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This publication
reflects the law prior to the enactment of the Pension Protection
Act of 2006. For further information on the Pension
Protection Act, visit the Pension
Reform page.
Offering a retirement plan can be one of the most
challenging, yet rewarding, decisions an employer can make. The employees
participating in the plan, their beneficiaries, and the employer benefit
when a retirement plan is in place. Administering a plan and managing its
assets, however, require certain actions and involve specific
responsibilities.
To meet their responsibilities as plan sponsors, employers need to
understand some basic rules, specifically the Employee Retirement Income
Security Act (ERISA). ERISA sets standards of conduct for those who manage
an employee benefit plan and its assets (called fiduciaries). Meeting Your
Fiduciary Responsibilities provides an overview of the basic fiduciary
responsibilities applicable to retirement plans under the law.
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This booklet addresses the scope of ERISA’s protections for
private-sector retirement plans (public-sector plans and plans sponsored
by churches are not covered by ERISA). It provides a simplified
explanation of the law and regulations. It is not a legal interpretation
of ERISA, nor is it intended to be a substitute for the advice of a
retirement plan professional. Also, the booklet does not cover those
provisions of the Federal tax law related to retirement plans.
Each plan has certain key elements. These include:
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A written plan that describes the benefit structure and
guides day-to-day operations;
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A trust fund to hold the plan’s assets(1);
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A recordkeeping system to track the flow of monies
going to and from the retirement plan; and
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Documents to provide plan information to employees
participating in the plan and to the government.
Employers often hire outside professionals (sometimes called third-party
service providers) or, if applicable, use an internal administrative
committee or human resources department to manage some or all of a plan’s
day-to-day operations. Indeed, there may be one or a number of officials
with discretion over the plan. These are the plan’s fiduciaries.
Many of the actions involved in operating a plan make the person or entity
performing them a fiduciary. Using discretion in administering and
managing a plan or controlling the plan’s assets makes that person a
fiduciary to the extent of that discretion or control. Thus, fiduciary
status is based on the functions performed for the plan, not just a person’s
title.
A plan must have at least one fiduciary (a person or entity) named in the
written plan, or through a process described in the plan, as having control
over the plan’s operation. The named fiduciary can be identified by office
or by name. For some plans, it may be an administrative committee or a
company’s board of directors.
A plan’s fiduciaries will ordinarily include the trustee, investment
advisers, all individuals exercising discretion in the administration of the
plan, all members of a plan’s administrative committee (if it has such a
committee), and those who select committee officials. Attorneys,
accountants, and actuaries generally are not fiduciaries when acting solely
in their professional capacities. The key to determining whether an
individual or an entity is a fiduciary is whether they are exercising
discretion or control over the plan.
A number of decisions are not fiduciary actions but rather are business
decisions made by the employer. For example, the decisions to establish a
plan, to determine the benefit package, to include certain features in a
plan, to amend a plan, and to terminate a plan are business decisions. When
making these decisions, an employer is acting on behalf of its business, not
the plan, and, therefore, is not a fiduciary. However, when an employer (or
someone hired by the employer) takes steps to implement these decisions,
that person is acting on behalf of the plan and, in carrying out these
actions, is a fiduciary.
Fiduciaries have important responsibilities and are subject to standards of
conduct because they act on behalf of participants in a retirement plan and
their beneficiaries. These responsibilities include:
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Acting solely in the interest of plan participants
and their beneficiaries and with the exclusive purpose of providing
benefits to them;
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Carrying out their duties prudently;
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Following the plan documents (unless inconsistent
with ERISA);
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Diversifying plan investments; and
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Paying only reasonable plan expenses.
The duty to act prudently is one of a fiduciary’s central responsibilities
under ERISA. It requires expertise in a variety of areas, such as
investments. Lacking that expertise, a fiduciary will want to hire someone
with that professional knowledge to carry out the investment and other
functions. Prudence focuses on the process for making fiduciary decisions.
Therefore, it is wise to document decisions and the basis for those
decisions. For instance, in hiring any plan service provider, a fiduciary
may want to survey a number of potential providers, asking for the same
information and providing the same requirements. By doing so a fiduciary can
document the process and make a meaningful comparison and selection.
Following the terms of the plan document is also an important
responsibility. The document serves as the foundation for plan operations.
Employers will want to be familiar with their plan document, especially when
it is drawn up by a third-party service provider, and periodically review
the document to make sure it remains current. For example, if a plan
official named in the document changes, the plan document must be updated to
reflect that change.
Diversification – another key fiduciary duty – helps to minimize the
risk of large investment losses to the plan. Fiduciaries should consider
each plan investment as part of the plan’s entire portfolio. Once again,
fiduciaries will want to document their evaluation and investment decisions.
With these fiduciary responsibilities, there is also potential liability.
Fiduciaries who do not follow the basic standards of conduct may be
personally liable to restore any losses to the plan, or to restore any
profits made through improper use of the plan’s assets resulting from
their actions.
However, fiduciaries can limit their liability in certain situations. One
way fiduciaries can demonstrate that they have carried out their
responsibilities properly is by documenting the processes used to carry out
their fiduciary responsibilities.
There are other ways to limit potential liability. Some plans, such as most
401(k) or profit-sharing plans, can be set up to give participants control
over the investments in their accounts. For participants to have control,
they must be given the opportunity to choose from a broad range of
investment alternatives. Under Labor Department regulations, there must be
at least three different investment options so that employees can diversify
investments within an investment category, such as through a mutual fund,
and diversify among the investment alternatives offered. In addition,
participants must be given sufficient information to make informed decisions
about the options offered under the plan. Participants also must be allowed
to give investment instructions at least once a quarter, and perhaps more
often if the investment option is extremely volatile.
If an employer sets up their plan in this manner, a fiduciary’s liability
is limited for the investment decisions made by participants. However, a
fiduciary retains the responsibility for selecting the providers of the
investment options and the options themselves and monitoring their
performance.
A fiduciary can also hire a service provider or providers to handle
fiduciary functions, setting up the agreement so that the person or entity
then assumes liability for those functions selected. If an employer appoints
an investment manager that is a bank, insurance company, or registered
investment advisor, the employer is responsible for the selection of the
manager, but is not liable for the individual investment decisions of that
manager. However, an employer is required to monitor the manager
periodically to assure that it is handling the plan’s investments
prudently.
A fiduciary should be aware of others who serve as fiduciaries to the same
plan, since all fiduciaries have potential liability for the actions of
their co-fiduciaries. For example, if a fiduciary knowingly participates in
another fiduciary’s breach of responsibility, conceals the breach, or does
not act to correct it, that fiduciary is liable as well.
As an additional protection for plans, those who handle plan funds or other
plan property generally must be covered by a fidelity bond. A fidelity bond
is a type of insurance that protects the plan against loss resulting from
fraudulent or dishonest acts of those covered by the bond.
Even if employers hire third-party service providers or use internal
administrative committees to manage the plan, there are still certain
functions that can make an employer a fiduciary.
If a plan provides for salary reductions from employees’ paychecks for
contribution to the plan (such as in a 401(k) plan), then the employer must
deposit the contributions in a timely manner. The law requires that
participant contributions be deposited in the plan as soon as it is
reasonably possible to segregate them from the company’s assets, but no
later than the 15th business day of the month following the payday. If
employers can reasonably make the deposits sooner, they need to do so.
Hiring a service provider in and of itself is a fiduciary function. When
considering prospective service providers, provide each of them with
complete and identical information about the plan and what services you
are looking for so that you can make a meaningful comparison.
Some items a fiduciary needs to consider when selecting a service provider
include:
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Information about the firm itself: financial condition
and experience with retirement plans of similar size and complexity;
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Information about the quality of the firm’s services:
the identity, experience, and qualifications of professionals who will
be handling the plan’s account; any recent litigation or enforcement
action that has been taken against the firm; and the firm’s experience
or performance record;
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A description of business practices: how plan assets
will be invested if the firm will manage plan investments or how
participant investment directions will be handled; the proposed fee
structure; and whether the firm has fiduciary liability insurance.
An employer should document its selection (and monitoring) process, and,
when using an internal administrative committee, should educate committee
members on their roles and responsibilities.
Fees are just one of several factors fiduciaries need to consider in
deciding on service providers and plan investments. When the fees for
services are paid out of plan assets, fiduciaries will want to understand
the fees and expenses charged and the services provided. While the law
does not specify a permissible level of fees, it does require that fees
charged to a plan be "reasonable." After careful evaluation
during the initial selection, the plan's fees and expenses should be
monitored to determine whether they continue to be reasonable.
In comparing estimates from prospective service providers, ask which
services are covered for the estimated fees and which are not. Some
providers offer a number of services for one fee, sometimes referred to as a
“bundled” services arrangement. Others charge separately for individual
services. Compare all services to be provided with the total cost for each
provider. Consider whether the estimate includes services you did not
specify or want. Remember, all services have costs.
Some service providers may receive additional fees from investment vehicles,
such as mutual funds, that may be offered under an employer’s plan. For
example, mutual funds often charge fees to pay brokers and other
salespersons for promoting the fund and providing other services. There also
may be sales and other related charges for investments offered by a service
provider. Employers should ask prospective providers for a detailed
explanation of all fees associated with their investment options.
Who pays the fees? Plan expenses may be paid by the employer, the plan, or
both. In addition, for expenses paid by the plan, they may be allocated to
participants’ accounts in a variety of ways. (See Resources for further
information). In any case, the plan document should specify how fees are
paid.
An employer should establish and follow a formal review process at
reasonable intervals to decide if it wants to continue using the current
service providers or look for replacements. When monitoring service
providers, actions to ensure they are performing the agreed-upon services
include:
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Reviewing the service providers’ performance;
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Reading any reports they provide;
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Checking actual fees charged;
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Asking about policies and practices (such as trading,
investment turnover, and proxy voting); and
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Following up on participant complaints.
More and more employers are offering participants help so they can make
informed investment decisions. Employers may decide to hire an investment
adviser offering specific investment advice to participants. These
advisors are fiduciaries and have a responsibility to the plan
participants. On the other hand, an employer may hire a service provider
to provide general financial and investment education, interactive
investment materials, and information based on asset allocation models. As
long as the material is general in nature, providers of investment
education are not fiduciaries. However, the decision to select an
investment adviser or a provider offering investment education is a
fiduciary action and must be carried out in the same manner as hiring any
plan service provider.
Certain transactions are prohibited under the law to prevent dealings
with parties who may be in a position to exercise improper influence over
the plan. In addition, fiduciaries are prohibited from engaging in
self-dealing and must avoid conflicts of interest that could harm the
plan.
Who is prohibited from doing business with the plan? Prohibited parties
(called parties-in-interest) include the employer, the union, plan
fiduciaries, service providers, and statutorily defined owners, officers,
and relatives of parties-in-interest.
Some of the prohibited transactions are:
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A sale, exchange, or lease between the plan and
party-in-interest;
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Lending money or other extension of credit between the
plan and party- in-interest; and
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Furnishing goods, services, or facilities between the
plan and party-in-interest.
Other prohibitions relate solely to fiduciaries who use the plan’s assets
in their own interest or who act on both sides of a transaction involving a
plan. Fiduciaries cannot receive money or any other consideration for their
personal account from any party doing business with the plan related to that
business.
There are a number of exceptions (exemptions) in the law that provide
protections for the plan in conducting necessary transactions that would
otherwise be prohibited. The Labor Department may grant additional
exemptions.
Exemptions are provided in the law for many dealings with banks, insurance
companies, and other financial institutions that are essential to the
on-going operations of the plan. One exemption in the law allows the plan to
hire a service provider as long as the services are necessary to operate the
plan and the contract or arrangement under which the services are provided
and the compensation paid for those services is reasonable.
Another important exemption – and a popular feature of most plans –
permits plans to offer loans to participants. The loans, which are
considered investments of the plan, must be available to all participants on
a reasonably equivalent basis, must be made according to the provisions in
the plan, and must charge a reasonable rate of interest and be adequately
secured.
The exemptions issued by the Department can involve transactions available
to a class of plans or to one specific plan. Both class and individual
exemptions are available on the EBSA Web site Compliance Assistance Page. For more information on applying for an exemption, request a
copy of Exemption Procedures Under Federal Pension Law (see Resources).
Plans that invest in employer stock need to consider specific rules
relating to this investment. Traditional defined benefit pension plans
have limits on the amount of stock and debt obligations that a plan can
hold and the amount of the plan’s assets that can be invested in
employer securities. For 401(k) plans, profit-sharing plans, and employee
stock ownership plans, there is no limit on how much in employer
securities the plans can hold if the plan documents so provide.
If an employer decides to make employer stock an investment option under the
plan, proper monitoring will include ensuring that those responsible for
making investment decisions, whether an investment manager or participants,
have critical information about the company’s financial condition so that
they can make informed decisions about the stock.
A plan can buy or sell employer securities from a party-in-interest, such as
an employer, an employee, or other related entity as described above (which
would otherwise be prohibited) if it is for fair market value and no sales
commission is charged. If the plan is a defined benefit plan (a traditional
pension plan), the plan generally is not permitted to hold more than 10
percent of its assets in employer stock.
ERISA requires plan administrators to furnish plan information to
participants and beneficiaries and to submit reports to government agencies.
The following documents must be furnished to participants and
beneficiaries.
The Summary Plan Description (SPD) -- the basic descriptive document
-- is a plain language explanation of the plan and must be comprehensive
enough to apprise participants of their rights and responsibilities under
the plan. It also informs participants about the plan features and what to
expect of the plan. Among other things, the SPD must include information
about:
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When and how employees become eligible to participate;
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The source of contributions and contribution levels;
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The vesting period, i.e., the length of time an
employee must belong to a plan to receive benefits from it;
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How to file a claim for those benefits; and
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A participant’s basic rights and responsibilities
under ERISA.
This document is given to employees after they join the plan and to
beneficiaries after they first receive benefits. SPDs must also be
redistributed periodically and provided on request.
The Summary of Material Modification (SMM) apprises participants and
beneficiaries of changes to the plan or to the information required to be in
the SPD. The SMM or an updated SPD for a retirement plan must be furnished
automatically to participants within 210 days after the end of the plan year
in which the change was adopted.
An Individual Benefit Statement provides participants with
information about their account balances and vested benefits. For plans
sponsored by a single employer, the statement must be provided when a
participant submits a written request, but no more than once in a 12-month
period, and automatically to certain participants who have terminated
service with the employer.
A Summary Annual Report (SAR) outlines in narrative form the
financial information in the plan’s Annual Report, the Form 5500 (see
below), and is furnished annually to participants.
The Blackout Period Notice, a recent addition to the notice
requirements for profit-sharing or 401(k) plans, requires at least 30 days'
(but not more than 60 days') advance notice before a plan is closed to
participant transactions. During blackout periods, participants (and
beneficiaries) cannot direct investments, take loans, or request
distributions. Typically, blackout periods occur when plans change
recordkeepers or investment options, or when plans add participants due to a
corporate merger or acquisition.
Plan administrators generally are required to file a Form 5500 Annual
Return/Report with the Federal Government. The Form 5500 reports information
about the plan and its operation to the U.S. Department of Labor, the
Internal Revenue Service (IRS), the Pension Benefit Guaranty Corporation (PBGC),
participants and the public. Depending on the number and type of
participants covered, the filing requirements vary. The form is filed and
processed under the ERISA Filing Acceptance System (EFAST). For more
information on the forms, their instructions, and the filing requirements,
see EBSAs EFAST Web site and request the publication
Reporting and Disclosure
Guide for Employee Benefit Plans. See the Resources section to obtain a
copy.
There are penalties for failing to file required reports and for failing to
provide required information to participants.
Yes, but there is one final fiduciary responsibility. Fiduciaries who no
longer want to serve in that role cannot simply walk away from their
responsibilities, even if the plan has other fiduciaries. They need to
follow plan procedures and make sure that another fiduciary is carrying out
the responsibilities left behind. It is critical that a plan has fiduciaries
in place so that it can continue operations and participants have a way to
interact with the plan.
The Department of Labor’s Voluntary Fiduciary Correction Program (VFCP)
encourages employers to comply with ERISA by voluntarily self-correcting
certain violations. The program covers 15 transactions, including failure to
timely remit participant contributions and some prohibited transactions with
parties-in-interest. The program includes a description of how to apply, as
well as acceptable methods for correcting violations. In addition, the
Department gives applicants immediate relief from payment of excise taxes
under a class exemption.
In addition, the Department’s Delinquent Filer Voluntary Compliance
Program (DFVCP) assists late or non-filers of the Form 5500 in coming up to
date with corrected filings.
For an overview of both programs, consult EBSAs Web site.
Understanding fiduciary responsibilities is important for the security of a
retirement plan and compliance with the law. The following tips may be a helpful starting point:
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Have you identified your plan fiduciaries, and are they
clear about the extent of their fiduciary responsibilities?
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If participants make their own investment decisions,
have you provided sufficient information for them to exercise control in
making those decisions?
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Are you aware of the schedule to deposit participants’
contributions in the plan, and have you made sure it complies with the
law?
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If you are hiring third-party service providers, have
you looked at a number of providers, given each potential provider the
same information, and considered whether the fees are reasonable for the
services provided?
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Have you documented the hiring process?
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Are you prepared to monitor your plan’s service
providers?
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Have you identified parties-in-interest to the plan and
taken steps to monitor transactions with them?
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Are you aware of the major exemptions under ERISA that
permit transactions with parties-in-interest, especially those key for
plan operations (such as hiring service providers and making plan loans
to participants)?
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Have you reviewed your plan document in light of
current plan operations and made necessary updates? After amending the
plan, have you provided participants with an updated SPD or SMM?
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Do those individuals handling plan funds or other plan
property have a fidelity bond?
The U.S. Department of Labor’s Employee Benefits
Security Administration offers more information on its Web site and through
its publications. The following are available by contacting EBSA at
1.866.444.EBSA (3272) or on the EBSA Web site.
For Employers
For Employees
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If a plan is set up through an
insurance contract, the contract does not need to be held in trust.
For a complete list of EBSA publications, call
toll-free: 1.866.444.EBSA (3272). This material will be made
available to sensory impaired individuals upon request. Voice phone: 202.693.8664, TTY: 202.501.3911.
This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.
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