United States

Getting it right Know the fiduciary responsibilities in a 401 k plan


As plan sponsors, clubs and their plan fiduciaries have a solemn responsibility to protect the interests of the participants in their benefit plans. Every retirement plan is required to have at least one fiduciary; someone who acts on behalf of the plan's participants and their beneficiaries or exercising discretion or control over the plan, oftentimes a club's general manager and senior financial executive will act as plan fiduciaries.

A number of decisions are not necessarily fiduciary actions but rather are business decisions made by the club. For example, the decisions, to establish a plan, to determine the benefit package, to include certain features in a plan, to amend or terminate a plan are business decisions which are not governed by the Employee Retirement Income Security Act (ERISA). These are decisions made on behalf of the club, not on behalf of the plan, and, therefore, is not a fiduciary. However, when a club or club employee takes steps to implement these decisions, that individual 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 the following:

  • Understand and follow the terms of their club's plans
  • Select and monitor service providers carefully
  • Carry out duties prudently
  • Pay only reasonable plan expenses
  • Diversifying plan investments
  • Act solely in the interest of the plan participants and their beneficiaries

There have been several events in the last few years, which should cause fiduciaries of employee benefit plans to take particular notice:

  • E-fast2 has made every financial statement, which is attached to Form 5500, public information. This means that anyone with a computer can review any plan's Form 5500, along with the financial statements that have been attached to the 5500.
  • The Department of Labor (DOL) has recently hired as many as 1,000 new inspectors to inspect employee benefit plans, and these inspectors are armed with analytical information, collected from the Form 5500 on the e-Fast2 database.
  • The recent fee disclosure rules for covered service providers (ERISA Section 408(b)(2)) and participant fee disclosures (ERISA Section 404(a)(5)) have also increased transparency of fees in employee benefit plans, resulting in further increased transparency of a fiduciary's performance for their employee benefit plan.

If these events were not compelling enough, there have also been several high profile court cases against plan fiduciaries (most notably Tussey vs. ABB). The decisions in these court cases have set the stage for future challenges against plan fiduciaries. Put all these events together, and the message is clear. Fiduciaries need to be on top of their game when it comes to their responsibilities.
How can a fiduciary stay on top of their game? The following process should be implemented and maintained:

  • 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 expertise, a fiduciary will want to hire one with the professional knowledge, such as an investment advisor/service provider and any other functions that are needed. A fiduciary is required to monitor any professionals hired and should document the hiring and monitoring processes.
  • Follow the club's plan document and review periodically to ensure it remains current.
  • Diversification – another important key fiduciary duty – helps to minimize the risk of large investment losses to the plan. Once again, the evaluation and investment decisions should be documented.
  • Get bonded; make sure you are properly covered by a fidelity bond as required by ERISA.
  • Timely contribution deposits are important; fiduciaries are responsible to remit participant's salary deferrals into the plan's trust in a timely manner. The DOL requires that deferrals be remitted to the trust “as soon as they can be reasonably segregated from the Sponsor's assets.” The process to segregate funds should be documented and the procedure should be set up to make deposits as soon as it is segregated. If there are any instances where the deposits are later than the normal deposit timeframe, the reason for the late remittance should be documented and conclude whether further action is required.
  • Use an experienced, reliable independent auditor for the plan's financial statement audit and Form 5500 filing process.

Club leaders who are fiduciaries and who fail to 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.