Sample Plan Sponsor Fiduciary Manual

Sample Plan Sponsor Fiduciary Manual

This manual provides the plan sponsor, a fiduciary of a participant directed retirement plan, with general information on complying with its fiduciary responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA). 1

The Plan Fiduciary

As the sponsor of your qualified retirement plan, you are offering your employees a great savings opportunity, and you have assumed some responsibility as well. As plan sponsor, you have a number of fiduciary duties and a standard of conduct imposed upon you by ERISA. By understanding your fiduciary role and responsibilities, you can handle your fiduciary duties appropriately.

A plan fiduciary is ultimately responsible for maintaining the plan, and your employees place their trust in you to keep the plan in full compliance with applicable law. This obligation is an important one but may not be as daunting as you think. With careful attention to your responsibilities, the plan fiduciary role, although challenging, can be rewarding as well.

Who Is a Plan Fiduciary?

Under ERISA, fiduciary status is attributed to anyone specifically named as a fiduciary in the plan document and to persons performing certain functions on behalf of the plan. A plan sponsor is always considered a plan fiduciary by virtue of maintaining and administering the plan. Although a person may be a fiduciary only with respect to the areas of plan operation over which he or she exercises discretionary authority, the plan sponsor typically fulfills a variety of roles with respect to plan operation and exercises authority by selecting and monitoring the providers retained to provide services to the plan.

Other plan fiduciaries include:

·  Any person specifically named as a fiduciary in the plan document (this may include the plan administrator, an administrative committee, or the plan trustee);

·  Any person with discretionary control over the administration of the plan;

·  Any person with discretionary control over the investment of plan assets; and

·  Any person rendering investment advice with respect to the plan's investment options for a fee or other compensation.

Who Is NOT a Plan Fiduciary?

If the person performing services for the plan has no discretionary authority or control over the plan or plan assets, that person will not be a plan fiduciary in most cases. The services provided by the following persons generally do not cause the person to be a plan fiduciary:

·  Attorneys, accountants, actuaries, and consultants;

·  Persons performing ministerial or administrative functions for the plan as directed by the plan fiduciary; and

·  Service providers, such as recordkeepers.

Co-fiduciary Liability

Some plan sponsors are under the mistaken impression that selecting one or more persons to serve as a plan fiduciary eliminates any further fiduciary responsibility or liability. As the plan sponsor, however, you remain a fiduciary regardless of the number of other plan fiduciaries you may select. In fact, ERISA imposes co-fiduciary liability in certain situations. You may be held responsible for the acts or omissions of other co-fiduciaries. For example, if you know that another plan fiduciary has committed a fiduciary breach and you knowingly participate in that act or omission, you may also be liable for that breach. Likewise, if you have knowledge of a breach by another plan fiduciary and you fail to make reasonable efforts to remedy the breach, you could be held responsible for that breach.

For example, if you retain a consultant or broker to provide the plan with investment information, but you retain all discretion over the investment options chosen for the plan, the consultant or broker is generally not a fiduciary. On the other hand, the consultant or broker would assume fiduciary responsibility if he or she makes investment decisions for the plan, and you could have co-fiduciary liability for his or her actions.

A Plan Fiduciary's Roles and Responsibilities

A plan fiduciary has a variety of roles and duties with respect to the plan and must perform those duties prudently and in the best interest of plan participants and beneficiaries. ERISA can be used by plan fiduciaries to guide them toward a sound, well-maintained plan. The ERISA principles plan fiduciaries are expected to follow include:

·  Prudent Man Rule—You are not required or expected to be an expert in every aspect of plan administration, but ERISA does require you to act with the care, prudence, skill, and diligence that a knowledgeable person would use in a similar situation. This means that you must carry out your duties in accordance with good judgment and sound processes when handling the affairs of the plan. This may require the hiring of experts to aid in making decisions with or for the plan. Such experts may include trustees, attorneys, accountants, and investment managers, to name a few. The plan sponsor's fiduciary liability, however, cannot be waived merely because an expert was hired. Careful selection of the expert is necessary to comply with ERISA's prudent man rule and the performance of all persons retained must be continually monitored.

·  Loyalty—One of the most important of your fiduciary duties is that of loyalty to the plan participants and beneficiaries. As an employee you may be inclined to put the interests of the company ahead of the interests of the plan. ERISA specifically requires you to put your duty as a plan fiduciary ahead of your corporate responsibilities when you are making a decision as a plan fiduciary. Called the “exclusive benefit rule,” you must act solely in the best interests of the plan and its participants and beneficiaries. This includes the duty to ensure that the expenses of the plan are reasonable based upon the services being provided to the plan. You are not charged with selecting the lowest cost plan, and cheaper is not always better. A prudent fiduciary will know what services are being provided to the plan for the dollar amount incurred and will compare the cost of those services to the market.

·  Follow the Plan Document—The plan document is the contract between the plan sponsor and the plan participants and beneficiaries. The plan document is your manual for operating and administering the plan and you must keep it updated to comply with ERISA and the Internal Revenue Code.

·  Avoid Prohibited Transactions—As a plan fiduciary you must avoid causing the plan to engage in any transaction that you know may constitute a direct or indirect:

o  sale, exchange, or lease between the plan and a party in interest; *

o  lending money or other extension of credit between the plan and a party in interest;

o  furnishing goods, services, or facilities between the plan and a party in interest;

o  transferring or using plan assets for your benefit or that of any other plan fiduciary or party in interest; or

o  dealing with employer securities or property in violation of ERISA.

·  Diversify the Menu of Investment Options Offered Under the Plan—The prudent man standard requires plan fiduciaries to evaluate the investment options to be made available under the plan and to offer a diverse range of investment options to plan participants. Diversification may be accomplished by offering investment options with materially different risk and return characteristics and investment objectives.

·  Monitor Investments and Service Providers—The menu of investment options offered to plan participants, as well as the experts retained to assist you, must be evaluated periodically. With respect to the investment options, a written investment policy statement defines the criteria to be used in selecting, retaining, and terminating a fund. If a fund does not meet the criteria set out in the investment policy statement, appropriate action must be taken. Likewise, with respect to trustees, administrators, attorneys, and others you have chosen to perform services to the plan, periodic evaluation is necessary to ensure that they are performing prudently.

·  Compliance with Participant Disclosure Requirements—New rules apply to plans with participant-directed investments effective for plan years beginning on or after November 1, 2011 (special transitional rules were available). Under the new DOL rules, plan fiduciaries must provide participants with certain plan- and investment-related information, including fee and expense information. The rules are designed to provide participants with information to make informed investment decisions.

·  Develop Prudent Fiduciary Processes and Procedures—Developing a prudent process for managing and administering the plan and documenting compliance with that process increase your chances of limiting your fiduciary liability. In addition to the bullet points listed above, these fiduciary procedures could include:

o  Compliance with a written investment policy statement;

o  Compliance with ERISA Section 404(c) ;

o  Compliance with ERISA's reporting and disclosure rules; and

o  Development and delivery of effective, easy-to-understand employee communications.

Breaches of Fiduciary Duty

As a fiduciary, you may be personally liable if you are considered to be in breach of your fiduciary duties under ERISA. Breach of fiduciary duty may result in participant lawsuits, monetary penalties, or the intervention of the Department of Labor (DOL) in your plan. You may be considered in breach of your fiduciary duties if you:

·  Fail to comply with the exclusive benefit rule by entering into self-dealing transactions, such as using plan assets for your own or your company's benefit;

·  Fail to exercise your responsibilities to the plan in a responsible manner;

·  Fail to diversify the menu of investment options offered under the plan;

·  Fail to monitor the plan's investment options and replace funds as necessary pursuant to your investment policy; or

·  Engage in a prohibited transaction.

Penalties for Breach of Fiduciary Responsibility

A number of civil and criminal penalties may be applied to fiduciaries that breach their responsibilities to the plan participants and beneficiaries. For example:

·  Plan fiduciaries can be held personally liable for any losses or may be required to restore profits to the plan resulting from a breach of fiduciary duty.

·  Plan fiduciaries may be subject to removal as a fiduciary by the DOL.

·  Plan fiduciaries may be assessed monetary penalties or may have personal criminal penalties or imprisonment imposed upon them for willful violations of fiduciary responsibility.

Written Investment Policy Statement

The DOL encourages plan fiduciaries to implement prudent policies for the selection and monitoring of investment options. Consolidating the criteria to be used in the selection and monitoring process into a written set of guidelines will assist you in following a prudent course. Documenting your compliance with those guidelines will also go a long way toward protecting you from liability.

Many plan fiduciaries became concerned about their responsibility for selecting and monitoring plan investment options. The DOL issued guidance aimed at helping you to meet your responsibilities. A central theme of that guidance is that fiduciaries must discharge their duties prudently and that the exercise of prudence in this context requires a deliberative process resulting in the best informed decisions possible under the circumstances. For example, “in cases where specific fund managers have been identified as under investigation by government agencies, fiduciaries should consider the nature of the alleged abuses, the potential economic impact of those abuses on the plan's investments, the steps taken by the fund to limit the potential for such abuses in the future, and any remedial action taken or contemplated to make investors whole.” 2

The purpose of an Investment Policy Statement is to set forth the goals and objectives of the investment options to be made available to the plan participants. It should provide a framework of guidelines for monitoring and evaluating the plan's investment options, including a procedure for terminating and replacing any nonperforming fund.

An effective Investment Policy Statement might include, among other things:

·  A statement regarding the investment objectives applicable to long-term retirement plan savings;

·  A methodology for selecting a broad, diversified array of investment options providing different levels of risk and historical returns;

·  The criteria to be used for selecting investment options that will enable participants to select investment options that are appropriate for their personal savings goals;

·  The performance standards that the selected funds will be expected to meet in order to be retained in the investment menu;

·  The criteria to be used to evaluate the fees and expenses of each fund;

·  The plan's processes for monitoring and evaluating plan investments, including the frequency, content, and person(s) responsible for the review;

·  The names and responsibilities of those plan fiduciaries charged with selecting and monitoring the plan's investments; and

·  Compliance with ERISA Section 404(c), if applicable.

Compliance with ERISA Section 404(c)

As previously discussed, the plan fiduciary of a participant directed plan is responsible for selecting the menu of investment options to be made available to plan participants.

ERISA Section 404(c) does, however, offer relief from liability for losses resulting from the individual investment choices made by plan participants. This relief is available only if certain rules are met. As the plan sponsor, it is your responsibility to monitor and maintain your plan's compliance with Section 404(c). First, you must give notice to plan participants that the plan is designed to comply with Section 404(c) and that plan fiduciaries may be relieved of liability for any participant investment losses. This notice is often considered the “trigger” that establishes the date when Section 404(c) protection becomes available.

In addition to the notice to participants, there are three general conditions that a participant directed plan must satisfy in order to take advantage of the fiduciary relief available under Section 404(c) :

·  The plan must offer at least three diversified investment alternatives (“core funds”), each of which has materially different risk and return characteristics and enables participants to minimize risk through diversification;

·  The plan must permit transfers among these three core funds at least quarterly; and

·  The plan must give participants enough information to permit informed decision making. (The regulation is very specific about what information must be given to participants automatically and upon request. Effective for plan years beginning on or after November 1, 2011, information that must be provided under the ERISA Section 404(a) Participant Disclosure Requirements (applicable to participant-directed plans regardless of 404(c) status) is integrated into the Section 404(c) disclosure requirements.)