Do you make decisions that impact your company's retirement plan? If so, you are most likely a plan fiduciary as defined by ERISA.. (read more: Are you a Plan Fiduciary)
Fiduciary responsibilities under ERISA were established to protect the interests of participants and beneficiaries, and to protect plan assets from misuse. By complying with ERISA, plan sponsors can also limit their potential liability. Here are five ways on how to deliver on on your fiduciary responsibility.
One – Document Your Decisions
Ideally, you set up a due diligence file when you established your company’s retirement plan. If not, now’s a good time to start one. In this file, document decisions you make about your retirement plan; this will serve as evidence that you’ve satisfied your fiduciary requirements. Keep this information for a minimum of six years.
Two – Establish an Investment Policy Statement
An Investment Policy Statement (IPS) is the foundation for the plan’s investment decisions. It establishes objectives for managing the plan’s investments, including criteria for investment selection, evaluation and monitoring. Using an IPS enables a more disciplined and systematic approach in your decision-making.
While an IPS is not explicitly required under ERISA, the DOL has issued guidance stating that having an IPS is consistent with the fiduciary obligations of loyalty and prudence. Specifically, an IPS can help:
- Carry out your fiduciary responsibilities in compliance with legal guidelines
- Shield fiduciaries from complaints and potential legal action
- Create a clear, comprehensive record that demonstrates your prudent planning and procedures
- Establish a framework for determining the selection, monitoring and termination of plan investments
Three – Select Investment Options
Your next step is to choose investment options that are consistent with the objectives set forth in the IPS. Section 404(c) regulations explain that participant-directed plans, such as 401(k) plans, should offer a “broad range of investment alternatives.” In effect, a plan’s investment options should be diverse enough to provide participants the opportunity to:
- Materially effect potential returns and degrees of risk
- Choose from at least three core diversified investment alternatives, each of which have different risk and return characteristics
- Choose among available investment options to achieve a portfolio that has risk and return characteristics within a range normally appropriate for the participant
- Diversify investments in order to minimize the risk of large losses.
Of course, performance and fees are important. But, it’s important to understand that ERISA’s fiduciary responsibility standards may not be satisfied by selecting investment options based only on above-average, short-term investment results, or by selecting the lowest cost service provider. In fact, fiduciaries could fail to satisfy ERISA’s fiduciary responsibility standards by selecting investment options based on these criteria alone. Appropriate funds for your plan are not necessarily the least expensive and short-term performance does not necessarily indicate long-term performance. Rather, it is the process a fiduciary uses that may ultimately determine whether or not the prudence requirement under ERISA has been met.
Four – Monitor Investment Options
As a fiduciary, one of your duties is to oversee and monitor the performance of funds offered to plan participants. This responsibility includes the preparation of fund performance review reports along with analysis of data in these reports.
Fiduciaries typically choose to either handle this responsibility themselves or hire an independent investment advisor to prepare the reports and assist in the reviews.
Five – Communicate to Participants
For plans seeking to comply with ERISA Section 404(c), certain participant communications are required to enable them to exercise control over their investment decisions. Plan fiduciaries need to provide participants with:
- A Summary Plan Description (SPD) before enrollment, which is usually prepared and supplied by your Third Party Administrator (TPA). Simply distribute the SPD to your participants.
- A written notice that your plan intends to qualify as an ERISA Section 404(c) plan. This notice should be included in your SPD. A statement of Material Modifications and Summary Annual Report at specified times, which your TPA will provide.
- A general description of investment objectives and risk and return characteristics of each fund, including information on the type and diversification of assets in the investment line up.
- Instructions on who to contact to give investment instructions and specific limitations on transferring among investment options. The above information is not a comprehensive list of every requirement under ERISA Section 404(c). Please consult your legal and/or tax advisor for more information.
Note from the editor: The Printers 401k® Success by Design Program is a collaboration of 401(k) specialists who assume specific fiduciary duties for your plan. The solution is designed to fulfill your fiduciary obligations, allowing you to continue serving as the plan sponsor without the liability and responsibility.
Companies that have participated in the Printers401k® Program have been able to:
- Reduce Risk and Work
- Lower Liability and Plan Costs
- Improve Plan Operations and Investments
Contact Joe Trybula CFP®, CPFA® today at 800.307.0376 or firstname.lastname@example.org to learn more about the Printers401k® Program, or request a free Plan Analysis Report which provides you with a snapshot of your plan investments, costs and plan operations compared to other plans in the industry. This analysis can reveal strengths and areas of concern along with solutions to improve your retirement plan.
RP-0386-1117 Tracking #1-669893 (Exp. 11/19)