Retirement plans offered by a company must follow a multitude of administrative and regulatory requirements established by the Department of Labor and Internal Revenue Service. The plan’s fiduciaries, according to acceptable standards of conduct, are the individuals responsible for carrying out these requirements. If these standards are not followed, fiduciaries may risk personal liability for any account losses the plan’s participants (employees) incur in the plan. In addition, fiduciaries can also have potential liability for the actions of their co-fiduciaries if they know of fraudulent or irresponsible action and do nothing to prevent or correct it.
So who are fiduciaries? A fiduciary is defined as anyone who:
- Is involved in the administration of the plan
- Makes decisions regarding the plan
- Has control over the plan.
Fiduciaries include, among others, members of the plan oversight committee, the plan’s named trustee, and personnel involved in the oversight of employee deferrals and employer match contributions.
A company-ran retirement plan must include a written plan document, which provides guidance of the structure to be followed. Fiduciaries are responsible for following the plan document in all instances, becoming familiar with all the plan features, and periodically reviewing the document to make sure it remains current.
Most plans establish a committee to share administration, provide oversight of the trust funds and recordkeeping system, and review documents that are provided to employees and the government. Best practices for the committee include the development of:
- A charter that provides a roadmap for the committee’s activities (including how members are appointed, responsibilities and procedures to be followed and timelines/schedules of activities).
- An investment policy statement for benchmarking plan investment performance.
- An educational plan for individual committee members on their roles and responsibilities.
Oversight by fiduciaries requires expertise in a variety of areas. Lacking expertise, a fiduciary may contract with a service provider who has the required knowledge. These service providers can include investment advisors and recordkeepers. In selecting a service provider, the fiduciary must obtain information about the provider, including their financial condition, experience with similar retirement plans, and the quality of their services. The selection process in awarding contracts to service providers, including evaluation criteria, should be documented. Because these service providers receive compensation from the plan, fiduciaries are also responsible for continued monitoring of their services. Most important in this monitoring process is the review of fees paid, including calculations to confirm that the fees are accurate according to contracts. Fees should also be periodically evaluated with benchmarking criteria to ensure that they remain reasonable.
For more information, please click here for the US Department of Labor’s overview of basic fiduciary responsibilities applicable to retirement plans under the Employee Retirement Income Security Act (ERISA) law.
By Cindy Love, CPA, Partner