Are you new to your role as a plan sponsor and still getting familiar with the job of managing your company‘s retirement plan? Or perhaps you’ve just joined the plan committee. Even if you’re a seasoned plan sponsor, it’s important to become comfortable with the word fiduciary. Because you are one.
It can be an intimidating word, so much so that there aren’t really many synonyms for it. Roget’s 21st Century Thesaurus brings up these four words as the most relevant synonyms: curator, depositary, guardian, trustee. Each individual word tells part of the story, but taken together they form a more complete picture. The Department of Labor defines the role of a fiduciary as follows:
- Must run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.
- Must act prudently and diversify the plan’s investments in order to minimize the risk of large losses.
- Must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA.
- Must avoid conflicts of interest by not engaging in transactions on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, services providers or the plan sponsor.
In practice, here are the 6 key fiduciary responsibilities that you need to be comfortable with in your role as a plan sponsor:
- Oversee Service Providers
While plan sponsors can delegate many responsibilities of managing a retirement plan to service providers such as recordkeepers, investment advisors, and others, a plan sponsor cannot completely hand over all fiduciary duty. A plan sponsor must carefully select and monitor their service providers, and is ultimately legally responsible for ensuring the providers are doing the right thing for their employees. Some items to consider in selecting a plan service provider:
- Information about the firm’s affiliations, financial condition, experience with retirement plans, and assets under their control or administration.
- A description of how the firm will invest plan assets or how it will handle participant investment directions, and its proposed fee structure.
- Information about the identity, experience, and qualifications of the professionals who will be handling the plan’s account, including any litigation or enforcement action taken against the firm and whether the firm has fiduciary liability insurance.
- Act in Employees’ Best Interest
A fiduciary must exercise a duty of loyalty by operating the plan in the best interests of participants. After all, the plan sponsor is a guardian for their employees’ retirement assets. You should be very thoughtful when considering hiring plan providers that also provide other services for the company or individual owners. In addition, the plan sponsor should not receive any kind of compensation or anything of value from operating the plan.
- Select Appropriate Investment Options
Plan sponsors should make sure that participants are offered a diversified set of investment options at a reasonable cost (that doesn’t mean they need to have the lowest fees). However, selecting the initial plan lineup is only the first step. Sponsors should continue to monitor the investment options available to participants to ensure they are able to balance their risk and help meet their retirement goals. It’s important to note that a plan investment option doesn’t need to be a top performer if it was part of a prudent overall diversified investment portfolio for the plan. Just make sure to document your decision-making process to demonstrate the rationale behind the decision at the time it was made.
- Follow the Plan Document
Plan sponsors must operate the plan in accordance with the terms of the plan document. Minor infractions can happen and usually occur in connection with administering loans, using the wrong definition of “compensation” for purposes of calculating benefits, and not submitting contributions on time. Failure to comply can become an issue, but corrective actions are clearly spelled out by regulators and easy to fix.
- Maintain Records
Plan sponsors to be aware of all their plan document, know what their service providers are doing to support the plan, and make careful decisions (and document them) about all activities relating to the plan. Have readily available all documents that show the your decision-making process and actions taken for the benefit of participants, as well as how decisions are implemented according to the terms of the plan. Keep all of those records on a permanent basis.
- Protect Against Losses
Fiduciaries must have an ERISA bond and should consider obtaining fiduciary insurance to cover any losses to the plan caused by a fiduciary breach.
Staying In Your Zone
The bottom line is that you are entrusted to help shape the financial futures of your employees and give them the best opportunity possible to achieve their retirement goals. No pressure! You can stay in your comfort zone with the help of your plan advisor, who (among other things) can help you manage your decision-making processes, advise on operational, compliance and regulatory matters, assist with vetting service providers, consult on potential plan design changes and help ensure you are always putting the needs of your employees first.
Department of Labor’s Meeting Your Fiduciary Responsibilities (September, 2021)
IRS website: https://www.irs.gov/retirement-plans/retirement-plan-fiduciary-responsibilities
Department of Labor’s. (2021, September). Meeting Your Fiduciary Responsibilities. Meeting Your Fiduciary Responsibilities
IRS. (2022, June). Retirement Plan Fiduciary Responsibilities. https://www.irs.gov/retirement-plans/retirement-plan-fiduciary-responsibilities
Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com
©2023 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.
Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).