Limiting Fiduciary Consequences
The basis of the fiduciary relationship – the reason you are a fiduciary – is trust. You are legally entrusted with the plan’s proper functioning. The other side of that relationship? If you break that trust, you can be penalized under the law. If you as a fiduciary do not follow the basic rules, you could be personally liable to refund any losses to the plan that happen as a result.The basis of the fiduciary relationship – the reason you are a fiduciary – is trust. You are legally entrusted with the plan’s proper functioning. The other side of that relationship? If you break that trust, you can be penalized under the law. If you as a fiduciary do not follow the basic rules, you could be personally liable to refund any losses to the plan that happen as a result.
The U.S. Labor Department may also make you pay penalty taxes if you fail to meet your fiduciary duty. Finally, plan participants may bring civil action against fiduciaries to recover any money lost by plan fiduciaries who were not fulfilling their obligations.
Am I My Fiduciary’s Keeper?
It’s not just your own actions you need to be concerned about. You could be liable for something a fellow fiduciary does, if you participate in, conceal, or even just know about another fiduciary’s violation and do not report it, or if you enable them to break the rules by failing to satisfy your own fiduciary responsibilities.
Excessive Fees are a common complaint
In light of recent 401(k) plan lawsuits, there is increased scrutiny that employees and their legal representation are placing on plan sponsors. The Supreme Court ruled in Tibble v. Edison that plan sponsors have a “continuing duty…to monitor and remove imprudent trust investments.” Lawsuits have been filed against large plans for allowing excessive fees — including health insurer An- them Inc., which settled for $23.7 million — but have crept down to smaller plans with as little as $188 million in assets as late. So, how do you protect yourself and limit your personal liability?
Have and Follow the Investment Policy Statement
One document that may be missing from a plan sponsor’s files is an Investment Policy Statement (IPS). This document is the roadmap for how you are going to select and monitor investments. By listing specific criteria in the IPS you add clarity to the review process. (See Elements of a Properly Crafted IPS, page 8).
Know your Role and your Plan
Another way to reduce liability is to make sure that you and your fellow fiduciaries are familiar with the plan documents. You must review the documents periodically and make sure that they are being followed. All committee members need to be educated on their roles, responsibilities, and on the need for documentation. Fiduciary training should occur periodically.
Monitor your Service Providers
You are allowed (and even encouraged) to contract outside the plan and the company to make sure certain functions are completed properly. You can hire an ERISA 3(21) investment advisor that makes recommendations which you need to approve before implementation or an ERISA 3(38) investment manager that has discretion over the assets.
In either arrangement, you do not eliminate your fiduciary responsibility in its entirety. You are responsible for challenging your advisor, seeking understanding of their reports and presentations, and making sure their advice is reasonable. Review Fees and Expenses
You are responsible for knowing the true and total cost of your retirement plan and ensuring that the fees you are paying are reasonable in light of the services you are receiving (see What You Need to Know about Fees, page 10).
Perhaps the best way to show a prudent process is through documentation. That includes a written IPS and documentation showing the review of investments per the criteria outlined in the IPS. It includes documenting fiduciary training sessions and committee meetings. The minutes should highlight the discussion, questions raised, decisions made, and thought process behind those decisions.
Fiduciary Liability Insurance
Plan sponsors are generally aware of a fidelity bond, which is a kind of insurance to protect the plan from losses resulting from dishonest or fraudulent acts by anyone associated with the plan. Fiduciary liability insurance may also be purchased. Before accepting a plan fiduciary position, you should know how your liability will be covered.
Ready to take the next step?
Download our investment committee handbook to continue educating your committee on fiduciary responsibilities.