Knowing Your Pension Plan’s Fiduciary Responsibility

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Planning for retirement is a source of stress for countless professionals around the world. Retirement should be a reward for your decades of hard work, but, before you throw away your alarm clocks and start polishing your golf clubs, you need to make sure you are financially ready to stop working. Retirement plan sponsors must know their fiduciary responsibilities. The prudency of plan fiduciaries is at the forefront of the Department of Labor’s priorities.

Retirement plan fiduciaries are those who have discretionary authority or control over the management of a retirement plan. This authority comes with a great deal of responsibility, including plan participants’ financial futures.

What are fiduciary responsibilities?

The Employee Retirement Income Security Act (ERISA), passed in 1974, is the standard companies and individuals alike must understand in order to protect themselves and their retirement plans. The focal point of ERISA is known as the prudent person rule.

Defined as “a standard that requires that a fiduciary entrusted with funds for investment may invest such funds only in securities that any reasonable individual interested in receiving a good return of income while preserving his or her capital would purchase…,” the prudent person rule demands that fiduciaries act in the best interest of the plan’s participants.

To comply with ERISA’s golden rule, prudent fiduciaries should:

Act Solely in the Interest of Plan Participants and Beneficiaries – This is the crux of a fiduciary’s job. In short, manage and operate the plan with as much care and fiscal responsibility as one would manage their own.

Operate and Understand the Plan in Accordance with Plan Documents and Provisions of ERISA – The plan document is the instrument that includes provisions that govern the terms and conditions under which the retirement plan is operated.

Diversity in Plan Investments and Benchmarking – When diversifying in plan investments, consider the portfolio’s composition with respect to diversification; the portfolio’s liquidity and current return relative to the plan’s anticipated cash flow requirements; and the projected return of the portfolio relative to the plan’s funding objectives. Benchmarking investment performance and fees enables plan fiduciaries to demonstrate that they have fulfilled their responsibility as it relates to oversight of the investments options offered.

Understanding of the Fees being Charged to the Plan – Plan fiduciaries must know what fees are being charged and must assess whether they are reasonable. Plan fees charged by service providers are required to be disclosed to participants, and plan fiduciaries should be assessing these disclosures annually to determine the reasonableness of fees being charged to the plan.

Remittance of Participant Contributions and Loan Repayments – The Department of Labor (DOL) continues to emphasize the importance of timely remittance of participant withholdings into the plan.  While there is a safe harbor of seven business days for small plans (plans with fewer than 100 participants), the guideline for large plans continues to be “as soon as administratively feasible.”  The DOL interpretation of this regulation is generally within three business days.

Communicate Transparently – It is the fiduciary’s responsibility to ensure that plan participants are made aware of upcoming deadlines for enrollment periods and any changes their plans have enacted.

Meticulously Document Fiduciary Processes – When in doubt, write it down and retain plan minutes. In order to substantiate fiduciary duties being performed, it is vital to keep detailed records of the processes and reviews that are completed in the operation and management of the plan.

Plan Education – Plan education allows participants to review their progress in meeting their retirement goals, as well as determine whether they have to make changes along the way. Plan sponsors can offer educational services through a third-party administrator or a third-party consultant, such as one-on-one meetings, webinars and workshops. Topics often cover auto enrollment, increasing company match and the importance of diversifying investments.

Of course, fiduciary responsibility cannot be boiled down to just the tips outlined above. These tips are meant to be used as general guidelines for plan fiduciaries and should be carried out as part of the plan operation and management.

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