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Employers who sponsor employee benefit plans – such as 401(k) and other retirement plans – have a powerful tool to help attract and retain talented people, to aid employees in investing for their retirements, and to potentially obtain tax benefits for both the employer and employee.
However, administering a retirement plan and managing its assets imposes specific responsibilities on employers. To meet their responsibilities as plan sponsors, employers need to understand some basic rules, specifically the Employee Retirement Income Security Act (ERISA). ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries).
Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. For example, ERISA generally defines a fiduciary as a person who either:
(1) Exercises discretionary authority or control over the management of an employee benefit plan or the disposition of its assets,
(2) Gives investment advice about plan funds or property for a fee or compensation or has the authority to do so,
(3) Has discretionary authority or responsibility in plan administration, or
(4) Is designated by a named fiduciary to carry out fiduciary responsibility.
Since using discretion in administering and managing a plan or controlling the plan's assets is a determining factor, it's important to note that fiduciary status is based on the functions performed for the plan, not just a person's title. A plan’s fiduciaries will typically include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan.
A fiduciary's responsibilities generally include managing plan assets solely in the interest of participants and beneficiaries (with the care a prudent person would exercise) and diversifying investments to minimize the risk of large losses unless it is clearly not prudent to do so. Specifically, the Department of Labor says that plan fiduciaries are responsible for:
• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
• Carrying out their duties prudently;
• Following the plan documents;
• Diversifying plan investments; and
• Paying only reasonable plan expenses.
This is all very significant, not only because a fiduciary has a moral obligation to the plan's participants, but also because under ERISA, a plan fiduciary is personally liable to the plan for losses resulting from a breach of his or her fiduciary responsibility. In addition, the fiduciary must restore to the plan any profits realized from the misuse of the plan's assets. Accordingly, some key fiduciary duties to consider include the following:
• Have a working understanding of the laws that affect your plan.
• Read and understand the plan document, and update the plan document when necessary due to changes in laws or plan operations.
• Formalize and document the process for selecting plan investments.
• Ensure that your plan has an "Investment Policy Statement", and periodically review it.
• Monitor your plan's investments on a periodic basis.
• Consider engaging a qualified, independent investment advisor to assist in selecting, monitoring, and replacing investment options.
• Monitor and evaluate the performance of the plan's service providers.
• Periodically review and evaluate expenses and fees – such as investment expenses and service provider fees – charged to plan to determine if they are reasonable.
• Consider obtaining a "fiduciary benchmarking report" to evaluate the various fees and expenses charged to the plan.
• Establish a process to ensure that all appropriate participant disclosures are made (such as annual required disclosures regarding plan expenses).
• Conduct educational meetings for all employees. Provide information on topics such as how to participate in the plan, saving for retirement, general investment diversification, and asset allocation concepts, etc.
• Establish an annual "fiduciary calendar".
• Purchase a fiduciary bond.
• Fully document all plan-related decisions in writing!
Still, have more questions? Reach out to your CPA to learn more.
Delap LLP is one of Portland’s largest local tax, audit, and consulting accounting firms, located in Lake Oswego, Oregon.