Employer-sponsored retirement plans can strengthen an organization’s benefits package and support employee recruitment and retention. They also create important legal and administrative responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA).
Individuals who manage a plan, control plan assets, administer plan operations, or provide certain investment advice may be considered fiduciaries. A fiduciary who fails to meet required duties may be held personally responsible for plan losses or face other remedies. Because executives and employees at small and midsize organizations often assume fiduciary responsibilities as part of their regular roles, employers should take proactive steps to manage this exposure.
Identify and Train Plan Fiduciaries
The plan document should identify the person or entity designated as the named fiduciary. However, fiduciary status is determined not only by job title, but also by the responsibilities a person performs.
An individual may be considered a fiduciary if that person:
- Has discretionary authority over plan management or administration
- Exercises authority or control over plan assets
- Serves as a plan trustee or as a member of an investment or administrative committee
- Provides certain investment advice for a fee
Employers should make sure fiduciaries receive appropriate training, especially when plan administration is not their primary job. Training can help fiduciaries understand their duties of prudence and loyalty, identify potential conflicts of interest, and distinguish between responsibilities retained by the employer and those delegated to outside service providers.
Training also helps the people responsible for appointing and overseeing fiduciaries demonstrate that they took reasonable steps to select qualified individuals.
Establish Consistent Processes and Maintain Documentation
Employers should adopt clear procedures for selecting and monitoring plan investments and service providers. These procedures should also address the evaluation of fees, expenses, performance, and service quality.
For example, if a plan offers target-date funds or uses one as its default investment option, fiduciaries should understand the fund’s investment approach and periodically determine whether it remains appropriate for the plan and its participants.
Processes should be reviewed regularly and updated as the plan, workforce, regulations, or available investment options change.
Thorough documentation is equally important. Meeting minutes, review materials, fee comparisons, service-provider evaluations, and written explanations of major decisions can help show that fiduciaries followed a thoughtful and prudent process. A well-documented process may be valuable even when a particular investment or administrative decision does not produce the expected result.
Review Fiduciary Liability Insurance
Organizations should also evaluate whether their insurance policies provide adequate protection for fiduciary claims. Directors and officers liability insurance and employment practices liability insurance may exclude ERISA-related fiduciary claims or offer only limited coverage.
Employers should also understand the difference between an ERISA fidelity bond and fiduciary liability insurance. A fidelity bond generally protects plan assets from losses caused by fraud or dishonesty by individuals who handle plan funds or property. It does not provide the same protection as fiduciary liability coverage for alleged breaches of fiduciary duty.
Although ERISA generally requires individuals who handle plan funds or property to be bonded, it does not require employers to purchase fiduciary liability insurance. Because fiduciaries may face personal liability, employers should consider working with an insurance advisor to review existing policies, identify exclusions, and determine whether separate fiduciary liability coverage is appropriate.
Take a Comprehensive Approach
A retirement plan can be a valuable part of an employer’s compensation and benefits strategy, but fiduciary responsibilities should not be overlooked. Employers can reduce risk by identifying fiduciaries, providing regular training, following consistent review procedures, documenting decisions, and evaluating insurance protection.
Consider reviewing the plan document and fiduciary governance practices with a qualified benefits advisor or ERISA attorney. A financial advisor can also assist with evaluating plan costs, investments, and other financial considerations.
Frequently Asked Questions
Who is considered a fiduciary of an employer-sponsored retirement plan?
A fiduciary may be a person or entity named in the plan document or someone whose actions give that person discretionary authority over plan management or administration, control over plan assets, or responsibility for certain investment advice. Fiduciary status generally depends on the functions performed, not only on a person’s job title.
What are the primary responsibilities of an ERISA fiduciary?
ERISA fiduciaries are generally expected to act prudently, follow the plan documents when consistent with ERISA, act solely in the interests of participants and beneficiaries, diversify plan investments when appropriate, and ensure that the plan pays only reasonable expenses.
How can employers document a prudent fiduciary process?
Employers can maintain meeting minutes, investment reviews, fee comparisons, service-provider evaluations, training records, and written explanations for significant decisions. Documentation should show what information was considered, who participated, and why a decision was made.
Does an ERISA fidelity bond cover fiduciary breaches?
Generally, no. An ERISA fidelity bond is designed to protect plan assets from losses caused by fraud or dishonesty by individuals who handle plan funds or property. Fiduciary liability insurance is a separate type of coverage that may respond to certain claims alleging breaches of fiduciary duty, subject to the policy’s terms, conditions, and exclusions.
How often should retirement plan fiduciaries review investments and service providers?
ERISA does not establish one universal review schedule for every plan. Employers should create and follow a reasonable monitoring process based on the plan’s circumstances. Reviews should occur regularly and whenever significant changes affect investments, fees, service providers, plan design, or participant needs.
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