Many organizations (plan sponsors) have implemented employee benefit plans to attract new talent or to reward and retain existing employees. What some fail to realize is that with the introduction of that benefit comes a tremendous amount of challenges, as well as plan governance and fiduciary responsibility in the oversight and administration of the plans. The entire employee benefit plan industry is under greater scrutiny as never before. With plan participants filing lawsuits, fiduciary failures in the news and the U.S. Department of Labor taking a much closer look at the operation of retirement plans, the actions of plan fiduciaries and those responsible for plan governance are under a microscope. Therefore, it is imperative that plan fiduciaries understand the obligations and immense accountability that they have to plan participants and beneficiaries.
In order to understand the roles and responsibilities, it is crucial to first understand who (or what) is a fiduciary. All ERISA (Employee Retirement Income Security Act) plans must have at least one fiduciary that is named in the plan document. The fiduciary can be either a person, an entity or a designated committee. Often, it is an administrative committee or an organization’s board of directors. Generally, fiduciaries will include the trustee, plan administrator, investment advisor, members of the administrative or investment committee, and those who selected the committee members; this is spelled out in ERISA. Additionally, there are other fiduciaries—not because of their title or position, but because of the duties they are performing. Simply, anyone that exercises discretion in administrating or managing the plan or controlling the plan’s assets is a functional fiduciary.
There are important responsibilities and significant standards imposed on fiduciaries. The basic standards that fiduciaries are bound by are:
- To always act solely in the best interest of the plan participants and beneficiaries (Exclusive Benefit Rule).
- To act with care, skill, prudence and diligence with every decision (Prudent Man Rule).
- To offer a diversified amount of investment choices in order to minimize the risk of loss.
- To operate the plan according to the plan documents, except where they are inconsistent with ERISA.
- To pay reasonable and necessary expenses of the plan.
The most successfully run plans all have one common thread: plan fiduciaries and those charged with plan governance completely understand the importance of their roles and take their responsibilities very seriously. Failure to abide by one’s fiduciary duties can result in personal liability, which may include monetary penalties and even incarceration.
The following is a list of some best practices for plan governance that all plan sponsors should consider:
- Identify plan fiduciaries, clearly designate the responsibility of each and ensure that each fiduciary clearly understands the magnitude of their duties. (Some plan sponsors refer to their documented fiduciaries as their retirement committee).
- Provide initial and ongoing fiduciary training.
- Establish a plan administrative and/or an investment committee. Consider a charter for each committee that describes the committee members, the process for the selection of the members, the term of each member, and a clear outline of the roles, duties and responsibilities at both the committee and individual levels, if deemed appropriate. We strongly encourage you to seek the advice of an ERISA attorney to ensure that the bylaws of the committees are complete and provide all necessary information.
- Develop an investment policy statement, and ensure that it is monitored and reevaluated on a regular basis. Having an independent investment advisor to assist you in the development and monitoring process is also encouraged.
- Maintain minutes from all committee meetings, and memorialize all decisions regarding the operation of the plan and investments. Make certain that you have an adequate number of meetings during the year and that the minutes document all vital information. Meetings are essential, but if detailed minutes are not maintained, then it is equivalent to not meeting at all. Avoiding fiduciary liability requires that the committees engage in a prudent and deliberative decision-making process, and thoroughly documenting the process is key.
- Maintain fiduciary liability insurance and a fidelity bond policy.
- Retain plan records, such as plan and trust documents, trust records (such as investment and financial statements) and participant records (such as employee census data, account balances, contributions, earnings, loan documents, participant statements and participant notices).
- Ensure that all required filings are completed.
- Hire qualified third-party providers with employee benefit plan experience including a custodian, recordkeeper, ERISA attorney and an experienced auditor with employee benefit plan expertise. The AICPA Employee Benefit Plan Audit Quality Center has issued a Plan Advisory titled “The Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit.” Plan sponsors may find this to be a helpful resource tool.
- Document the hiring process and the due diligence performed in selecting the best providers. It should be noted that although cost must play a part in the decision-making process to comply with fiduciary standards, it should not alone be the deciding factor for such an important and crucial decision. The reasonableness of fees must be analyzed in comparison to the quality of the third-party provider.
- Monitor all third-party providers on a regular basis and document such a review.
- Identify all parties-in-interest to the plan and monitor transactions with them.
In our experience, the best run plans are those where the fiduciaries take their responsibilities for plan governance seriously, adhering to the fiduciary standards and following the best practices discussed above.
If you have any questions on these or other benefit plan issues, feel free to contact the authors:
Kriste Naples-DeAngelo (Kriste.email@example.com or 732.243.7142)
Robert Reilly (Robert.firstname.lastname@example.org or 732.243.7261)