Understand Fiduciary Responsibility
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:
Retirement plan fiduciaries are required by ERISA to do the following:
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:
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:
Fee disclosure must be offered writing and include:
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.
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.
Plan sponsors can limit their fiduciary liability by giving participants control over the investments in their retirement plan accounts. This means allowing them to:
Sponsors who comply with ERISA 404(c) need to provide participants with the following disclosure:
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:
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.
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.
At least once a year, plan sponsors should conduct an investment review. Questions to ask include:
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.
Conduct a review of plan operations at least once a year. Key questions to ask include:
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.
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:
The purpose of the review should be to confirm that:
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).
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.