The Employee Retirement Income Security Act (ERISA) provides general standards of conduct for plan fiduciaries. A breach of fiduciary duty can result in personal liability for plan fiduciaries and monetary sanctions for their organizations.
A fiduciary advisor can help mitigate the fiduciary risks associated with plan management by maintaining proper plan governance practices and overseeing plan service providers. Recent case law has defined fiduciary responsibility and thus established best practices for plan governance.
An employee is a fiduciary with respect to a plan if he is named or deemed to be a fiduciary with respect to a plan, or if he makes fiduciary decisions with respect to a plan, including the selection and retention of a recordkeeper and fund managers. These employees, such as CFOs and human resources managers, must act in the best interest of employees and should have a documented plan governance process in place to demonstrate that they have prudently carried out their fiduciary duties.
Recent case law has defined the limits of fiduciary responsibility and sets forth best plan governance practices, such as the following:
- Ongoing duty to monitor investment options and remove imprudent options from the plan’s investment menu, and engage in risk mitigation [Tibble v. Edison International (9th Cir. 2013)]
- Duty to regularly monitor vendors and investments, and to take into account fee benchmarking and professional opinions on fees and services [George v. Kraft Foods Global Inc. (7th Cir. 2011)]
- Duty to follow the plan’s investment policy statement, a governing document, noting need to monitor fund performance and share class selection [Tussey v. ABB (8th Cir. on appeal 2012)]
Effective Plan Governance
Plan governance is the process and the delineation of the roles and responsibilities associated with the management and oversight of a retirement plan. Employers maintaining proper plan governance have an actionable strategy to manage retirement plan audit risks, protect employee fiduciaries from liability, achieve stated objectives, and enhance participant outcomes. Employers and their CPAs should consider—
- retaining an advisor acting as an ERISA section 3(21) investment fiduciary,
- conducting plan investment reviews and documenting decisions at least annually,
- maintaining an investment policy statement and complying with statement provisions,
- conducting on-site employee education meetings and offering asset allocation guidance,
- understanding direct and indirect compensation paid with plan assets to determine its reasonableness, and
- performing fee benchmarking, at least triennially, by securing marketplace service and fee quotes.
Employees, such as CFOs and human resources managers, who are parties charged with 401(k) plan governance need to establish a well-structured plan governance process, which is critical to effect legal compliance, risk mitigation, and benefit accumulation. ERISA supports the retention of experts, including a fiduciary advisor to assist employee fiduciaries in carrying out their fiduciary duties.