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Offering a retirement plan can be one of
the most challenging, yet rewarding, decisions an employer
can make. The employees participating in the plan, their
beneficiaries, and the employer benefit when a retirement
plan is in place. Administering a plan and managing its
assets, however, require certain actions and involve
specific responsibilities.
To meet their responsibilities as plan
sponsors, employers need to understand some basic rules,
specifically the Employee Retirement Income Security Act
(ERISA). ERISA sets standards of conduct for those who
manage an employee benefit plan and its assets (called
fiduciaries). Meeting Your Fiduciary Responsibilities
provides an overview of the basic fiduciary responsibilities
applicable to retirement plans under the law.
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This materi8al addresses the scope of ERISA’s
protections for private-sector retirement plans (public-sector plans and
plans sponsored by churches are not covered by ERISA). It provides a
simplified explanation of the law and regulations. It is not a legal
interpretation of ERISA, nor is it intended to be a substitute for the
advice of a retirement plan professional. Also, the booklet does not
cover those provisions of the Federal tax law related to retirement
plans.
Each plan has certain key elements. These include:
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A written plan that describes the
benefit structure and guides day-to-day operations;
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A trust fund to hold the plan’s
assets(1);
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A recordkeeping system to track
the flow of monies going to and from the retirement plan; and
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Documents to provide plan
information to employees participating in the plan and to the
government.
Employers often hire outside professionals (sometimes
called third-party service providers) or, if applicable, use an internal
administrative committee or human resources department to manage some or
all of a plan’s day-to-day operations. Indeed, there may be one or a
number of officials with discretion over the plan. These are the plan’s
fiduciaries.
Many of the actions involved in operating a plan make
the person or entity performing them a fiduciary. Using discretion in
administering and managing a plan or controlling the plan’s assets makes
that person a fiduciary to the extent of that discretion or control.
Thus, fiduciary status is based on the functions performed for the
plan, not just a person’s title.
A plan must have at least one fiduciary (a person or
entity) named in the written plan, or through a process described in the
plan, as having control over the plan’s operation. The named fiduciary
can be identified by office or by name. For some plans, it may be an
administrative committee or a company’s board of directors.
A plan’s fiduciaries will ordinarily include the
trustee, investment advisers, all individuals exercising discretion in
the administration of the plan, all members of a plan’s administrative
committee (if it has such a committee), and those who select committee
officials. Attorneys, accountants, and actuaries generally are not
fiduciaries when acting solely in their professional capacities. The key
to determining whether an individual or an entity is a fiduciary is
whether they are exercising discretion or control over the plan.
A number of decisions are not fiduciary actions but
rather are business decisions made by the employer. For example, the
decisions to establish a plan, to determine the benefit package, to
include certain features in a plan, to amend a plan, and to terminate a
plan are business decisions not governed by ERISA. When making these
decisions, an employer is acting on behalf of its business, not the
plan, and, therefore, is not a fiduciary. However, when an employer (or
someone hired by the employer) takes steps to implement these decisions,
that person is acting on behalf of the plan and, in carrying out these
actions, may be a fiduciary.
Fiduciaries have important responsibilities and are
subject to standards of conduct because they act on behalf of
participants in a retirement plan and their beneficiaries. These
responsibilities include:
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Acting solely in the interest of
plan participants and their beneficiaries and with the exclusive
purpose of providing benefits to them;
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Carrying out their duties
prudently;
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Following the plan documents
(unless inconsistent with ERISA);
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Diversifying plan investments; and
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Paying only reasonable plan
expenses.
The duty to act prudently is one of a fiduciary’s
central responsibilities under ERISA. It requires expertise in a variety
of areas, such as investments. Lacking that expertise, a fiduciary will
want to hire someone with that professional knowledge to carry out the
investment and other functions. Prudence focuses on the process
for making fiduciary decisions. Therefore, it is wise to document
decisions and the basis for those decisions. For instance, in hiring any
plan service provider, a fiduciary may want to survey a number of
potential providers, asking for the same information and providing the
same requirements. By doing so, a fiduciary can document the process and
make a meaningful comparison and selection.
Following the terms of the plan document is also an
important responsibility. The document serves as the foundation for plan
operations. Employers will want to be familiar with their plan document,
especially when it is drawn up by a third-party service provider, and
periodically review the document to make sure it remains current. For
example, if a plan official named in the document changes, the plan
document must be updated to reflect that change.
Diversification – another key fiduciary duty – helps
to minimize the risk of large investment losses to the plan. Fiduciaries
should consider each plan investment as part of the plan’s entire
portfolio. Once again, fiduciaries will want to document their
evaluation and investment decisions.
With these fiduciary responsibilities, there is also
potential liability. Fiduciaries who do not follow the basic standards
of conduct may be personally liable to restore any losses to the plan,
or to restore any profits made through improper use of the plan’s assets
resulting from their actions.
However, fiduciaries can limit their liability in
certain situations. One way fiduciaries can demonstrate that they have
carried out their responsibilities properly is by documenting the
processes used to carry out their fiduciary responsibilities.
There are other ways to reduce possible liability.
Some plans, such as most 401(k) and profit-sharing plans, can be set up
to give participants control over the investments in their accounts and
limit a fiduciary’s liability for the investment decisions made by the
participants. For participants to have control, they must be given the
opportunity to choose from a broad range of investment alternatives.
Under Labor Department regulations, there must be at least three
different investment options so that employees can diversify investments
within an investment category, such as through a mutual fund, and
diversify among the investment alternatives offered. In addition,
participants must be given sufficient information to make informed
decisions about the options offered under the plan. Participants also
must be allowed to give investment instructions at least once a quarter,
and more often if the investment option is volatile.
Plans that automatically enroll employees can be set
up to limit a fiduciary’s liability for any plan losses that are a
result of automatically investing participant contributions in certain
default investments. There are four types of investment alternatives for
default investments as described in Labor Department regulations and an
initial notice and annual notice must be provided to participants. Also,
participants must have the opportunity to direct their investments to a
broad range of other options, and be provided materials on these options
to help them do so. (See Resources for further information.)
However, while a fiduciary may have relief from
liability for the specific investment allocations made by participants
or automatic investments, the fiduciary retains the responsibility for
selecting and monitoring the investment alternatives that are made
available under the plan.
A fiduciary can also hire a service provider or
providers to handle fiduciary functions, setting up the agreement so
that the person or entity then assumes liability for those functions
selected. If an employer appoints an investment manager that is a bank,
insurance company, or registered investment adviser, the employer is
responsible for the selection of the manager, but is not liable for the
individual investment decisions of that manager. However, an employer is
required to monitor the manager periodically to assure that it is
handling the plan’s investments prudently and in accordance with the
appointment.
A fiduciary should be aware of others who serve as
fiduciaries to the same plan, because all fiduciaries have potential
liability for the actions of their co-fiduciaries. For example, if a
fiduciary knowingly participates in another fiduciary’s breach of
responsibility, conceals the breach, or does not act to correct it, that
fiduciary is liable as well.
As an additional protection for plans, those who
handle plan funds or other plan property generally must be covered by a
fidelity bond. A fidelity bond is a type of insurance that protects the
plan against loss resulting from fraudulent or dishonest acts of those
covered by the bond.
Even if employers hire third-party service providers
or use internal administrative committees to manage the plan, there are
still certain functions that can make an employer a fiduciary.
If a plan provides for salary reductions from
employees’ paychecks for contribution to the plan (such as in a 401(k)
plan), then the employer must deposit the contributions in a timely
manner. The law requires that participant contributions be deposited in
the plan as soon as it is reasonably possible to segregate them from the
company’s assets, but no later than the 15th business day of the month
following the payday. If employers can reasonably make the deposits
sooner, they need to do so.(2)
For all contributions, employee and employer (if
any), the plan must designate a fiduciary, typically the trustee, to
make sure that contributions due to the plan are collected. If the plan
and other documents are silent or ambiguous, the trustee generally has
this responsibility.
Hiring a service provider in and of itself is a
fiduciary function. When considering prospective service providers,
provide each of them with complete and identical information about the
plan and what services you are looking for so that you can make a
meaningful comparison.
Some items a fiduciary needs to consider when
selecting a service provider include:
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Information about the firm itself:
financial condition and experience with retirement plans of similar
size and complexity;
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Information about the quality of
the firm’s services: the identity, experience, and qualifications of
professionals who will be handling the plan’s account; any recent
litigation or enforcement action that has been taken against the
firm; and the firm’s experience or performance record;
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A description of business
practices: how plan assets will be invested if the firm will manage
plan investments or how participant investment directions will be
handled; the proposed fee structure; and whether the firm has
fiduciary liability insurance.
An employer should document its selection (and
monitoring) process, and, when using an internal administrative
committee, should educate committee members on their roles and
responsibilities.
Fees are just one of several factors fiduciaries need
to consider in deciding on service providers and plan investments. When
the fees for services are paid out of plan assets, fiduciaries will want
to understand the fees and expenses charged and the services provided.
While the law does not specify a permissible level of fees, it does
require that fees charged to a plan be "reasonable." After careful
evaluation during the initial selection, the plan's fees and expenses
should be monitored to determine whether they continue to be reasonable.
In comparing estimates from prospective service
providers, ask which services are covered for the estimated fees and
which are not. Some providers offer a number of services for one fee,
sometimes referred to as a “bundled” services arrangement. Others charge
separately for individual services. Compare all services to be provided
with the total cost for each provider. Consider whether the estimate
includes services you did not specify or want. Remember, all services
have costs.
Some service providers may receive additional fees
from investment vehicles, such as mutual funds, that may be offered
under an employer’s plan. For example, mutual funds often charge fees to
pay brokers and other salespersons for promoting the fund and providing
other services. There also may be sales and other related charges for
investments offered by a service provider. Employers should ask
prospective providers for a detailed explanation of all fees associated
with their investment options.
Who pays the fees? Plan expenses may be paid by the
employer, the plan, or both. In addition, for expenses paid by the plan,
they may be allocated to participants’ accounts in a variety of ways.
(See Resources for further information). In any case, the plan
document should specify how fees are paid.
An employer should establish and follow a formal
review process at reasonable intervals to decide if it wants to continue
using the current service providers or look for replacements. When
monitoring service providers, actions to ensure they are performing the
agreed-upon services include:
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Reviewing the service providers’
performance;
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Reading any reports they provide;
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Checking actual fees charged;
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Asking about policies and
practices (such as trading, investment turnover, and proxy voting);
and
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Following up on participant
complaints.
More and more employers are offering participants
help so they can make informed investment decisions. Employers may
decide to hire an investment adviser offering specific investment advice
to participants. These advisers are fiduciaries and have a
responsibility to the plan participants. On the other hand, an employer
may hire a service provider to provide general financial and investment
education, interactive investment materials, and information based on
asset allocation models. As long as the material is general in nature,
providers of investment education are not fiduciaries. However, the
decision to select an investment adviser or a provider offering
investment education is a fiduciary action and must be carried out in
the same manner as hiring any plan service provider.
Certain transactions are prohibited under the law to
prevent dealings with parties who may be in a position to exercise
improper influence over the plan. In addition, fiduciaries are
prohibited from engaging in self-dealing and must avoid conflicts of
interest that could harm the plan.
Who is prohibited from doing business with the plan?
Prohibited parties (called parties in interest) include the employer,
the union, plan fiduciaries, service providers, and statutorily defined
owners, officers, and relatives of parties in interest.
Some of the prohibited transactions are:
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A sale, exchange, or lease between
the plan and party in interest;
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Lending money or other extension
of credit between the plan and party in interest; and
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Furnishing goods, services, or
facilities between the plan and party in interest.
Other prohibitions relate solely to fiduciaries who
use the plan’s assets in their own interest or who act on both sides of
a transaction involving a plan. Fiduciaries cannot receive money or any
other consideration for their personal account from any party doing
business with the plan related to that business.
There are a number of exceptions (exemptions) in the
law that provide protections for the plan in conducting necessary
transactions that would otherwise be prohibited. The Labor Department
may grant additional exemptions.
Exemptions are provided in the law for many dealings
with banks, insurance companies, and other financial institutions that
are essential to the ongoing operations of the plan. One exemption in
the law allows the plan to hire a service provider as long as the
services are necessary to operate the plan and the contract or
arrangement under which the services are provided and the compensation
paid for those services is reasonable.
One exemption allows the provision of investment
advice to participants who direct the investments in their accounts.
This applies to the buying, selling, or holding of an investment related
to the advice as well as to the receipt of related fees and other
compensation by a fiduciary adviser. Because a final rule is pending,
check www.dol.gov/ebsa periodically for the publication of the final
rule.
Another important exemption in the law – and a
popular feature of most plans – permits plans to offer loans to
participants. The loans, which are considered investments of the plan,
must be available to all participants on a reasonably equivalent basis,
must be made according to the provisions in the plan, and must charge a
reasonable rate of interest and be adequately secured.
The exemptions issued by the Department can involve
transactions available to a class of plans or to one specific plan. Both
class and individual exemptions are available at www.dol.gov/ebsa (click
on Compliance Assistance). For more information on applying for an
exemption, request a copy of Exemption Procedures Under Federal
Pension Law (see Resources).
Plans that invest in employer stock need to consider
specific rules relating to this investment. Traditional defined benefit
pension plans have limits on the amount of stock and debt obligations
that a plan can hold and the amount of the plan’s assets that can be
invested in employer securities. For 401(k) plans, profit-sharing plans,
and employee stock ownership plans, there is no limit on how much in
employer securities the plans can hold if the plan documents so provide.
If an employer decides to make employer stock an
investment option under the plan, proper monitoring will include
ensuring that those responsible for making investment decisions, whether
an investment manager or participants, have critical information about
the company’s financial condition so that they can make informed
decisions about the stock. Participants in individual account plans must
be provided an opportunity to divest their investment in publicly traded
employer securities and reinvest those amounts in other diversified
investment options under the plan. For employee contributions invested
in employer securities, participants have the right to divest
immediately. Where employer contributions are invested in employer
securities, participants can divest if they have 3 years of service.
This does not apply to stand-alone employee stock ownership plans where
there are no employee or employer matching contributions.
A plan can buy or sell employer securities from a
party in interest, such as an employer, an employee, or other related
entity as described above (which would otherwise be prohibited) if it is
for fair market value and no sales commission is charged. If the plan is
a defined benefit plan (a traditional pension plan), the plan generally
is not permitted to hold more than 10 percent of its assets in employer
stock.
ERISA requires plan administrators to furnish plan
information to participants and beneficiaries and to submit reports to
government agencies.
The following documents must be furnished to
participants and beneficiaries.
The Summary Plan Description (SPD) -- the
basic descriptive document -- is a plain language explanation of the
plan and must be comprehensive enough to apprise participants of their
rights and responsibilities under the plan. It also informs participants
about the plan features and what to expect of the plan. Among other
things, the SPD must include information about:
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When and how employees become
eligible to participate;
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The source of contributions and
contribution levels;
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The vesting period, i.e., the
length of time an employee must belong to a plan to receive benefits
from it;
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How to file a claim for those
benefits; and
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A participant’s basic rights and
responsibilities under ERISA.
This document is given to employees after they join
the plan and to beneficiaries after they first receive benefits. SPDs
must also be redistributed periodically and provided on request.
The Summary of Material Modification (SMM)
apprises participants and beneficiaries of changes to the plan or to the
information required to be in the SPD. The SMM or an updated SPD for a
retirement plan must be furnished automatically to participants within
210 days after the end of the plan year in which the change was adopted.
An Individual Benefit Statement provides
participants with information about their account balances and vested
benefits. Plans that provide for participant-directed accounts must
furnish statements on a quarterly basis. Individual account plans that
do not provide for participant direction must furnish statements
annually. Traditional defined benefit pension plans must furnish
statements every three years.
If a plan automatically enrolls employees, the
Automatic Enrollment Notice details the plan’s automatic enrollment
process and participant’s rights. The notice must specify the deferral
percentage, the participant’s right to change that percentage or not
make automatic contributions, and the plan’s default investment. (See
Resources for information on a sample notice.) The participant
generally must receive an initial notice at least 30 days before he or
she is eligible to participate in the plan. Employers that provide for
immediate eligibility can provide this initial notice on an employee’s
first day of employment if they allow participants to withdraw
contributions within 90 days of their first contribution. An annual
notice also must be provided to participants at least 30 days prior to
the beginning of each subsequent plan year.
A Summary Annual Report (SAR) outlines in
narrative form the financial information in the plan’s Annual Report,
the Form 5500 (see below), and is furnished annually to participants.
Traditional defined benefit pension plans that are required to provide
an annual plan funding notice are not required to furnish an SAR.
The Blackout Period Notice requires at least
30 days' (but not more than 60 days') advance notice before a 401(k) or
profit-sharing plan is closed to participant transactions. During
blackout periods, participants (and beneficiaries) cannot direct
investments, take loans, or request distributions. Typically, blackout
periods occur when plans change recordkeepers or investment options, or
when plans add participants due to a corporate merger or acquisition.
Plan administrators generally are required to file a
Form 5500 Annual Return/Report with the Federal Government. The Form
5500 reports information about the plan and its operation to the U.S.
Department of Labor, the Internal Revenue Service (IRS), and the Pension
Benefit Guaranty Corporation (PBGC). These disclosures are made
available to participants and the public. Depending on the number and
type of participants covered, the filing requirements vary. The form is
filed and processed under the ERISA Filing Acceptance System (EFAST).
For more information on the forms, their instructions, and the filing
requirements, see www.efast.dol.gov and request the publication
Reporting and Disclosure Guide for Employee Benefit Plans. See the
Resources section to obtain a copy.
There are penalties for failing to file required
reports and for failing to provide required information to participants.
Yes, but there is one final fiduciary responsibility.
Fiduciaries who no longer want to serve in that role cannot simply walk
away from their responsibilities, even if the plan has other
fiduciaries. They need to follow plan procedures and make sure that
another fiduciary is carrying out the responsibilities left behind. It
is critical that a plan has fiduciaries in place so that it can continue
operations and participants have a way to interact with the plan.
The Department of Labor’s Voluntary Fiduciary
Correction Program (VFCP) encourages employers to comply with ERISA by
voluntarily self-correcting certain violations. The program covers 19
transactions, including failure to timely remit participant
contributions and some prohibited transactions with parties in interest.
The program includes a description of how to apply, as well as
acceptable methods for correcting violations. In addition, the
Department gives applicants immediate relief from payment of excise
taxes under a class exemption.
In addition, the Department’s Delinquent Filer
Voluntary Compliance Program (DFVCP) assists late or non-filers of the
Form 5500 in coming up to date with corrected filings.
For an overview of both programs, consult EBSA's Web
site.
Understanding fiduciary responsibilities is important
for the security of a retirement plan and compliance with the law. The
following tips may be a helpful starting point:
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Have you identified your plan
fiduciaries, and are they clear about the extent of their fiduciary
responsibilities?
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If participants make their own
investment decisions, have you provided sufficient information for
them to exercise control in making those decisions?
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Are you aware of the schedule to
deposit participants’ contributions in the plan, and have you made
sure it complies with the law?
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If you are hiring third-party
service providers, have you looked at a number of providers, given
each potential provider the same information, and considered whether
the fees are reasonable for the services provided?
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Have you documented the hiring
process?
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Are you prepared to monitor your
plan’s service providers?
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Have you identified parties in
interest to the plan and taken steps to monitor transactions with
them?
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Are you aware of the major
exemptions under ERISA that permit transactions with
parties-in-interest, especially those key for plan operations (such
as hiring service providers and making plan loans to participants)?
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Have you reviewed your plan
document in light of current plan operations and made necessary
updates? After amending the plan, have you provided participants
with an updated SPD or SMM?
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Do those individuals handling plan
funds or other plan property have a fidelity bond?
The U.S. Department of Labor’s Employee Benefits
Security Administration offers more information on its Web site and
through its publications. The following are available by contacting EBSA
at 1.866.444.EBSA (3272) or on the EBSA Web site.
For Employers
For Employees
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If a plan is set up through an
insurance contract, the contract does not need to be held in trust.
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A proposed rule provides a safe
harbor period for plans with fewer than 100 participants. If the
salary reduction contributions are deposited with the plan no later
than the 7th business day following withholding by the employer,
they will be considered contributed in compliance with the law.
Pending the adoption of a final rule by the Department of Labor, the
Department's Employee Benefits Security Administration (EBSA) will
not assert a violation of ERISA regarding participant contributions
where such contributions are deposited with a small plan within 7
business days. Because the final rule may change, check
www.dol.gov/ebsa periodically for the publication of the final rule.
For a complete list of EBSA publications, call
toll-free: 1.866.444.EBSA (3272). This material will be made
available to sensory impaired individuals upon request. Voice
phone: 202.693.8664, TTY: 202.501.3911.
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