Fiduciary Oversight

July 5, 2022 | | Business Insights

The competition for talent across various industries means that employers need to set up benefits packages such as 401(k) plans to attract top talent. However, employers incur significant legal responsibility in setting up and running such retirement benefit plans.

Employers become fiduciaries of employee retirement benefit plans by default because they manage many of the administrative and investment duties involved.

The Employee Retirement Income Security Act (ERISA) sets out principles and regulations about how the funds collected under these plans may be managed and invested, failure to which employers may incur significant legal liability.

What Does It Mean to Be a Plan Fiduciary?

The word "fiduciary" comes from the Latin word Fiducia, which means trust. A fiduciary is a person who has been trusted to act on behalf of another in total honesty and good faith for the benefit of that person. That often means putting the interests of the beneficiary before their own.

A retirement plan fiduciary is someone entrusted with the management or control of an employee retirement benefit plan on behalf of its beneficiaries.

The title of a fiduciary is dependent on whether the person retains the discretion to act for the plan. The employer remains a fiduciary by default because the organization retains discretionary control of the plan. Certain types of trustees and investment advisers are also considered fiduciaries to the extent that they can influence the operation of the plan. Many providers including Retirement Plan Services, can alleviate all or a portion of fiduciary responsibility, reducing liability and risk to the company.

Key Functions of a Plan Fiduciary

ERISA states that fiduciaries must:

  • Act solely in the interests and to the advantage of the plan participants and its beneficiaries.
  • Carry out all duties prudently.
  • Follow the plan documents to the extent where they are consistent with ERISA.
  • Mitigate investment risk by diversifying funds.
  • Maintaining minimum and reasonable plan expenses.

Fiduciaries have to run the plan prudently with the sole aim of procuring benefits for the participants and beneficiaries of the plan. This means carrying out all functions in a skilled and diligent manner. These include the following.

1. Making Prudent Investments

Plan fiduciaries are responsible for making prudent investment decisions. This means that as a fiduciary, you have to manage these investments and assets as a reasonable person would grow the assets under your care.

Every investment you make needs to meet plan objectives and have reasonable fees. High fees are a leading cause of lawsuits against investment plan fiduciaries.

2. Selecting Other Fiduciaries

Many employers elect to hire or consult experts in relevant fields to fulfill the requirements of a skilled investment fiduciary. These experts then assume a limited or directed fiduciary role to act on behalf of the plan either in a controlling or advisory role.

These other fiduciary roles are set up in ERISA: 3(16) -- Plan administrator, 3(38) -- Investment Fiduciary, and 3(21) -- Investment Advisor (co-fiduciary). The level of fiduciary responsibility varies between these levels:

  • Trustee duties can be delegated to parties who have Trust powers, which are granted at the State level. Since they are discretionary Trustees, they also have fiduciary responsibilities.
  • A 3(38) fiduciary, if appointed by the plan sponsor, generally takes on the liability and control of the core investment menu that is available to plan participants.
  • A Discretionary Trustee takes on a similar role to that of a 3(38) fiduciary, but they have additional duties that are also associated with being a Trustee of the plan.
  • A 3(21) Investment Advisor, sometimes referred to as a co-fiduciary, assists the plan sponsor with the selection of the investment menu, however, the plan sponsor retains ultimate decision-making authority.

As set out by ERISA, all investment fiduciaries must act solely in the interest of plan participants, their beneficiaries, and to their benefit. Conflicts of interest must be avoided as much as possible, and any decisions made must be in the best interests of the plan beneficiaries.

3. Managing Plan Expenses

Overseeing the plan also involves managing any costs and expenses associated with the plan. You are expected to minimize or eliminate unreasonable expenses, which include administrative fees and investment profit-sharing ratios.

4. Diversifying the Investment Portfolio

Fiduciaries are legally required to offer a range of investment options to the participants and offer advice on how to utilize these to diversify their investment. This helps them to minimize any losses incurred as a result.

Fiduciaries are also expected to monitor and review these investments in a timely manner to make sure that they are performing as expected and withdraw the investment if deemed necessary.

5. Operational Compliance

Pension and retirement benefits plans operate under the close confines of ERISA, as well as the terms defined by its participants and various oversight bodies. For example, 401(k) plans must fully comply with all its rules concerning age, deposits, withdrawals, and taxation.

Where the employer is a not-for-profit organization, the plan will be a 403(b) and must be administered accordingly. While 403(b) plans are similar to 401(k) plans, they operate somewhat differently.

One of the biggest compliance duties of plan fiduciaries is maintaining good records and submitting reports as required by law. This includes audits, annual census reports, and the preparation of, signing, and submission of Form 5500.

3(16) Fiduciary Services

When the employer hires third-party services providers, such as HTLF Retirement Plan Services, to help manage the administrative duties of the plan, the provider becomes a Plan Administrator under ERISA 3(16). The employer still retains some duties and responsibilities as what’s sometimes known as "The Mother of All Fiduciaries".

Depending on the level of duties taken on, a 3(16) Plan Administrator can assume some or a large portion of the day-to-day operations of the plan including regulatory, compliance, reporting, and the liability that comes with the fiduciary title.

One of the most important advantages of having a 3(16) administrator is that they may agree to handle administrative duties that can be cumbersome and complex for the plan sponsor. For example, they may review and sign Form 5500, thus reducing the risk of possible penalties from incorrect or late filing.

Other responsibilities of a 3(16) fiduciary include handling loans and distributions, including Domestic Relations Orders.

Summary: Fiduciary Oversight for Retirement Plan Sponsors

Employers are held legally liable for the performance of employee retirement benefits plans, and charges or lawsuits arising out of this responsibility must be paid out by the employer. For this reason, many employers opt for fiduciary oversight from providers that offer these varying levels of fiduciary services to assist them with the operation of the plan.

As an employer, evaluate your responsibilities and consider options in which you may be able to limit your liability through fiduciary oversight. If you want to discuss your Fiduciary responsibilities or want to limit your liabilities, contact us for a plan review and comparison to determine what solutions we may be able to offer.

Products offered through Heartland Retirement Plan Services are not FDIC insured, are not bank guaranteed and may lose value, unless otherwise noted.

Heartland Retirement Plan Services are offered through Dubuque Bank and Trust Company. The information provided herein is general in nature and is not intended to be nor should be construed as specific investment, legal or tax advice. The factual information has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Heartland Retirement Plan Services makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, it.