One of the most important and controversial topics in the realm of employee benefits recently has been the definition of “fiduciary.” The Department of Labor (DOL) has taken on the task of broadening its definition of the term under the Employee Retirement Income Security Act of 1974 (ERISA). The DOL issued a proposed rule redefining “fiduciary” in 2010, but under pressure from the public and some members of Congress, it withdrew the regulations in September 2011. It is now expected to issue an amended definition in 2012. The new regulations are expected to provide strong protections for plan participants and beneficiaries.

The Basics

A fiduciary of a retirement plan is any person who exercises judgment or discretion in administering or managing a plan or who has control over plan assets. Fiduciaries generally include the plan’s trustee, investment advisers, plan administrative or investment committee members and those who select committee members. Fiduciaries may also include the company and its officers and board of directors. Whether or not a person is a fiduciary depends on the functions performed on behalf of the plan, not just a person’s title.

Fiduciaries have a general duty to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. Fiduciaries must also carry out their responsibilities prudently, disclose complete and material information to plan participants and beneficiaries, follow plan documents, monitor and evaluate the performance of service providers, follow the terms of plan documents, appoint other fiduciaries, select and monitor plan investments, interpret plan provisions and exercise discretion in approving or denying benefit claims. Other duties include diversifying plan investments and paying only reasonable plan expenses.

It is not possible to rid oneself of fiduciary duty by delegating it to a third party or by including disclaimer language in plan documents. Even when certain duties are delegated, those who hired the service provider retain the duty to monitor and evaluate the service provider’s performance.

Personal Liability of Fiduciaries

Under ERISA, fiduciaries who breach their duties and cause the plan to incur a loss are personally liable. Generally, this means that a fiduciary must make the plan whole and return to the plan any personal profits gained through the use of plan assets, plus a 20% penalty and other equitable or remedial relief that a court may deem appropriate. The key to limiting personal liability is proving that a fiduciary acted prudently. If the fiduciary is successful in proving that he or she acted prudently, he or she should not be held personally liable for a loss incurred by plan participants. However, this may be difficult to prove. One way fiduciaries can demonstrate that they have carried out their responsibilities properly is by documenting the processes used to carry out fiduciary responsibilities.

Fiduciaries should be aware of others who serve as fiduciaries to the same plan. All fiduciaries have potential liability for actions of their co-fiduciaries. For example, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals such a breach or does not act to correct it, that fiduciary is liable as well.

Best Practices to Limit Fiduciary Liability

The following best practices in plan governance can help limit fiduciary liability:

  • Effective committees. Members should have relevant skills and be willing to devote the necessary time, receive sufficient training, hold meetings regularly, distribute meeting agendas in advance and document decisions carefully.
  • Written plan policies. Written policies regarding plan investments and a statement of investment policy should be in place.
  • Accountability. The role of each fiduciary should be documented, and each fiduciary should be aware of others who serve as fiduciaries of the same plan.
  • Oversight and monitoring. An investment or administrative committee should periodically review the performance of fiduciaries and service providers and regularly review compliance with ERISA.
  • Effective flow of information. Timely and relevant plan-related information should be shared among decision makers, third-party administrators, consultants, legal counsel and other advisers.
  • Bonding. Fiduciaries who handle plan funds or other plan property should be covered by a fidelity bond.
  • Fiduciary liability insurance/indemnification. A fiduciary liability insurance policy covering breaches of fiduciary duty and errors and omissions should be purchased.

Click here to view the Department of Labor’s booklet, “Meeting Your Fiduciary Responsibilities.”

Contact MCB’s Employee Benefit Plan Audit Practice Leader, Charles Deppe, at 703-218-3600 or email info@mcb-cpa.com with your benefit plan questions or to request a proposal for your next review or audit.

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