Categorized | Fiduciary, Pension

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A Retirement Plan Fiduciary’s Responsibilities – Part 1

Posted on 24 August 2009

Money Shirt_20090828In a previous blog post, we spent time reviewing who could be considered a retirement plan fiduciary, and what the associated responsibilities and liabilities would be. As we discussed, anyone who has the ability to act with discretion and control, with respect to the management of retirement plan sets or other investments, could be considered a fiduciary under ERISA or the Employee Retirement Income Security Act of 1974.

The question then becomes, what specific responsibilities do I have to add a retirement plan fiduciary? Well, this reaction has a number of specific responsibilities under the law including:

  • Managing the plan for the exclusive benefit of the participants
  • Acting prudently
  • Selecting and monitoring diversified plan investments
  • Selecting and monitoring the services of the plan
  • Abiding by the plan’s provisions

For this article, we’ll spend some time discussing each of these significant responsibilities, and in future articles discuss several of them in more depth. Let’s then start with the first one – managing the plan for the exclusive benefit of the plan participants.

The qualified retirement plan must be managed for the explicit benefit of the retirement plan participants. This rule is also known as the duty of loyalty. Generally, retirement plan fiduciaries may not place their own interests above those of retirement plan participants or beneficiaries. The primary duty of a pension plan fiduciary is the sound administration of the retirement plan for the exclusive benefit of its participants and beneficiaries.

At first blush, this “duty of loyalty” obligation may seem comparatively easy for retirement plan fiduciaries to meet however, consider the plan that has employee or stock as an investment option. In this particular case, retirement plan trustees must monitor the performance of their own company’s stock as an investment option plan, and make sure that it continues to be an appropriate alternative for their participants. If you spend some time thinking about this, you can quickly envision situations where a manager’s responsibility as a fiduciary for the retirement plan could diverge from responsibilities associated with his or her role as an officer in the company.

Now let’s spend a few moments talking about the second duty noted above – acting prudently. This concept is normally applied when selecting and monitoring investment options for a qualified retirement plan. Interestingly, the definition of prudence with respect to the management of retirement plan investment options differs significantly from the more traditional prudent man rule that most corporate executives will be familiar with. Under the original prudent person standard, a corporate executive must act with the care, and skill that a prudent person acting in a similar situation would demonstrate.

Under ERISA, this traditional prudent person standard has no weight. The prudence that a fiduciary must exercise under ERISA when selecting and monitoring investment options in a qualified retirement plan is that of an expert. When selecting and monitoring investment options for a qualified retirement plan, fiduciaries must act with the care and skill of a knowledgeable long-term investor. There is actually no higher standard of prudence than that imposed under ERISA.

In part two of this post, we will discuss the remaining responsibilities outlined in the regulations. However, even a cursory review of these responsibilities clearly reinforces the importance of retirement plan sponsors having knowledgeable advisers in this area.

This post was written by:

- who has written 16 posts on R. Dean Piccirillo, CFP®, CRPS®, AIFA®.

Dean is a Principal at HBK Sorce Financial LLC and a Senior Financial Advisor. He works closely with families helping them plan for their long-term financial objectives, manage their financial assets effectively and preserve their wealth for future generations. Dean also leads the firm’s Retirement Plan Unit working with most of HBK Sorce’s corporate and institutional clients sponsoring qualified retirement plans.

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