Thanks to the first blog post in our fiduciary prudence series
, you already know that if you are either named as a fiduciary or act in a manner where you are functioning as one (e.g., you answered “yes” to the question “Do I have the discretionary authority over the management of plan assets or over the administration of the Plan?”), you are a fiduciary.
But now what? After determining fiduciary status, it is imperative that you understand your roles and responsibilities as a plan fiduciary.
First and foremost, it is important to know when these roles and responsibilities begin. Your role as a fiduciary begins at the inception of the plan. Once an employer decides to sponsor a plan—which in and of itself is NOT a fiduciary decision—the roles and responsibilities of a fiduciary are born.
Now that you know when your role begins, it is essential to understand what roles and responsibilities exist as a fiduciary.
By acting on behalf of retirement plan participants and their beneficiaries, fiduciaries are subject to certain standards of conduct. Specifically, a fiduciary must adhere to the following responsibilities:
(1) Complying with the duty of loyalty,
(2) Carrying out their duties prudently,
(3) Diversifying plan investments, and
(4) Following the plan documents (unless inconsistent with ERISA).
Duty of Loyalty
A fiduciary’s first duty is that of loyalty, whereby a fiduciary must act solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them, and must pay only reasonable plan expenses. In complying with this responsibility, the fiduciary must avoid self dealing, i.e., the fiduciary must avoid using his/her position to act in his/her own best interest. More so, the fiduciary must balance the interests of plan participants and beneficiaries over the interests of third parties and must steadfastly pursue the rights of these individuals in all relevant matters.
As for the requirement that the fiduciary pay only reasonable fees, this may be accomplished so long as the fiduciary ensures that plan assets are used only to pay benefits and reasonable expenses of administering the plan as well as by reviewing service provider fees to ensure reasonableness. This requirement has come under intense scrutiny with the Department of Labor’s recently enacted fee disclosure rules (search on our blog for “fee disclosure” for blog posts on the topic). Fiduciaries should have a systematic process in place for regularly monitoring their service providers’ fees.
The next role of a fiduciary is that of the prudent expert. The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. This notion of prudence focuses on the process for making fiduciary decisions. Because process is so important, it is wise to document decisions and the basis for those decisions. Prudence requires expertise in a variety of areas (e.g., investments) and where the fiduciary is lacking that expertise, s/he will want to hire an expert to carry out the given functions. So, in the event a fiduciary needs to hire someone to provide the necessary expertise, it would be prudent to both survey a number of possible experts and to document the process taken for the hiring of the expert.
Diversification of Investments
In complying with your duties as a fiduciary, diversification of plan assets is an important responsibility because it helps to minimize the risk of large investment losses to the plan. To ensure diversification, the fiduciary should look at each investment based upon the entire plan portfolio, not simply on an individual basis. Not surprisingly, adherence to this duty is closely entwined with that of the prudent expert. In ensuring diversification, a procedure must be followed, and fiduciaries will want to document all evaluation and investment decisions.
Plan Document Compliance Officer
A fiduciary’s fourth role is effectively that of a plan document compliance officer. The plan document serves as the foundation for plan operations, so following the terms of the plan is an integral part of a fiduciary’s job. Employers should be familiar with their plan document in its current state and should periodically review the document to make sure it remains up to date with law and best practices. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change. Remember though, there is an exception to the rule of always following the plan document: if your plan document is inconsistent with purpose and intent of Title I or Title IV of ERISA, then you shouldn’t follow that plan provision.
A fiduciary has many responsibilities and roles, as have been laid out above. It is important that, as a fiduciary, you comply with each one of these duties. After all, failure to comply may result in a breach of one’s duty, which could bring about a number of consequences. To better understand those consequences, such risks will be covered in our next installment in the fiduciary series: “What are the risks of being a plan fiduciary?”
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.