Are you a trustee or manager for your company’s 401(k) plan? Know your fiduciary responsibilities under law and regulation
The Employee Retirement Income Security Act (ERISA) sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries). Whether a person is considered a fiduciary depends on the functions the person is performing for the plan, and the extent to which the person is exercising discretion or control over the plan.
Responsibilities of plan fiduciaries include:
- Acting solely in the interest of the plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
- Carrying out their duties prudently;
- Following the plan documents (unless inconsistent with ERISA);
- Diversifying plan investments; and
- Paying only reasonable plan expenses.
ERISA applies to private-sector retirement plans. Public-sector and church-sponsored retirement plans are not covered by the act.
Fiduciaries are 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. Fiduciaries may be able to limit their liability in some situations. One way to help limit liability is to consistently document the process used to carry out fiduciary responsibilities.
Duty to act prudently
The duty to act prudently requires expertise in a variety of areas, including investments. The prudence requirement emphasizes the process used for making fiduciary decisions. Therefore, it is wise to document decisions, the process for making decisions, and the basis for those decisions.
Duty to diversify plan investments
The duty to diversity plan investments, in order to minimize the risk of large investment losses to the plan, is another key fiduciary duty. Again, fiduciaries are wise to document their evaluation of investment alternatives and the related decisions. Many plans are designed to give participants control over the investments in their accounts. Department of Labor (DOL) regulations state that, for a participant to have control, they must be given the opportunity to choose from a broad range of investment alternatives.
Participants must be given sufficient information to make informed decisions about the options offered under the plan and be allowed to give investment instructions at least once a quarter, and possibly more often if a particular investment option is volatile. Plans investing in employer stock are subject to certain restrictions on the amount of employer stock that may be held by the plan.
Handling employee’s funds
Employers are required to deposit employee contributions to a plan on a timely basis. The law requires funds to be deposited as soon as it is reasonably possible to segregate the funds from the company’s assets. Employee contributions must be deposited no later than a specified number of business days from the payroll date, depending on the size of the plan. It is important to understand that these “no later than” rules do not represent a safe harbor for the employer. We recommend depositing employee funds as quickly as possible, and always depositing employee funds a consistent number of business days from the payroll date. Employers are wise to make depositing employee contributions to the plan an integral part of the payroll process, just like depositing payroll taxes on time.
Selecting and monitoring service providers
Fiduciaries are responsible for the prudent selection of service providers, such as third party administrators, custodians, record-keepers, auditors and attorneys. Again, an employer should document the selection process and consistently adhere to a process for monitoring the performance of service providers and the fees charged, especially if those fees are to be paid from plan assets.
Participants must be given information about their accounts and a plan sponsor must regularly make participants aware of their rights and responsibilities under the plan. Certain documents must be provided to participants at specified times. These include: The summary plan description (SPD), the summary of material modifications (SMM), the individual benefit statement (IBS), summary annual report (SAR) and, under certain circumstances, the blackout period notice. Plans are required to report to the government annually on form 5500, and under certain circumstances, the annual report must be accompanied by the report of an independent auditor. The penalties for not filing annual reports to the government on a timely basis are substantial.
Certain transactions are prohibited under law and regulation. These are primarily transactions with persons or entities that are considered “parties in interest.” It is important to understand the definition of “party in interest,” and to know what transactions are and are not allowed with these parties.
If you believe you may have made mistakes in the administration of your plan, the DOL’s Voluntary Fiduciary Correction Program (VFCP) may be helpful to you.
This article provides a simplified and partial explanation of fiduciary responsibilities. It was compiled from information available on the DOL’s website. It is not intended to be a complete description of plan sponsor responsibilities. It is also not intended to be a
legal interpretation of ERISA, and it does not address the federal income tax aspects of employee benefit plans. Additional information is available at the DOL’s website (www.dol.gov/ebsa.) Questions about your fiduciary responsibilities or other aspects of ERISA should be directed to a qualified ERISA attorney.
by Mitch Perry
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