Understanding ERISA Fiduciaries and Their Retirement Plan Responsibilities
What is ERISA?
ERISA stands for the Employee Retirement Income Security Act of 1974. This act is currently the major law governing employee retirement plans. This act ensures that both employees and employers are taken care of fairly.
Within ERISA, there are several types of fiduciary roles. ERISA fiduciaries help make a retirement plan safe and functioning for your staff.
What are the Different ERISA Fiduciaries?
Generally speaking, a fiduciary is anyone who makes decisions about managing the plan or its investments. These are a few types of fiduciaries you may hear about:
1. Named Fiduciary
Under ERISA Section 402, each plan must have a named fiduciary who is the "go to" person with regard to operation and administration of the plan. This person is responsible for choosing and monitoring other plan fiduciaries and service providers. Often, the named fiduciary is the plan sponsor.
Under ERISA Section 403, unless certain exceptions apply, plan assets must be held in trust, making the role of a trustee necessary. A trustee is the person or group of people who are responsible for managing the assets in the trust, including oversight of contribution processing, investment transactions, financial statements, and fees and expenses.
3. 3(21) Investment Advisor Fiduciary
This fiduciary recommends investments for the plan but does not have discretion to implement those recommendations. The 3(21) fiduciary will also monitor the plan's investments and suggest modifications as needed. The plan sponsor maintains responsibility for the investment decisions.
4. 3(38) Investment Manager Fiduciary
This type of fiduciary has full discretion to choose, manage, or remove investments within the employee benefit plan.
5. 3(16) Plan Administrator
A plan administrator is responsible for the day to day decisions and operation of the plan. Unlike an ERISA 3(21) or 3(38) fiduciary that focus on the investments in a retirement plan, the role of a 3(16) fiduciary relates to administrative duties. Some duties that a 3(16) may perform include the monitoring, hiring and firing of service providers, filing Form 5500, monitoring plan operations, distributing annual notices, and approving distributions and loan requests.
What Are the Key Duties of ERISA Fiduciaries?
There are several duties required to uphold ERISA standards to ensure the plan is working in the best interests of the employees.
1. Loyalty: Usually loyalty lies on the shoulders of the plan's trustee. Because a trustee is responsible for overseeing money, they must act solely in the best interest of the beneficiary.
2. Documentation: Communication and clear documentation with your service provider and plan provider will help ensure your plan document is written to comply with all requirements in the Internal Revenue Code. This method will also ensure that a plan is carried out in a strategic operational fashion.
3. Prudence: According to ERISA, actions made for a retirement plan must be made with care, prudence, skill, and diligence. To protect employees and their money if a company cannot carry out the fiduciary responsibilities they must hire someone that can work with prudence.
4. Diversification: Generally, a well-diversified retirement account can provide less risk for plan losses. A fiduciary must assess a particular investment or investment course of action to determine if it is designed to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain associated with such investment.
5. Reasonable Plan Expenses: Reviewing your current plan and measuring the costs and expenses against the services provided are an important part of ensuring you're handling your retirement accounts properly.
If your company offers a retirement option, you'll need to take care of your fiduciary responsibilities. But you don't have to handle the process on your own. Do some research and you'll find that some third party providers can help alleviate some of the fiduciary responsibilities for you.