Fiduciary follow-up: understand & address your fiduciary personal liability
May 10, 2023
Offering your employees benefits like a qualified retirement savings plan is an important part of business recruiting and retention, but it’s more than that. Your retirement plan offering can help demonstrate that you value your employees’ wellbeing and care about their future financial security — even after they leave your organization.
So it’s important to understand that as a plan fiduciary, you have obligations to its trustees and beneficiaries, with standards set by the Internal Revenue Service (IRS) and the Employee Retirement Income Security Act of 1974 (ERISA).
Laws and regulations hold plan fiduciaries liable for plan losses that result from a breach of fiduciary duty — i.e. a failure to perform to fiduciary standards. It’s also vital to understand that in addition to liability for losses due to breach, individual fiduciaries may be assessed civil penalties by the Department of Labor (DOL).
Note that the emphasis is on prudent fiduciary conduct, rather than a focus on plan losses. As a plan fiduciary, it’s important to know the steps you can take to protect against liability, and how to protect the business against claims related to plan mismanagement or fiduciary breach.
Establish, follow and document a process for prudent decision-making
Fulfilling your duty of prudence is measured by your fiduciary process, so it’s essential to establish, follow and document a formalized process that demonstrates prudent decision-making that meets these duties:
- To investigate
- To evaluate the information resulting from investigation
- To get expert advice when it’s needed
- To make and implement decisions
- To maintain records
In other words, your documented decision-making process should make it possible for you to demonstrate clearly that your plan-related decisions are informed and rationally connected to the information obtained from these five steps.
Every fiduciary decision is held to this standard for prudence, including investment selections; selection of plan service providers like financial professionals, third-party administrators and participant education providers; and determinations about continuing to offer investments or use service providers. (Decisions about continuing or discontinuing investments or services fall under “monitoring” duties.)
Maintaining due diligence records is critically important
Remember, fiduciary standards focus on the process of decision-making — rather than the outcome. That’s why documentation is of the utmost importance. It’s part of your fiduciary duty of prudence, because it allows you to clearly show the rational basis for your decisions.
Your fiduciary due diligence files should include records of meetings, as well as documentation of decision-making processes for provider and adviser selections, information you review and advice you receive. Keep copies of all provider contracts and correspondence.
Can a fiduciary be held liable for another fiduciary’s breach?
In a word, yes. ERISA provides these three ways that a fiduciary can be liable for another’s breach:1
- Knowingly participating in or concealing an act or omission of a fiduciary that constitutes a breach
- Failure to comply with ERISA fiduciary standards in a way that enables another fiduciary to commit a breach
- Failure to make reasonable efforts to remedy a breach in the case that a fiduciary becomes aware of another fiduciary’s breach
An ERISA fidelity bond is required
ERISA requires fiduciaries and “plan officials” to be bonded to protect your plan against embezzlement or theft.1 This includes anyone with authority or control over the plan and/or its funds. In practice, this means your plan trustee, company board of directors, and employees and third parties who handle funds, assets or employee deferrals need to be covered by the bond.
Coverage requirements depend on plan funds and whether employer securities are included in the plan. The fidelity bond is a proper plan expense, and failure to possess one is a breach of fiduciary duty — so in the case of theft or embezzlement of funds, an employer without a fidelity bond could be held liable for those losses. It’s also important to understand the terms of your plan’s fidelity bond, review it regularly and keep its documentation up to date.
The U.S. Treasury Department certifies ERISA fidelity bond providers.
Do you also need fiduciary liability coverage?
Plan fiduciaries are responsible for managing and monitoring the plan properly, but mistakes can happen.
Federal credit unions acting as fiduciaries are required under National Credit Union Administration rules to have liability coverage; other plan fiduciaries are not required to hold this coverage, but many deem it appropriate to purchase.
Coverage can vary widely from one provider to another, so you’ll need to communicate clearly with your insurer to make sure the policy you select covers the plan sponsor, employees, directors, volunteers and fiduciaries. Deductibles and exclusions can vary, but a fiduciary liability plan can cover negligent acts such as errors or omissions in interpreting, counseling employees or handling plan records.
Where to find more information
Plan fiduciary duties can seem daunting, but your choice of plan provider, plan design and other safeguards can make a difference to you, your team of plan fiduciaries and participants alike. Start by taking your questions to a plan provider, and asking for information about the ways they help inform and support fiduciaries. They should be ready to answer your questions and provide resources and tools to get you started right away.
1 Govinfo.gov, Employee Retirement Income Security Act of 1974, February 28, 2023.