment options. Customize the menu. 
  • Loans. Limit loan obligations. 
  • Review. Review plan documents; measure effectiveness, participation; savings rate and median account balance.
  • Simplify, if possible. Try to reduce administrative burdens and consolidate to a single recordkeeper. Try to reduce complications and oversight obligations.

Remember, Pisellini and Clousing say, that taking steps to effectively fulfill fiduciary responsibilities is a protection for the plan and its fiduciaries. For instance, they argue: 

  • If a process is followed correctly there can be no mistake that fiduciary duty has been met. 
  • Reviews can help in showing why certain funds are part of—or not part of—the plan’s investment menu. 
  • Benchmarks help in proving that fees are reasonable.