Roles and Responsibilities of a Fiduciary


The last several years have seen issues surrounding employer sponsored retirement plans make headlines. The company stock scandals connected with the Enron collapse, the recently predicted death of traditional pension plans and the pending pension legislative reform currently being considered in joint committee to reconcile the US Senate and House pension bills are a few. The laws that govern retirement plans are complex and often little understood by those who are required to adhere to them.

Furthermore, the Department of Labor, the government entity charged with administering and enforcing these laws, is on record as standing ready to act more aggressively than ever before. At the heart of compliance with pension law is the role of a plan fiduciary under the Employee Retirement Income Security Act or ERISA. Understanding their responsibilities as a plan fiduciary is something every senior manager as an employer should take very seriously. The penalties for violating ERISA are severe, putting even the personal assets of an individual at risk. ERISA holds fiduciaries to a demanding standard of care, a standard that is independent from the manager’s broader responsibilities to their employer. Under ERISA, retirement plans are not extensions of the employer’s business or organization; they are separate entities, and they must be managed solely in the interest of the plan and its beneficiaries.

In many instances there simply isn’t a clear understanding of what makes someone a fiduciary and what the fiduciary’s legal obligations are. This is a primary reason we at Burns-Fazzi, Brock & Associates have chosen to partner with Pentegra Retirement Services, a Best of Class provider of qualified retirement plans, full-service defined contribution and defined benefit.

Pentegra has been in the business of providing retirement plans to community based financial institutions for over 60 years and they are the only provider that offers a retirement plan designed exclusively for credit unions and banks that offers guaranteed fiduciary protection--because Pentegra is the named ERISA administrator and plan fiduciary. They are specialists at providing quality fiduciary protection at competitive cost and have assisted with the preparation of this CD to familiarize you with the legal obligations every plan sponsor has as a fiduciary for their retirement plan.

What is a plan fiduciary?

Generally ERISA considers anyone who exercises discretionary authority over plan assets, gives investment advice for a fee or has some discretionary authority in the administration of the plan or appoints or removes individuals and others who exercise any of those functions to be a fiduciary.

How does someone become a fiduciary?

Generally a person can become a fiduciary in one of two ways. First, when they are expressly appointed a fiduciary, usually as the plan administrator, plan trustee, or member of an administrative or investment committee. Second, when they perform a duty or function that is deemed to be a fiduciary function. Adding to the complexity, however, a fiduciary relationship also may be legally inferred from circumstances. In other words you don’t have to be formally appointed to become a fiduciary. Your actions regarding a retirement plan are more determinative than the name of your position.

What are the duties of a fiduciary?

Stated most broadly there are four principle duties of a plan fiduciary, (1) loyalty; (2) prudence; (3) to diversify investments; and (4) to follow plan documents. These sounds pretty clear and simple, but actually they indicate a fairly complex set of standards and liabilities for functioning as a fiduciary under ERISA. Let’s look at each of these duties in more detail.

What does ERISA mean by loyalty?

In the context of a qualified retirement plan, loyalty means that a fiduciary must act solely in the best interest of the plan participants and their beneficiaries and that the fiduciary’s obligation to the plan outweighs those to their boss, a board of directors or even shareholders. This concept of loyalty is also referred to as the exclusive benefits rule. In principle it also covers issues of conflicts of interest, prohibited transactions and self-dealing by a fiduciary, which are all prohibited if they could harm the plan.

What does ERISA mean by prudence?

A fiduciary must always act with care, skill and the diligence of a prudent person as they carry out their duties related to a qualified retirement plan. At times this may include seeking the assistance of an expert, if that would be the prudent thing to do, due to their own lack of knowledge about some areas of plan management. It is a fiduciary responsibility to monitor the activities and fees of any expert appointed to act on behalf of the plan. This concept is also referred to under ERISA as the prudent man rule.

What does ERISA mean by diversify investments?

This does not mean that a plan fiduciary is required to “pick winners” as part of their plan’s investment platform. As a fiduciary ERISA requires that they follow a specific prudent procedure. That is, they must establish and follow good processes and document their actions to show due consideration. This would include creating an Investment Policy Statement that formally describes this process including an investment review with an established Investment Committee. So, even a low performing investment option may be a good choice, if it can be demonstrated that it was part of a prudent, overall diversified investment portfolio for the plan.

What does it mean to follow plan documents?

It is a requirement of all qualified retirement plans under the Internal Revenue Code to operate according to a written plan document. Furthermore, a fiduciary must provide information about the rules of the plan to all plan participants. This is usually done through a plain language explanation of the plan rules called a Summary Plan Description or SPD. In addition to plan disclosure documents there are a number of government reporting requirements that all qualified retirement plans must complete and file with the IRS or DOL.

How can a fiduciary be personally liable for their employer’s plan?

Personal liability is specifically stated in Section 409 of ERISA. It says that any “person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach…” The fiduciary may also be personally responsible for paying any civil penalties or excise taxes imposed on an employer by a Court of Law. Fiduciaries can also be held liable for failing to take reasonable steps to correct another fiduciary’s breach of duty. Employers should also be aware that the assets of a corporation can not shield the individual from liability when that individual is acting as a fiduciary.

How can I help to avoid a breach of my fiduciary obligations?

The Secretary of Labor, Elaine Chao, has said that there are a number of steps plan sponsors can take to improve fiduciary performance. For example:

  • Sponsors need to determine who is currently acting in a fiduciary capacity for their plan and
  • Analyze how your organization has assisted them in learning and fulfilling their obligations
  • Compile all necessary documents including: a plan document, a trust agreement, an investment policy statement, and plan communication materials
  • Set an annual schedule of meetings and maintain documentation of these meetings on an ongoing basis