Many employers mistakenly believe that if they use a prototype or volume submitter plan for their 401(k) type retirement plans they can put their plans on auto-pilot and forget about them. This is because these forms of plans allow adopting employers to simply elect options (often in a check-the-box format) and not really worry about ongoing changes. The creator of the form document (the prototype or volume submitter sponsor) retains responsibility for submitting the plan for approval to the IRS and updating the plan to reflect law changes.

Unfortunately, employers may not realize that they nonetheless have ongoing obligations with respect to their plans. They are plan fiduciaries and have fiduciary duties to plan participants and beneficiaries with respect to both administering the plan and managing its assets.

Under ERISA, a plan must identify at least one named fiduciary. In addition, to the extent that anyone exercises any discretionary authority or control with respect to the management of a plan or the disposition of its assets, that individual is an ERISA fiduciary. Individuals who have discretionary authority or responsibility for administering the plan are also ERISA fiduciaries. Thus, fiduciary status is based on the functions an individual performs for the plan.

Also see: 5 steps to better retirement plan fiduciary compliance

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, all members of the plan’s investment committee, and those who select committee members. Under ERISA, any person who is a plan fiduciary is personally liable for any losses that result from a breach of his or her duties.

What does it mean to be an ERISA fiduciary?

Among other things, ERISA fiduciaries have an obligation to discharge their duties solely in the interest of the plan participants and beneficiaries, defray reasonable expenses, and to act prudently and in accordance with the plan documents. Even if plan fiduciaries hire outside service providers to manage the plan, they still have fiduciary responsibility for certain functions. For example, since liability will ultimately lay with the plan fiduciaries, they have an obligation to be familiar with the plan’s terms and ensure that the administrators are following such terms.

Plan fiduciaries also have a fiduciary duty in selecting the plan’s advisers and administrators. In making these selections they must understand the services to be provided and assess the reasonableness of the compensation to be paid (directly and indirectly) to the service provider. They should also consider items like the provider’s experience with plans of similar size and complexity, the quality of the provider’s services, and the financial condition of the provider. 

Also see: 401(k) suits draw attention to fees, fiduciary duty

The plan fiduciaries then have an ongoing obligation to monitor the services providers. They should establish and follow a review process to regularly assess whether they want to continue using the current service providers or look for new ones.

ERISA does allow some protections to plan fiduciaries. ERISA Section 404(c) provides that, if its requirements are met, plan fiduciaries will not be liable for investment losses resulting from a participant’s investment elections.  However, in order to have 404(c) protection, plan fiduciaries must provide plan and investment related information to participants as necessary for them to make informed decisions about their investments. Participants must also have the opportunity to direct their investments to a broad range of options.

Moreover, 404(c) does not provide absolute protection. Fiduciaries retain responsibility for selecting and monitoring the investment alternatives that are made available under the plan. Much of the litigation surrounding 401(k) plans currently involves allegations that fiduciaries have failed to do just that, for example by not selecting the lowest cost investment options available. 

Also see: Which type of fiduciary should plan sponsors hire?

Similarly, if a plan has an auto-enrollment option, or provides for a profit sharing contribution, plan participants may not have made investment elections. In which case, plan fiduciaries will need to select a default investment. This selection is a fiduciary function. However, the potential liability of selecting a default investment can be mitigated if plan fiduciaries elect one of the types of investment alternatives that the Department of Labor has approved as such and by providing the required notices to participants.

The selection and monitoring of investment options may be extra tricky when a plan offers employer stock as an investment option. Plan fiduciaries may be in the precarious position of ignoring what is best for the company in order to do what is best for plan participants and beneficiaries. In what is traditionally referred to as the stock-drop cases, plan participants typically bring suit against plan fiduciaries when the value of employer stock held in a plan significantly declines. These participants generally claim:

  • A breach of fiduciary duty for failure to monitor the employer stock and not selling it or imprudently continuing to offer the stock as an investment option when it became too risky; and
  • A breach of fiduciary duty of loyalty for failure to disclose information relating to the value of the stock.  

While the U.S. Supreme Court has held that ERISA’s duty of prudence does not require plan fiduciaries to break securities laws (such as by selling a fund’s holdings of employer’s stock on the basis of inside information), it is not yet clear what a plan fiduciary’s obligations are when the value of employer stock declines.
Note, however, that the ERISA fiduciary requirements focus on the process for making fiduciary decisions. Thus, plan fiduciaries will likely be protected if they carefully consider both the plan’s administration and investment options on a regular, ongoing basis, making decisions based solely on what is in the best interests of plan participants and beneficiaries. Plan fiduciaries should also carefully document this process and their decision-making.

Gladys C. Zolna is a partner in the corporate practice group at Freeborn & Peters in Chicago. She has in-depth experience with and knowledge of qualified retirement plans, health and welfare benefits, and executive compensation. She advises small and mid-sized businesses, as well as Fortune 500 companies, in the design, implementation and administration of plans and individual arrangements, as well as drafting of plan documents and forms.

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