The old adage that “no good deed goes unpunished” is a bit cynical, but it does serve to remind us that just because you are doing something noble, you are not automatically protected from claims related to your service.
This article will address whether you are an “appointing fiduciary”, and if you are, what you may wish to do to protect yourself and to achieve better results for the plan’s participants. The Department of Labor, in an Interpretive Bulletin on this topic, said:
“At reasonable intervals the performance of trustees and other fiduciaries should be reviewed by the appointing fiduciary in such manner as may be reasonably expected to ensure that their performance has been in compliance with the terms of the plan and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all cases; the procedure adopted may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the procedure”. (29 C.F.R. § 2509.75-8, FR 17)
Does every Board Member have fiduciary responsibilities? No. Two categories of Board Members may be personally off the hook:
- If your organization’s retirement plan is not subject to ERISA, then you don’t have a legal obligation to meet a fiduciary standard.
- Even if your organization’s retirement plan is subject to ERISA, you may not have personal fiduciary responsibilities if you are not part of the responsibility chain.
More on both of these later.
Disclaimer: This article is intended as a “heads-up” that important fiduciary issues exist for some Board Members. It is not intended as legal advice, which we are not qualified to provide. There are some terrific ERISA attorneys who can give you advice about your organization-specific fiduciary obligations. If you need a couple of names, please feel free to contact us.
Also, this article is focused on 403(b) plans, but the same general principles apply to any other qualified retirement plans your organization sponsors, such as Defined Benefit, 401(k), and Profit Sharing.
Not all retirement plans are covered by ERISA.
- Non-ERISA 403(b) plans – Years ago, it was common for non-profit organizations to offer tax-sheltered annuity (TSA) programs, in which their employees could opt to participate. Many educational organizations still offer these sorts of plans. What’s the difference between a 403(b) plan that is covered by ERISA and one which is not? Generally, it comes down to control. If the employer has plan-level control over the assets, it would generally be an ERISA governed plan. For example, if the employer has the authority to direct that the plan assets be moved to a new vendor, it would strongly suggest that it is an ERISA governed plan. ERISA 403(b) plans are now required to have adopted a formal plan document and to make annual IRS filings on Form 5500. It’s worth checking with senior management to see if such a determination has been made, and to satisfy yourself that the determination process was comprehensive.Note: If your organization’s plan is a non-ERISA 403(b) plan, there may be no legal fiduciary obligation, but there may be a moral obligation to determine whether the organization’s sponsorship of a plan with “retail” pricing is in your employees’ best interest. Taking advantage of your group’s collective buying power, to shift to an institutionally priced plan, may allow your employees to achieve better long-term retirement saving results.
- Church plans are not automatically covered by ERISA, even when the employer has plan-level control over the assets. Generally, church plans are covered under ERISA only if they waive their statutory exemption.
If your organization’s plan is not covered by one of these ERISA exemptions, you may or may not have personal responsibility. How can you tell?
- If you have plan-level decision making authority, you are likely a fiduciary, with attendant obligations. Examples:
- You vote on resolutions concerning the plan
- You participate in the selection of service providers for the plan
- You participate in the delegation of authority to others to manage aspects of the plan
- If none of the above applies, you may not have any fiduciary responsibilities. If in doubt, please seek a qualified opinion.
What if you are in the fiduciary chain? This isn’t necessarily a bad thing. Average people aren’t generally asked to serve on Boards. You are a Board Member because you possess exceptional knowledge and decision skills, which can help with managing the organization’s retirement plan(s). Here are some things to consider so you can manage your own personal fiduciary risk, while doing a more effective job on behalf of the employees, whose future quality of life depends upon the quality of your fiduciary decision-making.
- You can delegate fiduciary responsibility – kind of. It is common to delegate the on-going plan management responsibility to a member of senior management or to a committee. They then, commonly, delegate the day-to-day operational responsibilities to others. However, as an appointing fiduciary you still have the responsibility to:
- Act prudently in the selection of those to whom authority is delegated
- Are they qualified to handle the extent of responsibility delegated to them?
- Are they being provided with continuing education and other resources to evolve with their responsibilities? (ERISA and the provider marketplace are constantly changing.)
- Act prudently in the selection of those to whom authority is delegated
Board Member best practices: Determine if you are a retirement plan fiduciary. If so:
- Gain and maintain the knowledge needed to fulfill your duties
- Perform a risk analysis and establish controls
- Formally document the chain of responsibility
- Determine the appropriate level of oversight needed to assure that a prudent process is being followed and that the terms of the plan’s governing documents are being followed
- Document the above
Under ERISA, retirement plan fiduciaries are held to a prudent expert standard; this is a high hurdle. Not many employers have the specialized skill-sets in-house to meet this standard. There is some expectation that plans of any reasonable size will go outside to seek a prudent expert to advise them. Your prudent expert will likely work directly with senior management or a committee, as per the chain of responsibility you have established. Some of the things they can help with include:
- Establishing, following and documenting a prudent investment process, including a carefully worded Investment Policy Statement
- Performing regular reviews of the above
- Providing on-going education to the plan’s fiduciaries
- Assisting with fulfillment of the fiduciaries’ obligations with regard to 408(b)(2) and any other disclosure and notice requirements
Summing it up: Board Members incur fiduciary responsibility when they participate in retirement plan decisions. They don’t need to micro-manage the plan, but they do need to have a process in place to monitor whether the fiduciaries they appoint are doing an appropriate job. This would include having procedures in place to prudently manage the plan’s investments and to ensure that the plan is being operated in compliance with its own document and applicable regulations. Board Members can be held personally liable under some circumstances, so they may want to consider fiduciary liability insurance and the use of an independent prudent expert to help with plan management.
Jim Phillips, President, and Patrick McGinn CFA, Vice President, Retirement Resources
Patrick and Jim have over 50 years of combined investment and retirement plans experience. Retirement Resources in a Registered Investment Advisor that helps employees retire with greater security, while helping employers manage workload, costs and fiduciary liability.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.