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Understanding Your Fiduciary Responsibilities

All retirement plans have certain key elements. These include:

  • A written plan that describes the benefit structure and guides day-to-day operations
  • A trust fund to hold the plan’s assets (If a plan is set up through an insurance contract, the contract does not need to be held in trust)
  • A recordkeeping system to track the flow of monies going to and from the retirement plan
  • Documents to provide plan information to employees participating in the plan and to the government

A hot topic related to the administration of 401(k) plans is how to minimize liability as a fiduciary of the plan. A fiduciary is anyone who exercises discretion or control over the plan. It is not limited to those who are named fiduciaries in plan documents. Fiduciaries can be held 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. This means that if employees feel that you made poor decisions in regards to the plan, they can sue you. If the employees win, the fiduciaries would have to pay…out of their own pockets!

What are my Roles & Responsibilities as a Fiduciary?

  • Make decisions regarding the Plan that are in the best interest of participants and their beneficiaries (the best interest of the company should not be a factor)
  • Carry out your duties prudently. Prudence focuses on the process for making decisions so be sure to have documentation on the processes used to carry out your fiduciary responsibilities
  • Always follow the Plan documents and periodically review them to make sure it remains current
  • Diversify investments available on the Plan documenting the evaluation and investment decisions (have an Investment Policy Statement in place)
  • Pay Plan expenses that are reasonable

Best Practices – Fiduciary Check-Up

Fiduciary risk mitigation, simply put, is the application of best practices in the administration of your plan. Here is a checklist of items that should be evaluated (click here download PDF of checklist):

  1. Updated, signed, and filed Plan documents reflecting the most recent legislative changes.
  2. If you have an IRS-approved Plan document, have the IRS Determination Letter on file.
  3. Complete Annual IRS Form 5500 reporting by the required filing date (7/31 unless request to extend to file is submitted).
  4. Know annual plan contribution limits (click here for 2012 limits). If limits increase, employees and HR Systems have been updated appropriately.
  5. Applicable annual written notices provided to plan participants 30 to 90 days before the beginning of the plan year (e.g., Safe Harbor 401(k) Notice, Automatic Enrollment Notice, and Qualified Default Investment Alternative (QDIA) Notice).
  6. Investment Committee has formally adopted a written Investment Policy to which it conforms and that policy is kept on file with other Plan documents.
  7. The intention to be 404(c) compliant is documented, and legally required information has been distributed to participants.
  8. Make contributions and loan repayments on a timely basis.
  9. Read your contracts with vendors. Understand the services provided to your plan, how much these services cost and who bears the cost.
  10. Understand that many investments pay revenue to your recordkeeper. Know the revenues accrued for your plan and how these revenues compare to your plan expenses. Excess revenues should be accounted and utilized for the benefit of the plan and plan participants.
  11. Benchmark your fees to ensure they are appropriate.
  12. If the plan includes an automatic enrollment feature, confirm that the default investment option is selected in a prudent process consistent with ERISA standards.
  13. Regularly schedule employee meetings to update participants on changes to the plan and investment options, as well as to educate them on fundamental investment strategies, such as dollar cost averaging?
  14. Ensure that your plan has documented processes that the company follows for administering the plan (e.g., onboarding newly eligible employees, offboarding terminated participants, loans, hardship withdrawals, early retirement, RMDs, determining eligibility for company contributions, etc.).
  15. Complete a thorough analysis of the plan every few years and evaluate making amendments if they meet the company’s objectives.

Make sure you also know your co-fiduciaries. You are responsible for their actions and could be liable for their breaches.