During our discussions with clients there has been a consistent concern expressed by individuals responsible for the administration and governance of their company’s retirement plans. Retirement plan fiduciaries have been increasingly subject to litigation by plan participants, and are concerned about how to manage their risk.
Common Fiduciary Mistakes
A good place to start is to identify the most common ERISA Fiduciary mistakes, and then adopt best practices to reduce the possibility of committing these mistakes. The mistakes that can potentially lead to the most significant problems are:
1. Failing to identify who your Plan Fiduciaries are. Fiduciaries may be named in the plan document, but also may become fiduciaries by virtue of their functions or actions. If an individual exercises discretionary authority or responsibility for the administration of the plan, or exercises any authority or control over the plan or disposition of the plan’s assets, they could be a fiduciary.
2. Individuals may not understand when they are acting in a fiduciary capacity. Many individuals who are members of a retirement committee perform both fiduciary and settlor functions.
Fiduciary duties include plan administration, implementation of amendments or termination of the plan, holding or investing plan assets, appointing a fiduciary, and communication with participants.
Settlor functions include plan design, plan amendment or termination, and employee communications about corporate issues.
3. Failing to monitor appointed fiduciaries and service providers leaves the appointing fiduciary exposed to liability for actions of the appointed fiduciary. There is a duty to monitor the activities of persons or entities selected by the fiduciary to perform plan functions.
4. Failing to document reasons behind decisions made and actions taken creates unneeded risk.
A fiduciary’s conduct is evaluated according to the result of a decision as well as the process used to make the decision. Procedural prudence means:
Identifying factors relevant to decision-making process
Identify necessary fact-finding steps and background information
Identify required expertise; when necessary, consult with outside experts (e.g., accountant, actuary, legal counsel)
Evaluate relevant criteria
Document the decision and the process
If it isn’t documented, it didn’t happen! At least you can’t approve it.
5. Failing to Conduct Fiduciary Training isn’t acceptable. The Department of Labor has indicated that fiduciaries should take part in regular training to improve their skills, and the training should be documented.
6. Fiduciaries have a roadmap to follow in the form of a Plan’s Governing Documents, including its Investment Policy Statement. Failing to follow the terms of these documents is a clear violation of fiduciary duties.
7. Fees paid from plan assets directly reduce the benefits or security for plan participants. There probably have been more law suits regarding excessive fees in recent years than for any other reason. Section 408(b)(2) requires fees to be disclosed, and plan fiduciaries to determine if those fees are reasonable for the services provided. Failing to monitor fees for reasonableness and negotiate fees with service providers can expose fiduciaries to liability.
8. A fiduciary must use the level of care that a prudent person familiar with such matters would use in the same situation. If relying on experts, experts must be selected prudently, be fully informed of all relevant facts, and advice should be updated.
Failing to follow advice of investment consultant could be considered as failing to use the level of care necessary. It should be carefully documented if the fiduciary decides on another course of action.
Plan Fiduciary Best Practices
Despite these common failures, there are a number of fiduciary best practices that will reduce risk. These practices can be implemented and maintained with little additional effort by plan fiduciaries. These best practices are:
1. Know standards, laws, plan, and trust provisions
2. Establish a Committee Charter, detailing rules and obligations
3. Diversify assets to specific risk/return profile
4. Prepare/review investment policy statement
5. Use “prudent experts” and document due diligence
6. Control and account for plan/investment expenses
7. Monitor the activities of “prudent experts”
8. Avoid conflicts of interest and prohibited transactions
9. Hold regular Plan committee meetings
10. Engage in fiduciary education and training
11. Document, Document, Document!
Take the time to review your current practices against these best practices. Begin by auditing your activities and documentation for compliance with these best practices. Then an action plan can be prepared that will result in a reduction of your potential liability.