If you’re not involved in making day-to-day decisions about your company’s retirement plan, you may think that rules about fiduciary responsibility don’t apply to you. However, it’s possible that you are a fiduciary and don’t even know it. While retirement plan fiduciaries assume serious responsibilities, a person isn’t always explicitly informed when they’re in a fiduciary role.
You're a fiduciary if you answer “yes” to any of the four questions listed below.
Question #1: Are you named in plan documents as a fiduciary?
This one is a no-brainer. If you’re named in your 401(k) plan documents as a fiduciary, then you fall into the category known as “named fiduciaries.” What’s tricky is that you need not be named as a fiduciary to be considered a fiduciary. Don’t assume you’re safe if you answer “no” to Question #1.
Question #2: Do you exercise control over the management or administration of the plan or its assets?
This is the question that brings many corporate employees into the realm of fiduciaries. Fiduciaries typically include “the trustee, investment advisers, and 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,” according to “Meeting Your Fiduciary Responsibility” on the Department of Labor (DOL) website.
It’s important to look at the functions you perform for your company plan to see if they can be considered control over the plan’s management or administration. For example, a human resources professional learned that he was considered a fiduciary simply because he handled questions about a participant’s benefit claim, according to a case cited by the law firm of Winston & Strawn.
Question #3: Do you provide ongoing investment management or advice to the plan or to plan participants?
This question isn’t likely to snare many corporate employees. But it’s a good reason to be careful before offering any informal investment advice to your colleagues or employees.
Question #4: Do you select or supervise other plan fiduciaries?
This question gives managers a good reason to examine the meaning of “fiduciary” even if they lack direct influence over their company’s retirement plan.
So, what happens if you’ve answered “yes” to one of the four questions above? What does it mean to be a fiduciary and why should you care? Here are two reasons why your fiduciary duty matters.
Reason #1: You care about your employees and want them to enjoy a secure, well-funded retirement. Plan sponsors who don’t fully understand their fiduciary duty may select imprudent investments for their defined contribution plan offerings. They may also pay unreasonably high expenses. Sometimes plan sponsors fall under the sway of brokers or fund companies, which are not legally required to put client interests first. These providers may bundle their services or use revenue sharing, so it’s difficult to understand how much plan participants are paying for their investments.
Plan sponsors who pay attention to their fiduciary duty know that fees add up. A plan participant who pays a fee of 2.0% will have significantly less money upon retirement than if he or she paid only 1.0%. Fiduciaries ensure that fees are reasonable.
Reason #2: You expose yourself to financial liability, if you don’t fulfill your fiduciary duty. Lawsuits by individuals against the fiduciaries for their retirement plans used to be rare. But recent court rulings are changing this. A lawsuit could result in fiduciaries losing their personal assets. Moreover, an individual fiduciary’s legal fees could easily run into six figures or more.
Plan sponsors who understand the importance of fiduciary duty can reduce their risk. This often involves hiring an independent advisor who lives, eats and breathes the requirements of fiduciary duty.
Some plan sponsors don’t realize they can delegate much of their fiduciary duty. In fact, the fiduciary duty to put employees’ interests first may mean that a company has a duty to hire an independent fiduciary to make up for gaps in the plan fiduciaries’ knowledge. Both the fiduciaries and employees may be better off with a skilled, independent advisor.
If you’re involved with your company’s retirement plan, it’s important for you to determine whether or not you are fiduciary. Not only does carrying out your fiduciary responsibility affect employees’ ability to enjoy a secure retirement, but failing to do so could expose you to legal and financial liability. To rest easy, and ensure the best results for employees, it may be smart to think about delegating your fiduciary responsibility to an independent advisor.