Remembering the Basics of Fiduciary Duties

The Department of Labor (DOL) describes any person involved in operating a retirement plan as a fiduciary.

According to its publication, “Meeting Your Fiduciary Responsibilities,” under the Employee Retirement Income Security Act (ERISA), fiduciaries are responsible for maintaining reasonable plan fees, following the terms under the plan, selecting diversified investment options and, perhaps most importantly, managing the plan with the participants’ best interests in mind. If a fiduciary does not understand specific terms of the retirement plan, such as fees, they can look to financial advisers or service providers for help.

The DOL says, “The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of assets, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

Possibly one of the most important responsibilities is considering the best interests of employees when making plan decisions. If a plan sponsor fails to do so, they risk litigation.

In fact, many retirement plans are brought to court on the matter. In December, the Rollins 401(k) Savings Plan was sued by participants who claimed the firm had hired “imprudent vendors to assist with the Plan’s investments, allowing them to put improper investment funds in the plans, and allowing them and other vendors to collect unreasonable and excessive fees, all at the expense of participants’ retirement savings.” Additionally, employees of the United Parcel Service (UPS) recently filed a lawsuit alleging that firm had committed several fiduciary breaches.

“In all cases, though, plan fiduciaries in carrying out their fiduciary duties are responsible for acting prudently, with an ‘eye single’ to the benefit of plan participants and beneficiaries,” Neal J. Shikes, founder of the Trusted Fiduciary, and Andrew L. Oringer, co-chair of Dechert LLP, previously noted to PLANSPONSOR.  

Keeping these best interests in mind also means checking in with service providers. According to the Internal Revenue Service (IRS), plan sponsors must monitor these experts and follow formal, daily review processes to decide whether to continue working with the provider or not. These formal reviews may include evaluating the service providers’ performance, reading reports, looking at fees, asking about policies or following up on complaints from participants, as listed by the DOL in its publication.

Reviewing fees is another highly important fiduciary duty, the DOL notes. Implementing low-cost plan fees ensures the plan sponsor is navigating expenses in a reasonable manner and can help plan sponsors avoid ERISA litigation. Similar to reviewing service providers, plan sponsors are also responsible for gauging investment options and their performance in a prudent matter. Based on this evaluation, employers must decide whether to keep or leave the investments, depending on what best serves plan participants.

Even as the DOL and the IRS provide lists of top fiduciary responsibilities, misperceptions on these duties still exist among plan sponsors. “Some [plan sponsors] believe they can offload all of their fiduciary responsibilities for investments to a third party,” wrote Dan Notto, an ERISA strategist for J.P. Morgan, in an analysis of its 2019 Defined Contribution (DC) survey. “Plan sponsors who harbor misperceptions like these or who are unaware of their fiduciary status risk violating ERISA’s fiduciary standards, harming participants and exposing themselves and their firms to liability.”

While plan sponsors can look to service providers for help, this does not mean all responsibilities may be transferable to the expert. Notto says while employers can hire multiple service providers, the act of employing these professionals is a fiduciary duty in and of itself. Therefore, employers must act as prudently as possible, ensuring that the service provider provides best practices and will act in the top interest of participants.