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As of the printing
date of this publication, the Department of Labor is working to
complete several regulations that affect fee and other information
requirements regarding retirement plans. For further information
on these regulations, check www.dol.gov/ebsa periodically for the
issuance of these final rules.
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
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.
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:
A written plan that describes the benefit structure and
guides day-to-day operations;
A trust fund to hold the plan’s assets(1);
A recordkeeping system to track the flow of monies
going to and from the retirement plan; and
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
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 not
governed by ERISA. 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, may be 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:
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
Diversifying plan investments; and
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
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 reduce possible liability. Some plans, such as
most 401(k) and profit-sharing plans, can be set up to give participants
control over the investments in their accounts and limit a fiduciary’s
liability for the investment decisions made by the participants. 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 more often if the investment option is volatile.
Plans that automatically enroll employees can be set up to limit a
fiduciary’s liability for any plan losses that are a result of
automatically investing participant contributions in certain default
investments. There are four types of investment alternatives for default
investments as described in Labor Department regulations and an initial
notice and annual notice must be provided to participants. Also,
participants must have the opportunity to direct their investments to a
broad range of other options, and be provided materials on these options
to help them do so. (See Resources for further information.)
However, while a fiduciary may have relief from liability for the
specific investment allocations made by participants or automatic
investments, the fiduciary retains the responsibility for selecting and
monitoring the investment alternatives that are made available under the
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 adviser, 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 and in accordance with the appointment.
A fiduciary should be aware of others who serve as fiduciaries to the same
plan, because 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.(2)
For all contributions, employee and employer (if any), the plan must
designate a fiduciary, typically the trustee, to make sure that
contributions due to the plan are collected. If the plan and other
documents are silent or ambiguous, the trustee generally has this
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
Information about the firm itself: financial condition
and experience with retirement plans of similar size and complexity;
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;
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
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
Reviewing the service providers’ performance;
Reading any reports they provide;
Checking actual fees charged;
Asking about policies and practices (such as trading,
investment turnover, and proxy voting); and
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
advisers 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
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:
A sale, exchange, or lease between the plan and
party in interest;
Lending money or other extension of credit between the
plan and party in interest; and
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
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 are provided in the law for many dealings with banks, insurance
companies, and other financial institutions that are essential to the
ongoing 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.
One exemption allows the provision of investment advice to participants who direct the investments in their accounts. This applies to the buying, selling, or holding of an investment related to the advice as well as to the receipt of related fees and other compensation by a fiduciary adviser. Because a final rule is pending, check www.dol.gov/ebsa periodically for the publication of the final rule.
Another important exemption in the law – 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
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 at www.dol.gov/ebsa (click on Compliance
Assistance). 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.
Participants in individual account plans must be provided an opportunity
to divest their investment in publicly traded employer securities and
reinvest those amounts in other diversified investment options under the
plan. For employee contributions invested in employer securities,
participants have the right to divest immediately. Where employer
contributions are invested in employer securities, participants can divest
if they have 3 years of service. This does not apply to stand-alone
employee stock ownership plans where there are no employee or employer
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
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
When and how employees become eligible to participate;
The source of contributions and contribution levels;
The vesting period, i.e., the length of time an
employee must belong to a plan to receive benefits from it;
How to file a claim for those benefits; and
A participant’s basic rights and responsibilities
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. Plans that
provide for participant-directed accounts must furnish statements on a
quarterly basis. Individual account plans that do not provide for
participant direction must furnish statements annually. Traditional defined
benefit pension plans must furnish statements every three years.
If a plan automatically enrolls employees, the Automatic Enrollment
Notice details the plan’s automatic enrollment process and participant’s
rights. The notice must specify the deferral percentage, the participant’s
right to change that percentage or not make automatic contributions, and
the plan’s default investment. (See Resources for information on a
sample notice.) The participant generally must receive an initial notice
at least 30 days before he or she is eligible to participate in the plan.
Employers that provide for immediate eligibility can provide this initial
notice on an employee’s first day of employment if they allow
participants to withdraw contributions within 90 days of their first
contribution. An annual notice also must be provided to participants at
least 30 days prior to the beginning of each subsequent plan year.
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. Traditional defined
benefit pension plans that are required to provide an annual plan funding
notice are not required to furnish an SAR.
The Blackout Period Notice requires at least 30 days'
(but not more than 60 days') advance notice before a 401(k) or profit-sharing 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), and the Pension Benefit Guaranty Corporation (PBGC).
These disclosures are made available to 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 www.efast.dol.gov and request the publication
Reporting and Disclosure
Guide for Employee Benefit Plans. See the Resources section to obtain a
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 19
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 EBSA's 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:
Have you identified your plan fiduciaries, and are they
clear about the extent of their fiduciary responsibilities?
If participants make their own investment decisions,
have you provided sufficient information for them to exercise control in
making those decisions?
Are you aware of the schedule to deposit participants’
contributions in the plan, and have you made sure it complies with the
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
Have you documented the hiring process?
Are you prepared to monitor your plan’s service
Have you identified parties in
interest to the plan and
taken steps to monitor transactions with them?
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
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?
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.
If a plan is set up through an
insurance contract, the contract does not need to be held in trust.
A proposed rule provides a safe harbor period for plans with fewer than 100 participants. If the salary reduction contributions are deposited with the plan no later than the 7th business day following withholding by the employer, they will be considered contributed in compliance with the law. Pending the adoption of a final rule by the Department of Labor, the Department's Employee Benefits Security Administration (EBSA) will not assert a violation of ERISA regarding participant contributions where such contributions are deposited with a small plan within 7 business days. Because the final rule may change, check www.dol.gov/ebsa periodically for the publication of the final rule.
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.