Fiduciary Fundamentals: The BasicsPDF
The Employee Retirement Income Security Act of 1974 (ERISA) is a body of federal laws and regulations that govern the provision and operation of certain employer-sponsored benefit plans. While its structure and requirements are famously convoluted, ERISA places a clear premium on the process of plan governance. Perhaps the single best way to avoid ERISA-related litigation and liability is to understand the fundamentals of ERISA fiduciary governance and establish proper fiduciary structures and processes.
The Fiduciary Fundamentals series is designed to provide brief overviews of current trends and common pitfalls in fiduciary governance. To familiarize you with the basics of fiduciary rules, this introductory installment will provide a simplified breakdown of a broad and nuanced topic — the “who, what and why” of ERISA plan fiduciaries.
Who is an ERISA plan fiduciary?
As a matter of law, every ERISA plan has one or more fiduciaries. There are three types of fiduciaries: named, delegated and functional. Named fiduciaries are actors who are expressly designated as fiduciaries in the plan document (the official text establishing the terms of the plan). Delegated fiduciaries are actors to whom fiduciary responsibilities are delegated. For example, a named fiduciary may delegate her fiduciary responsibilities to one or more other actors, who then also become fiduciaries in connection with those responsibilities. “Functional fiduciaries are actors who are neither named nor delegated fiduciaries but who (1) exercise discretionary authority or responsibility in the administration of the plan, (2) exercise authority or control concerning management and disposition of plan assets and/or (3) render investment advice regarding plan assets for a fee or other compensation. Essentially, the effect of the “functional fiduciary” concept is to treat as an ERISA fiduciary any actor who functions as a fiduciary in practice (e.g., by performing certain administrative or operational actions on behalf of the plan, as explained below), even if such actor was never formally identified as a fiduciary or properly granted fiduciary responsibility.
What does a fiduciary do? What are fiduciary duties?
ERISA plan fiduciaries administer and operate the plan for the exclusive benefit of plan participants. They manage the day-to-day operations of the plan, invest and dispose of plan assets (as applicable), select and monitor plan service providers, communicate with plan participants and maintain the tax-qualified status of the plan. In performing these fiduciary functions, plan fiduciaries’ conduct must meet a particular standard of care. ERISA requires that plan fiduciaries strictly adhere to their fiduciary duties. The broadest of such duties — the duty of loyalty and the duty of prudence — require fiduciaries to act (1) solely in the best interests of plan participants and beneficiaries, (2) with the skill, care and diligence that a prudent person familiar with the matters at issue would exercise under the circumstances. When a named (or delegated) fiduciary delegates its fiduciary responsibility to another actor, it may be relieved of certain fiduciary duties with respect to the delegated responsibilities, but it retains a “duty to monitor” the delegate.
Why are plan fiduciaries important?
Fiduciaries must properly administer their ERISA plan in order to protect both plan participants and the employer(s) sponsoring the plan. If fiduciaries fail to fulfill their fiduciary duties, the penalties may be severe. From a financial standpoint, the DOL and IRS may impose civil penalties and excise taxes, and plan fiduciaries may personally face civil lawsuits and criminal penalties. From a human standpoint, plan participants could fear for the security of their plan benefits and lose trust in their employer. In this way, plan fiduciaries safeguard legal compliance, financial health, employer reputation and employee relations.
Stay tuned! The Fiduciary Fundamentals series will feature practical overviews of the hottest fiduciary topics of 2023, including developing trends in excessive fee litigation, the controversial new Final Rule addressing ESG considerations in retirement plan investment strategies, and the changes effected and opportunities offered by the SECURE 2.0 Act. If you would like to suggest a topic for or learn more about the Fiduciary Fundamentals series, please contact Heather Ryan or Elizabeth Smith.