What do I need to do if I am a fiduciary?

Part One: Fiduciary Rules

The Employee Retirement Income Security Act of 1974 (ERISA) establishes four core fiduciary duties, which require plan fiduciaries to do the following:

Act prudently

ERISA Section 404(a)(1)(B) requires a fiduciary to discharge his/her duties with respect to a plan “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

Under this standard, it is generally not enough for a fiduciary to do his/her best with respect to the plan. The fiduciary, instead, must possess the knowledge and experience warranted by the matter or must get help from a competent source. In other words, an “empty head and a good heart” are not enough.

The duty of prudence does not require that every fiduciary decision yield the best possible result. Rather, the courts have focused on the process followed and the documentation available. In that sense, “prudence” is a two-part concept: (1) substantive prudence—having the requisite knowledge and experience for a given decision and, if not, obtaining assistance; and (2) procedural prudence—establishing a process to ensure a consistent, robust approach to decision-making, along with documenting that the process was followed each time a decision is made, including documenting the basis for the decision.

Plan fiduciaries must be familiar with the plan’s terms and with ERISA’s requirements.

Act with loyalty and for the exclusive benefit of participants and beneficiaries

ERISA Section 404(a)(1)(A) requires a fiduciary to discharge his/her duties solely in the interest of participants and their beneficiaries for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan. This duty is known as the Exclusive Benefit rule.

The Exclusive Benefit rule is among the most complex of ERISA’s core fiduciary duties. The complexity arises from the fact that an individual may act in more than one capacity, which inherently implicates the notions of “exclusivity” and “loyalty.” For example, an individual could be a plan fiduciary and could also be an officer of the plan sponsor. In such instances, the individual wears more than one “hat.” Because the exclusive benefit rule prohibits an individual from making a fiduciary decision for any purpose other than the exclusive benefit of participants and their beneficiaries, or the defrayal of reasonable expenses, it is crucial that such an individual understand whether he/she is wearing a fiduciary “hat” when making decisions involving the plan. This duty prohibits fiduciaries from making decisions for personal gain or corporate interests when wearing a fiduciary “hat.”

Diversify plan investments

ERISA Section 404(a)(1) requires a fiduciary to diversify “the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.”

The diversification requirement cannot be stated in terms of fixed allocation percentages but, instead, depends on the facts and circumstances of each investment, such as each investment’s risk and return characteristics and other factors, including the purpose of the plan, the amount of plan assets, and current economic and market conditions.

Carry out plan duties in accordance with the plan’s terms and with ERISA provisions

ERISA Section 404(a)(1)(D) requires a fiduciary to “discharge his/her duties with respect to a plan in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with ERISA.” This duty requires plan fiduciaries to be familiar with the plan’s governing documents and with ERISA’s requirements. To the extent that the fiduciary needs expert assistance to determine what those requirements are, the fiduciary must obtain that assistance. It is important to note that, to the extent the plan’s governing documents are inconsistent with ERISA, the fiduciary is required to follow the terms of ERISA and, in effect, ignore the inconsistent plan provisions.

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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.