The Employee Retirement Income Security Act (ERISA) imposes special legal requirements of fiduciaries of 401(k) plans. Many business owners are unaware of the dangers they face under ERISA and the implications of being a fiduciary.
Who is a Fiduciary under ERISA?
The plan sponsor (which is usually the employer) and any trustees are fiduciaries. Additionally, many business owners use employee “committees” comprised of non-trustee employees who conduct an oversight function with the ability to select a new provider or investment menu. These committee members are considered fiduciaries. ERISA defines a fiduciary as anyone who:
1. Exercised discretionary authority or control over the management/disposition of plan assets
2. Renders investment advice for a fee
3. Has discretionary authority in the administration of the plan
What are the Duties of a Fiduciary?
1. The fiduciary must act solely in the best interest of plan participants and their beneficiaries.
2. The fiduciary must act for the exclusive purpose of providing benefits to the participants.
3. The fiduciary must use the care, skill, prudence and diligence under circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use. This is called the “Prudent Expert” standard. In other words, the fiduciary has a duty to act solely in the interest of the participants, and to prudently select and monitor plan investments.
There can be no “side deals” that benefit the fiduciary. For example, if a bank offers to reduce the business owner’s interest rate on their credit line in exchange for moving or keeping the company’s retirement plan with the bank, and the business owner accepts the offer, then he/she has violated his/her fiduciary duties.
The Risks of Being a Fiduciary
The fiduciary is personally liable for breaches of fiduciary duty. In recent years, several cases have had sanctions or judgments that often are in the seven figure range.
In summary, a plan fiduciary who breaches his/her fiduciary duties to the plan:
- Is personally liable for any breaches of fiduciary duty
- Must make up any plan losses and lost opportunity costs
- Must pay participants’ attorneys’ fees
- Is often subject to stiff DOL civil and criminal fines and IRS excise taxes
There are many ways to mitigate your liability as a plan fiduciary. Talk to your investment adviser or retirement plan broker for best practices in this area especially with regards to ways to limit your exposure.