Each employee benefit plan covered under the Employee Retirement Income Security Act (ERISA) is required to identify at least one person or entity as a “fiduciary.” Plan fiduciaries can be any person or entity that exercises discretion in administrating and managing the plan: a trustee, investment advisor, named plan administrator or administrative committee member.
Fiduciary responsibilities include: carrying out duties prudently, following the plan document, diversifying plan investments and paying only reasonable plan expenses. Fiduciaries who do not follow the basic standards of prudent conduct may be held personally liable should problems arise. Following are five steps that fiduciaries can take to limit their liability.
1) Document Document Document
ERISA standards revolve around a basic theme: document prudence. Demonstrate that you have carried out your fiduciary responsibilities by properly documenting the processes used to carry out those responsibilities.
2) Diversify
ERISA clearly states that a fiduciary must diversify the plan’s assets. Diversification is the risk-reduction process of choosing a broad range of different individual investments within a particular investment class. Diversification objectives should be outlined in a well-thought-out Investment Policy Statement.
3) Watch for Conflicts
The courts have been quick to find conflicts of interest when a fiduciary received “current economic benefit” from a transaction. A fiduciary should always be able to provide a satisfactory answer to the question, “As the plan fiduciary, do I stand to benefit or gain personally, either directly or indirectly, by the handling of the plan assets?”
4) Consider Bringing in the Experts
It is crucial that investment decisions be made with utmost diligence. Congress, the IRS and the courts have strongly encouraged the appointment of professional investment advisors to manage the plan assets. Although you can reduce your liability by hiring an investment manager, you are still responsible for selecting a prudent investment manager and monitoring the manager’s performance.
5) Monitor Expenses
ERISA requires the fiduciary to ensure that investment transactions are executed at the best cost and that commission dollars pay for services that benefit the plan and participants. Even if fees are not listed on plan investment statements, they are being charged. It is a fiduciary’s responsibility to understand the fee structure and to determine if fees are reasonable.