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A Simple Guide to Understanding Fiduciary Responsibility

A fiduciary is simply a person who holds a legal or ethical relationship of trust with one or more persons. Because fiduciary relationships are built on trust, fiduciaries are expected to be extremely loyal to those they serve.  For those maintaining a 401(k) plan, the idea of fiduciary duty is central.  

Who is a Fiduciary?

Many of the activities involved in operating a 401(k) plan fall into the arena of fiduciary responsibility. To the extent that a person or entity uses discretion in managing a plan or controlling its assets, that person is a fiduciary. Thus, fiduciary status is based on the functions performed for a plan, not just the title of “fiduciary”.    

Every plan must have at least one fiduciary named in a written plan, or through a process described in that plan. The named fiduciary can be either an individual or an administrative committee or board of directors.  Ordinarily, plan fiduciaries will include the trustee, investment advisor, individuals administrating the plan, a plan’s administrative committee, or those who select committee officials. When acting solely in their professional capacity, attorneys, accountants and actuaries are not fiduciaries.

What are Fiduciary Duties?

Fiduciaries have important responsibilities and are subject to standards of conduct under the Employee Retirement Income Security Act of 1974 (ERISA) when acting on behalf of participants of a retirement plan.

Below is a simplified overview of fiduciary responsibilities:

  1. Act solely in the best interests and for the exclusive benefit of plan participants and beneficiaries.
  2. Defray plan expenses in a reasonable manner (which means knowing plan costs).
  3. Comply with all plan documents and applicable state laws and regulations (which means being familiar with them).
  4. Seek advice from experts when necessary and evaluate the advice given.
  5. Avoid engaging in certain transactions with parties providing services to the plan, including selling or leasing property, lending money, transferring or using plan assets, or  furnishing goods, services or facilities.
  6. Do not use a fiduciary position for personal gain (self-dealing is prohibited).
  7. Refrain from acting on behalf of any party whose interests are adverse to the interests of the plan or its participants.
  8. Act with the care, skill and diligence of a prudent person exercising expertise consistent with the responsibilities of a fiduciary.
  9. Consider each plan investment as part of the plans’ entire portfolio in order to diversify plan investment options. 
  10. Prudently select investment options for the plan, periodically evaluate the performance of such vehicles, and based on this evaluation, decide whether these vehicles should continue to be available to plan participants.

What is Fiduciary Liability?

Not every decision related to a 401(k) plan is a fiduciary action. Decisions to establish a plan, determine a benefit package, include certain features, or amend or terminate a plan are business decisions and not currently regulated by ERISA.  However, since decisions that are related to fiduciary actions come with potential liability,  fiduciaries that do not follow basic standards of conduct may be personally liable to restore what was lost due to their negligence.  

One way fiduciaries can protect themselves is by documenting the processes used to carry out their fiduciary responsibilities. Though other options are available to reduce possible liabilities, a fiduciary can also hire a service provider or providers to handle fiduciary functions and assume liability for those functions.

The role of the fiduciary is essential in maintaining a 401(k) plan, and ultimately, it is the responsibility of the employer to ensure they have the best fiduciary for their plan.