Reducing Your Fiduciary Responsibility
Are you a fiduciary on your company’s retirement plan?
Do you know what that means for you if you are?
Do you also know that the United States is the only country that holds retirement plan fiduciaries personally liable for the investment decisions made on behalf of a company’s plan?
Hagan Newkirk would like to give you a few suggestions for reducing your fiduciary liability. But first, let’s identify what a ‘fiduciary’ is and what are their responsibilities. In general terms, a fiduciary is a person who owes a duty of care and trust to another and must act primarily for the benefit of the other in a particular activity. For retirement plans, the law defines the actions that result in fiduciary duties and the extent of those duties.
According to the IRS – many of the actions needed to operate a qualified retirement plan involve fiduciary decisions – whether you hire someone to manage the plan for you or do the plan management yourself. Controlling the plan assets or using discretion in managing the plan makes you or the entity you hire a plan fiduciary to the extent of that discretion or control. Fiduciary status is based on the functions performed for the plan, not a title. Be aware that hiring someone to perform fiduciary functions is itself a fiduciary act.
Every retirement plan has at least one person who acts as a fiduciary. In most cases, there is a team, committee or board who together act as plan fiduciaries.
So, what are the responsibilities of a fiduciary? ERISA holds fiduciaries to a very high standard. The responsibilities of a retirement plan fiduciary are as follows:
- Acting solely in the interest of plan participants
- Carrying out their duties with skill, prudence, and diligence
- Following the plan documents unless they are not consistent with ERISA
- Diversifying plan investments
- Paying only ‘reasonable’ plan expenses
The responsibility to be prudent covers a wide range of functions needed to operate a plan. Since you must carry out these functions in the same manner as a prudent person, it may be in your best interest to consult experts in such fields as investments, plan administration and accounting. Other ways to mitigate your potential liability as a fiduciary include:
1. Develop a Process
According to the IRS, fiduciary responsibilities cover the process used to carry out the plan functions rather than the results. For example, a plan investment doesn’t have to be a “winner” if it was part of a prudent overall diversified investment portfolio for the plan. Since a fiduciary needs to carry out activities through a prudent process, you should document your decision-making process to demonstrate the rationale behind the decision at the time it was made.
2. Equip your Participants
Be sure your plan is setup to give participants control of the investments in their accounts. For participants to have control, they must have sufficient information and education on the specifics of their investment options. If properly executed, this type of plan limits your liability for the investment decisions made by participants. Prudence and knowledge are crucial in determining investment styles, share classes, performance and fees. This is an ongoing duty, not just an initial decision when the plan is established.
3. Hire a Professional
Also, according to the IRS, you can also hire a service provider or providers to handle some or most of the fiduciary functions, setting up the agreement (written) so that the person or entity then assumes liability. There are basically two types of fiduciary investment advisors under ERISA. A section 3(21) Co-Fiduciary is an advisor who provides the plan fiduciary or fiduciaries investment research and counsel but little liability in the process…since the person, committee or board is making the actual investment decision from the plan/participants. A section 3(38) full investment fiduciary assumes the responsibility and liability of developing and maintaining a fiduciary process for selecting, monitoring and replacing investments within the plan.
The DOL’s “fiduciary rule” (scheduled to take effect in April on 2017) will compel plan fiduciaries to consider one of these options moving forward.
If you would like more information regarding your liability as a plan fiduciary and how to best mitigate it – or, would like more information on the “fiduciary rule” and how it will effect your plan – please get in touch with us.
If you don’t currently have a plan, we’ll discuss options. If you already have a plan we’ll discuss how it is set-up and how we can improve it!
You can call us directly or visit our office too!
Hagan Newkirk | Plan, Invest, Live
Central Arkansas Corporate Office
6235 Ranch Drive
Little Rock, AR 72223
Phone: (501) 823-4637