Whether it is a defined benefit plan or a 401(k) account, retirement plans are an important part of the benefits package a company uses to attract and retain top talent. Managing a plan that helps employees save for their future is a significant responsibility, so it is important that employers are compliant with the rules that govern the administration of retirement plans.
The Employee Retirement Income Security Act (ERISA) is a key federal provision outlining the minimum standards a retirement plan must meet. To that end, ERISA assigns certain responsibilities to plan managers and administrators (also known as fiduciaries). Failure to comply with these responsibilities could result in penalties and fines against an employer.
Fiduciary Responsibilities Under ERISA
In the interest of protecting employees and their nest eggs, ERISA outlines a number of requirements for fiduciaries, including:
- Administering the plan solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them;
- Acting in a prudent manner;
- Diversifying plan investments to minimize risk;
- Following plan documents, which must also be ERISA-compliant;
- Avoiding conflicts of interest; and
- Paying only reasonable plan expenses.
Drilling down into these responsibilities, fiduciaries may find that compliance requires expertise in certain areas like investing and financial management. Fiduciaries that do not have such expertise in-house are permitted under ERISA to hire an external party to build and manage a diversified investment portfolio. It is important that all actions taken by the fiduciary related to investment management, record-keeping and use of third-party vendors are well-documented and justified to avoid conflicts of interest and demonstrate ERISA compliance.
The document in which these terms and conditions are contained serves as a foundation for retirement plan operations. In order to adhere to ERISA’s requirement to follow the plan document, employers should regularly review and update as needed to keep it current and compliant.
Ways to Reduce Fiduciary Liability
A thorough and updated plan document is not only a responsibility of fiduciaries, it can also be a strong defense against potential liabilities related to investment losses or imprudent actions. There are other ways employers can reduce personal liability to restore any plan losses, like increasing participant control over investment choices or outsourcing complete or selected fiduciary responsibility.
Most common for 401(k)s or profit-sharing plans, setting up a plan to give the participant more control over their personal investment portfolio will limit the fiduciary’s liability for losses resulting from those decisions. Keep in mind, however, that under this model the fiduciary remains responsible for selecting and monitoring the investment options from which plan participants may choose.
When a fiduciary outsources all or certain functions, it is accountable for the hiring decision and selection of the third-party manager. For example, if a fiduciary selects an investment manager, they are only responsible for that choice, not the investment decisions the manager goes on to make. In this case, the ongoing responsibility of the fiduciary after initial selection would be routine monitoring to ensure that the manager is acting in a prudent manner with regard to the plan’s investments. In addition, fiduciaries must ensure that every person who handles funds or other property of an employee benefit plan is bonded as required under ERISA, unless covered under one of the exemptions. A fidelity bond is a type of insurance to protect the retirement plan and its participants from losses incurred by dishonest or fraudulent activity of those who handle funds on behalf of the plan.
It is critical that employers understand their fiduciary responsibilities and potential liabilities under ERISA, both to protect themselves from fines and penalties and to preserve the integrity and stability of their company retirement plans. RKL has a team of professionals dedicated to conducting employee benefit plan audits and helping employers maintain compliance and improve plan administration. Contact one of our local offices today for help determining or improving your plan’s ERISA compliance.
Contributed by Jill E. Gilbert, CPA, CGMA, Partner in RKL’s Audit Services Group. Jill serves a broad range of industries including governmental agencies and not-for-profit organizations. She also specializes in employee benefit plan audits.