Private sector retirement plans that fail to comply with the requirements of the Employee Retirement Income Security Act of 1974 can incur legal liability and financial penalties. If your organization is considering offering a retirement plan, becoming familiar with fiduciary basics is essential.

Who Is a Fiduciary?

Every retirement plan must provide for at least one fiduciary in its written plan document. Marla Kreindler, a partner the employee benefits and executive compensation practice at law firm Morgan Lewis, says there are three types of fiduciaries: named, appointed and functional.

Named fiduciaries are listed in the plan’s written document or pursuant to procedures contained in the document. These fiduciaries can include individuals, specific organizational roles—human resources director, for instance—or a committee such as the organization’s employee benefits committee.

Kreindler explains that plan sponsors can divide named fiduciary responsibilities between multiple parties.

“When named fiduciary responsibilities are divided between two or more named fiduciaries, then each has its own responsibilities and not the others,” she says. “That’s why many plans have separate administrative and investment committees serving as named fiduciaries.”

Named fiduciaries can designate others not named in the plan document as appointed fiduciaries. For example, a named fiduciary can appoint investment managers to serve as fiduciaries over a plan’s assets.

Functional fiduciaries might not be named or appointed, but they are deemed fiduciaries based on their work with the plan. If a service provider handling participant accounts and plan transactions makes discretionary decisions affecting plan operations, they may be a functional fiduciary. Another possible functional fiduciary is a third-party administrator that exercises discretionary control over plan management or benefit decisions.

“Even if someone wasn’t appointed to be a fiduciary, [but] if they take on fiduciary responsibilities, they become a fiduciary,” says Kreindler.

Primary Obligations

ERISA regulations spell out a plan fiduciary’s obligations. Claire Bouffard, a counsel at Morgan Lewis, says that ERISA Section 404 describes four key fiduciary duties. The first is a duty of loyalty, which is a conflict-of-interest rule. Fiduciaries must act exclusively in the best interest of plan participants and beneficiaries when making decisions.

The second duty is the duty of prudence: Fiduciaries must act and discharge their responsibilities as prudent experts would using prevailing standards. “Essentially, what would a prudent expert do today?” Bouffard asks.

Benjamin L. Grosz, a partner in Ivins, Phillips & Barker, says the third main ERISA fiduciary rule, also known as the investment rule, covers diversification. Grosz says the rule is relatively straightforward, so there is less confusion or litigation around it.

“It would be very uncommon these days to find a plan where they only offer a money market fund or all the money is in an S&P 500 Index or large-cap fund,” he says. “It’s usually not an issue.”

Grosz notes that ERISA Section 404(c) also provides an exception against fiduciary liability for investment losses in participant-directed retirement plans, such as 401(k) plans. He explains that the participants are responsible for their investment outcomes if a sponsor satisfies the 404(c) requirements, including adequate diversification.

The fourth main fiduciary duty comes from the plan documents rule, which states that fiduciaries must follow their plan documents unless the documents conflict with ERISA, says Grosz. Most plans, especially smaller or new ones, will likely use a pre-approved plan document instead of creating an individually designed one, according to Grosz.

Recordkeepers and financial institutions create a plan document template. They submit that template for IRS approval of the structure, language and form. They then offer that form to their clients and prospective clients. These pre-approved plan documents are often very flexible, says Grosz: “We even see some larger plans that have thousands of employees or hundreds of millions of assets on pre-approved plan documents.”

Additional Obligations

Besides complying with ERISA’s main requirements, plan fiduciaries are responsible for completing or overseeing numerous additional administrative tasks. Grosz tells plan committees with which he works that “the buck stops with you, and you need to make sure that these things happen and happen accurately, but it’s not necessarily that you personally do them.”

In addition to the four duties laid out by ERISA, Grosz highlights additional fiduciary responsibilities. Most ERISA-covered retirement plans are required to file an annual report for the Department of Labor, IRS and Pension Benefit Guaranty Corporation. The primary reporting requirement is the Form 5500 series. The summary annual report, a summary of Form 5500, must also be distributed to plan participants within three months after the Form 5500 filing deadline.

Other fiduciary duties include being responsible for participant claims and appeals and maintaining plan documents and records. A plan’s fiduciaries must maintain and provide a summary plan description and may be required to send out a summary of material modifications if material changes are made to the plan. Also, fiduciaries should “generally ensure that … plans are compliant from a tax and legal perspective,” Grosz adds.

Failing to fulfill these tasks can be expensive. For instance, failing to file Form 5500 on time can result in DOL penalties of up to $2,670 per day and IRS penalties of $250 per day, up to $150,000 per plan year. The PBGC can impose additional penalties for failing to submit reports related to defined benefit plans.

More on this topic:

	ERISA Rules of the Road
	Does Outsourcing Impact the Need for Fiduciary Education?