Assessing your risk

Fiduciary best practices

When acting on behalf of your employees in your role as a plan fiduciary, just how certain are you that you’re complying with all the relevant rules and regulations? This guide is designed to assist you in considering the right questions so you can diligently exercise your fiduciary duties—ultimately helping you to manage risk for your organization and optimize your benefits plan for your employees.

To review, a fiduciary as defined by the Employee Retirement Income Security Act of 1974 (ERISA), as amended, is an individual who:

  • Exercises discretion over the management or administration of a plan; or exercises any authority or control over the management or disposition of plan assets, or
  • Renders investment advice for a fee or other compensation, or
  • Has any discretionary authority or responsibility in the administration of a plan.

ERISA requires that each plan have a named fiduciary. The following is not an exhaustive list of fiduciary considerations, but provides an initial foundation for oversight of your fiduciary duties and responsibilities.

 

Fiduciary Structure

A strong fiduciary structure is the starting point for ensuring that you’re properly meeting your fiduciary responsibilities. While there is no one right way to structure the allocation of fiduciary responsibility, it is essential to have a formal structure and to make sure responsibilities are clear. When thinking about fiduciary structure, you may consider:

  • Have fiduciaries been properly appointed in accordance with the plan and any trust agreements?
  • Are all fiduciaries aware of their status as fiduciaries?
  • Are all fiduciaries aware of the scope of their fiduciary duties?
  • Have you established a committee to:
    • Make fiduciary decisions about the selection and monitoring of investment options; and/or
    • Make fiduciary decisions on plan administration duties?
  • If you’ve formed a fiduciary committee, are there established procedures on:
    • The frequency of meetings?
    • Replacing committee members?
    • Regularly reviewing documents governing the fiduciary structure?
  • Do the plan’s fiduciaries either have the expertise required for their role or utilize experts as necessary?

 

Fiduciary process

Even a strong fiduciary structure can be undermined by a lack of sound processes—or the failure to follow established processes. Here’s a look at some of the more important processes fiduciaries should consider implementing. How many does your organization have in place?

  • Do you have an established process and schedule for determining whether the investments offered under the plan are prudent?
  • Do you have an established process and schedule for determining whether the fees being paid by the plan are reasonable?
  • Do you have a process and schedule for determining whether the terms of any service contracts between the plan and service providers are reasonable?
  • Has your plan adopted an Investment Policy Statement ?
  • If your plan has an Investment Policy Statement, do the plan fiduciaries regularly consult the policy when making decisions about the investments offered under the plan?
  • Do you keep written records of all fiduciary activity?
  • Do you regularly review the documents governing the structure and operation of any fiduciary committee to ensure compliance with those documents?

Duty to monitor fees

One fiduciary obligation under ERISA is to prudently monitor your plan’s fees and other compensation to ensure that the services received are helpful and necessary and that the resulting fees and other compensation are reasonable in light of the services provided. Fidelity will provide you with an overview of the investment and administrative services, fees, and other compensation attributed to your plan, including information required by the Department of Labor regulation under ERISA Section 408(b)(2) as well as ongoing disclosures required by the regulation.

Investment review

This review provides your fiduciary committee a performance overview of the plan’s investment lineup aligned to a holistic view of the market. The data and information are tools to help you determine if the investment options selected for your plan align to the objectives set forth by your fiduciary investment committee.

 

Plan administration

Establishing and amending a plan are generally considered settlor functions, rather than fiduciary functions. In other words, these responsibilities lie with the plan sponsor, not the plan fiduciaries. However, it is your duty as a fiduciary to make sure your plan is run properly, in accordance with its provisions, and in compliance with ERISA and other regulatory requirements. You may consider some of these administration activities to ensure that your plan is in compliance with applicable regulations:

  • Do the plan fiduciaries regularly consult the plan document to ensure that they are complying with its terms?
  • Has your plan been amended to comply with changes in legal and regulatory requirements?
  • Have you communicated any plan amendments to your plan’s recordkeeper?
  • Do you properly perform any required nondiscrimination testing each year and timely return any excess contributions?
  • Do you timely remit to the plan the contribution amounts and loan repayments withheld from participant pay or those received on behalf of the plan?
  • Have you corrected any operational errors in accordance with the correction methods established by the Internal Revenue Service and the Department of Labor?
  • If you have encountered any operational errors, have you established procedures to prevent those errors from happening in the future?

Nondiscrimination testing and reporting services

Fidelity’s Nondiscrimination Testing and Reporting Services can help simplify your retirement plan administration, while helping you meet your fiduciary responsibilities. These services offer a proactive approach to helping employers address compliance issues applicable to testing, in addition to maximizing tax-deferred savings opportunities among employees.

 

Fiduciary safeguards

While complying with ERISA Section 404(c) or the rules regarding Qualified Default Investment Alternatives (QDIAs) is not mandatory, many fiduciaries find that adhering to these rules is a worthwhile strategy for limiting fiduciary risk. Other important safeguards include a fiduciary bond to protect your plan (required by ERISA) and fiduciary liability insurance for the appropriate individual fiduciaries.

What does your organization do to safeguard itself from fiduciary risk?

  • Does your plan comply with ERISA Section 404(c)?
    • Do participants have the right to direct investments under the plan?
    • Are participants given a reasonable opportunity to provide investment direction?
    • Do participants have an opportunity to choose from a broad range of investment alternatives?
    • Before they provide investment direction, are participants provided with any disclosures required by 404(c) that have not already been disclosed pursuant to the Department of Labor’s participant disclosure regulation, including that the plan intends to comply with ERISA Section 404(c)?
    • Are the plan’s investment alternatives sufficient to provide participants a reasonable opportunity to materially affect risk and return, and to diversify to minimize risk of large losses?
  • Does your plan utilize a QDIA for amounts for which participants have failed to provide investment direction?
  • Have you purchased a fidelity bond to protect the plan as required by ERISA?
  • Do you have fiduciary liability insurance and are all fiduciaries covered by the policy?

 

Participant communication

There has been a focus on the disclosure of plan related information and fees to participants in recent years. The Department of Labor’s Participant Disclosure Regulation defines a fiduciary’s obligations with regard to participant fee disclosure. It is a plan fiduciary’s obligation to ensure the disclosure of plan information and related fees to plan participants as required by the Regulation.

Are you providing your participants these other required communications?

  • Do you distribute the following materials to participants and beneficiaries on a timely basis?
    • Summary Plan Descriptions
    • Summaries of Material Modifications
    • Summary Annual Reports
    • Benefits Statements
  • Do you distribute any required automatic contribution arrangement notices to participants on a timely basis?
  • Do you distribute any required QDIA notices to participants and beneficiaries on a timely basis?
  • Do you timely distribute Sarbanes-Oxley notices prior to blackout dates?

Your Plan Review

The “Your Plan Review” that Fidelity provides, gives an in-depth analysis of your retirement plan, exploring behaviors and trends in the areas of participation, contribution levels, and investment allocations—coupled with industry and peer-group benchmarks.


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Fidelity does not provide legal advice, and the information provided herein is general in nature and should not be considered legal advice. Consult an attorney regarding your plan’s specific legal situation.

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