Most fiduciary breaches are the result of a lack of prudence. Many plan sponsors are not aware that they are a fiduciary and don't understand what responsibilities and potential liabilities such a designation entails. Following these steps should prevent most of the violations that lead to lawsuits:
- Determine Who is a Fiduciary - Briefly, a fiduciary is anyone who (1) Exercises discretionary control over the management of the plan; (2) Has any discretionary authority or responsibility regarding plan administration; (3) Offers investment advice regarding plan assets and derives compensation from it. Although determining who exactly is a fiduciary depends on the facts and circumstances of each case, fiduciaries usually include the plan administrator designated in the plan document and which may be an administrative, or investment committee, the investment manager and the broker/consultant - if the plan relies on her advice
- Review Basic Fiduciary Responsibilities - The next step is to remind everyone of a fiduciary's basic responsibilities. First, fiduciaries must act in the best interest of participants and their beneficiaries. Although this is usually only a problem involving cases of "self-dealing" or conflicts of interest (the classic example involves selling real estate at an inflated price to the plan), it also means that sponsors have a duty to keep costs reasonable. Finally, to quote ERISA, plan decisions must be made "with care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters in the conduct of an large of a like character and with like aims." This means that a fiduciary must seek outside expertise when lacking the requisite education, experience or skill.
- Perform a Self Audit - ERISA stipulates that each plan must have a plan document and that the plan is operated according to those plan documents. An annual spotcheck of basic plan operations (e.g., rollovers, loans, hardship withdrawals, nondiscrimination testing, etc.) and a review of all required plan documentation will go a long way in preventing any potential problems.
- Ensure a Sound Process is in Place for Investment Selection and Monitoring - Plan sponsors need a process in place for selecting and monitoring investments. Many advisors work with their clients by drafting a customized investment policy statement and helping their clients to monitor the investment on a regular basis. The important point here is that a plan sponsor has a bona fide process in place that they can refer to should anyone question a plan's investment decision-making process.
- Consider Buying Fiduciary Liability Insurance - Advisors need to apprise their clients of the potential liabilities associated with fiduciary status. Fiduciaries can be held personally liable for breaches. In addition to the ERISA-required fidelity bond, advisors may want to raise the idea of buying additional fiduciary liability insurance for the plan. Large plans routinely buy such extra protection as it is relatively inexpensive and offers broad coverage.
By understanding your fiduciary status, you will go a long way in helping to prevent future lawsuits.
ADP makes investment funds available for selection by plan investment fiduciaries; ultimate responsibility for selection and monitoring of a plan's investment alternatives rests with the plan's designated investment fiduciaries.
Please note that neither Blue Prairie Group nor ADP can provide you with legal advice regarding your fiduciary duties under ERISA. This article and those following are not intended to constitute or be relied on as legal advice, but a description of applicable principles. Please consult with your attorney for legal advice on matters contained in these articles.
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