Who and What is a Fiduciary?
The dictionary defines a fiduciary as “a person or organization that acts on behalf of another and has a legal and ethical duty to put the client’s interests first.” Retirement plans require attention in many areas to make sure they provide intended benefits to participants.
With regard to retirement plans, the Department of Labor issued complex and controversial regulations on April 23, 2024 that outline precisely who has fiduciary responsibility in specific situations. Although the new regulations make some changes that expand the definition of a fiduciary1, there are some general principles that apply:
If you have discretionary authority or control regarding the plan assets or investments, you are a fiduciary.
If you have discretionary authority over the administration of the plan, you are a fiduciary.
If you render investment advice regarding the plan for a fee or other compensation, you are a fiduciary.
A party can be a fiduciary by being so named in the plan, trust, or other documents, or they can be a “functional fiduciary,” meaning they are a fiduciary by virtue of their actions even if they are not so designated. A functional fiduciary cannot avoid a fiduciary role by disclaimer.
Fiduciaries typically include the plan sponsor and its officers, the retirement plan committee, named trustees, directed trustees2, 3(16) plan administrator3, 3(21) investment advisor3, 3(38) investment manager3, and anyone else named as a fiduciary. Fiduciaries generally do not include recordkeepers, pension administration firms, law firms, accountants and auditors, and employees of the plan sponsor who perform tasks such as submitting information to the above parties, or processing contributions or benefits from the plan that have been approved by fiduciaries.
General Guidelines Fiduciaries Must Follow
RISA contains several general rules that apply to all retirement plan fiduciaries.
Exclusive Benefit Rule: Fiduciary actions must be for the exclusive benefit of participants.
Prudent Person Rule: A fiduciary must act with the care, skill, and diligence that a prudent expert would use in similar circumstances.
Duty of Loyalty: In acting in the best interest of participants, a fiduciary must avoid having a personal interest in transactions, and not use their role for personal gain.
Duty of Care: A fiduciary must act in a way that will not cause harm to the plan or its participants.
Fiduciary Duties Regarding Plan Assets
Qualified retirement plan assets must be held in a Trust, and the Trustee is generally responsible for the investment and monitoring of plan assets. Assets should be properly diversified, be reasonably priced, and consider the risk tolerance and objectives of plan participants. Factors such as past performance, expense ratios and fees, risk profiles, and fund managers’ track records are all part of the prudent process for evaluating plan assets. Reviews should be documented on an ongoing basis.
It’s best to have an Investment Policy Statement that details the criteria for selecting and monitoring investment performance. Investments that fail to meet the stated criteria should be replaced. Evolving market conditions and regulatory changes can also drive the need to make changes in the plan’s investments.
Cost Management
One of a fiduciary’s important duties is to review plan expenses and ensure that they are reasonable and justifiable. These may include fees that are taken directly from investments by the managers of plan assets. Or the expenses may be paid from plan assets to cover items such as auditing fees, compliance testing fees, preparation of plan documents or government forms, or legal fees. The fees do not have to be the lowest ones available, but they must be reasonable and not more expensive than otherwise available for an identical level of service.
Compliance
Fiduciary responsibility includes making sure that contributions to the plan and benefits to participants are paid timely. Numerous reporting and disclosure rules are imposed on plans to ensure that participants receive notices about their benefits and rights under the plan. An Annual Report must be filed with the Department of Labor each year; the Internal Revenue Service has required filings; and the Pension Benefit Guaranty Corporation requires premiums to be paid by covered defined benefit plans. Numerous operational compliance tests must be met, including coverage tests, nondiscrimination tests, and top-heavy tests. Plan documents and Summary Plan Descriptions must be updated to reflect ongoing retirement plan legislation and regulation on a regular basis. Plan fiduciaries are responsible for making sure all these compliance matters are properly handled and documented.
Educating Plan Participants
In plans where participants direct the investment of their accounts, the fiduciaries must make sure that the participants have enough information to make informed investment decisions. Sufficient investment alternatives must be offered, and other rules must be followed, otherwise the fiduciaries may be exposed to liability for the investment performance of participants’ accounts. Having regular participant education meetings and providing ongoing investment information to participants is advisable in plans with participant-directed accounts.
Monitoring Service Providers and Other Fiduciaries
Fiduciaries may hire various service providers to provide advice and assist in the completion of the required duties noted above. Such services may include accountant and auditors, actuaries, asset managers, attorneys, investment providers, recordkeepers, and many others. However, the fiduciary has not completely delegated their responsibility for that duty. The fiduciaries must use diligence in hiring and monitoring the performance of the service providers. Periodic service reviews are required and benchmarking against other service providers is advisable. If services are found to be deficient or unreasonably priced, the affected service providers should be replaced.
Various fiduciaries are responsible for various different duties. If one fiduciary is aware, or should be aware, that another fiduciary is not fulfilling their duties properly, action must be taken to correct the deficiency; otherwise, both fiduciaries may be liable for the failure.
Fiduciary Breaches
Any fiduciary who breaches their fiduciary responsibilities is personally liable to return any losses suffered by the plan. Further, they must return all profits made through the improper use of plan assets. In appropriate cases, a fiduciary may be removed or even permanently barred from providing services to retirement plans.
Penalties can apply in case of a fiduciary breach. The Department of Labor can assess a civil penalty of up to 20% of amounts recovered by the plan through litigation or settlement.
In certain cases of willful violation of fiduciary responsibility, the violator may be subject to fines of up to $100,000 per person ($500,000 for corporations) and imprisonment up to 10 years.
Co-fiduciary liability may be imposed in certain cases, meaning that one fiduciary may be liable for breaches by another fiduciary. This applies only if:
They participate knowingly, or act to conceal, a breach by another fiduciary;
They fail to prudently act in a way that enables the other fiduciary to commit a breach; or
They have, or should have, knowledge of another fiduciary’s breach and don’t make reasonable efforts to remedy the breach.
Dealing With Fiduciary Liability
The Voluntary Fiduciary Correction Program (VFCP) is a Department of Labor program that allows for the correction of certain fiduciary duty violations. An application must be submitted and if approved, the fiduciary can avoid civil penalties. Only specific types of violations are covered under the program.
Fiduciaries can purchase a Fiduciary Liability Insurance policy that will provide coverage for certain claims. Different policies cover different risks, but in general these policies cover claims arising from inadvertent or negligent breaches. Willful or egregious violations typically would not be covered.
Conclusion
Retirement plan fiduciary responsibilities are wide-ranging. Failure to be aware of and comply with those responsibilities can have serious consequences.
Footnotes