Fiduciary Training Q&A
We recently conducted a fiduciary training that covered a lot of ground, but we had quite a few questions that we didn’t have the time to go into detail on. Here are the answers to those questions, as well as some resources from the Department of Labor that will help you get a handle on your fiduciary duties. We’re not attorneys, and of course you should always consult with the appropriate subject matter expert on your particular plan, but we’ll get you headed in the right direction.
FIRST A LOOK AT SOME RESOURCES
Meeting Your Fiduciary Responsibilities is a great publication from the DOL that, while looking a bit dated, still gives DOL’s applicable advice on how to be a good fiduciary. It covers the major responsibilities of being a fiduciary:
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.
On the surface it may look easy to be a plan fiduciary, but if something goes wrong, it’s important to know that if you’re the fiduciary, you’re personally liable; there’s no corporate shield to cover you. It would be on you to make the plan whole.
The duty to act prudently is central to these responsibilities. So, how do you prove that you’ve acted prudently when running your plan? You talk about the decision-making process, the facts and circumstances, the applicable laws, and how you deliberated in making those decisions and what the outcome was. In other words, you follow a prudent process of organizing the facts and circumstances, formalize the problem you’re trying to solve and work through possible solutions, implementing the decision, and monitoring the decision going forward.
Two other resources, also from the DOL feature tips for selecting and monitoring service providers for your plan and understanding fees and expenses:
NOW FOR THE Q&A
Question 1: If the organization is the plan sponsor and the administrator of the plan, does that mean the CFO is?
Answer: The plan document will name the plan sponsor and plan administrator. If the company is sponsoring the plan, there will be someone (or a committee) who is overseeing the plan and who has the power to make decisions, move money around, and give instructions to service providers. This person (or committee) has fiduciary responsibility and liability for the plan, since they are able to make decisions without asking anyone else’s permission. Your title does not automatically make you a plan fiduciary, so just because you are the CFO does not mean you are a plan fiduciary. The plan document and how you run the plan will make it clear who is.
Question 2: Are our Account Executives for our plan considered advisors and/or fiduciaries?
Answer: An account executive (or relationship manager) is typically someone who works at a service provider, usually the recordkeeper. The recordkeeper maintains the plan’s assets and is responsible for issuing statements, collecting money, etc. We’ve never seen a situation where an account executive served as a plan fiduciary or investment advisor, and though there may be extremely rare exceptions, we’ll answer no to this question. They are there to carry out the plan fiduciary’s instructions.
Account executives will provide plan information to you, but they don’t have the ability to make plan decisions or assume liability for you. They can be a valued part of the retirement plan review process, and can help you navigate your service provider’s offerings, but they’re not an investment advisor or plan fiduciary.
Question 3: Where can we find the amounts that an employee or participant in the plan pays, and other fees that may be charged or deducted for each fund a participant chooses to invest in?
Answer: This is a two part question.
At the plan level, the recordkeeping expenses, advisor costs, and other plan costs are required to be sent to you annually in a report called the 408(b)2, i.e. the Plan Sponsor fee disclosure.
Some service providers simply put it on the plan sponsor website, while others send it to the plan sponsor directly or include it in with other things. Regardless of how it’s delivered, this document can be overwhelming and hard to decipher. However, it’s really important to understand it, because as mentioned earlier, one of the responsibilities of the plan fiduciary is to ensure that plan expenses (e.g. fees) are reasonable. How can you know if the plan fees are reasonable if you don’t know what they are?
2. At the participant level, there is the participant fee disclosure, i.e. the 404(a)5. This is supposed to be delivered to the participant once a year or when fund changes are made; sometimes the service provider handles the delivery, while in some cases the disclosure is sent to the plan sponsor, who then has to pass it on to the participant. The disclosure will include any fees they’re paying for the plan, such as investment, administrative, or recordkeeping fees coming out of their accounts, and will also include a list of possible fees for items they could use, such as loan fees, distribution fees, managed account fees, and so on.
A side note: Timely and accurate delivery of the participant fee disclosure and any other notices is a big deal for the DOL. If you’re being audited and can’t provide copies of the notices or don’t know how they’re being delivered, that can cause problems. Make sure participant contact information is correct (including those of terminated/separated employees).
Even if your recordkeeper says they will handle delivery of notices for you, it is ultimately your responsibility as plan sponsor to make sure they are delivered and timely.
Question 4: I’d like to hear more about the responsibilities related to fees and disclosures.
Answer: To reiterate: You want to really pay attention to the fee disclosures and make sure you understand them, because as a plan fiduciary one of your responsibilities is to make sure that any fees you (or participants) are paying are reasonable. You need to know not only what fees are being paid, but to whom and for what. Ongoing review of fees is also required in order to ensure they remain reasonable, as is making sure participants receive any information on fees and other expenses they need in order to manage their accounts.
Think of it this way. If I told you I paid $12 for a salad and asked if that was reasonable, you’d need more information. You would want to know what’s in it. Chicken? Vegetables? Just plain iceberg lettuce? You’d want to know what size it was. $12 for a tiny side salad would probably be deemed overpriced. Also, where did I buy it and how fresh was it? The grocery store? The premade food section at a convenience store in the airport? Only with the appropriate information for comparison could you make the call about whether that was a reasonable price.
Question 5: What about a fiduciary maintenance file?
Answer: You need to do a fiduciary review of the plan at least once a year, and one of the items you’ll need is meeting minutes. Some advisors (like us!) handle drafting meeting minutes for you, but if you don’t have meeting minutes, start keeping them now. They are your trail of breadcrumbs -- a way of showing that you acted prudently and responsibly when it came to administering your retirement plan. Proper documentation of everything that happened with the plan, including problems/solutions, plan notices, documents and so on, is key to managing your retirement plan well and being able to pull records quickly.
Question 6: What about the investment policy statement? What is its purpose?
Answer: The investment policy statement (IPS) will outline the criteria and process for selecting investments for the retirement plan, as well as describe the investment monitoring process. Circumstances change, so you don’t want the IPS to be too restrictive, but you do want to show that there is a process that is followed in order to prevent knee-jerk reactions.
Investment fees have been targeted in several lawsuits recently, particularly in cases where revenue sharing has been built into the plan. It’s important to be mindful of any fees that go with the investments.
Also, educating participants is key in making them wise investors. Surprisingly, it's not required to help educate your employees about the plan at all, but it’s a good practice, plus it will help with your recruitment and retention efforts. This should be a valued benefit!
Question 7: What are prohibited transactions?
Answer: There are some transactions that are simply no-go territory and are defined in ERISA. Some examples are: If you’re hiring close family members to oversee the plan, that’s not allowed. How about offsetting your payroll fees or getting a better deal on your commercial mortgage if you bring your retirement plan over to the same vendor? Prohibited. Lending money from the plan to the CEO? Prohibited. Many of the prohibited transactions are obvious, but many are not. Do be sure you’ve learned the basics and whether or not there is a specific exemption for a transaction that would otherwise be prohibited.
The Meeting Your Fiduciary Responsibilities document from the DOL provides information on prohibited transactions and is a good place to start. Also, if you are considering paying for anything out of the plan’s assets, you need to make sure you can legally do so, or if the company needs to pay for it. Settlor functions need to be paid for by the company.
If you have any questions regarding fiduciary responsibility or anything else regarding your retirement plan, reach out to us! We’d be glad to provide a second opinion or a tune-up.