Posted: 12.01.2006
An Owner's Three W's of Retirement Planning

What is a Fiduciary? What are your responsibilities? What else do you need to know?

By James Wampler
Retirement Planning Division

In September 1974 the U.S. Government passed the Employee Retirement Income Security Act (ERISA).  This landmark legislation regulates minimum standards for employer-sponsored retirement and health plans in private industry.  Prior to ERISA, private industry was able to design and operate their plan(s) with great leeway.  Private industry could, and often did, establish plans that potentially placed their employees at great risk to receive no retirement benefits at all.  ERISA protects employees by defining who is a fiduciary, defines his or her responsibilities, and attaches limited personal liability to those who are considered fiduciaries.

Who is a fiduciary?

The U.S. Department of Labor loosely defines a fiduciary as “using discretion in the administering, and managing of a plan.”  What that means is fiduciary responsibility is not based on a person’s title but by the amount of discretion that he or she has regarding the investments and functions for the retirement plan.  Typical fiduciaries include the company’s owner and/or chief financial officer, a trustee, an investment advisor, and a committee or board that exercises discretion over the plan.  These are decision makers that can make wholesale changes to the investments, administration and plan documentation for the entire plan.

What are your responsibilities as a fiduciary? 

Under ERISA you must:

• Act solely in the interest of the plan, its participants and their beneficiaries, and with the exclusive purpose of providing benefits to them
• Carry out your duties prudently
• Follow the plan documents
• Diversify plan investments
• Pay only reasonable plan expenses

The central responsibility of a fiduciary is to act prudently.  A prudent fiduciary will document the processes and procedures behind all decisions and actions on their plan.  He or she also will hire outside experts to assist where their knowledge and expertise are not sufficient to satisfy the interests of their plan participants.  An example would be to hire an outside investment professional to help monitor and maintain the plan’s investment lineup.

What else should you know?

You can never completely remove your fiduciary responsibility, but the DOL has specific requirements plan sponsors can use to limit their liability in certain situations, including:

• Document the process and procedure used to carry out responsibilities
• Document evaluations and investment decisions
• Give participants control over their individual accounts
• Offer a broad range of investments so that employees can diversify
• Provide participants with sufficient information in order to make an informed decision
• Additional insurance solutions that provide protection in case of claims

These responsibilities are important and should be taken seriously. Each fiduciary has the potential for personal limited liability on their plan, so covering your liability is in your personal financial interest.  Fiduciaries that do not follow this standard of conduct may be held personally liable and ordered to pay restitution to the plan from their own pockets if the DOL finds claim.

Retirement plans serve many purposes in business today including aiding in employee retention and recruiting, as well as helping people save for their retirement.  By knowing the right questions to ask and with some simple planning, you can avoid some of the unwanted liability behind offering a plan to your employees.

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