Offering a retirement plan can be one of the most challenging - yet rewarding - decisions an employer can make. The employees participating in the plan, their beneficiaries, and the employer all may benefit when a retirement plan is in place. Administering a plan and managing its assets, however, requires certain actions and involves specific responsibilities governed by the Employee Retirement Income Security Act.
Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These include:
* Carrying out their duties prudently. The duty to act prudently is one of a fiduciary's central responsibilities under ERISA. It requires expertise in a variety of areas, 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. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.
* Following the terms of the plan document. The document serves as the foundation for plan operations. Employers will want to be familiar with their plan document, especially when it is drawn up by a third-party service provider, and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change.
* Diversifying plan investments. Diversification helps to minimize the risk of large investment losses to the plan. Fiduciaries should consider each plan investment as part of the plan's entire portfolio. Once again, fiduciaries will want to document their evaluation and investment decisions.
* Paying only reasonable plan expenses. Plan expenses can generally be paid from the plan assets as long as they are prudent and reasonable and permitted by the plan document. Since these fees directly affect participants' account, fiduciaries need to continually monitor plan expenses to ensure that they are reasonable in light of the services provided.
With these fiduciary responsibilities, there is also potential liability. Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan's assets resulting from their actions.
However, fiduciaries can manage their liability in certain situations. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities. There are other ways to reduce possible liability:
* Investment Selection. Some plans, such as most 401(k) and profit sharing plans, can be set up to give participants control over the investments in their accounts and limit a fiduciary's liability for the investment decisions made by the participants. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under Labor Department regulations, there must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is volatile.
* Automatic Enrollment. Plans that automatically enroll employees can be set up to limit a fiduciary's liability for any plan losses that are a result of automatically investing participant contributions in certain default investments. There are four types of investment alternatives for default investments as described in Labor Department regulations and an initial notice and annual notice must be provided to participants. Also, participants must have the opportunity to direct their investments to a broad range of other options, and be provided materials on these options to help them do so.
* Fiduciary Warranty. Fiduciary warranties are being offered in response to the needs of the retirement services marketplace. Fiduciary warranty promotes the plan sponsor's or adviser's development and maintenance of diversified plan investment lineups. As such, it enables participants to create a retirement portfolio that best meets their individual objectives, and offers advisers, plan sponsors and participants added peace of mind and confidence.
A fiduciary warranty will:
* Outline the plan sponsor's fiduciary obligations,
* define the provider's commitment to stand by them should their investment decisions come into question,
* educate plan sponsors about their responsibilities and helps them make sure they're doing the right things for their plan so that they won't need the warranty, and
* offer protection in the event there is a legal judgment that results in damages attributable to a breach in the warranty and will generally restore any losses to the plan and pay litigation costs related to the suitability of the investment process and fund lineup for the plan.
The bottom line
ERISA holds all sponsors of a retirement plan to the highest standards of being prudent investment experts - even though they are almost never investment experts.
There is no substitute for the in-depth expertise retirement advisers deliver on behalf of plan sponsors and participants, but a fiduciary warranty will provide assurance that an additional level of screening supports their evaluation of overall investment lineups, and will offer increased confidence to both advisers and plan sponsors. Understanding fiduciary responsibilities is important for the security of a retirement plan and compliance with the law. EBA
Bluestone, CFP, is president and CEO of Morristown, N.J.-based Selective Benefits Group, which provides 401(k) plan management, education and support services. He can be reached at firstname.lastname@example.org or (646) 820-401k.
Securities and investment advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Selective Benefits Group are not affiliated. Additional products and services may be available through Andrew S. Bluestone, CFP, or Selective Benefits Group that are not offered through AIC.
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