Fiduciary is a formal sounding word that is used often in the financial world. But how does it apply to retirement plans and your own personal wealth management? Who is the fiduciary of a 401(k) Plan?
As referenced by my colleague, MaryBeth Meyer, in her article What is a Fiduciary Financial Advisor?, a fiduciary is a person who acts on behalf of others, putting the interest of the other party ahead of their own. In other words, fiduciaries have a duty to act in the best interest of that other party. Back in 1974, The Employee Retirement Income Security Act (ERISA) of 1974 was born. It set the standards for retirement plans and health plans including the initial rules that established them and how income taxes are affected. But ERISA also established rules to protect the participants in those plans and gave them a right to sue those in charge of the plan. ERISA also gave fiduciary status to many people who work on or with retirement plans.
What is Fiduciary Management
ERISA established that a person could become a fiduciary by who they are and what they do. For example, what is fiduciary management? It’s a person or company who has discretion over the management of the plan or the assets of the plan is a fiduciary. A person who renders investment advice for a fee is a fiduciary. And a person who has discretion over the administration of the plan is also a fiduciary. In some cases, the fiduciary is spelled out in the document that governs the establishment of the plan (Plan Document) such as the Plan Administrator, Plan Sponsor, or Trustee.
The company may establish a committee of persons who make decisions about the plan and its investments. Those individuals are also fiduciaries. But sometimes someone may become a fiduciary unintentionally. Someone who is not under someone else’s authority and oversees the day to day administration of the plan may also be a fiduciary. At the same time, someone who is merely designing the plan or amending the plan may not be a fiduciary.
Fiduciary status is important because fiduciaries have certain explicit duties to both the participants and the beneficiaries in the plans that they serve. A fiduciary must put the interest of the participants and their beneficiaries above all else – even above the interests of their company. They must make sure any fees charged to the participants are reasonable. The fees do not have to be the lowest, but they should be comparable to other plans.
A fiduciary must act with the care, skill, prudence, and diligence of a prudent person. That does not mean that a fiduciary must be an expert on all plan matters. In fact, a fiduciary may delegate those duties to a skilled vendor to offer support; however, they will have a fiduciary duty to monitor those vendors.
A fiduciary must diversify the plan’s assets, or offer a diversified investment menu, to minimize the risk of loss. Fiduciaries must not only understand the rules and regulations detailed in the plan document, but also ensure that the plan follows those rules and regulations.
Knowing who your fiduciaries are and knowing if you are a fiduciary yourself are both important. There can be serious consequences for a breach of fiduciary duty. Civil action, and rarely criminal action, can be brought against any fiduciary of the plan by participants, beneficiaries, other fiduciaries, or the Secretary of the Department of Labor. A fiduciary can be held personally liable for a breach and that liability cannot be discharged in bankruptcy court. The fiduciary must make restitution to the plan for the breach.
The Internal Revenue Service, the Department of Labor and the Pension Benefits and Guaranty Corporation all have correction programs for various more common breaches. While ERISA requires that the plan have a fidelity bond for each retirement plan, it may be worth considering obtaining fiduciary insurance to indemnify fiduciaries who work on your plan.
On the next post, ML&R Wealth Management will focus on the best practices for those working on or sponsoring retirement plans. For questions on how ML&R Wealth Management can help you with your company sponsored retirement plan, reach out to us.