Fiduciaries are responsible for the management of employee retirement plans in many regards, including plan investments and plan administration. As such, fiduciaries have responsibilities to both their participants as well as their employers, to hold to the fiduciary standards in all aspects of their work.
What are fiduciary responsibilities?
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 responsibilities include:
- Acting solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them and paying plan expenses
- Carrying out their duties prudently. If you lack the expertise that a prudent person familiar with the administration of employee benefit plans would exercise, then ERISA requires that you hire experts to help.
- Following all plan documents (unless inconsistent with ERISA)
- Diversifying plan investments to minimize the risk of large losses
- Paying only reasonable plan expenses
- Monitoring investments
- Avoiding transactions that are a conflict of interest
Who is a fiduciary?
ERISA, while not applicable to public sector plans, is the primary resource for guidance for fiduciary responsibilities. State laws, on the other hand, do apply to public sector plans, and language about fiduciary responsibilities and requirements can be found in trust provisions. Under ERISA, there are two types of fiduciaries: named and functional. Named fiduciaries are just that: identified by position, title or name as a fiduciary to the plan. Functional fiduciaries are those who have discretion over plan administration and investments; who provide advice to the trustees or administrators, or who have decision-making authority over the plan investments.
Individuals become fiduciaries by title or by actions. ERISA broadly defines a retirement plan fiduciary as a person or entity that does any of the following with respect to a retirement plan, such as:
- Exercising discretionary control or authority over the management of the plan or its assets
- Providing investment advice or managing the plan assets for a fee
- Having discretionary responsibility in the administration of the plan
- Being specifically identified in the written plan documents as a fiduciary
A plan’s fiduciaries will ordinarily include the trustees, investment advisors, plan administrators, plan sponsor, members of the plan sponsor’s board of directors, corporate officers, and those who select committee members. The key to determining whether a person or entity is a fiduciary is to determine whether they are exercising discretion over the plan.
Under ERISA, there are three types of functional fiduciaries:
- The 3(16) Plan Administrator – one who has discretionary responsibility for plan administration. In this arrangement, trustees are liable for investment decisions.
- The 3(21) Investment Consultant – one who provides investment advice to plan trustees for a fee or other compensation, to aid the trustees in their decision-making process.
- The 3(38) Investment Manager – one who has complete discretion over plan management and investment options. In this arrangement, the 3(38) advisor is wholly responsible for fiduciary duties.
Most advisors are typically either 3(21) or 3(38) advisors. Please consult with your advisor to further discuss fiduciary roles, responsibilities and duties for your plan.