What Is an ERISA Fiduciary?
An ERISA fiduciary is an individual or entity that works with an employee benefit plan and has special duties and obligations as laid out in the Employee Retirement Income Security Act (ERISA).
This person or organization must adhere to specific standards of conduct when acting on behalf of, managing, or handling the assets of a benefit plan. An ERISA fiduciary is responsible for ensuring compliance with all applicable laws and regulations related to these plans.
A person may be specifically named as the ERISA fiduciary for an employee benefit plan. However, anyone with discretionary authority over plan administration and the management and trading of its assets is also considered a fiduciary.
Additionally, a fiduciary can also be anyone receiving compensation other than regular salary for providing investment advice regarding the plan assets. A fiduciary is expected to avoid conflict of interest and pursue what is best for the plan and its participants.
Core Duties of an ERISA Fiduciary
A plan fiduciary has six core supportive duties under ERISA.
Duty to Exercise Prudence
An ERISA fiduciary must act with the same care, skill, and diligence that any prudent person would use when managing their own affairs. They must consider the plan's investment objectives, risks associated with investment options, and other relevant factors.
Exercising prudence is centered on conduct. It involves asking questions, analyzing all alternatives, changing the status quo, and seeking expert opinion to arrive at a sound decision regarding the employee benefit plan under a fiduciary's care.
It emphasizes process over outcomes. Fiduciaries must document the decision-making process to ensure that all the choices related to the plan are made after careful analysis using research and reliable information.
Duty to Diversify Plan Investments
ERISA fiduciaries must also diversify plan investments within acceptable parameters. Fiduciaries should understand market conditions and recognize that certain investment options are riskier than others.
Therefore, balancing investments backed by different assets and spreading out exposure across diverse industries and sectors is necessary. Such diversity protects the plan from suffering losses due to economic downturns or other similar factors affecting a particular asset class.
Fiduciaries must consider costs, total plan assets, financial conditions, investment types, geographic location, maturity date, industry conditions and distributions, and liquidity issues associated with each alternative when deciding how to invest plan funds.
Duty to Adhere to Plan Rules
A fiduciary must abide by the plan’s rules set out in its governing documents. This duty includes reading, understanding, and complying with the plan document's terms and summary description.
The ERISA fiduciary must also follow any agreements regarding trusts and investment policies and management. The fiduciary should be familiar with local state labor laws and federal regulations regarding employee benefits plans.
They must ensure that all decisions related to the plan adhere to these laws and the provisions stated in the plan document. An ERISA fiduciary can help protect the company from costly lawsuits or fines by adhering to these standards.
Duty of Loyalty
Fiduciaries must make decisions in the best interest of plan participants and their beneficiaries and avoid any potential conflicts, such as personal gain or benefit from any investment decision made for the plan.
A fiduciary must not self-deal and avoid investing in securities linked to their interests, family members, or any affiliated entities.
Fiduciaries should always place the welfare of plan participants and beneficiaries first when making decisions related to the employee benefit plans under their stewardship.
Duty to Pay Only Justifiable Plan Expenses
An ERISA fiduciary must be certain that fees charged by service providers are comparable to similar services available in the market. Excessive fees must be avoided.
Similarly, the fiduciary must also accurately and timely document all fees associated with the plan. Such expenses must be disclosed, including any related party transactions.
Doing this promotes transparency of operations, allowing participants to understand how their hard-earned money is being used and managed within the plan.
Duty Not to Undertake Certain Prohibited Transactions
An ERISA fiduciary is prohibited from engaging in certain activities, such as selling securities to the plan, borrowing money from it, lending money to it, and dealing with their own assets.
Any transaction that involves a conflict of interest between the plan and any disqualified person must also be avoided.
A disqualified person refers to anyone who can exercise control or influence over decisions associated with the plan, also known as "parties in interest." These include the fiduciary, plan counsel, any plan employee, or employers sponsoring the plan.
By avoiding these prohibited transactions, an ERISA fiduciary promotes the security of participants’ funds and avoids potential tax penalties related to noncompliance.
Consequences of Breaching a Fiduciary Duty
Being a fiduciary is an immense responsibility. Noncompliance to the duties enumerated above not only potentially affects plan investments, participants, and beneficiaries but may also lead to dire consequences for the fiduciary.
Even accusations of a breach of fiduciary responsibility can lead to reputational losses. A fiduciary's trustworthiness will be reduced, potentially terminating a professional relationship and decreasing the chances of finding new clients.
If a breach of fiduciary duty is proven by a legal proceeding, the fiduciary may be held liable for losses and damages or charged fines and penalties.
Depending on the severity of the breach, a fiduciary can face civil or criminal charges and serve jail time. It can also lead to removal from service, loss of license and other professional credentials, or permanent disqualification.
Why Your Company Needs an ERISA Fiduciary
Having an ERISA fiduciary helps your company minimize the risk of large losses, improve plan administration, make better investment decisions, and reduce liabilities.
Minimized Risk of Large Losses
ERISA fiduciaries manage an employee benefits plan's investments, expenses, and other assets. They have to manage these assets with care, prudence, and diligence to protect the interests of plan participants.
They must diversify investments, pay only justifiable costs, adhere to plan rules and documents, and avoid prohibited transactions.
As such, having an ERISA fiduciary reduces the risk of potentially large losses due to mismanagement, conflicts of interest, or haphazard decision-making. You can rest assured that your company’s employee benefit plans are held to the highest standards.
Improved Plan Administration
An ERISA fiduciary provides valuable guidance for the proper administration and management of your company’s employee benefit plans. They can help ensure that all documents are properly completed, filed, and updated in a timely manner.
They can also provide advice on how to handle plan operations and disputes, including eligibility requirements, contribution limits, and vesting schedules. Having an ERISA fiduciary helps avoid costly mistakes due to noncompliance with government regulations or plan rules.
An experienced ERISA professional will be able to determine what procedures must be followed. They ensure that employee benefits plans are managed efficiently in accordance with all state and federal laws.
Better Investment Decisions
ERISA fiduciaries should make decisions that are in the best interest of plan participants.
It includes selecting appropriate investments that will produce reasonable returns with minimal risk.
An ERISA fiduciary can help you develop a prudent investment strategy by researching and analyzing all relevant options and information. They ensure that investments are tailored to meet the needs of your company’s employee benefit plans.
They can also guide diversification, balancing long-term goals with current income needs, and setting up cost-effective strategies such as matching or profit-sharing contributions for potential tax deductions.
Reduced Company Liability
Having an ERISA fiduciary helps protect your company from potential liabilities related to employee benefit plans.
An ERISA fiduciary can help reduce risk by meeting all legal requirements and providing guidance on compliance issues. They can also ensure that plan participants are informed about their rights and benefits, helping to prevent possible lawsuits.
If you hire a third-party professional, they are liable to abide by fiduciary responsibilities, thus providing an extra layer of protection for your company.
How to Choose an ERISA Fiduciary
Working with an ERISA fiduciary benefits your company. Consider the following in selecting which professional to hire:
Identify the Specific Role Needed
You will need to determine what type of advice or services are required and the level of experience necessary for the job. Consider the three main roles of a fiduciary: plan administrator, investment advisor, or investment manager.
Consider whether you will need regular visits from a consultant or just occasional strategic guidance. You must also decide if the role is for a third-party consulting firm or for an individual within your organization.
It will help you narrow down the list of potential advisors and better understand their qualifications and responsibilities.
Check Qualifications and Experience
It is essential to hire a qualified professional with experience and expertise in fiduciary matters. Look for a professional with the necessary credentials and knowledge in dealing with relevant laws, such as ERISA and the Internal Revenue Service (IRS) Code.
Any fiduciary must also be familiar with the Employee Benefits Security Administration (EBSA) audit. There is a great chance that they will face EBSA in performing their fiduciary duties.
Ensure your ERISA fiduciary has the knowledge and skills needed to handle complex issues that may arise from managing employee benefit plans.
Assess Reliability and Review Background
It is important to analyze a potential fiduciary's past performance. You should also inquire about any disciplinary actions that may have been taken against them in the past. You may review legal proceedings and disciplinary actions made in relation to their role as fiduciary.
To assess individuals and firms, you can check the Securities and Exchange Commission's (SEC) Investment Adviser Public Disclosure (IAPD) website. Asking for references and recommendations from current and previous clients is also a good way to vet potential advisors.
Conduct interviews with potential fiduciaries. Consistency between their answers and your own research can enhance your confidence in the fiduciary.
Final Thoughts
An ERISA fiduciary is a person or company that has the legal responsibility to manage and protect retirement plan assets, which includes managing investments, monitoring fees, selecting service providers, interpreting regulations, and ensuring compliance with all applicable laws.
Core duties include exercising prudence, diversifying plan investments, adhering to plan documents, loyalty, paying justifiable expenses, and avoiding prohibited transactions. Noncompliance can result in a loss of reputation, civil or criminal charges, and fines.
Working with an ERISA fiduciary can help your company minimize the risk of large losses, improve plan administration, make better investment decisions, and reduce legal liabilities.
In selecting a fiduciary, you should determine the specific role your company needs, review qualifications and experience, assess their reliability, and review their background.
Consider consulting a qualified financial advisor for further guidance. Properly selecting an ERISA fiduciary can help ensure that your company is adequately protected and compliant with the law.
Why Your Company Needs an ERISA Fiduciary FAQs
What is an ERISA fiduciary?
An ERISA fiduciary is an individual or company responsible for managing investments and other assets of an employee benefit plan in accordance with the Employee Retirement Income Security Act (ERISA) of 1974.
What are the responsibilities of an ERISA fiduciary?
ERISA fiduciaries have the following core duties: exercise prudence, diversify investments, adhere to plan rules, loyalty, pay justifiable costs, and avoid prohibited transactions. They must always act to benefit the plan and its participants and avoid conflicts of interest.
What are the benefits of having an ERISA fiduciary?
It helps companies minimize the risk of large losses, simplify and enhance plan administration, make better-informed investment decisions, and decrease legal liabilities.
How do you choose an ERISA fiduciary?
In selecting an ERISA fiduciary, companies must specify the roles needed, review qualifications, background, and experience, and gauge reliability.
When should a company consider hiring an ERISA fiduciary?
Companies may hire a fiduciary when establishing an Employee Retirement Income Security Act (ERISA) plan or managing assets of an existing one. Companies must also consider whether they have the resources necessary to administer the plan and abide by ERISA regulations.
