The stock market declines of 2000 and the gyrations of 2001 have given many sponsors of retirement plans reason to pause and reflect on the issues of fiduciary responsibility and the attendant liability. As stock markets have gone from rocketing upward, to spiraling downward, to spinning sideways, participant account balances have experienced similar fluctuations.
As a plan design and administration consultant to thousands of retirement plans through the years, as well as a fiduciary of my own company's retirement plan, I have seen a renewed interest in what it means to be a retirement plan fiduciary and a growing concern over the responsibilities and liabilities associated with this role. I am frequently asked, "What are some of the precautions for minimizing my risk as a plan fiduciary." From my perspective, this is a critical question to ask. During the heyday of 40% returns, nobody seemed concerned with this question. Now that plan sponsors are focusing on these issues, however, they are finding complex nomenclature and unclear standards. What should be done to protect plan fiduciaries and are there some basic changes that can be made to their retirement plans to provide greater protection?
In my conversations with plan sponsors and fiduciaries, I highlight the following issues to help them understand fiduciary liability. It's important to note that I am not an ERISA attorney- I do not offer legal advice, I simply try to help make my clients aware of their responsibilities, and in that process offer some general suggestions as to how they might begin to minimize their liability. The following information is intended to assist you in considering these same issues.
Fiduciaries
Every qualified retirement plan is required to have at least one "named fiduciary." The fiduciary requirement creates a system of accountability for the proper operation of a retirement plan. Because there is significant responsibility and liability associated with being a fiduciary, only individuals who understand these responsibilities should act in this capacity.
What is a Fiduciary?
Under ERISA, a plan fiduciary is any person, group of people, or company that:
What are the duties of a fiduciary?
Plan fiduciaries are charged with a duty and standard of care that brings the potential to be held personally liable for plan losses. The primary and overriding duty of a fiduciary "is to act solely in the interests of the plan's participants and beneficiaries and for the exclusive purpose of providing benefits for participants and their beneficiaries." In carrying out these duties, a fiduciary must also act prudently, diversify investments of the plan's assets and act in a manner consistent with the plan's documents.
The standard of care for an ERISA fiduciary is tantamount to that of a "Prudent Expert." The fiduciary must act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." This doesn't mean the fiduciary must be an expert in investing or plan administration. However, he must be certain that those people he retains to provide investment and administration services are capable professionals.
Minimizing Risk
There are a few things a fiduciary can do to begin minimizing the risk associated with operating a retirement plan.
Make Sure the Plan Design Addresses Participant Needs
When establishing your retirement plan, take into consideration the needs and financial circumstances of your employees. For example, if you're considering a 401(k) plan, consider whether your employees have sufficient discretionary income to make salary deferrals. If the majority of your employees earn $8 an hour, the chances of them participating in (and appreciating) a 401(k) are minimal. Under the circumstances, you might be better off establishing a profit sharing plan that is funded solely by the company.
Also take into consideration the education level of your employees. Are they sophisticated enough to make investment decisions? If participants in your plan are not investment-saavy, and if you give them an opportunity to manage their own investments, you will need to provide an education program in order to give them a basic understanding of investing (asset allocation, etc.). If, on the other hand, you determine that your employees are not sophisticated enough to direct their own investments and don't want to invest time and money in a participant education program, you will probably choose to have the trustee of the plan direct the investments.
Another factor in determining who directs investments, participants or trustees, is often the source of plan contributions. If participants defer salary into the plan (i.e., 401(k) plans), sponsors often choose to allow participants to direct their own investments. If, however, the only contributions to the plan are from the employer (defined benefit plans or profit sharing plans), sponsors frequently choose to direct the investments themselves.
There are advantages and disadvantages to each approach to handling investments, which leads to the next issue…
Select Your Advisors Carefully
Whether you allow participant to direct their own investments or choose to have the trustee manage the investments, fiduciaries must be very discerning in choosing an investment advisor. If plan investments are going to be directed by a trustee (an officer of the Company or an investment committee, for example), that individual will become a fiduciary of the plan. It is important, therefore, that you select someone whom understands his responsibilities, and is capable of providing competent advice. Asking the person in your office who brags of getting 35% returns year after year to manage your Company's pension plan assets may be a recipe for disaster.
Finding an individual or organization that truly understands economics and investments, and who understands your investment philosophy (as described in your retirement plan's investment policy statement) is an important step towards minimizing your liability. An annual due-diligence review (often facilitated by the investment manager) is also highly advisable.
The foregoing information is by no means a full discussion of the issues surrounding fiduciary responsibility. But hopefully it begins to create the framework for you to examine your position. By taking into consideration your employees' needs and by carefully selecting your investment advisors, you begin to protect yourself from the liability associated with sponsoring a qualified retirement plan. The addition of a written investment policy and a regular review of that policy and its performance further extends your protection. The maintenance of a full due diligence process on no less than an annual basis also begins to fully embrace the expectations of governing regulations.
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[Guest Forum]
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Pat Byrnes is the founder and President of Actuarial Consultants, Inc., an employee benefits consulting firm located in Torrance, California. Pat is a past president of the American Society of Pension Actuaries (ASPA), a 3,000-member national actuarial organization headquartered near Washington, DC. While president, Pat was instrumental in spearheading the organization's involvement in the IRS small plan audit program. He has testified before the IRS on Treasury Regulations and continues to work with ASPA's Government Affairs Committee.
Pat is a frequent speaker at national and regional pension conferences. He is a founding co-chair of the Los Angeles Benefits Conference, which is held annually and is sponsored by ASPA, the IRS and more than 20 employee benefits-oriented organizations. He was recently presented with the IRS's Los Angeles District Director's Award in recognition of his commitment and service to the pension industry and the Benefits Conference.
Pat earned his bachelor's degree from the University of Santa Clara and his MBA from the Wharton School of Finance.