How Successful Plan Sponsors Address Basic Responsibilities and Standards
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).
Questions about whether you’re fulfilling these basic fiduciary responsibilities and meeting ERISA standards? Contact our experts today!
Scott Gehman, ERPA, CEBS
Retirement Plan Consultant
Bio