Employee Benefit Plan Compliance Checklist for Plan Fiduciaries
For plan executives, fiduciary awareness is critical. What you don’t know can hurt your plan, your participants and you personally.
Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of their alleged errors or omissions or breach of their fiduciary duties. The following key areas should always be considered when performing your duties. This checklist will help you act in accordance with ERISA’s duty of care and duty of loyalty standards so that you can keep your plan in compliance, your liability in check and at the same provide the very best service to your participants.
√Understand your role.
Many employers who own a retirement plan are unaware of where their responsibilities begin and end. Anybody who has the power to administer and manage the plan, or the power to control its assets, regardless of title, is a fiduciary.
As a plan sponsor, you owe a fiduciary duty to your plan participants regardless of whether or not you hire a third-party administrator (TPA) to oversee the plan, or whether or not you hire advisors to make investment selections. While the TPAs and financial advisors that you hire will may also be considered plan fiduciaries, you cannot abdicate your responsibility by simply outsourcing the work. You will be held responsible for the actions of your co-fiduciaries, so it is imperative that you choose your third parties wisely.
√ Be aware of best practices.
You and your team can act prudently by following a few of the industry’s “best practices” for sponsoring a retirement plan. To begin, you should ensure that the plan’s operating procedures are written down and reviewed regularly. ERISA’s fiduciary duties require you to act in accordance with the plan documents, so keep them simple, to-the-point and easy to understand.
Agreements with third-party vendors should also be written down, and third-party relationships should be assessed on a systematic basis. It is best for you and the other fiduciaries to meet regularly to discuss the plan, its performance and the actions of all third parties to ensure your participants are protected.
√ Make prudent investment decisions.
The number one investment decision you can make is to diversify the plan’s investment options. Not only does this minimize the risk of loss (a prudent decision under any investment scenario), but it allows your participants the freedom of choice, which will satisfy ERISA’s safe harbor provision outlined in §404(c). This provision relieves you of liability for one of your employees’ poor investment decisions as long as you (1) offer a broad range of investments, and (2) provide employees the opportunity to get informed about their investments.
There is no single perfect set of investments, and you should feel comfortable tailoring your selections to meet the needs of your employees. For example, a plan sponsor whose participants are mostly above age 50 will make different selections than a plan sponsor whose participants are mostly recent college graduates. Consider how the makeup of your investments (active or passive, mutual fund or collective, low fee or high fee) will be viewed by your participants and take their preferences into consideration. And of course, remember that cheaper is not always better. Fees are only one aspect of the assessment, and it should not be the only factor on which to base your decisions.
√ Act exclusively in the participants’ best interests.
Acting in the participant’s best interests is the backbone of fiduciary responsibility. Your decisions about the plan should be motivated purely by the participant’s needs, and not by self-interest. It may be tough to remove yourself from the equation, but fear of litigation cannot factor into an investment decision. A technique that can help with this outlook is to imagine what an uninvolved, well-informed, rational and knowledgeable person would do in your shoes. ERISA describes this exercise as doing what a “prudent man” would do.
By acting as a “prudent man” would, you should be focusing on the selection process rather than getting caught up in potential investment outcomes. In a perfect world, making an informed decision would save you from choosing an investment that turns south. However, history has shown that this is not a guarantee against selecting an underperforming investment. ERISA’s fiduciary standards extend only to the process, not to the outcome; as long as you act prudently and made a thoughtful decision in your participants’ best interests, you will not be held liable for a poorly-performing plan.
√ DOCUMENT, DOCUMENT, DOCUMENT!!!
Make sure that all actions taken by fiduciaries are fully documented. Fiduciaries should meet periodically to discuss the plan decisions, and minutes of those meetings should be kept. Try to avoid being too detailed when it comes to documenting those minutes.
Service provider performance should be evaluated periodically and decisions for changes to service providers should be documented. Remember that service providers do NOT have to be the cheapest option to be the right choice. The fees charged should be commensurate with the services provided, but make sure that all decisions and the thought process for making those decisions are adequately documented.
To learn more about how you can remain in compliance with your fiduciary duties as an ERISA retirement plan sponsor, contact your WNDE accountants.