A 401(k) plan sponsor’s fiduciary duties: The 4 key responsibilities, under ERISA rules

The benefits world is seeing a big increase in interest about retirement savings, with a lot of companies expanding their offerings in this area. That’s why it’s more important than ever to understand the basics of retirement plans, such as the role fiduciaries play.

This fact was the point of a recent webinar hosted by the American Society of Pension Professionals and Actuaries (ASPPA), entitled “Fiduciaries: Who Are They?”

The learning session was conducted by Lyndsey Barnett, an attorney with Bricker Graydon. Barnett spoke for more than an hour on the basics of fiduciaries and what employer-based plans should be aware of in this area.

“Fiduciary roles are [held by] people who we have hired to help our plan, and we put our trust in them,” she noted. “But the fiduciary role is not one-size-fits all, and there are lots of different hats that fiduciaries may wear.” She added that with the wide variety of structures available with retirement savings plans, it is important to be educated on the roles that fiduciaries and advisors may have.

Fiduciary regulations and definitions have changed over the years and been subject to intense scrutiny, and at times, opposition. The Department of Labor (DOL) oversees regulatory changes—some recent changes were implemented during the Trump Administration were overturned by the Biden Administration, and more changes are reportedly in the works. That’s why it’s important to keep up to date on the state of fiduciary rules, Barnett said.

Definitions, and different approaches to an important role

Barnett started the webinar by going over definitions of what a fiduciary is and how there are different categories for these types of officers.

Under ERISA, she said, a fiduciary is anyone who exercises any discretionary authority or control over management of retirement plan, or management or disposition of plan assets. This can include trustees, investment managers, committees, agents who provide advice for a fee, and company owners in some cases. She also noted the industry push for more 3(16) advisor services from organizations outside the company to manage the day-to-day operations of retirement plans. These plan administrators have seen an increase in popularity, but Barnett noted that there hasn’t been a drastic shift of companies moving away from the employer/committee structure for plan administration. “I’m still mostly seeing the employer or a committee serving as the plan sponsor,” she said. “But even if an employer engages a 3(16)-service provider, that’s not a one-size-fits all situation either. You really need to go behind the curtain and see exactly what they are offering.

“Even if a plan sponsor hires a 3(16) plan administrator, there is no way to completely outsource all of your fiduciary duties,” she added.

The 5-part fiduciary rule

The question of who is serving as a fiduciary is guided by a five-part rule, Barnett said. “Not all individuals providing investment advice are actually fiduciaries,” she noted.

Under current regulations the five-part test includes:

1. That the fiduciary actually makes investment recommendations.
2. That this occurs on a regular basis (“Is the party checking in regularly?” Barnett said).
3. That the relationship is covered by a mutual agreement, arrangement, or understanding. (Notably, Barnett said, a statement that a party is NOT a fiduciary isn’t determinative, if the party is acting like one in other ways).
4. That the advice given is a primary basis (it doesn’t have to be the only basis) for investment decisions.
5. That the investment advice is individualized, based on a recipient’s particular needs.

The webinar also covered the difference between duties of the fiduciary as opposed to duties of the “settlor decisions,” which cover establishing, amending, or terminating plans. The settlor is more responsible to the company as opposed to the plan’s participants.

Related: Biden cracks down on ‘junk fees’ in 401(k) plans with proposed DOL fiduciary rule

Under current regulations, the fiduciary has four areas of duty: loyalty to the participants, prudence in running the plan, the ongoing duty to diversify and minimize risk, and the duty to follow plan documents—unless they violate ERISA rules.

Liability questions and issues

Barnett went through different scenarios of liability as well; noting that fiduciary officials can be held liable if the fiduciary duty is breached; or if they conceal, enable, or participate in a breach; or discover or fail to act on a breach.

For most of these cases, lawsuits will include trustees, committee members, anyone who shares fiduciary roles as part of the plan.

“We do need to be diligent in our responsibilities,” Barnett said. “If I know that one of my trustees has committed a breach, I can’t just resign. I have to consider what action I can take to address that breach situation.”

To protect against liability, fiduciaries have a range of options. These include liability insurance, fidelity bonds, and limited types of indemnification (such as an employer indemnifying fiduciaries for breaches).

The best way to avoid these problems, Barnett said, is to make sure fiduciaries have proper training. Companies should also make sure the right people are on the team of trustees or committee members—determine if they have expertise or can be trained in this area. Making sure that all actions are documented is another important step. “Have a process in place,” she said. “Every meeting should have minutes; committees should approve the meeting minutes.

Finally, Barnett said, there are voluntary correction policies from the DOL if a plan does have a problem. “It can be a painful process,” she said. “The DOL wants so much information, and every ‘t’ crossed and ‘I’ dotted—but it can give your client relief that they have in fact corrected [the problem].”