fiduciary_expertise

Frequently Asked Questions

1.  What is a “Fiduciary?”

Generally, a fiduciary is someone who holds other people’s money, or who has power over the deployment of that money, to perform a professional service for the exclusive benefit of the entrusting party.  ERISA Section 3(21) defines a fiduciary as a  person (i) who holds discretionary control and authority over the administration of the plan or the investment of plan assets, (ii) exercises such discretionary control and authority, even if it has not been effectively delegated to that person, or (iii) renders investment advice, or has the authority to render such advice, for a fee paid directly or indirectly by the plan.

2.  What is ERISA?

The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) regulates employee benefit plans maintained by organizations or industries engaged  in commerce, or by employee organizations who represent employees employed by such organizations or entities.  The Act covers both pension benefit and welfare benefit type plans, but as the title implies,its focus is on enhancing the security of retirement income benefits.  ERISA does not require any employer to establish a pension plan.  It only requires that those who establish plans must meet certain minimum standards.  The law generally does not specify how much money a participant must be paid as a benefit.

ERISA does the following:

  • Requires plans to provide participants with information about the plan including important information about plan features and funding.  The plan must furnish some information regularly and automatically.  Some is available free of charge, some is not.
  • Sets minimum standards for participation, vesting, benefit accrual and funding.  The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits, and to have a non-forfeitable right to those benefits.  The law also establishes detailed funding rules that require plan sponsors to provide adequate funding for your plan.
  • Requires accountability of plan fiduciaries.  ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan’s management or assets, including anyone who provides investment advice to the plan.  Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan.
  • Gives participants the right to sue for benefits and breaches of fiduciary duty.
  • Guarantees payment of certain benefits if a defined plan is terminated.

3.  What are ERISA’s fiduciary standards?

ERISA requires that a fiduciary, when acting in that capacity, perform its functions subject to specific standards of conduct:

  • The fiduciary must make decisions with the care, prudence, skill and diligence of a similarly situated expert in that field of decision making (aka the “Prudent Expert Rule”).
  • The fiduciary functions must be performed for the exclusive benefit of the plan’s participants and their beneficiaries (aka the “Exclusive Benefit Rule”).
  • The fiduciary functions must be performed in the absence of any conflict of interest, or self-dealing by the fiduciary and avoiding all other types of prohibited transactions (aka the “Anti-Self Dealing Rule”).
  • The fiduciary must at all times follow the terms and conditions of the plan’s governing instruments (aka the “Plan Documents Rule”)..
  • Fiduciaries with discretionary control and authority over the investment of plan assets, are required to ensure that plan assets are adequately diversified to minimize the risk of large investment losses (aka the “Diversification Rule”).

4.  What protections do the fiduciary standards of ERISA provide?

ERISA protects plans from mismanagement and misuse of assets through its fiduciary provisions.  ERISA defines a fiduciary as anyone who exercises discretionary control or authority over plan management or plan assets, anyone with discretionary authority or responsibility for the administration of a plan, or anyone who provides investment advice to a plan for compensation or has any authority or responsibility to do so.  Plan fiduciaries include, for example, plan trustees, plan administrators, and members of a plan’s investment committee.  The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.  Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses.  In addition, they must follow the terms of plan documents to the extent that the plan terms are consistent with ERISA.  They also must avoid conflicts on behalf of the plan that benefit parties related to the plan, such as other fiduciaries, service providers, or the plan sponsor.  Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of plan assets.  Courts may take whatever action is appropriate against fiduciaries who breach their duties under ERISA including their removal.

5.  What are the limitations on a fiduciary’s responsibility?

Generally, a fiduciary is exposed to fiduciary liability only when it is acting in its fiduciary capacity, i.e. when it is exercising the discretionary control and authority that makes it a fiduciary.  For example, a fiduciary may have no responsibility as to any assets of the plan with respect to which the fiduciary does not have discretionary authority or control, does not  exercise actually any authority or control and does not render investment advice for a fee or other compensation.  The personal liability of a fiduciary who is not a named fiduciary, i.e. an appointed fiduciary, is generally limited to the specific fiduciary functions that the fiduciary performs with respect to the plan.  A directed trustee will typically avoid exposure to fiduciary liability for investment losses that are the result of decisions made by an Investment Manager.

6.  What are 401(k) plans?

An employer may establish a defined contribution plan that is a cash or deferred arrangement, usually called a 401(k) plan.  A participant can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan.  Sometimes the employer may match their contributions.  There are special rules governing the operation of a 401(k) plan.  For example, there is a dollar limit on the amount a participant may elect to defer each year.  The dollar limit in 2013 is $17,500.  The dollar amount may be adjusted annually by the Treasury Department to reflect changes in the cost of living.  Other limits may apply to the amount that may be contributed on a participant’s behalf.  For example, if the participant is highly compensated, they may be limited depending on the extent to which rank and file employees participate in the plan.  An employer must advise participant’s of any limits that may apply to them.  Although a 401(k) plan is a retirement plan, participants may be permitted access to funds in the plan before retirement.  For example, if a participant is an active employee, the plan may allow them to borrow from the plan.  Also, the plan may permit a withdrawal on account of hardship, generally from the funds the participant contributed.  The sponsor may want to encourage participation in the plan, but it cannot make participants’ elective deferrals a condition for the receipt of other benefits, except for matching contributions.

7.  When must employers deposit withheld employee contributions into a 401(k) plan or other pension plan?

Employers must transmit employee contributions to pension plans as soon as they can reasonably be segregated from the employer’s general assets, but not later than the 15th  business day of the month immediately after the month in which the contributions either were withheld or received by the employer.

8.  Can a plan be terminated?

Although pension plans must be established with the intention of being continued indefinitely, employers may terminate plans.  If a plan terminates or becomes insolvent, ERISA provides participants some protection.  In a tax-qualified plan, a participant’s accrued benefit must become 100 percent vested immediately upon plan termination, to the extent then funded.  If a partial termination occurs in such a plan, for example, if an employer closes a particular plant or division that results in the termination of employment of a substantial portion of plan participants, immediate 100 percent vesting, to the extent funded, also is required for affected employees.

9.  What is the role of the U.S. Department of Labor in regulating pension plans?

The U.S. Department of Labor enforces Title I of ERISA, which, in part, establishes participants’ rights and fiduciaries’ duties.  However, certain plans are not covered by the protections of Title I.  They are:

  • Federal, state, or local government plans, including plans of certain international organizations.
  • Certain church or church association plans.
  • Plans maintained solely to comply with state workers’ compensation, unemployment compensation or disability insurance laws.
  • Plans maintained outside the United States primarily for non-resident aliens.
  • Unfunded excess benefit plans – plans maintained solely to provide benefits or contributions in excess of those allowable for tax-qualified plans.

The U.S. Department of Labor’s Employee Benefits Security Administration is the agency charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers’ benefit rights.

10.  What other federal agencies regulate plans?

The Treasury Department’s Internal Revenue Service is responsible for ensuring compliance with the Internal Revenue Code, which establishes the rules for operating a tax-qualified pension plan, e.g. a 401(k) plan, including pension plan funding and vesting requirements.  A plan that is tax-qualified can offer special tax benefits both to the employer sponsoring the plan and to the participants who receive pension benefits.