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Fiduciary risk management: 2 developments that have increased your risk and what you can do about it

Thought Leadership on Risk Management presented by AHT Insurance

Offering a retirement plan can be beneficial to employees, their beneficiaries, and the company. Administering a plan and managing its assets however comes with great responsibility and possible risk. If your organization has already implemented a retirement plan you are likely very aware of the risks and responsibilities involved. However, recent changes in the industry might require you and your plan fiduciaries to change course or reevaluate current processes.

  1. Supreme court decisions regarding fiduciary duties
    In May, the Supreme Court of the United States published its long-awaited opinion in Tibble v. Edison International. The Supreme Court held that an Employee Retirement Income Security Act (ERISA) fiduciary has a duty to continuously monitor the prudence of investment options offered under a qualified retirement plan, separate and distinct from their duty to prudently initially select investment options.In the Tibble case, participants in the Edison 401(k) Savings Plan brought a class-action lawsuit against the fiduciary of the Plan claiming a breach of ERISA’s duty of prudence related to the inclusion of six mutual funds in the Plan’s investment option lineup. All six mutual funds were higher-cost, retail class shares. The participants claimed that institutional share classes (lower fees) of the same six mutual funds were available for inclusion in the Plan. Three of the contested mutual funds were added to the Plan’s investment lineup in 1999 and three were added in 2002.

    The issue before the Supreme Court was whether the retention of an allegedly imprudent investment is an action or omission that triggers the 6-year statute of limitations. The Supreme Court found that said retention would be a new trigger, and that the Ninth Circuit erred in failing to apply trust law in determining the nature of the Plan’s fiduciaries’ obligation under ERISA.

    ERISA requires plan fiduciaries to act with the “care, skill, prudence and diligence” that a prudent person acting in a like capacity and familiar with such matters would use in similar circumstances. The Supreme Court noted that because ERISA is derived from trust law, it often looks to trust law to determine the contours of ERISA’s fiduciary duties. Under trust law, a trustee has a separate and distinct continuing duty to monitor investments and to remove imprudent ones. As a result, a plaintiff may allege a fiduciary breached its duty of prudence by failing to properly monitor investments and remove imprudent ones. A timely suit can be brought within six years of this failure.

    While the Supreme Court’s brief opinion clearly dictates a fiduciary’s responsibility under ERISA to review investment options on a continuing basis, it did not express an opinion on the scope of such a review. That being said, best practices do exist regarding the scope of such review. Additionally, previous guidance from the DOL has provided that should a fiduciary not be prepared to meet the requirements/responsibilities of managing a retirement plan, they should seek assistance from a retirement plan professional capable of assisting them in the management of the plan.

  2. Expanding the definition of a “fiduciary”

Recent proposed regulations from the Department of Labor (DOL) have attempted to redefine ERISA’s definition of “fiduciary.” The new, proposed regulation is significantly different than ERISA’s existing definition, broadening both the group of individuals and firms considered fiduciaries. Advisors and consultants previously not considered fiduciaries to date may now become fiduciaries, and employee investment education programs may need to be revised.

Plan sponsors can expect that advisers and consultants they work with who have not been considered a fiduciary in the past may be a fiduciary under the proposed regulation. For example, this new definition provides that a person who advises a plan one time will be considered a fiduciary with respect to such advice. In the past, the advice needed to be provided on an ongoing basis in order to be considered fiduciary advice. The recommendation of another adviser is now considered fiduciary advice under the proposed regulation. As a result, consultants and advisers may be required to enter into new agreements, revise the manner in which their fees are paid, or provide rigorous disclosures to plan fiduciaries. Also, advice to plan participants regarding distributions or rollovers from a plan and advice to IRA owners are now considered fiduciary advice.

As a fiduciary, the new guidance will force plan sponsors to take a close look at all parties involved in the operation and management of the retirement plan, the scope of their work, and if that creates a fiduciary role to the plan. The onous will be on the plan sponsor to identify the fiduciaries and ensure that their actions are in accordance with their fiduciary responsibility.

Whether the developments we’ve just discussed expanded the group of people needing to follow fiduciary responsibilities, or highlighted a need to adjust program processes currently in place, there are a few best practices to mitigate the liability of both plan sponsors and individual fiduciaries:

  • Get help
    Fiduciaries have a requirement to act as a prudent expert. If you are not an expert, it is within your fiduciary duty to seek out expert assistance. To circumvent any potential issues with the DOL fiduciary definition, work with a consultant who acknowledges their co-fiduciary status in writing.
  • Form a retirement plan committee
    Forming a retirment plan committee with fiduciary responsibility can help spread out the fiduciary liablity and provide additional input on fiduciary decisions. It is important to give the committee responsibility for the plan, have regular meetings, and document all meetings, discussions & decisions. Third party consultants should be able to assist with the formation and ongoing management of the retirement plan committee.
  • Understand your contracts, services, expenses and revenues

It is now a requirement that all covered service providers to retirement plans provide the plan sponsor with a full disclosure of their fees and services. The duty of the fiduciary extends beyond simply receiving these, but understanding the fees and ensuring that they are fair and reasonable for the services provided. It is also important to be fully aware of how those plan fees and expenses are being paid as well as at what cost to the participants through the investment options selected. This should be part of any investement review being conducted by a plan advisor. It is also best practice to re-evaluate these plan fees through a full analysis every 2-3 years.

  • Write and follow an investment policy statement (IPS)
    An IPS provides the documentation and the process a plan committee will use to select, monitor and replace funds. It is very important that if an IPS is in place that it is being followed as part of the decision making process in regular investment review meetings. If investment decsions are made outside of the IPS guidance that could be cause for a fiduciary breach. IPS’ should not be considered static documents and should be reviewed at least annually to ensure that analytics used to monitor the investments still meet the goals of the organization.
  • Know your plan

As a fiduciary of a retirement plan it is your legal responsibility to operate your plan in accordance to the legal plan document. Not following the direct language of the plan document will be considered a fiduciary failure and can cause liability. When selecting a plan expert to provide guidance, periodic reviews of the plan documents and provisions should be a minimum requirement. Plan design assistance and consultation is a best practice.

  • Educate your participants

Retirement plan sponsors are required to provide education to their employees in order to satisfy the requirements of a participant directed investment plan. Simply providing the minimum education to participants will meet those requirements. But a more indepth participant education program can provide additional fiduciary protection and increase participant satisfaction.

  • Know who is a Fiduciary

Knowing and document the fiduciaries of your retirement plan are important components to understanding who is liable for misteps. An additional safeguard is to seek a fiduciary education program through a plan expert that can provide guidance and education to plan fiduciaries regarding their duties as well as best practices to avoid liablity.

For more information, or to ensure your plan and fiduciaries are in compliance with current regulations, contact AHT for a thorough Fiduciary Diagnostics and Compliance Audit.

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