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Retirement

Best practices for plan fiduciaries

open yellow umbrella over pair of yellow boot by poolside

next issue no. 9: Fiduciary perspective

The Employee Retirement Income Security Act (ERISA) establishes fiduciary standards of conduct for employers and other persons who sponsor, maintain and administer certain retirement plans (e.g., 401(k) plans). Plan fiduciaries are subject to one of the highest levels of responsibility in law under ERISA.

There has been a recent flood of ERISA lawsuits related to plan fees, appropriateness of plan investments and other fiduciary matters. Since 2020, more than 170 lawsuits challenging retirement plan fees and investments have been filed in federal court with the pace of cases escalating. Settlements have regularly been in the millions of dollars.7

ERISA litigation also has had the knock-on effect of driving insurance rates for fiduciary liability coverage up by 15–20 percent.8

It is important to understand exactly who is an ERISA fiduciary, what their responsibilities are, and what steps can be taken to help protect the plan and fiduciaries when sponsoring, maintaining and administering a retirement plan.

Who is a plan fiduciary?

There are generally two types of plan fiduciaries: (1) named fiduciaries and (2) functional fiduciaries.

Named fiduciary

Every ERISA retirement plan has to have at least one named fiduciary authority who has control over operation and administration of the plan.9 This designation is regularly done at an entity or position level, rather than the name of the person specifically, which means that the plan documents do not need to be updated whenever a new person takes on that position.

The named fiduciary can be an individual or entity (e.g., the employer), or a group of individuals (e.g., plan committee). The plan can have more than one named fiduciary, but the plan must have at least one named fiduciary.

Functional fiduciary

A functional fiduciary is someone engages in one or more of the following activities:10

 

A person who engages in one of the above activities is a fiduciary for that action only.

Fiduciary Duties

A plan fiduciary must act in accordance with the following rules in carrying out their fiduciary duties solely for the interests of plan participants.11

Common fiduciary responsibilities13

Selection and monitoring of plan service providers

Plan sponsors are responsible administrating and record keeping a plan in the sole interest of plan participants. Administering and record keeping a retirement plan requires expertise in a variety of areas. Because plan sponsors are not generally equipped to administer and record keep a plan themselves, they hire plan service providers to help administer and record keep the plan.

Selection and monitoring of the various vendors, consultants, investment managers and other parties to the plan is one of the key responsibilities of a fiduciary. The duty does not end with the selection of investment options or consultants, but specifically includes ongoing monitoring to ensure that the plan service provider remains appropriate for the plan.

Monitoring fees

ERISA contains provisions that allow plan assets to be used for two purposes: paying benefits and paying reasonable expenses of administering the plan. Excessive fee court cases have been climbing, so this is an area of increased scrutiny for fiduciaries. Proper examination of underlying administrative fees, and documentation of processes to ensure that fees are reasonable are an increasingly important area for fiduciaries to monitor. Again, it is the process and procedure that are important, as higher investment management fees are not necessarily automatically excessive, as long as the process in determining the suitability of the investment options can be justified.

Fiduciary liability

With fiduciary responsibility comes fiduciary liability. Plan fiduciaries who breach their fiduciary responsibilities, obligations, or duties are personally liable to make the plan whole for any losses resulting from the breach. In addition, plan fiduciaries are personally liable for returning any profits made by the fiduciary through use of plan assets to the plan.14

In addition, plan fiduciaries may be jointly liable for the actions of other plan fiduciaries. For example, if a fiduciary knowingly participates in another fiduciary’s breach, conceals that breach or does not act to correct a breach then they are potentially liable.15

There are a number of ways plan fiduciaries can limit their potential liability.

 

Settlor decisions

Not all actions taken by an employer for its retirement plan are fiduciary in nature. Some actions taken by an employer for its retirement plan are non-fiduciary business decisions (“settlor decisions”).

The DOL takes the position that decisions related to establishment, design and termination of plans generally are not fiduciary activities governed by ERISA. For example, in making the decision to create a plan, the business is acting on behalf of the business, not its employees, so these are not fiduciary decisions.

It is important to identify settlor decisions because expenses incurred in connection with the performance of settlor functions may not be paid by the plan as the expenses would be incurred for the benefit of the employer. For example, legal or consulting services in connection with plan formation may not be paid by the plan.19

We believe that by taking proper precautions and having an awareness of fiduciary responsibilities under ERISA plan sponsors and committees can work diligently and productively while maintaining appropriate protections.

In this issue
Retirement How to communicate amid ongoing inflation and volatile markets
The market environment has been highly volatile and deeply negative through 2022. Stocks and bonds are falling in tandem, breaking historical patterns.
Retirement Our role in closing the gender gap in retirement
This perpetual gap in retirement savings between men and women – sons and daughters, mothers and fathers – remains a significant hurdle that we have the power to help overcome.
Retirement What will make you stay?
Despite higher inflation, the U.S. equity market down year to date and growing questions about the U.S. economy is heading toward a recession, the employment market remains one of the brightest stories and best pandemic recovery narratives around for employees.

Endnotes

7 Bloomberg Law. 5 April 2022.

8 401k Specialist. 8 August 2022.

9 29 U.S. Code § 1102

10 29 U.S. Code § 1002(3)(21)

11 29 U.S. Code § 1104(a)

12 26 CFR § 1.401(a)(35)-1

13 https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resourcecenter/publications/meeting-your-fiduciary-responsibilities.pdf

14 29 U.S. Code § 1109

15 29 U.S. Code § 1105

16 29 U.S. Code § 1002(3)(38)

17 29 U.S. Code § 1002(3)(16)

18 29 U.S. Code § 1104(c)(5)

19 https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2001-01a

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals

Please note that this information should not replace a client’s consultation with a tax professional regarding their tax situation. Nuveen is not a tax advisor. Clients should consult their professional advisors before making any tax or investment decisions.

Nuveen provides investment advisory services through its investment specialists.

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