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Understanding Fiduciary Rules

Updated: Mar 8

401(k) Plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which imposes fiduciary standards of conduct on the individuals and entities managing such plans, including the employer/plan sponsor, and in many cases, corporate officers and board members. Because plan fiduciaries are subject to personal liability for breaching their duties, it is important to understand the scope of the fiduciary responsibilities established under ERISA.


The Basic Fiduciary Duties

Prudence

ERISA requires fiduciaries to perform their duties with respect to the plan “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 a like character and with like aims.”


In practice, the duty of prudence requires plan fiduciaries to:


1. Possess the necessary knowledge and experience to make a decision, or, if not, to obtain assistance from one does; and

2. Establish a process that ensures a consistent, robust approach to decision making, and to document the decision making process and basis for the decisions


Loyalty

ERISA requires fiduciaries to perform their duties solely in the interest of participants and their beneficiaries for the exclusive purpose of providing benefits and defraying reasonable expenses associated with administering the plan. At the heart of ERISA’s fiduciary duty of loyalty is a prohibition against self-dealing, or in other words, making decisions for self-gain.


Diversify Plan Assets

ERISA requires a fiduciary to diversify “the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.” Meeting this requirement depends on the facts and circumstances of each investment, such as each investment’s risk and return characteristics and other factors, including the purpose of the plan, the amount of plan assets, and current economic and market conditions.


Adhere to the Plan’s Terms and ERISA

ERISA Section 404(a)(1)(D) requires a fiduciary to “discharge his/her duties with respect to a plan in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with ERISA.” This duty requires plan fiduciaries to be familiar with the plan’s governing documents and with ERISA’s requirements.

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Who Is A Fiduciary?

Every employee benefit plan must provide for one or more “named fiduciaries” with the authority to control the operation and administration of the plan. Typically the named fiduciary will be identified in the plan document or pursuant to a procedure described in the plan. However, a person may be considered a fiduciary even though they are not a named fiduciary. Under ERISA, a person is a fiduciary if they satisfy any of the following requirements:


(i) Exercises any discretionary authority or discretionary control over the management of a plan, or exercises any authority or control over the management or disposition of plan assets;

(ii) Renders investment advice to a plan for a fee, or has any authority or responsibility to do so; or

(iii) Has any discretionary authority or discretionary responsibility over the administration of a plan.


Common Fiduciaries include the sponsoring employer, corporate officers, board members, investment managers, investment advisors, and plan trustees.