Offering a qualified retirement plan comes with a good deal of responsibility—personal responsibility—that plan sponsors and advisors must follow to avoid lawsuits or regulatory sanctions. This article will help you understand the basic duties of a retirement plan fiduciary, as outlined by the Employee Retirement Income Security Act of 1974 (ERISA).
What is a 401(k) plan fiduciary?
Employer-sponsored retirement plans, such as 401(k) plans, are governed by ERISA and primarily enforced by the Department of Labor (DOL). ERISA aims to promote the interests of a retirement plan’s participants and beneficiaries by establishing fiduciary standards of conduct, responsibility, and obligations.
Under ERISA, fiduciaries have several duties, not the least of which is to act solely in the interest of plan participants and their beneficiaries, with the exclusive purpose of providing benefits to them. Failure to do so can put both the employer and its fiduciaries in serious legal jeopardy. Therefore, it's critical that all parties understand their duties.
You can become a fiduciary under ERISA either by functioning or being named as one in the plan document.¹ Both types of fiduciaries are held to ERISA’s standards of conduct.
Named fiduciary—A named fiduciary is designated in the plan document by name or title to have the authority to control and manage the operation and administration of the plan. The named fiduciary is often the employer or organization offering the plan—the plan sponsor. And, unless noted otherwise in the plan document, the plan sponsor will also be the plan administrator.
Functional fiduciary—If you exercise discretionary authority over plan management, administration, or assets, or you render investment advice for a fee with respect to the assets of the plan, you're functioning as a plan fiduciary, even if you're not specifically named as a fiduciary in the plan document. Functional fiduciaries could include your plan’s service providers in certain situations.²
The consequences of a breach of ERISA fiduciary duty
The duties outlined under ERISA are basic fiduciary guidelines that must be followed by law. Failure to comply with these duties can result in:
- Removal from your fiduciary role
- Personal liability for plan losses
- Possible civil penalties and, in certain circumstances, criminal prosecution, fines, and imprisonment
The duties of an ERISA plan fiduciary
Many plan fiduciaries that have inadvertently breached their duty find they’ve done so because they didn't have the right information or support. Because that isn't an acceptable excuse, it's vital that all plan fiduciaries understand and are capable of fulfilling their roles as a fiduciary.
ERISA’s fiduciary duties must be adhered to, including:
- Duty to act for the “exclusive purpose” of providing benefits and paying the “reasonable expenses” of the retirement plan: Fiduciaries must act solely in the interest of participants and beneficiaries.
- Duty to be a prudent expert (i.e., the prudent man rule): Fiduciaries must be more than well intentioned. They must perform their duties with care, skill, prudence, and diligence in each area in which they make decisions for the plan. The duty of prudence is generally satisfied if the fiduciaries, at the time a decision is made, consider those facts and circumstances that are relevant to the particular decision and act accordingly.
- Duty to monitor: The fiduciary is under continuing duty to monitor the performance of all service providers and investment options.
- Duty to disclose: The plan administrator is responsible for providing employees with various disclosures, such as a summary plan description (SPD), quarterly benefit statement, investment information, and ERISA section 404a-5 notifications.
- Duty to act in accordance with the retirement plan document: Fiduciaries must strictly follow the terms of the documents governing the plan, unless they're inconsistent with ERISA.
- Duty to avoid engaging in prohibited transactions: Fiduciaries must avoid causing the plan to engage in transactions with “parties in interest” and must also avoid transactions that involve self-dealing or conflicts of interest, unless an exemption applies.
- Duty to diversify retirement plan investments: A fiduciary responsible for investment selection has a general duty to diversify the plan’s investments to minimize the risk of large losses, unless under the circumstances it's clearly prudent not to do so. For participant-directed plans, such as 401(k) plans, this duty generally doesn't apply to the investments that are directed by the participant, although to comply with ERISA section 404(c), the plan sponsor must still offer employees a broad range of investment alternatives.
For more information, see visit the Department of Labor’s dedicated fiduciary website.
1 Employee Retirement Income Security Act of 1974, §3(21). 2 Generally, service providers, such as attorneys, accountants and consultants, performing their usual professional functions are ordinarily not considered fiduciaries.
The guidelines above, while helpful, do not constitute legal advice and should not be solely relied on. To be certain that you are complying with your fiduciary responsibilities, follow up with your legal counsel.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date but may be subject to change. John Hancock and its representatives do not provide investment, tax, or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made herein. '