2021 Best Practices Conference: Understanding ERISA and Fiduciary Fundamentals

During the first session of the virtual 2021 PLANSPONSOR Best Practices Conference, experts discussed the requirements for maintaining retirement plan documents and operating a plan according to the Employee Retirement Income Security Act (ERISA). They also discussed what should be reported to participants and regulators, and how sponsors can adhere to fiduciary duties.

Bradford Campbell, a partner at Faegre Drinker, explained that when plan sponsors are acting as fiduciaries to a plan, they have a duty to act solely in the interest of the participants and beneficiaries—for the purpose of providing benefits or deferring reasonable expenses.

ERISA apples to private-sector companies and nonprofit organizations that aren’t governmental, and those groups have “two masters” that play a part in the establishment and maintenance of plan documents and operational polices, Campbell said. These are the Internal Revenue Service (IRS), which polices the tax code, and the Department of Labor (DOL), which polices ERISA. Ultimately, these regulators seek to ensure workers have their hard-earned retirement benefits protected.

A big part of plan sponsors’ responsibility is the accurate and timely filing of the annual Form 5500, Campbell noted. This form becomes more detailed if/when the plan has more than 100 participants and includes details such as schedules of assets, fees and other information. It is one of the most important filings, Campbell said, as both the DOL and the IRS use this form to target enforcement actions. If a plan sponsor misses a year’s filing, both regulators tend to notice.

“The rule of thumb is, if you’re not keeping up with your Form 5500, it probably suggests you’re not running your plan that well either,” Campbell said. “The DOL does look at that data as a basis for doing investigations of plans.”

Prudence and loyalty are key to ERISA, meaning sponsors are being judged not on if they make or lose money, but on if they kept proper documentation and followed the appropriate process, Campbell said. When it comes to investments, sponsors must act solely in the interest of doing right by the participants, in whatever process they employ.

“When it comes to prudently and loyally choosing investments, the issue is not whether the investments that you put in the plan make more money or lose more money compared with other possible options,” Campbell said. “The issue is, did you prudently select them, and did you go through a process that is appropriate and takes into account all relevant factors? It is how you make a decision that really counts.”

In addition to acting in good faith, sponsors must double check their blind spots and be sure that no conflicts can arise from prohibited transactions, said Michael Montgomery, OneDigital senior vice president. They must challenge assumptions and engage in a thorough decisionmaking process, he advised.

Sponsors should set up a plan and make sure the right people are fiduciaries so there is never a situation where someone is accidentally making fiduciary decisions without realizing it, the speakers agreed. Confusion about responsibilities contributes to the likelihood that the plan didn’t have a proven process and that the rules were not followed, Campbell said. The reason why ERISA works is because there is a functional fiduciary status, he added, meaning that even if someone is not named as fiduciary in a contract or title, they can still be held accountable for taking actions on behalf of the plan for making a fiduciary decision.

Some best practices can include forming an investment or retirement committee that can have a wide range of responsibilities delegated to it and putting into writing the specific authority the committee holds, Montgomery said. While not required by law, the committees can help with all the big decisions. Another good idea is to have an investment policy statement (IPS) so if there are ever any challenges, there is a written, foundational document to look back on.

“The monitoring of outsourced fiduciaries is also critical. They may be responsible for the day-to-day decisions that you delegated to them, but you are always responsible for watching them and making sure they’re doing what they’re supposed to,” Montgomery said. “The key is, you want it all spelled out in writing and very clearly spell out what’s being delegated and what is not. You need to make sure that no less than annually, you are looking at what they are doing and making sure you have reviewed the relationship and that it’s still appropriate.”