Administering a retirement plan and managing its assets requires certain actions and involves specific responsibilities. To meet their responsibilities as plan sponsors, employers need to understand some basic rules, specifically the Employee Retirement Income Security Act (“ERISA”). ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries). Most plan sponsors hire service providers to perform a great deal of the tasks that are considered fiduciary functions, e.g. administration, record keeping, and custodial services. As a result, some plan sponsors may feel that they have little fiduciary responsibility and liability with respect to the plan. As we discuss below, this is a false impression. The following provides an overview of the basic fiduciary responsibilities applicable to private‐sector retirement plans under the law:
The Essential Elements of a Plan
Each plan has certain key elements. These include:
- A written plan that describes the benefit structure and guides day to day operations;
- A trust fund to hold the plans assets;
- A record-keeping system to track the flow of monies going to and from the retirement plan; and
- Documents to provide plan information to employees participating in the plan and to the government.
Who is a Fiduciary?
Many actions involved in operating a plan make the person or the entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan assets makes that person 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 an entity) named in the written plan, or through a process described in the plan as having control over the plan’s operations.
I’m a Fiduciary, What Does This Mean for Me?
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 plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
- Paying only reasonable plan expenses.
With these fiduciary responsibilities, there is also potential liability. 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 plan’s assets resulting from their actions. However, fiduciaries can limit their liabilities in certain situations. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out those fiduciary responsibilities.
Additionally, 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. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. However, while a fiduciary may have relief from liability for the specific investment allocations made by participants, the fiduciary retains 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. However, an employer is required to monitor the service provider periodically to assure that it is providing services prudently and in accordance with the appointment. An employer should document its selection and monitoring process, and when using an internal administrative committee, educate committee members on their roles and responsibilities.
Fees are also one of the several factors fiduciaries need to consider when deciding on service providers and plan investments. When the fees for services are paid out of plan assets, fiduciaries will need to understand the fees and expenses charged and the services provided. While the law does not specify a permissible level of fees, it does require that fees charged to a plan be “reasonable”. Plan expenses may be paid by the employer, the plan, or both. In addition, for expenses paid by the plan, they may be allocated to participants’ accounts in a variety of ways. In any case, the plan document should specify how fees are paid.
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.
As an additional protection for plans, those who handle plan funds or other plan property generally must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts performed by those covered in the bond.
Fiduciaries who no longer want to serve in this role need to follow plan procedures and make sure that another fiduciary is carrying out responsibilities left behind. It is critical that a plan has fiduciaries in place so it can continue operations and participants have a way to interact with the plan.
What are Prohibited Transactions?
Certain transactions are prohibited under the law to prevent dealings with parties who may be in a position to exercise improper influence over the plan. In addition, fiduciaries are prohibited from engaging in self‐dealing and must avoid conflicts of interest that could harm the plan. Prohibited parties (called parties in interest) include the employer, the union, plan fiduciaries, service providers, and statutorily defined owners, officers, and relatives of parties in interest. Some of the prohibited transactions are:
- A sale, exchange , or lease between the plan and party in interest;
- Lending money or other extension of credit between the plan and party in interest; and
- Furnishing goods, services or facilities between the plan and party in interest.
There are a number of exceptions (exemptions) in the law that provide protections for the plan in conducting necessary transactions that would otherwise be prohibited and the US Department of Labor may grant additional exemptions. Exemptions are provided in the law for many dealings with banks, insurance companies, and other financial institutions that are essential to the ongoing operations of the plan.
Plans that invest in employer stock need to consider specific rules relating to this type of investment.
How do Employees Get Information about the Plan?
ERISA requires plan administrators to furnish plan information to participants and beneficiaries and to submit reports to government agencies. The following documents must be furnished to participants and beneficiaries:
- Summary Plan Description
- Summary of Material Modifications
- Individual Benefit Statements
- Automatic Enrollment Notice
- Summary Annual Report
- Black‐out Period Notice
Reporting to the Government: Plan administrators are generally required to file a Form 5500 Annual Return/Report with the Federal Government. The form 5500 reports information about the plan and its operations to the US Department of Labor, Internal Revenue Service, and the Pension Benefit Guaranty Corporation. These disclosures are made available to participants and the public. Depending on the number and type of participants covered, the filing requirements vary. There are penalties for failing to file required reports and for failing to provide required information to participants.
What Help is Available for Employers Who Make Mistakes in Operating a Plan?
The US Department of Labor’s Voluntary Fiduciary Correction Program (VFCP) encourages employers to comply with ERISA by voluntary self‐correcting certain violations. The program covers 19 transactions and includes a description of how to apply as well as acceptable methods of correcting violations. In addition, the US Department of Labor’s Delinquent Filer Voluntary Compliance Program (DFVCP) assists late or non‐filers of the Form 5500 in coming up to date with corrected filings.
The US Department of Labor’s Employee Benefit Security Administration (EBSA) offers more information on its Web site and through its publications available at www.dol.gov/ebsa.