This article originally ran on August 12, 2014.
By Kimberly Flett, CPA, QKA, QPA
Editors’ Note: In ERISA plans, the issue of fiduciary responsibilities is more clear-cut than it would be in non-ERISA plans. In the 403(b) world, public education employers are exempt from ERISA coverage (ERISA Section 3(32)), as are non-electing churches and association of churches (3(33)). The exempt group of employers may or may not bear fiduciary responsibility for their 403(b) plans, depending on state statues.
Distinguishing who the fiduciary is within a 403(b) plan or other qualified plan is an important determination. It is a highly confused, misinterpreted and somewhat gray area in the world of retirement plan compliance. Many plan sponsors wish to forgo all responsibility and risk related to their fiduciary roles in order to avoid liability and pitfalls and would gladly delegate the role to another third-party. If and how that can be done and some common application of the role of the fiduciary is the essence of this article.
A common question for sponsors is “how do I relieve myself of fiduciary responsibility?.” It’s important to know that this role cannot be removed altogether. Liabilities related to the plan fiduciary role can be shared but not reduced.
The theme word is discretion. The fiduciary function remains with individual who has discretion or is able to exercise control over the plan and most particular when making investment decisions. There may be attorneys, third-party administrators and other service providers involved with the plan, but unless those individuals are able to control the plan’s assets they generally will not be a fiduciary to the plan.
The fiduciary responsibility generally remains with the plan sponsor, trust board member, CFO, CEO and director of human resources. Additionally advisors who provide comprehensive and continual investment advice for a fee are generally fiduciaries. The key is the ability to exercise discretion over the plan assets. The fiduciary must also ensure that the investment managers overseeing the assets have been properly selected and are monitored regularly.
Examples of discretionary actions include the ability to buy or sell assets, authority to appoint other co-fiduciaries, determining an ongoing investment strategy to name a few. Individuals named in the trust documents as fiduciaries will be deemed to have discretion over these functions. A good rule of thumb is considering who has the overall legal responsibility.
All plans must name at least one fiduciary. Additional co-fiduciaries can be assigned, but must be identified and named in related trust documents and plan documents. Plans should have an investment Policy Statement that will also name the fiduciaries and other responsible parties involved in plan oversight.
The Department of Labor’s website makes a good distinction between actions in the normal course of business vs. fiduciary actions as follows: “Not all decisions regarding a retirement plan are fiduciary action — some are business decisions. For example, when an employer decides to establish a plan, create a benefit package, include certain features in a plan, or amend or terminate a plan, it is a business decision. However, when an employer or someone hired by the employer takes steps to implement these decisions, that person is a fiduciary.”
ERISA has specific requirements regarding a fiduciary’s role. ERISA Section 3(21) defines an individual as a fiduciary if he or she has discretionary authority regarding management or disposition of plan assets. This individual will generally render investment advice for a fee. ERISA Section 3(38) defines a fiduciary as someone who agrees in writing to be an investment manager for the plan, having the power to manage, acquire or dispose of assets. In general, such an individual would be a registered investment advisor. ERISA Section 3(16) applies to the fiduciary responsibilities of plan administrators and is the person or persons generally named in the plan document. This person handles the day to day operations.
ERISA provides safe harbors that will help protect fiduciaries from liability related to actions of participants, advisors and other co-fiduciaries. Some of these safe harbors include Sections 405(c), 404(c), and qualified default investment alternatives (QDIAs).
ERISA Section 405(c) is the general safe harbor. It states that when investment decisions are delegated, certain safe harbor requirements apply. The plan must allow for delegation of investment decisions and those decisions must be given to prudent experts. This would include investment managers and advisors. These experts must be given discretion of the plan assets and the acknowledgement must be in writing. The plan sponsor or those delegating the fiduciary responsibility has a responsibility to monitor the actions of the assigned expert.
ERISA Section 404(c) provides protection to the fiduciary for actions of the participants for their investment decisions. The safe harbor requires a notification in writing, a choice of at least three different investment options with different risk/reward characteristics, and an opportunity for participants to make choices based on the investment strategies within the plan. Participants must be able to change their allocations at least quarterly or more frequently in the case of volatile investment choices. Pre-approved plan documents governing the plan generally have a specific option the plan sponsor may select to designate that the plan will be in compliance with ERISA Section 404(c).
A sponsor will have some protection for participant investment decisions by offering a QDIA. These options became available after the Pension Protection Act and include preselected options such as target maturity/lifecycle funds and balanced or lifestyle funds. Participants must be provided 30 days’ advance notice with an explanation that an investment decision will be made on their behalf if they do not make an election.
When determining fiduciary responsibility prudent decision making is pivotal. A carefully constructed investment policy statement, plan document, and well-document implementation goals and strategies will help clearly clarify who is the fiduciary and who ultimately will bear the responsibility. Although the fiduciary’s responsibility cannot be fully delegated, planning with added safe harbor options will help minimize liability traps and risk. Prudent planning is essential.
Kimberly Flett, CPA, QKA, QPA, is Director of SS&G — Certified Public Accountants and Advisers.