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To protect the benefits of the plan participants and beneficiaries, ERISA prescribes the standards for the execution of the duties and responsibilities of the plan fiduciary. A plan typically has more than one fiduciary, each of whom may be responsible for a particular aspect of the plan operation such as the plan administration or the investment of the plan assets.

Fiduciary Defined By definition, a fiduciary is a person who exercises any discretionary authority or control with respect to the management of the plan or its assets. The plan administrator (typically the employer) has this authority and therefore generally has this responsibility.

The administration of the plan requires the periodic performance of certain ministerial functions (e.g., determination of eligibility for plan participation, calculation of service and compensation to determine benefits, preparation of employee communications, maintenance of employment records, preparation of reports for filing with government agencies such as Form 5500, etc.). The parties (e.g., actuaries, consultants, third party administrators) who typically perform of these ministerial functions are not considered fiduciaries if they perform the functions within the confines of policies, rules, practices and procedures made by other persons. These same parties may not have discretionary authority over plan management or administration, or exercise any authority or control over the plan assets.

A person becomes a fiduciary by virtue of rendering advice and recommendations pertaining to the value, advisability of investing in, the purchase or sale of a particular investment; by having the discretion or control to buy or sell investments; and by receiving compensation for these services either directly or indirectly. A person also becomes a fiduciary by default if he exercises control over the management of the plan or the disposition of the plan assets, even if he is not given this authority.

Duties and Responsibilities The plan fiduciaries are responsible for the general administration and operation of the plan and the standards for fiduciary conduct.

The general administration and operation of the plan requires that the plan be in the form of a written instrument. The plan documents establish the terms of the plan and outline the fiduciary’s duties and responsibilities relative to the operation of the plan.

Standards of Conduct ERISA states that a fiduciary must execute his duties solely in the interest of the plan participants and beneficiaries. It further states that he must discharge his duties in the manner of a prudent person “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims”.

This standard of prudence applies to responsibilities relating to the investment of the plan assets and the responsibilities relating to the administration and management of the plan.

Lastly, within the context of the fiduciary’s investment responsibility, the investment of the plan assets must be diversified to minimize the risk of large losses, unless it is not prudent to do so under a particular circumstance.

Fiduciary Liability A plan fiduciary is held to the standards of conduct in the execution of his duties and responsibilities. His conduct is judged in the context of the facts and circumstances of the situation and whether such conduct was commensurate with the ERISA fiduciary standards.

Prohibited Transactions The objective of the prohibited transaction rules is to protect the interest of the plan participants. The rules prohibit transactions between the plan and persons who have conflicts of interest with the plan.

Even though a particular transaction may in fact benefit the plan participants, it is still may not permitted due to the relationship of the parties involved in the transaction. If the relationship of the parties exists, the law considers it improper since it increases the probability for causing potential harm to the plan.

The extension of credit from the plan to the employer is an example of a prohibited transaction. This prohibited transaction can occur as a result of an employer failing to timely remit employee salary deferrals to the plan’s investment vendor.

The law provides prohibited transaction exemptions that permit loans to plan participants, allow employers to contribute employer securities to the plan and permit plan participants or the employer/plan sponsor to purchase life insurance with plan assets.

ERISA Section 404(c) A plan fiduciary is relieved of liability for investment losses resulting from participant investment decisions if the plan offers a broad range of investment options and the plan gives the participants the ability to exercise control over the assets in their accounts. Plan participants must also be notified in writing of the employer/plan sponsor’s intention to qualify for the fiduciary relief afforded through compliance with ERISA Section 404(c). Learn more

Even after these requirements are satisfied, the fiduciaries have the responsibility for selecting and monitoring the investment alternatives that are made available to the plan participants.

Private Brokerage Accounts (PBA) A private brokerage account option allows participants to invest the money as they desire is a permissible qualified plan feature. The plan fiduciaries will receive relief from any liability arising from investment losses resulting from their self-directed investment decisions only if the plan otherwise meets the previously described 404(c) requirements. Learn more

Investment Policy Statement ERISA requires the Plan fiduciaries to adopt and adhere to an investment policy but it does not specify that a requirement that this policy be in writing. However, it is prudent for plan fiduciaries to outline the systematic and disciplined guidelines they employ in selecting and monitoring the plan investments in a written statement to provides the plan fiduciaries protection from liability resulting from investment losses incurred by the Plan (or its participants if the Plan permits participant-directed investments). Sample Investment Policy Statement

We intend the information in this publication as a general resource, not as legal or plan compliance advice or counsel. If you consider any actions discussed herein, we suggest that you consult a tax or ERISA professional. Milberg Consulting LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this information.