Acting as a fiduciary for a qualified retirement plan involves a number of important responsibilities. However, making even simple fiduciary decisions can have serious consequences. Failing to follow best practices may leave a fiduciary personally liable for losses to the plan and result in removal from their duties.
Most qualified retirement plans fall under the Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA, there is a fiduciary duty for those who administer, manage, or control plan assets. This fiduciary duty requires individuals to act solely in the interest of plan participants and beneficiaries. Failure to comply with ERISA requirements for qualified plans can expose a company to ERISA litigation and Department of Labor or IRS penalties.
There may be a difference between fiduciary decisions and business decisions. An employer's decisions to establish a plan, terminate a plan, or determine a benefits package on behalf of the business may be business decisions. However, taking steps to implement those plans while acting on behalf of the plan may be fiduciary actions. Fiduciary duties depend on the functions performed for the plan and its participants and beneficiaries and are not limited to specific titles. Plan fiduciaries may include plan trustees, plan administrators, or members of a retirement plan's investment committee.
The IRS and Department of Labor provide guidance on meeting your fiduciary duties. Fiduciary responsibilities for an ERISA retirement plan may include defraying the reasonable costs of administering the plan, diversifying the investments to minimize risk, following the terms of the plan documents, avoiding conflicts of interest, monitoring investment performance, and selecting investment options and providers.
There are a number of actions fiduciaries can take to limit potential liability. This includes documenting the decision-making process to show the basis for making decisions on behalf of the plan. For example, if a plan investment loses money, plan participants may blame the fiduciary for making a risky investment. However, if the fiduciary can show their decision at the time was part of an overall prudent and diversified investment portfolio, they may not have violated their fiduciary duty to the plan.
Another way to reduce potential liability is to empower plan participants with control over their investment portfolio. Provided participants have information about their investment options, plan fiduciaries may limit their liability for the investment decisions of plan participants.
Some plan providers may decide to hire a third-party service provider to handle fiduciary investment decisions and manage the plan. A financial institution may have more experience in fiduciary decision-making which limits the liability of employers. However, the employer may still have some fiduciary responsibility when deciding who will manage the plan and ensure the plan managers are acting in the best interest of the plan participants.
When reviewing plan service providers, the employer should consider the institution's experience, assets, potential conflicts of interest, investment plans, proposed fee structure, and the institution's track record. Again, this decision-making process should be documented at the time the decision is made.
If you have any questions about retirement plan fiduciary rules and ERISA compliance, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on employee benefits and ERISA. Our firm can provide fiduciary counseling, help you avoid ERISA penalties, and represent you in ERISA litigation. Contact our office today with any questions on how we can help you and your business succeed.
