Fall 08 - Fiduciary Responsibilities
Fiduciary Responsibilities: Five Ways to Minimize Your Liability
Each employee benefit plan covered under the Employee Retirement Income Security Act (ERISA) is required to identify at least one “fiduciary.” Plan fiduciaries can be any person or entity that exercises discretion in administering and managing a plan. This includes the trustee, investment advisors and all members of a plan’s administrative committee (if it has such a committee) as well as those who select committee officials.
Note that attorneys, accountants and actuaries generally are not considered fiduciaries when they are acting
solely in their professional capacities.
Fiduciary Responsibilities
Include:
- Carrying out duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
- Paying only reasonable plan expenses
Fiduciaries who do not follow the basic standards of prudent conduct may be personally liable. For example,
plan participants can bring suit against fiduciaries for performance losses and court costs. In fact, the number of court cases brought by plan participants is increasing because participants are more sophisticated about investments and the benefits of diversification and they have immediate access to results.
In addition, the U.S. Department of Labor (DOL) and the IRS can audit a plan at any time. If the DOL finds fault
with the management of plan assets, they can file suit against fiduciaries personally. The IRS can also
disqualify the plan if it finds that the plan’s assets have not been managed for the exclusive benefit of the
participants.
Limiting Liability
Of course, a well-run plan provides benefits to its participants — and participants who are receiving adequate benefits are less likely to resort to litigation. But there are additional steps that fiduciaries can take to limit their liability.
Document, document, document. ERISA standards revolve around a basic theme: documented prudence. Fiduciaries are rarely surcharged by the courts for poor performance results when investment decisions are prudently undertaken and properly documented. But, fiduciaries have been held liable for taking imprudent risks that resulted in losses or substandard performance when deficient documentation and/or poor procedures were followed in making initial investment decisions.
Takeaway: Demonstrate that you carried out your fiduciary responsibilities by properly documenting the processes used.
Diversify. ERISA clearly states that a fiduciary must diversify the plan’s assets. And the courts have been
quick to find fiduciary liability when it was apparent that diversification did not exist and a loss occurred. Here, it is important to note that “asset allocation” and “diversification” are not synonymous. Asset allocation is the distribution of assets among various investment classes to attempt to yield the greatest possible return consistent with the portfolio’s risk parameters. Diversification is the risk-reduction process of choosing a broad range of different individual investments within a particular investment class. For example, if a fiduciary determines that 20 percent of assets should be placed in equities, then within that equity portfolio, assets should be diversified among a range of equity issues.
Takeaway: Diversification objectives should be outlined in a well-thought-out Investment Policy Statement.
Watch for conflicts. The courts find conflicts of interest, or “prohibited transactions,” when the fiduciary
received a “current economic benefit” from a transaction. This might include the sale, exchange or leasing of land between the plan and the fiduciary or foreign investments (which are generally prohibited) and loans from a plan to a participant (unless the plan authorizes loans and certain conditions are met).
Takeaway: A fiduciary should satisfactorily answer the question, “As the plan fiduciary, do I stand to benefit or gain personally, either directly or indirectly, by the handling of the plan assets?”
Consider bringing in the experts. Plan assets may represent the single most significant source of funds
on which workers will depend during their retirement years. So it is crucial that decisions be made with utmost diligence. For this reason, Congress, the IRS and the courts strongly encourage the appointment of
professional investment advisors to manage plan assets. Here, fiduciaries may obtain a degree of protection from liability if the investment advisor has been prudently selected and monitored.
Takeaway: You can reduce your liability by hiring an investment manager, but you are still responsible for using prudence when making the selection and monitoring their performance.
Monitor expenses. ERISA requires the fiduciary to not only develop an investment policy and select
“prudent experts” to implement that policy, but also to ensure investment transactions are executed at the best cost and that commission dollars benefit the plan and participants.
Takeaway: The U.S Department of Labor offers a downloadable 401(k) Plan Fee Disclosure Form on its website (www.dol.gov/ebsa/pdf/401kfefm.pdf) that compares investment product fees and plan administration expenses charged by competing service providers.
Schedule Regular Reviews
If the above procedures are followed, a fiduciary’s exposure to liability can be significantly reduced. The key is to monitor either the asset manager you’ve selected or the performance of assets under your management. The results and documentation used in the review should then be maintained
as evidence of the process. The review process should include performance assessments, review of service provider reports, validation of actual vs. expected fees, and following up on participant complaints.
Benefit Plan Advisor is produced quarterly by Bober Markey Fedorovich’s Employee Benefit Plans
Services Team. If you would like additional information about the services we provide, please contact James E. Merklin, CPA, CFE, M.Acc. at 330.762.9785 or by email.
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