Work in the Time of COVID-19: FAQs for Employers

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If you help manage a retirement plan, you may be a fiduciary under federal law. Fiduciaries have significant legal duties, and may have personal liability for breaching those duties. Below are four best practices that can help retirement plan fiduciaries to fulfill their duties and avoid costly breaches:

1. Understand your duties.

The first step to fulfilling your duties as a retirement plan fiduciary is to understand them. Under the Employee Retirement Income Security Act (ERISA), you must act solely in the interest of the participants and beneficiaries of the plan, and you must:

2. Get the help you need.

While retirement plan fiduciaries are held to a high “prudent expert” standard, fiduciaries are not required to have all the necessary expertise themselves. If plan fiduciaries lack necessary expertise, they may hire investment advisors, attorneys, and other professionals to provide that expertise. Accordingly, it is important for you to consider your own level of expertise in retirement plan matters, and to involve external advisors where necessary. Often, this will include hiring an investment advisor to help select the plan’s investments, retaining an attorney experienced in retirement plan matters to guide you through applicable legal requirements, and obtaining the services of a recordkeeper or third-party administrator to assist with required plan testing, notices, and disclosures.

3. Get organized.

Fulfilling fiduciary duties is largely about establishing and following a prudent decision-making process. This requires good organization and documentation.

As an initial matter, plan fiduciaries should be properly identified so that there is no confusion about who is a plan fiduciary. Many companies establish a committee whose members collectively handle the fiduciary duties involved in managing its retirement plan. Once formed, a committee should meet periodically to review and decide matters affecting the plan. The frequency of committee meetings may depend on the size and complexity of the plan, but many committees meet at least quarterly. Regardless of the frequency of its meetings, the committee should be sure to document its decisions and the reasons for those decisions. (The same is true for plan fiduciaries who are not part of a committee.)

It may also be helpful to maintain a calendar or list of deadlines and issues that will require fiduciaries’ attention, such as the deadlines for filing required reports and providing participant notices. This list might also include actions to monitor plan administration, e.g., by ensuring that trust statements are reconciled with payroll and distribution reports, that payroll codes are periodically reviewed for compliance with the plan’s definition of compensation, and that other aspects of plan administration are reviewed, such as by checking samples of distributions and loans, and periodically confirming that notices and communications comply with applicable legal requirements.

4. Pay attention to costs.

Fiduciaries must ensure that only the reasonable expenses of administering a plan are paid from plan assets. This involves making decisions about whether an expense is a type of expense that may be paid from plan assets (your employee benefits attorney can help you with this decision), and whether the amount of the expense is reasonable. When considering the reasonableness of an expense, you should assess both quality and cost, bearing in mind that the lowest cost provider of a product or service will not always be the best choice for the plan.

One of the more common mistakes that plan fiduciaries make in regard to expenses is failing to monitor the fees associated with plan investments. For example, mutual funds are often available in different share classes, usually based on the size of the plan’s investment in the fund. Different share classes typically have different fees, with lower fees usually available for larger investments. As a retirement plan’s assets grow over time, the plan might qualify for a more favorable share class with lower fees. However, if fiduciaries do not monitor the plan’s investments, the plan might remain in the less favorable share class and pay more than is necessary for its investments.

Even for fiduciaries who closely monitor costs, it can be difficult to know whether a plan is getting the best possible value from its service providers. One way to answer this question is to periodically send out requests for proposal (RFPs) to various potential service providers, including the plan’s current service providers. This allows fiduciaries to gain information about the services that such providers could offer to the plan, and the fees they would charge. After going through an RFP process, fiduciaries might conclude that retaining a current service provider is the most prudent choice, or they might decide that a different service provider could provide better value.

While retirement plan fiduciaries have significant duties, they can fulfill these duties by understanding them, getting the help they need, following prudent processes, and closely monitoring plan expenses.

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