First, let’s acknowledge that a 403(b) plan is a retirement plan. In the public school sector, the 403(b) may be a supplemental savings plan, since school district and public university employees often have a defined benefit plan as their primary retirement benefit. But in the tax-exempt sector, defined benefit plans are, at best, uncommon. So the 403(b) plan is the retirement plan for these employees (as the 401(k) plan is for nearly two-thirds of the employees in the commercial world according to a recent Los Angeles Times article). With that in mind, who are the fiduciaries in an ERISA 403(b) plan and what are their duties?
In essence, a fiduciary is someone who owes a special duty to safekeep the property or oversee the well-being of another person; and generally, that person is considered a fiduciary by reason of the position he holds, such as the trustee of a trust. ERISA, on the other hand, has a “functional” definition: fiduciary status under ERISA is defined by conduct and not title. You are a fiduciary under ERISA if you possess or actually exercise discretion or control over the administration or assets of a plan. Anyone who gives investment advice to an ERISA plan is also a fiduciary.
So, for example, the plan sponsor is a fiduciary to its own 403(b) plan because it has the ultimate discretion over the plan. And the trustee is a fiduciary because by law it possesses discretionary power over both the administration and the assets of the plan. If there is a plan committee charged with overseeing the implementation of the plan or deciding on the investment options in which the employees may invest, the members of that committee are fiduciaries. And a financial adviser who recommends (or actually selects) the investment options for the plan or for individual participants is a fiduciary.
What are their duties? At least one court has referred to the duties as the highest known to the law. So the ERISA fiduciary burden is not a light one. The primary duty under ERISA is to operate the plan for the “exclusive purpose” of providing benefits to the participants and their beneficiaries and of defraying the reasonable costs of operating the plan. This primary obligation includes the requirement to follow the plan document (unless it is clearly prudent not to do so), to diversify the assets of the plan (again, unless it is prudent not to do so) and to avoid engaging in self-dealing (under specific “prohibited transaction” rules under ERISA). How well the fiduciaries carry out these obligations is measured by the prudent person standard.
The following illustrate what ERISA fiduciary rules mean in practice (though this is by no means an exhaustive list):
- The employer (also called the plan sponsor) must inform the employees about the availability and terms of the plan. (This is also required under the 403(b) Treasury Regulations.) In effect, the plan sponsor needs to help its employees help themselves by participating in the plan - they can't accumulate retirement savings if they don't.
- Recognizing that the 403(b) plan may be an employee's primary source of retirement benefits, and in keeping with the exclusive purpose requirement, the plan committee (or the plan sponsor if there isn't one) must prudently select the investment options to be offered, ensuring that they are suitable for long-term investment, that they cover a broad range of asset classes to enable employees to adopt an appropriate allocation to fit their needs, and also ensuring that the costs of the investments and all services offered to the employees are reasonable. This last obligation is one that, in our experience, is most often overlooked or ignored and yet may have an enormous impact on the ability of the employees to accumulate adequate retirement savings.
- The committee must then periodically review the performance of the plan's investments, to make sure they continue to be suitable, and of the plan's service providers, to make sure they are doing their jobs properly.
- To act prudently, the committee needs to determine what is relevant to the decision it needs to make, gather information to enable it to make the decision, analyze the information and then make an informed, reasoned decision. And to show that it did these things, it needs to maintain adequate records of its deliberations.
- Committees may engage experts to assist them, but cannot rely blindly on their analyses or recommendations (with limited exceptions).
Are there any safety nets for fiduciaries under ERISA? There are, and we'll examine these in our next column.
- 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.