The Investment Scientist

Retirement Plan Fiduciary Responsibilities

Posted on: June 21, 2011

[Guest post by Andrew Platou] Who qualifies as a plan’s fiduciaries? Fiduciaries are generally those individuals or entities who manage an employee benefit plan and its assets. A plan must have at least one fiduciary, a person or an entity, named in the written plan, or through a process described in the plan. 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. Employers often hire outside professionals, sometimes called third-party service providers, or use an internal administrative committee or human resources department to manage some or all of a plan’s day-to-day operations. Even if an employer hires third-party service providers or uses internal administrative committees to manage the plan, it still has fiduciary responsibilities. A key point to note is that fiduciary status is based on the functions the person performs for the plan, not just the person’s title. 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.

Additional examples of a plan’s fiduciaries are the plan trustee(s), the investment advisers, all individuals exercising discretion in the administration of the plan, and those who select committee officials. Determining whether an individual or an entity is a fiduciary depends on whether such individuals are exercising discretion or control over the plan.

Retirement plan sponsors are not always fully aware of their fiduciary responsibilities. What exactly are fiduciary responsibilities? Fiduciaries are subject to standards of conduct under ERISA because they act on behalf of participants in a retirement plan and their beneficiaries. Fiduciary responsibilities include acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them, carrying out their duties prudently, following the plan documents (unless inconsistent with ERISA); diversifying plan investments, and paying only reasonable plan expenses.

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The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, especially investments. If the fiduciary does not have the expertise required, he or she should hire someone with that professional knowledge. In addition, prudence focuses on the process for making fiduciary decisions. It is wise to document decisions and the basis for those decisions.

Following the terms of the plan document is also an important responsibility. The plan 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. Plan assets should be diversified to minimize the risk of large investment losses. 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.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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