Understand Fiduciary Responsibility | American Funds

Understand Fiduciary Responsibility

Understand Fiduciary Responsibility

Regulatory changes can be challenging, but they also offer an excellent opportunity to provide a valuable service to your retirement plan clients. Use these resources to learn about the fiduciary role and how you can help them meet their fiduciary responsibilities.

Step
1

The fiduciary role

In the retirement plan world, fiduciaries have a special relationship of trust or responsibility to plan sponsors, participants and beneficiaries.

The Employee Retirement Income Security Act of 1974 (ERISA) requires every retirement plan to have at least one fiduciary, whether it’s a person, a group of people or a company. A fiduciary can be:

  • Designated in the plan document or chosen by a corporate authority, such as a firm’s board of directors or retirement plan committee
  • Determined by what an individual does with respect to a retirement plan (e.g., someone who has discretionary authority over plan administration)
  • Anyone who gives investment advice for a fee, including the plan’s financial advisor
Step
2

Fiduciary responsibilities

Retirement plan fiduciaries are required by ERISA to do the following:

  • Demonstrate loyalty to the plan. Fiduciaries must act solely in the interests of the plan, its participants and beneficiaries (e.g., plan assets should never be used for their own or the company’s advantage even if it also benefits the plan).

    They must avoid any conflicts of interest (e.g., between the sponsor’s role as a fiduciary vs. their role as a corporate officer). And, they should never receive personal benefit from any party associated with the plan.
  • Proceed with prudence. Fiduciaries must “act with the care, skill, prudence and diligence” that a prudent individual who is familiar with retirement plan issues would use under similar circumstances. (They should ask themselves “How would a prudent person proceed in this area?”)

    Plan sponsors are held to this standard, even though they bring in experts to help. They can delegate some responsibilities to others, but plan sponsors still have oversight responsibility and are therefore personally liable. They should also document all investments and operations reviews.
  • Diversify investment options. Fiduciaries must ensure that the plan’s investments are adequately diversified. They can increase diversification by:

    • Offering a sufficient number of investment options with materially different risk and return characteristics covering different investment objectives (e.g., growth, growth and income, income, and capital preservation)
    • Including funds that focus on investments both inside and outside the United States (e.g., international and global funds)
    • Selecting bond funds with different maturity rates (short-term, intermediate-term and long-term)
  • Act in accordance with plan terms. Fiduciaries’ decisions and actions must be consistent with the basic rights and obligations outlined in the plan document.

    Plan sponsors typically work with service providers to set up the provisions of the plan. Their decisions as fiduciaries should be consistent with the plan terms.
  • Provide participants with the information they need. To comply with ERISA 404(a)(5), fiduciaries must ensure participants receive timely information about:

    • The plan: Including a listing of plan investments, general information about directing investments, plan-level administrative charges and individual participant charges.
    • The investments: Including investment results, comparisons of results to relevant benchmarks, investment fees and expenses, and a reference to a website for additional information.
    • Deductions from participant accounts: Including all fees actually assessed against participant accounts during the prior quarter — whether shared by all participants (such as recordkeeping fees) or specific to individual participants (such as loan fees).

      The information must be expressed in dollar amounts and provided by means of a quarterly statement or similar financial disclosure.
Step
3

Participant fee disclosure

When participants are responsible for their own investment decisions, plan administrators must ensure that all plan-eligible employees (participating and nonparticipating), former employees and beneficiaries with account balances receive sufficient information about the plan.

The required disclosures generally fall into three categories:

  • Plan information: Including the investments that are offered, general information about directing investments, plan-level administrative charges and individual participant charges that may be levied against an account.
  • Investment information: Including investment results, comparisons to relevant benchmarks/indexes, and investment fees and expenses.

    Information should be provided within a chart to easily compare returns and expenses for all plan investment options. References to a website where participants can find additional information should also be included.
  • Charges deducted from participant accounts: Including any fees actually assessed against participant accounts during the prior quarter — whether shared by all participants (such as recordkeeping fees) or specific to services used by individual participants (such as loan fees).

    The fees must be disclosed within a quarterly statement or similar disclosure, and reported in dollars. If relevant, the statement should include disclosure stating that some plan expenses are paid through the expense ratios of the plan’s investments.

    Any plan-related changes must be disclosed to participants 30 to 90 days before they become effective.
Step
4

Service provider fee disclosure

To help retirement plan fiduciaries ensure their plan services are reasonable, service providers are required to provide them with appropriate fee disclosure.

Services providers who reasonably expect to receive at least $1,000 in compensation (direct or indirect) for services in one of these three categories are required to disclose their fees:

  • Fiduciary or registered investment adviser services.
  • Recordkeeping, brokerage and platform services through which designated investment alternatives are made available to participant-directed defined contribution plans.
  • Other services, such as consulting, third-party administration, actuarial or legal services for which the service provider reasonably expects to receive indirect compensation from the plan.

Fee disclosure must be offered writing and include:  

  • The specific services being provided
  • A description of those services and how — in dollars, as a percentage or a formula — providers are compensated for these services
  • Investment-related information for all investment alternatives in the plan

Note: Services providers are also required to declare whether they service as a plan fiduciary.

It should be sufficient enough for fiduciaries to meet their participant disclosure obligation; and must be provided in advance of entering into a new contract or arrangement.

Step
5

ERISA compliance

As a financial professional, you’re in a position to help plan sponsors take the steps they need to steer clear of trouble and reduce their potential liability. Here are some strategies you can use to help them comply with ERISA.

Take advantage of ERISA section 404(c) safe harbor

Plan sponsors can limit their fiduciary liability by giving participants control over the investments in their retirement plan accounts. This means allowing them to:

  • Choose from a range of investment alternatives that incorporate varying levels of risk and return, and
  • Change investments with a frequency that’s appropriate given the market volatility of the investment alternatives in the plan

Sponsors who comply with ERISA 404(c) need to provide participants with the following disclosure:

  • An explanation that the plan intends to comply with ERISA 404(c)
  • If applicable, a description of procedures to ensure confidentiality of stock purchases, sales, holdings and proxy voting as well as the name, address and phone number of the plan fiduciary responsible for these procedures

Plan sponsors can also limit fiduciary liability by selecting a qualified default investment alternative (QDIA) for participants who fail to make an active investment selection. In order to qualify, plan sponsors must:

  • Select an investment that meets the DOL’s QDIA requirements such as life cycle or target date funds, a balanced fund that takes into account the plan’s demographics and or an actively managed account option.
  • Provide participants with any information required under the ERISA QDIA rules.

Participants must be notified of the selected QDIA before the first contribution is invested on their behalf, and every year thereafter. It should be delivered at least 30 days before the investment is made, and must describe the QDIA that was chosen for the plan, including its investment returns and expenses, and inform participants how to exchange out of the QDIA.

Note:
Many broker-dealer firms have policies that prohibit their financial professionals from acting in the capacity of a fiduciary. Be sure to check with your compliance officer for information specific to your firm before deciding what role you might play. In many cases, your recommended role may be similar to that of a consultant who assists plan fiduciaries in understanding decisions they must make for their plan.

Create an investment policy statement

An investment policy statement helps in the prudent selection and proper diversification of plan investments. It should also cover how investment reviews will be conducted — for instance, which benchmarks the investments will be compared to, the periods over which results will be evaluated, etc.

Investment policies must be crafted carefully and approved by the plan’s legal counsel. Once established, plan sponsors should follow it as there is liability for not doing so, and review it every year to see if changes are warranted.

Plan sponsors can use our Investment Policy Statement Questionnaire (PDF) to gather the information they’ll need to create the investment policy statement. Then use our Investment Policy Statement Template (RTF) as a guide for writing one for their plan.

Monitor investments and plan expenses

At least once a year, plan sponsors should conduct an investment review. Questions to ask include:

  • Are the objectives of each investment option still consistent with the plan’s overall investment objectives and goals?
  • Does each investment continue to contribute to the overall diversification of the plan’s portfolio?
  • How do the results of the investment options compare with appropriate industry benchmarks over a series of different time periods?
  • What are the investment expenses associated with each option, and how do these costs compare with those of similar funds in their peer groups?

Plan expenses should also be looked at from time. Plan sponsors should evaluate whether the plan is getting good value for its money in view of the expenses it incurs.

The different sources of revenue used to pay plan expenses should also be noted, who receives those payments, and from which particular source the payments are derived.

Sponsors can use our Investment Review Checklist (PDF) to review their plan investment options. It also can serve as an agenda for the meeting.

Note:
Documentation of the review process is essential. This checklist and minutes from each meeting should be filed to document procedural prudence. Make sure your clients consult with their legal advisors to confirm that this documentation is adequate.

Review plan operations

Conduct a review of plan operations at least once a year. Key questions to ask include:

  • Have applicable participant notices for automatic enrollment, safe harbor contributions and qualified default investment alternatives all been delivered in a timely fashion?
  • Are contributions being remitted on time and invested as directed?
  • Are withdrawals being approved appropriately and in conformity with plan terms, and were the proper consents and/or waivers obtained?
  • Are the vesting rules being applied correctly?

Also, consider whether any changes to the plan terms are required or desired. Be sure to review any processes that are outsourced as well.

Plan sponsors can use our Operations Review Checklist (PDF) as an agenda for the review. The checklist is not exhaustive. There may be other areas of the plan’s operations that should be reviewed.

Note:
All issues and resolutions should be documented in the meeting minutes. Make sure your clients consult with their legal advisers to confirm they’re covering all the bases.

Step
6

Fiduciary reviews

If your firm permits it, offer to conduct a fiduciary review with clients to show them the tremendous value you can bring to the plan. A fiduciary review will help plan sponsors:

  • Understand their fiduciary responsibilities under ERISA
  • Identify weaknesses in their ERISA compliance procedures
  • Develop key documents, such as an investment policy statement
  • Identify a diversified group of plan investment options
  • Learn how to monitor investments and plan operations
  • Take steps to reduce their liability

The purpose of the review should be to confirm that:

  • A fiduciary or group of fiduciaries has been named for the plan and they have been told of their obligations under ERISA.
  • There is a fiduciary committee that meets on a regular basis.
  • The plan has a written investment policy statement to which the fiduciaries adhere.
  • The investment selection process used has been documented and corresponds with the requirements of the investment policy statement.
  • Procedures have been established for monitoring investments.
  • Procedures have been established for monitoring plan operations.
  • A due diligence documentation file is being maintained.
  • An analysis of plan costs and expenses is conducted on a regular basis.

Finally, your review should also establish whether the plan follows ERISA section 404(c) in general and also meets the rules in offering a qualified default investment alternative (QDIA).

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Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. For an investment offered through a group annuity, some of this information may differ and can be obtained from a financial professional.