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What Are The Essential Elements Of A Plan?
Each plan has certain key elements. These include: • A written plan that describes the benefit structure and guides day-to-day operations; (formal business plan for monitoring & selecting fund choices) • A trust fund to hold the plan’s assets • A recordkeeping system to track the flow of monies going to and from the retirement plan; and • Documents to provide plan information to employees participating in the plan and to the government. Employers often hire outside professionals (sometimes called third-party service providers) or, if applicable, use an internal administrative committee or human resources department to manage some or all of a plan’s day-to-day operations. Indeed, there may be one or a number of officials with discretion over the plan. These are the plan’s fiduciaries. Who Is A Fiduciary? Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title. A plan must have at least one fiduciary (a person or entity) named in the written plan, or through a process described in the plan, as having control over the plan’s operation. The named fiduciary can be identified by office or by name. For some plans, it may be an administrative committee or a company’s board of directors. A plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan. A number of decisions are not fiduciary actions but rather are business decisions made by the employer. For example, the decisions to establish a plan, to determine the benefi t package, to include certain features in a plan, to amend a plan, and to terminate a plan are business decisions. When making these decisions, an employer is acting on behalf of its business, not the plan, and, therefore, is not a fiduciary. However, when an employer (or someone hired by the employer) takes steps to implement these decisions, that person is acting on behalf of the plan and, in carrying out these actions, is a fiduciary. What Is The Significance Of Being A Fiduciary? Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: • Acting solely in the interest of plan participants and their benefi ciaries and with the exclusive purpose of providing benefi ts to them; • Carrying out their duties prudently; • Following the plan documents (unless inconsistent with ERISA); • Diversifying plan investments; and • Paying only reasonable plan expenses. The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so a fiduciary can document the process and make a meaningful comparison and selection. Following the terms of the plan document is also an important responsibility. The document serves as the foundation for plan operations. Employers will want to be familiar with their plan document, especially when it is drawn up by a third-party service provider, and periodically review the document to make sure it remains current. For example, if a plan official named in the document changes, the plan document must be updated to reflect that change. Diversification – another key fiduciary duty – helps to minimize the risk of large investment losses to the plan. Fiduciaries should consider each plan investment as part of the plan’s entire portfolio. Once again, fiduciaries will want to document their evaluation and investment decisions. Limiting Liability With these fiduciary responsibilities, there is also potential liability. Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. However, fiduciaries can limit their liability in certain situations they have carried out their responsibilities properly is by documenting the processes used to carry out their fiduciary responsibilities. There are other ways to limit potential liability. Some plans, such as most 401(k) or profit-sharing plans, can be set up to give participants control over the investments in their accounts. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under Labor Department regulations, there must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. In addition, participants must be given suffi cient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is extremely volatile. If an employer sets up their plan in this manner, a fi duciary’s liability is limited for the investment decisions made by participants. However, a fi duciary retains the responsibility for selecting the providers of the investment options and the options themselves and monitoring their performance. A fi duciary can also hire a service provider or providers to handle fi duciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. If an employer appoints an investment manager that is a bank, insurance company, or registered investment advisor, the employer is responsible for the selection of the manager, but is not liable for the individual investment decisions of that manager. However, an employer is required to monitor the manager periodically to assure that it is handling the plan’s investments prudently. Other Plan Fiduciaries A fi duciary should be aware of others who serve as fi duciaries to the same plan, since all fi duciaries have potential liability for the actions of their co-fi duciaries. For example, if a fi duciary knowingly participates in another fi duciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fi duciary is liable as well. Bonding As an additional protection for plans, those who handle plan funds or other plan property generally must be covered by a fi delity bond. A fi delity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond. How Do These Responsibilities Aff ect The Operation Of The Plan? Even if employers hire third-party service providers or use internal administrative committees to manage the plan, there are still certain functions that can make an employer a fi duciary. Employee Contributions If a plan provides for salary reductions from employees’ paychecks for contribution to the plan (such as in a 401(k) plan), then the employer must deposit the contributions in a timely manner. The law requires that participant contributions be deposited in the plan as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday. If employers can reasonably make the deposits sooner, they need to do so. Hiring A Service Provider Hiring a service provider in and of itself is a fi duciary function. When considering prospective service providers, provide each of them with complete and identical information about the plan and what services you are looking for so that you can make a meaningful comparison. Some items a fi duciary needs to consider when selecting a service provider include: • Information about the fi rm itself: fi nancial condition and experience with retirement plans of similar size and complexity; • Information about the quality of the fi rm’s services: the identity, experience, and qualifi cations of professionals who will be handling the plan’s account; any recent litigation or enforcement action that has been taken against the fi rm; and the fi rm’s experience or performance record; • A description of business practices: how plan assets will be invested if the fi rm will manage plan investments or how participant investment directions will be handled; the proposed fee structure; and whether the fi rm has fi duciary liability insurance. An employer should document its selection (and monitoring) process, and, when using an internal administrative committee, should educate committee members on their roles and responsibilities. Fees Fees are just one of several factors fi duciaries need to consider in deciding on service providers and plan investments. When the fees for services are paid out of plan assets, fi duciaries will want to understand the fees and expenses charged and the services provided. While the law does not specify a permissible level of fees, it does require that fees charged to a plan be “reasonable.” After careful evaluation during the initial selection, the plan’s fees and expenses should be monitored to determine whether they continue to be reasonable. In comparing estimates from prospective service providers, ask which services are covered for the estimated fees and which are not. Some providers offer a number of services for one fee, sometimes referred to as a “bundled” services arrangement. Others charge separately for individual services. Compare all services to be provided with the total cost for each provider. Consider whether the estimate includes services you did not specify or want. Remember, all services have costs. Some service providers may receive additional fees from investment vehicles, such as mutual funds, that may be offered under an employer’s plan. For example, mutual funds often charge fees to pay brokers and other salespersons for promoting the fund and providing other services. There also may be sales and other related charges for investments offered by a service provider. Employers should ask prospective providers for a detailed explanation of all fees associated with their investment options. Who pays the fees? Plan expenses may be paid by the employer, the plan, or both. In addition, for expenses paid by the plan, they may be allocated to participants’ accounts in a variety of ways. (See Resources for further information). In any case, the plan document should specify how fees are paid. Monitoring A Service Provider An employer should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements. When monitoring service providers, actions to ensure they are performing the agreed-upon services include: • Reviewing the service providers’ performance; • Reading any reports they provide; • Checking actual fees charged; • Asking about policies and practices (such as trading, investment turnover, and proxy voting); and • Following up on participant complaints. Investment Advice & Education More and more employers are offering participants help so they can make informed investment decisions. Employers may decide to hire an investment adviser offering specifi c investment advice to participants. These advisors are fi duciaries and have a responsibility to the plan participants. On the other hand, an employer may hire a service provider to provide general fi nancial and investment education, interactive investment materials, and information based on asset allocation models. As long as the material is general in nature, providers of investment education are not fiduciaries. However, the decision to select an investment adviser or a provider offering investment education is a fiduciary action and must be carried out in the same manner as hiring any plan service provider. Resources The U.S. Department of Labor’s Employee Benefits Security Administration offers more information on its Web site and through its publications. The following are available by contacting EBSA at 1.866.444.EBSA (3272) or on the EBSA Web site. For Employers • http://www.dol.gov/ebsa/pdf/rdguide.pdf • http://www.dol.gov/ebsa/publications/401kplans.html • http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html • http://www.dol.gov/ebsa/pdf/401kfefm.pdf • http://www.dol.gov/ebsa/publications/SEPPlans.html • http://www.dol.gov/ebsa/publications/simple.html • http://www.dol.gov/ebsa/publications/exemption_procedures.html For Employees • http://www.dol.gov/ebsa/pdf/savingsfitness.pdf • http://www.dol.gov/ebsa/publications/wyskapr.html • http://www.dol.gov/ebsa/publications/10_ways_to_prepare.html • http://www.dol.gov/ebsa/publications/women.html Footnotes 1. If a plan is set up through an insurance contract, the contract does not need to be held in trust. For a complete list of EBSA publications, call toll-free: 1.866.444.EBSA (3272). John Pemrick Lewis is an Investment Advisory Representative with Walnut Street Securities, Inc., a Metlife Company. Member FINRA/SIPC. www.walnutstreet.com 518.330.6804.
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