Basic Fiduciary Responsibilities and Standards
Prudence and Process – the Two Pr’s
The ERISA application of fiduciary duty and prudence is much more stringent than the common law understanding. An ERISA fiduciary must act as a prudent expert in his or her applicable area of discretion over the plan – using the care, skill, prudence, and diligence that a prudent person who is familiar with such matters would use under the prevailing circumstances. If a fiduciary is not equipped to act as a prudent expert in the area of choosing a plan’s investments, ERISA essentially requires that an outside professional be engaged to help.
Prudence also focuses on the process followed in fulfilling one’s fiduciary duties. Any process must be documented in such a way that supports a claim of fulfilling one’s fiduciary duties. For example, a plan should have an up-to-date investment policy statement that outlines the process of periodically evaluating the plan’s investment menu, and the fiduciaries should document that this process has been followed on a regular basis.
Regardless of how well a process is documented, however, it is difficult to document that a prudent process has been followed when proper expertise has not been brought into the decision. A “good faith effort” is not enough when fiduciaries do not have the required expertise, no matter how well-documented the decision might be.
Other Fiduciary Responsibilities
A fiduciary is also charged with the following:
- To make sure the plan’s document, trust agreement, investment policy statement, and loan QDRO (Qualified Domestic Relations Order) policies are properly written and administered.
- To ensure that any employer and employee contributions (including loan payments) are deposited on time as prescribed by the IRS and DOL;
- To verify that any employer stock investment (in a non-participated directed plan) is maintained at the proper percentage of the overall portfolio (generally limited to 10% for defined benefit plans); and
- To provide the proper notifications and disclosures to participants and beneficiaries (the Summary Plan Description, for example) and the government (the annual IRS Form 5500, for example).
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