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Retirement Plan Knowledgebase

Questions and Answers of Interest to Plan Fiduciaries

Note that our website does not currently provide Fiduciary Information regarding ERISA Regulations' Sections 408(b)(2) and 404a-5

 

What are my responsibilities as a Plan Fiduciary?

To protect the benefits of the plan participants and beneficiaries, ERISA prescribes the standards for the execution of the duties and responsibilities of the plan fiduciary.  A plan typically has more than one fiduciary, each of whom may be responsible for a particular aspect of the plan operation such as the plan administration or the investment of the plan assets.

 

Fiduciary Defined  By definition, a fiduciary is a person who exercises any discretionary authority or control with respect to the management of the plan or its assets.  The plan administrator (typically the employer) has this authority and therefore generally has this responsibility.

 

The administration of the plan requires the periodic performance of certain ministerial functions (e.g., determination of eligibility for plan participation, calculation of service and compensation to determine benefits, preparation of employee communications, maintenance of employment records, preparation of reports for filing with government agencies such as Form 5500, etc.).  The parties (e.g., actuaries, consultants, third party administrators) who typically perform of these ministerial functions are not considered fiduciaries if they perform the functions within the confines of policies, rules, practices and procedures made by other persons.  These same parties may not have discretionary authority over plan management or administration, or exercise any authority or control over the plan assets. 

 

A person becomes a fiduciary by virtue of rendering advice and recommendations pertaining to the value, advisability of investing in, the purchase or sale of a particular investment; by having the discretion or control to buy or sell investments; and by receiving compensation for these services either directly or indirectly.  A person also becomes a fiduciary by default if he exercises control over the management of the plan or the disposition of the plan assets, even if he is not given this authority.

 

Duties and Responsibilities  The plan fiduciaries are responsible for the general administration and operation of the plan and the standards for fiduciary conduct.

 

The general administration and operation of the plan requires that the plan be in the form of a written instrument.  The plan documents establish the terms of the plan and outline the fiduciary’s duties and responsibilities relative to the operation of the plan. 

 

Standards of Conduct  ERISA states that a fiduciary must execute his duties solely in the interest of the plan participants and beneficiaries.  It further states that he must discharge his duties in the manner of a prudent personwith the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims”. 

 

This standard of prudence applies to responsibilities relating to the investment of the plan assets and the responsibilities relating to the administration and management of the plan.

 

Lastly, within the context of the fiduciary’s investment responsibility, the investment of the plan assets must be diversified to minimize the risk of large losses, unless it is not prudent to do so under a particular circumstance. 

 

Fiduciary Liability  A plan fiduciary is held to the standards of conduct in the execution of his duties and responsibilities.  His conduct is judged in the context of the facts and circumstances of the situation and whether such conduct was commensurate with the ERISA fiduciary standards.

 

Prohibited Transactions    The objective of the prohibited transaction rules is to protect the interest of the plan participants.  The rules prohibit transactions between the plan and persons who have conflicts of interest with the plan.

 

Even though a particular transaction may in fact benefit the plan participants, it is still may not permitted due to the relationship of the parties involved in the transaction.  If the relationship of the parties exists, the law considers it improper since it increases the probability for causing potential harm to the plan.

 

The extension of credit from the plan to the employer is an example of a prohibited transaction.  This prohibited transaction can occur as a result of an employer failing to timely remit employee salary deferrals to the plan’s investment vendor.

 

The law provides prohibited transaction exemptions that permit loans to plan participants, allow employers to contribute employer securities to the plan and permit plan participants or the employer/plan sponsor to purchase life insurance with plan assets.

 

ERISA Section 404(c)  A plan fiduciary is relieved of liability for investment losses resulting from participant investment decisions if the plan offers a broad range of investment options and the plan gives the participants the ability to exercise control over the assets in their accounts.  Plan participants must also be notified in writing of the employer/plan sponsor’s intention to qualify for the fiduciary relief afforded through compliance with ERISA Section 404(c).  Learn more

 

Even after these requirements are satisfied, the fiduciaries have the responsibility for selecting and monitoring the investment alternatives that are made available to the plan participants. 

 

Private Brokerage Accounts (PBA)  A private brokerage account option allows participants to invest the money as they desire is a permissible qualified plan feature.  The plan fiduciaries will receive relief from any liability arising from investment losses resulting from their self-directed investment decisions only if the plan otherwise meets the previously described 404(c) requirements.  Learn more

 

Investment Policy Statement  ERISA requires the Plan fiduciaries to adopt and adhere to an investment policy but it does not specify that a requirement that this policy be in writing.  However, it is prudent for plan fiduciaries to outline the systematic and disciplined guidelines they employ in selecting and monitoring the plan investments in a written statement to provides the plan fiduciaries protection from liability resulting from investment losses incurred by the Plan (or its participants if the Plan permits participant-directed investments).   Learn more

 

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When must employee 401(k) contributions be deposited to the Plan?

DOL Regulation §2510.3-102(b)(1) states that participant contributions become plan assets on the earlier of:

(a) The earliest date on which the contributions can reasonably be segregated from the employer's general assets; or

(b) The 15th business day of the month following the month in which the contribution is withheld by the employer from the employee's wages or the amount is received by the employer (in the case of amounts, such as after-tax voluntary contributions, that the participant pays to the employer).

The date in (b) is the maximum deadline which applies only if the date in a) does not come sooner.  This is a hot audit issue for both the DOL and the IRS.  Employee 401(k) contributions not deposited timely to the trust are considered an extension of credit from the plan to the employer (“a party-in-interest”).  The extension of credit is considered a “prohibited transaction.” 

Related article: "Revised Form 5500 Targets Late Deposits of 401(k) Plan Deferrals"

Full text of DOL Regulation §2510.3-102

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Are participant-directed investment accounts required for plans with a 401(k) feature and what are the requirements of ERISA Section 404(c)?

Participant-directed investment accounts are a feature typically offered in Profit Sharing Plans with a 401(k) feature.  The employer/plan sponsor has the option to include this feature, it is not required by law.  This feature is permitted for any account balance defined contribution plan (Money Purchase Pension, Profit Sharing or Profit Sharing with a 401(k) feature). 

 

The employer/plan sponsor also has the option to differentiate the responsibility between the direction of the investment of each respective account within the plan.  This permits the employer/plan sponsor to allow the investments to be directed as follows:

  • All plan accounts are trustee-directed

  • All plan accounts are participant-directed

  • Certain accounts are trustee-directed (e.g., employer profit sharing and match accounts), others are participant-directed (e.g., employee 401(k) and rollover accounts)

The employer/plan sponsor also has the option to establish a private brokerage account (PBA) for each plan participant (see discussion below).  As with the typical participant-directed account discussed above, the PBA feature can be limited to particular accounts (e.g., employee 401(k) and rollover).

 

All eligible plan participants must receive the same benefits, rights and features with regard to the direction of investments.  This means that the option to direct investments in a PBA cannot be limited to selected individuals.  However, while the law requires this option to be uniformly available, it does not require that all plan participants elect to use the option.

 

The option with regard to the direction the investments of participant accounts must be stated in writing within the plan documents or separately in written procedures.

 

ERISA Section 404(c) provides Fiduciary Relief    Plan fiduciaries are relieved of liability for investment losses resulting from participant investment decisions if the plan offers a “broad range” of investment options and the plan gives the participants the ability to “exercise control” over the assets in their accounts.

 

Broad Range Requirement   The “broad range” requirement is satisfied by providing “core investments” consisting of a minimum of three (3) diversified investment options.  These options must allow participants to materially affect their potential investment return and degree of risk while minimizing potential losses through diversification. 

Exercise Control Requirement   The “exercise control” requirement is satisfied if the plan permits the participants to change their investment selections as frequently as is appropriate based on asset volatility, and by providing prescribed information

Prescribed Information   This prescribed information requirement falls into two broad categories.  One is information with respect to the plan’s “designated alternatives”.  The other is information with respect to all types of investments, both designated and “administratively feasible” investments (“nondesignated” investments).

General information must be provided for the plan’s designated alternatives.  This includes a description of these investment options and, if applicable, a general description of the participant’s ability to invest in securities by other means (e.g., private brokerage account).  In addition, specific information must be provided regarding the designated alternative’s investment objectives and risk/return characteristics.  The specific information requirement does not apply to nondesignated alternatives.

Lastly, with regard to the information requirement, expenses that are chargeable to participant accounts, prospectuses, listings of an investment option’s underlying assets, etc. must be available upon request of the participant. 

Notification in Writing   In addition to the above requirements, the plan participants must be notified in writing of the employer/plan sponsor’s intention to qualify for the fiduciary relief afforded through compliance with ERISA Section 404(c).

Selecting and Monitoring   After all of the above requirements are satisfied, the fiduciaries still have the responsibility for selecting and monitoring the investment alternatives that are made available to the plan participants.  The monitoring process should be facilitated by information provided through the plan’s investment vendor.  This information should include fund peer group and indices performance.

 

Private Brokerage Accounts (PBA)    A private brokerage account permits the plan participant to invest in a much broader range investments as compared to the menu of pre-selected investment options typically available with a participant-directed account (e.g., permits the purchase of individual stocks, bonds and any mutual funds versus a pre-selected menu of mutual funds).  This optional feature can provide plan fiduciaries with relief from any liability arising from investment losses resulting from the participant-directed investment decisions only if the plan otherwise meets the previously described 404(c) requirements. 

 

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What is an Investment Policy?

 

ERISA requires the Plan fiduciaries to adopt and adhere to an investment policy.  ERISA does not require that this policy be in writing.   However, it is prudent for plan fiduciaries to outline the systematic and disciplined guidelines they employ in selecting and monitoring the plan investments in a written “Investment Policy Statement”. 

 

The written investment policy statement provides the plan fiduciaries protection from liability resulting from investment losses incurred by the Plan (or its participants if the Plan permits participant-directed investments).  An investment policy statement may include:

 

Investment Policy Objectives  A statement that the employer’s Plan is intended to provide a source of retirement income for its participants and that the intention of the investment policy statement is to establish investment principles, to document the Plan’s investment objectives and establish performance guidelines for the evaluation of investment decisions.  If applicable, it may also state the Plan’s intention to satisfy the requirements of ERISA Section 404(c).

 

Responsible Parties  A listing of the parties who are responsible for deciding the number and types of investment options, selecting and/or removing investment options, monitoring investment performance and communicating the risk and return characteristics of each investment option to the plan participants.

 

Investment Objectives  An outline of the realistic parameters for performance and liquidity of the investment program to satisfy the Plan’s retirement benefit liabilities.

 

Investment Guidelines  These guidelines are to provide the Plan (or, if applicable, the participants) with a listing of a broad range of investment options with various risk/return characteristics to meet the Plan’s (or the participant’s) goals and objectives.  This may include why an investment type or option was selected (or offered for selection) and to which investment benchmark the investment type or option is compared.  The investment guidelines may also outline the standards considered in the investment selection process such as the number of years of historical investment performance, investment peer group performance and expense ratios and investment risk measures (e.g., alpha, beta, standard deviation).  For Plan’s offering participant-directed investments, the guidelines may also include the frequency and method (e.g., in writing, telephonic, web-based) by which a participant can change investment selections. 

 

Guidelines for Reporting and Monitoring  This would include the frequency of investment performance reporting.  The frequency of committee meetings to monitor investment performance and the standards (as discussed above) to determine the retention, replacement or addition of a plan investment.  The monitoring process may also include changes in the investment options that may be necessary as a result of a change in the Plan’s funding method, a change in benefit payment options or a change in the participant demographics and needs.  For Plan’s offering participant-directed investments, these guidelines may include the method by which a plan participant can access account information (e.g., telephonic or web-based access).

 

The investment policy statement may also reference the attachment of the any pertinent information used to facilitate the investment, and reporting and monitoring guidelines.

 

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What are the Bonding Requirements?

The employer/plan sponsor or the plan is required to purchase a fidelity bond to protect the plan against the misappropriation of funds by persons handling the plan assets.  The face amount of the bond must be at least 10% of the value of plan assets (but no less than $1,000) not to exceed $500,000 (if the plan has assets which are equal or greater than $5 million). 

The bonding requirement does not apply to one-person plans.  A one person plan is defined as a plan providing contributions and/or benefits to owners and owner's spouses only (includes partners and partner spouse only plans).

A higher bond amount (greater than 10% and without the $500,000 limit) may be necessary for certain plans covering fewer than 100 participants to be exempt from the audit requirement

Related article: Certain Small Plans Now Subject to Annual Audit Requirement

Fidelity Bond Premium Calculator

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What is Fiduciary Liability Insurance?

The employer/plan sponsor, the plan or the plan fiduciaries are not required to purchase liability insurance to cover liability or losses by reason of the act or omission of a fiduciary.  Although ERISA §410 prohibits any agreement or instrument which purports to relieve a fiduciary from responsibility or liability, this does not preclude the plan or a named fiduciary form purchasing certain insurance and indemnification arrangements. 

ERISA §410(b)(1) provides that the plan may purchase insurance to cover liability or losses by reason of the act or omission of a fiduciary if it provides for recourse by the insurer against the fiduciary. 

ERISA §410(b)(2) provides that a named fiduciary may purchase liability insurance with his own funds.

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