In keeping with the tradition of making a new year’s resolution, we suggest the following five resolutions that plan sponsors and fiduciaries can make in 2013 to encourage effective plan governance in the new year, and thereafter.
One: Identify the plan fiduciaries.
The best practices recommended in this article are only helpful if they are applied to, and followed by, the plan’s fiduciaries. While some fiduciaries can be identified easily, due to their titles, one must also look beyond their job titles to the activities actually being performed by them with respect to the plan to determine if they are fiduciaries. Section 3(21)(A) of the Employee Retirement Income Security Act (“ERISA”) defines a fiduciary as a person who:
- Exercises discretionary authority or control with respect to management of the plan
- Exercises any authority or control with respect to the management of disposition of plan assets
- Renders investment advice for a fee with respect to any plan assets
- Has any discretionary authority or responsibility in the administration of the plan
Certain positions are inherently fiduciary in nature. An individual who holds an office or position with the plan that requires the individual to perform one or more of the functions listed above is considered a fiduciary. These positions include the trustee of the plan and the ERISA—defined plan administrator. In addition, anyone who in fact exercises discretion or control over plan assets or plan administration may be a fiduciary for ERISA purposes regardless of his or her nominal title or position. This means, that no matter what your position with the plan is called, if you exercise any of the functions listed above, you may be considered a fiduciary under ERISA. For this reason, the first best practice is to take a look at all of the individuals who work with your plan and determine whether or not they act like fiduciaries, even though they may not call themselves fiduciaries.
Certain actions taken by a plan sponsor are considered to be business decisions (settlor functions) and do not implicate the fiduciary status of the plan sponsor, nor do such actions subject the plan sponsor to fiduciary liability. The decision to establish, amend or terminate a plan are not fiduciary actions. However, the actions taken to implement such a decision are subject to the fiduciary standards of ERISA. For example, the decision to add a loan feature to a plan is a settlor function. The steps taken by the fiduciary to implement the loan feature are considered fiduciary functions. In some circumstances a single individual may function as both a fiduciary and a settlor. For those individuals, it is very important that they realize when they are wearing their “settlor hat” and when they are wearing their “fiduciary hat.”
Step 2: Train the plan fiduciaries.
ERISA prescribes a specific set of duties that a plan fiduciary must fulfill. If a fiduciary does not know what the duties are, it is difficult to expect him or her to fulfill his or her duties. Section 404 of ERISA lays out the basic rules applicable to plan fiduciaries. In short summary, a fiduciary shall:
- Discharge his or her plan duties solely in the interest of the participants and beneficiaries for the exclusive purpose of providing benefits and defraying the reasonable expenses of administering the plan
- Act with the care, skill, prudence and diligence under the circumstances that a prudent person acting in a like capacity and familiar with such matter would use
- Diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly not prudent to do so
- Act in accordance with the documents and instruments governing the plan insofar as they are consistent with the provisions of ERISA
An excellent way to educate fiduciaries about their duties is to have them attend routine fiduciary training. Fiduciary training reminds the individuals of the importance of their role as a fiduciary, what is specifically expected of them in that role under ERISA, steps they can take to fulfill their duties, and what their individual liability may be in the event they do not meet their fiduciary duties.
While it is hoped that by regularly performing their duties the plan fiduciaries will be reminded of the importance of them often, in reality, these individuals’ positions as plan fiduciaries may be obscured by the other roles they play at the plan sponsor. A fiduciary may also face new situations that need to be analyzed in light of the fiduciary’s general duties. In addition, individuals not previously involved with the plan may take on fiduciary responsibilities that are brand new to them. In these cases, a refresher on the responsibilities of a fiduciary under ERISA can be valuable. Trucker Huss attorneys are experienced at providing training to plan fiduciaries.
Step 3: Establish a plan committee.
Under ERISA, the plan sponsor is typically the default plan administrator since, in the absence of any delegation of responsibility, the plan sponsor manages the operation of the plan. While a plan sponsor may delegate its fiduciary duties to a single individual, this is not a recommended practice. If that were the case, a single individual with a single, particular role in the company would have all of the responsibility, and liability, for performing many different fiduciary functions for the plan. Instead, it is recommended that a plan sponsor establish a committee and delegate some, or all, of the plan sponsor’s fiduciary duties to the committee. Typical responsibilities of a committee include the administration of the plan, selecting and monitoring investment alternatives available under the plan, making non—material amendments to the plan, managing claims for benefits, overseeing the plan’s service providers, and providing an annual report and making recommendations to the plan sponsor.
This approach has several advantages. The membership of the committee can include individuals whose job duties represent a cross—section of plan or plan—type functions, such as members of human resources, finance and legal. This diversity in membership helps ensure that the various different aspects of a plan are evaluated, and not just one particular aspect. In addition, the structure of a formal committee facilitates the process of successfully satisfying fiduciary responsibilities.
It is also recommended that the committee adopt a charter that sets forth the process by which the committee will operate as it carries out its duties. Establishing a guideline for the frequency of committee meetings helps ensure that fiduciaries are actively fulfilling their duties at regular intervals. Requiring that minutes be prepared for all committee meetings provides documentation of the process taken by the committee to meet its fiduciary responsibilities. The ability to document this process is extremely important in order for a plan fiduciary to demonstrate that its duties are being met. Trucker Huss attorneys are experienced at preparing committee charter documents, and can prepare one for your committee.
Step 4: Adopt an Investment Policy Statement.
A plan fiduciary’s investment responsibilities include selecting and monitoring the investment options offered under a plan. The primary purpose of an investment policy statement (an “IPS”) is to outline the process that the fiduciary intends to use in selecting and monitoring the plan’s investments. Typically an IPS sets forth criteria for ensuring that the plan’s assets are invested in a diverse mix of investment vehicles, thereby documenting the process followed by the fiduciary in satisfying its duty to diversify plan investments.
In the case of a participant—directed plan, such as many 401(k) plans, the IPS should not only set forth criteria for ensuring that the plan offers a sufficiently diverse mix of investment options for the participant to select from, but should also outline other steps that must be taken by the fiduciaries to ensure that the requirements of Section 404(c) of ERISA are met, thereby relieving the plan fiduciaries of liability for the investment decisions exercised by the plan participants. The IPS plays an important role in reassuring plan sponsors and plan participants that their investments are being prudently selected and monitored by the plan fiduciaries. If your plan’s investment consultant has prepared an IPS for your committee, Trucker Huss attorneys are available to review the IPS, or Trucker Huss attorneys can draft an IPS for your committee.
Step 5: Review the plan documents.
Plans are governed by a myriad of documents. In order to properly fulfill their duties, fiduciaries must be familiar with and understand the terms of the plan’s governing documents. The starting point is the plan document itself. It is important for plan sponsors and plan fiduciaries to familiarize themselves with the plan provisions allocating and delegating fiduciary responsibilities. The fiduciaries should be exercising the responsibilities that are delegated to them under the terms of the plan document. Also, to the extent the fiduciaries are reviewing claims for benefits, the fiduciaries must understand the plan’s provisions regarding eligibility for benefits, claims for benefits, and appeals on denial of benefits.
Providing participants with a summary plan description (“SPD”) is another fiduciary function. Because the SPD is the document participants rely on for information about the benefits provided under a plan, it is important that SPDs be updated and reviewed regularly to ensure that they reflect the current terms of the plan document.
Fiduciaries should also be familiar with and understand service agreements with the plan’s service providers. First, if a service provider is performing fiduciary responsibilities, the service agreement should acknowledge the service provider’s status as a fiduciary. Second, under the exclusive benefit rule, plan fiduciaries must analyze plan expenses and determine that they are reasonable. The service agreements typically provide for service providers’ fees, and fiduciaries should be familiar with the fee structures provided for under such agreements and review them to confirm that the fees remain reasonable in relation to the value of the services being received. For details about ERISA section 408(b)(2) requirements related to reasonable fees, please see our February 2012 Special Alert.
This article highlights just five suggested best practices for effective plan governance. There are many other fiduciary functions and responsibilities with recommended best practices that are not covered in detail here. By starting with the resolutions in this article, and following through on them, you can put your plan on the path toward effective plan governance. Feel free to discuss these resolutions with the Trucker Huss attorney with whom you normally work.