As a business owner, once you decide to offer a retirement plan for your employees, you become a plan sponsor with fiduciary duties. It is vital to understand the responsibilities that come along with the establishment of a retirement plan and who you may share this responsibility with. Individuals that assume fiduciary duties carry the weight of the interests of all employees participating in the retirement plan.
What is a fiduciary?
Generally speaking, a fiduciary is any person who owes a duty of care and trust to another individual and must act primarily in the best interest of the other in a particular activity – frequently handling money or other assets for another person.
When it comes to company-sponsored retirement plans, the employer offering the plan automatically assumes the fiduciary duties owed to their employees. These duties do not have to fall wholly on one individual, however the plan sponsor will always retain some level of fiduciary duty.
What are fiduciary duties/responsibilities for a retirement plan?
The duties
The retirement plan fiduciaries have a legal obligation to protect the plan’s assets for the primary benefit of the beneficiaries. The beneficiaries in this case are your employees participating in the retirement plan you’re sponsoring. Theses legal obligations are listed in the Employee Retirement Income Security Act (ERISA).
ERISA requires plans meet certain standards to provide protection for individuals involved in these plans:
- Acting primarily in the interest of plan participants and providing benefits to them
- Carrying out their duties prudently and with appropriate expertise
- Following the plan documents
- Diversifying plan investments
- Keeping plan expenses to a reasonable level
Who can act as a fiduciary?
Any individual involved with operating your company’s retirement plan can be a fiduciary. Fiduciaries can be named or unnamed:
Named fiduciaries are specifically written in the plan document. This may be the employer, a company officer, or a third party. A named fiduciary can designate some of their fiduciary duties to others and allow them to make decisions or maintain the plan.
Unnamed fiduciaries gain the duty through actions they take in managing the retirement account. By making a decision about the plan’s assets they automatically are subject to fiduciary responsibilities.
The ERISA goes on to establish three different types of named or unnamed fiduciaries.
Section 3(16) Plan Administrator
The plan administrator is the individual designated to operate and maintain the plan. This can be the plan sponsor or a third party provider. They have the responsibility of following all ERISA guidelines and reporting to the plan’s participants and the IRS. The plan sponsor will always have a degree of fiduciary duty, even if they pass the duties on to a third party.
Section 3(21) Investment Advisor
The investment advisor is an individual who contributes their expert advice. They offer investment advice to the plan sponsor so they can make informed decisions.
Section 3(38) Investment Manager
An investment manager is a Registered Investment Advisor, a bank, or an insurance company who has full control over the plan’s assets and investments. They can take the investment liability away from the plan sponsor.
How can I limit my fiduciary liability as plan sponsor?
As a plan sponsor, you will always retain some degree of fiduciary duty for your plan. However, there a few choices you can make to limit potential liability or reduce your duties.
The first is to record your thorough planning process of all plan investments and decisions. This can be helpful if an investment doesn’t pan out well. You’ll want to be able to prove your decision to make the initial investment was reasonable at the time.
Another liability mitigation technique is to give participants of the plan control over their investments in the plan. For this to be successful, participants need sufficient plan information to make informed decisions.
Educating and training your staff who handle payroll and plan duties on the plan definitions and how it is supposed to operate is key, as operational errors can affect the qualification status of the plan and result in large penalties.
Finally, hiring a service provider to handle some of the fiduciary duties and functions can shift some liability from you to them. Here, you retain the fiduciary duty of selecting and keeping the service provider, so it is essential to select a trusted professional and monitor their service.
Corrigan Krause Can Help
Adding retirement plan fiduciary to your list of responsibilities as a business owner can feel daunting, but the team at Corrigan Krause can help. Feel free to reach out to info@corrigankrause.com with inquiries and questions.