Sponsoring a retirement plan can help employers attract and retain talent, but it also comes with important responsibilities and retirement plan fiduciary risk. Under the Employee Retirement Income Security Act (ERISA), individuals involved in managing or administering the plan may be considered fiduciaries, meaning they are legally responsible for acting in the best interests of the plan and its participants.

Those who breach their duties can face personal liability for resulting plan losses and other remedies. And because many small and midsize employers have executives or other employees who take on fiduciary duties, managing this risk deserves careful attention. Here are three important areas to consider.

Proper Training to Reduce Retirement Plan Fiduciary Risk

Your plan document should identify the person or entity serving as the “named fiduciary.” However, fiduciary status can also arise from the functions someone performs. For example, plan trustees and members of investment or administrative committees commonly serve as fiduciaries. Other ways someone may become a fiduciary include:

• Having discretionary authority over plan management or administration,
• Exercising authority or control over plan assets, or
• Providing certain investment advice for a fee.

 
Given the critical function of plan fiduciaries, be sure to train them properly. This step is often neglected and can be especially important for employees who don’t have full-time jobs related to running the plan.

Training can help fiduciaries understand ERISA’s duties of prudence and loyalty, recognize potential conflicts of interest, and know which responsibilities have been delegated to service providers. In addition, it can help those who appoint and oversee fiduciaries show they’ve taken reasonable steps to put qualified people in those roles.

Processes & Documentation

Establish clear processes to select and periodically monitor plan investments and service providers, evaluate fees and expenses, and document important decisions. For instance, say the plan offers target-date funds or uses them as a default investment. Fiduciaries should understand how those funds work and periodically review whether they remain appropriate for the plan. If you already have such processes, regularly review and refine them as circumstances change.

Documentation is particularly important. Written records of meetings, reviews and the reasoning behind major decisions can help demonstrate that fiduciaries followed a prudent process — even when an investment or other decision doesn’t ultimately produce the desired result.

Insurance Protection

A sometimes-overlooked task is reviewing whether fiduciaries have adequate insurance protection. Your organization may already carry a directors and officers liability policy or employment practices liability insurance for other risks. But those policy types may exclude or provide insufficient coverage for ERISA fiduciary claims.

And remember, ERISA fidelity bonds protect the plan’s assets from losses caused by fraud or dishonesty on the part of people who handle plan funds or property — not from fiduciary breaches. ERISA generally requires people who handle plan funds or other property to be covered by a fidelity bond. However, the law doesn’t mandate fiduciary liability insurance.

Because fiduciaries who breach their duties may be personally liable for resulting plan losses and subject to other remedies, consider whether a fiduciary liability policy is appropriate for your organization if you don’t have one already. Work with your insurance advisor to understand what existing policies cover, identify exclusions, and determine whether separate coverage is warranted.

Comprehensive Approach

An employer-sponsored retirement plan can play an important role in your organization’s compensation and benefits strategy. However, it’s all too easy to ignore or underestimate the seriousness of fiduciary responsibilities. Consider reviewing your plan document and fiduciary processes with your benefits advisor or ERISA attorney. For support with plan administration, compliance, and ongoing retirement plan needs, contact KPM’s employee benefit plan advisors to start the conversation.