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ERISA Compliance FAQs: Fiduciary Responsibilities pt. 1

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for employee benefit plans maintained by private-sector employers. ERISA includes requirements for both retirement plans (for example, 401(k) plans) and welfare benefit plans (for example, group health plans). ERISA has been amended many times over the years, expanding the protections available to ERISA benefit plan participants and beneficiaries.

ERISA includes standards of conduct for those who manage employee benefit plans and their assets, who are called “fiduciaries”.

This Compliance Overview is part 1 of a set of frequently asked questions (FAQs) to help employers understand the basic fiduciary responsibilities applicable to plans under ERISA.

Who is a Fiduciary?

Many of the actions involved in operating an employee benefit plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of the person’s discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title. 

Group health and retirement plans can be structured in a variety of ways. The structure of the plan will affect who has fiduciary responsibilities. Most employers exercise some discretionary authority and therefore are fiduciaries. If the employer sponsors a fully insured plan, fiduciary status depends on whether the employer exercises discretion over the plan.

A plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors. A plan’s fiduciaries will ordinarily include:

  • Plan administrators, trustees and investment managers;
  • Individuals exercising discretion in the administration of the plan; and
  • Members of a plan’s administrative committee (if applicable) and those who select committee officials.

Who is Not a Fiduciary?

Attorneys, accountants and actuaries generally are not fiduciaries when acting solely in their professional capacities. Similarly, a third-party administrator (TPA), recordkeeper or utilization reviewer who performs solely ministerial tasks is not a fiduciary; however, that may change if the entity exercises discretion in making decisions regarding a participant’s eligibility for benefits.

Also, a number of decisions are not fiduciary actions, but rather, are business decisions made by the employer. For example, the decisions to establish a plan, determine the benefit package, include certain features in a plan, amend a plan and terminate a plan are employer business decisions not governed by ERISA

When making these decisions, an employer is acting on behalf of its business, not the plan, and, therefore, is not a fiduciary. However, when an employer (or someone hired by the employer) takes steps to implement these decisions, that entity is acting on behalf of the plan, and, in carrying out these actions, may be a fiduciary.

What Does it Mean to Be a Fiduciary?

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants and their beneficiaries.

ERISA requires fiduciaries to discharge their duties with respect to employee benefit plans:

  • Solely in the interest of plan participants and their beneficiaries;
  • For the exclusive purpose of providing plan benefits, or for defraying reasonable expenses of plan administration;
  • With the care, skill, prudence and diligence that a prudent person in similar circumstances would use;
  • By diversifying the plan's investments to minimize the risk of large losses; and
  • In accordance with the plan's documents (unless inconsistent with ERISA).

The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out those functions. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Following the terms of the plan document is also an important responsibility. The plan document serves as the foundation for plan operations. Employers should be familiar with their plan document, especially when it is drawn up by a third-party service provider, and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change.

In addition, a fiduciary should be aware of others who serve as fiduciaries to the same plan, since all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach or does not act to correct it, that fiduciary is liable as well.

What Are the Possible Consequences of a Fiduciary Breach?

A person who is an ERISA fiduciary can be liable for a breach of fiduciary duty. Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. A fiduciary’s liability for a breach may also include a 20 percent penalty assessed by the Department of Labor (DOL), removal from his or her fiduciary position, and, in extreme cases, criminal penalties.

What Steps Can Fiduciaries Take to Limit Their Liability?

Fiduciaries can limit their liability in certain situations. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities. A fiduciary can also hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. If an employer contracts with a plan administrator to manage the plan, the employer is responsible for the selection of the service provider, but is not liable for the individual decisions of that provider. However, an employer is required to monitor the service provider periodically to ensure that it is handling the plan’s administration prudently.

As an additional protection for plans, every person, including a fiduciary, who handles plan funds or other plan property, generally must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss by reason of acts of fraud or dishonesty on the part of individuals covered by the bond. While not required under ERISA, obtaining fiduciary liability insurance serves as extra protection for plan fiduciaries against claims arising from alleged fiduciary breaches.

Finally, the DOL maintains a voluntary correction program for fiduciary breaches. The Voluntary Fiduciary Correction Program (VFCP) allows plan officials who have identified certain violations of ERISA to take corrective action to remedy the breaches and voluntarily report the violations to the DOL, without becoming the subject of an enforcement action.

Click here to download your copy of this Compliance Overview. If you have any questions about retirement plan services, or would like to begin talking to a retirement plan advisor, please get in touch by email or by calling (800) 388-1963.

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