The practical side of being a fiduciary

By Jerry Kalish
August 1, 2009
It’s a tough world out there now for retirement plan fiduciaries. Buffeted by the most complex set of forces since ERISA arrived in 1974, plan fiduciaries today must cope with heightened compliance enforcement by the Internal Revenue Service and the Department of Labor, increasing litigation by plan participants and tightened fiduciary liability insurance markets.Despite all these forces that are swirling around, there are some practical ways that fiduciaries can effectively manage their responsibilities. But before you say, “I’m not a fiduciary,” you should double-check. As an HR/benefits executive, you may be a fiduciary if you:

■ Exercise discretionary authority or responsibility over management of the plan or disposition of its assets.

■ Render investment advice.

■ Have discretionary authority or responsibility for plan administration.

And not just you – any or all of the following people in your organization also could be a legal fiduciary:

■ Trustee.

■ Plan sponsor.

■ CEO.

■ COO.

■ Plan committee.

For the sake of brevity, I’ll skip the rest of the technical stuff and simply say that a fiduciary has to act in a prudent manner and can be held personally liable for failure to do so. Classic risk-management theory dictates that fiduciaries should:

■ Decide on a plan that could be interpreted as acting in good faith.

■ Review that plan on a periodic basis and take remedial action if necessary.

■ Make decisions based on expert recommendations and advice.

■ Document the decision-making process.

■ Establish directed investment accounts for defined contribution plans.

■ Appoint an investment manager and monitor his or her performance.

However, theory in the current environment is not enough. Here are some practical suggestions on how to approach your fiduciary responsibilities:

Appoint an individual or committee as plan administrator.

Formally designating a plan administrator is required by ERISA. Practically, it accomplishes two key things: It lays the groundwork for a clearly delineated claims procedure that might better meet the test of challenge, and it exempts the employer/plan sponsor, senior management and board of directors from being involved in any benefit disputes.

Consider the financial strength of your service providers.

The recent collapse of several high-profile financial institutions gave me flashbacks to the 1990s, when we struggled with insolvency issues affecting ERISA plans. It reminds fiduciaries yet again of the need to be proactive in protecting the assets of plan participants.

Carefully review the principal policy provisions of fiduciary liability insurance you have/are considering.

This includes the insuring clause, persons or organizations not insured, insurance exclusions, recourse, subrogation and the deductible. Also, consider whether you are covered against ERISA civil penalties. DOL levies a 20% penalty for an amount recovered through either a court decision or settlement for breach of any fiduciary responsibility.

Be aware of the scope of indemnification coverage.

ERISA voids any indemnification provision that relieves a fiduciary of responsibility: A fiduciary cannot be indemnified from plan assets. DOL has interpreted that to mean that it is permissible to have an indemnification agreement between the employer and a plan fiduciary. In other words, a fiduciary can be indemnified from the assets of the employer. However, the employer’s bylaws may have to be amended to provide indemnification to employees, officers or directors who are acting as fiduciaries, if permitted by state law.

Make sure investment responsibility has been properly delegated.

Four questions that should be addressed:

1. Does the plan document expressly authorize the delegation of responsibility to an investment manager?

2. Is the investment adviser a bank, registered investment adviser, or an insurance company qualified under state law to manage plan assets?

3. Has the named fiduciary, with respect to control or management of plan assets, appointed the investment manager?

4. Most important, but often overlooked: Has the investment manager acknowledged in writing that he or she is a plan fiduciary?

If the answer to the last question is no, then you may still be responsible for the investment decisions of an otherwise qualified investment manager.

Understand that selection of service providers is a fiduciary decision.

Among the obvious criteria is selecting a service provider are qualifications, references and industry standing, and reasonableness of fees. And remember that there is a further fiduciary obligation to monitor your provider’s performance.

Assume your plan will be audited.

There are two federal agencies with oversight over defined contribution plans: the IRS oversees tax aspects of retirement plans, while DOL manages reporting, disclosure and fiduciary aspects of retirement plans.

The IRS wants to ensure that the plan actually exists; plan documents and amendments have been executed; contributions have actually been made; participation, funding, vesting and other requirements and limitations have been met; prohibited transactions have not occurred; and there are no discrepancies between the various reports filed by the employer and the plan, such as corporate tax returns, plan tax returns, W-2s and 1099s.

DOL is focused on: timely deposit of employee contributions; diversification under Section 404(c) in the case of a self-directed defined contribution plan; selection and monitoring of funds, service providers, trustees, and other fiduciaries; nature and origin of fees; fees paid by plan participants; and whether there is an investment policy statement.

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Contributing Editor Jerry Kalish is the founder of The Retirement Plan Blog and president of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm. The information provided here is based upon complex requirements of federal law and related IRS regulations. This article is not intended to provide specific advice to any plan sponsor or fiduciary. Be sure to review each specific situation with an adviser(s).