403(b) Good: Fiduciary Protections under ERISA

December 2, 2008 (PLANSPONSOR (b)lines) - In our last column, we looked at the duties of fiduciaries in 403(b) plans that are subject to ERISA. Here we'll examine some of the safety nets that exist under ERISA for the fiduciaries.

Most of the fiduciary protections built into ERISA – but not all – relate to the investments available under the plan or how the assets are invested in an employee’s individual account.   Let’s look at what’s available:

  1. “Automatic Plans.”   One of the obligations we identified for ERISA plan fiduciaries is to advise employees of the existence and terms of the plan, and assist them in participating.   Another aspect of this goal is to get the employees to defer enough.   One safe harbor built into ERISA (since the Pension Protection Act) is automatic enrollment and automatic increases in the rate of deferral.   While the decision to implement such an “automatic” plan is not a fiduciary one – it’s generally referred to as a “settlor” function because it is up to the employer to decide whether it wants to offer such a plan – this structure goes a long way in helping to fulfill the fiduciary duty.
  2. Investment Managers.   Another obligation of ERISA fiduciaries is to prudently select and monitor the plan’s investments.   This duty can be shifted entirely from the employer to an “investment manager” – that is, a bank, insurance company or registered investment adviser that is given the discretion to make the investment decisions and agrees with the employer in writing that it is acting as a fiduciary to the plan for this purpose.   (Engaging investment managers is common in defined benefit plans, less so in 401(k) plans and, in our experience, very uncommon in 403(b) plans.)   Appointment of an investment manager relieves the employer or plan committee from the responsibility to select and monitor the investments, but does require that the decision to select the manager be made prudently and that the performance of the manager be monitored periodically.
  3. Employee Investing – Section 404(c).   Among the duties of the trustee – or other “named” fiduciary in an ERISA plan -is to prudently allocate the investments in individual participant accounts among the alternatives available under the plan.   But wait – how can this be?   Don’t the employees decide how to invest their money?   Yes, but unless the plan meets certain requirements, the fiduciaries are responsible for the employees’ decisions.   ERISA contains another “safe harbor” (actually, it’s a defense against a claim of breach of fiduciary duty) related to employee investing under Section 404(c) and a related Department of Labor (DOL) regulation.   And, yes, this protection is available to ERISA 403(b) plans.   There are roughly 20 requirements that must be met for a plan to be considered a 404(c) plan, but if it meets the requirements, the fiduciaries are relieved from liability for any losses sustained by employees who made their own investment decisions.   This doesn’t relieve the fiduciaries of the responsibility to prudently select and monitor the investment options available to the employees – only for the asset allocation decisions of the employees.
  4. Default Investments.   What if an employee makes deferrals into the plan but doesn’t decide how the funds should be invested?   ERISA provides a safe harbor for such “default investments” so long as the employee had an opportunity to control his or her account but failed to do so, appropriate notices are given to the employees and the funds are held in a “qualified default investment alternative” or QDIA.   QDIAs consist of risk-based asset allocation funds, target date funds, or accounts managed by a registered investment adviser.   If the plan complies with these QDIA requirements, the fiduciaries are relieved of all responsibility for how the funds perform.   Default investments aren’t common in 403(b) plans, but given the protection available under ERISA for QDIAs, 403(b) plan fiduciaries in ERISA plans may seek ways to create defaults, such as through automatic enrollment.  

Even though ERISA imposes significant duties on fiduciaries, it has safety nets that can be used to provide them with significant protections while also serving the needs and best interests of their employees.

– Bruce Ashton, Reish Luftman Reicher & Cohen

NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.

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