Avoiding fiduciary pitfalls

Even if your company has outside professionals managing your retirement plan, one or more company employees may have legal liabilities for the plan. In a number of cases I have come across, employees are completely unaware of this “fiduciary” responsibility or lack an adequate understanding of what those responsibilities entail. This can lead to expensive legal problems.

Fiduciary status is determined by the duties performed for the plan. A fiduciary exercises discretion or control over the plan or plan’s assets. Generally trustees, investment advisers, the administrative committee or those who select committee members or service providers are fiduciaries to the plan – whether they have been notified, agree or are even aware.

Generally, employees of the plan sponsor who are not company officers are not fiduciaries. The extent of responsibility and control exercised by an individual and the employee’s position may be considered in determining fiduciary status.

Being a fiduciary to a plan may put individuals at risk for lawsuits arising from participants alleging a breach of fiduciary duty or from the Department of Labor, should the plan suffer a loss that could have been prevented or not comply with the Employee Retirement Income Security Act of 1974. A fiduciary’s personal assets may be at risk because they may be held personally liable for losses to the plan as a result of a breach of fiduciary duty.

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What are the responsibilities of a fiduciary?

Fiduciaries must:

n Act in the best interest of plan participants and beneficiaries.

n Act prudently.

n Follow the terms of the plan.

n Diversify plan investments.

n Pay only reasonable plan expenses.

n Operate the plan in accordance with the plan document.

n Collect employee and employer contributions and timely remit to the plan.

n Maintain the plan document in compliance with ERISA.

n Maintain and distribute the plan’s summary plan description.

n Comply with nondiscrimination rules.

n Conduct regular educational meetings for participants.

n Ensure timely distribution of participant disclosures (fees, investments).

n Obtain an ERISA bond.

It should be noted that acting as a prudent person is not sufficient. One must act as a prudent expert, which generally means hiring outside experts to perform services for the plan.

What best practices can protect the plan and plan’s fiduciaries?

Identify the organization’s plan fiduciaries. Make sure that each individual is aware of his or her responsibilities and agrees to them.

In determining if a fiduciary has acted prudently, the DOL focuses on the decision-making process. Therefore, best practice dictates documentation of the process used to make decisions, such as choosing investments available to the participants under the plan. When evaluating management fees, be sure you understand what services are included in the fees. Prudence does not require that you necessarily come to the best decision, as long as the process followed is reasonable.

List the steps and timetable to make decisions regarding the plan. Fiduciary responsibility is ongoing. It is not sufficient to choose an investment lineup, for instance, and not continually monitor those investments.

Do not rely on your organization’s other insurance policies to cover fiduciary liability issues. Invest in separate fiduciary liability insurance. •

Diane M. Caron is a director in the Retirement and Benefit Plan Services Group at CBIZ Tofias, which has offices nationwide, including in Providence and Boston.

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