Fiduciary Best Practices

Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Having discretion over plan assets or administration can make you a fiduciary to the extent of that discretion, thus, fiduciary status is based on the functions performed for a plan, not just a title.

It is important to understand who is and is not a fiduciary of your plan. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over a plan. Remember that you can share your fiduciary responsibility with service providers and employees, but you cannot completely eliminate it.

A plan must have at least one fiduciary (person or entity) named in the plan documents, or through a process described in the plan, as having control over the plan’s operation. The fiduciary can be named by office or name. In general, the trustee and plan administrator are fiduciaries, while attorneys, accountants, and actuaries are not fiduciaries when acting solely in their professional capacities. Depending on the relationship between the plan and a vendor, a service provider such as an investment advisor may also be a fiduciary.

Fiduciaries act on behalf of participants in a retirement plan and, as a result, are subject to high standards of conduct. Fiduciaries must:

• Act solely in the interest of participants and their beneficiaries and with the exclusive purpose of providing benefits;
• Carry out their duties prudently;
• Follow the plan documents;
• Diversify plan investments; and
• Pay only reasonable plan expenses.

The most important step is to identify the fiduciary needs of your plan and assign or delegate each responsibility. You should also determine the fiduciary roles and responsibilities of:

• Trustee
• Plan Administrator
• Investment Advisor

Look to the plan document or written policies to clarify areas of responsibility and oversight. Review these materials and ensure you are operating in accordance with them. You should have several policies such as an investment policy, loan policy, QDRO policy, etc. Make sure you know and understand what is expected of you and follow through on your obligations. Setting up policy committees to handle the different aspects of your responsibilities can help.

Policy Committee Tips

• Meet regularly (at least annually)
• Follow by-laws on committee appointment and acceptance
• Document the experience of members
• Provide education and training
• Bring in outside professionals as needed

Hiring experts to provide fiduciary functions is permissible but is not a simple solution. You must still review and select your experts well, ensure that they are receiving only reasonable compensation, and monitor their performance. This is not a case of “set it and forget it.”

Policy Committee Meetings

Take and retain notes of meetings, even if no changes occur. Make a record of:

• Attendees
• Items discussed
• Other considerations
• Decisions reached

Review Fiduciary Liability Coverage

• Ensure that it is included in your commercial package
• Determine if it is a “claims made” policy
  • Must report claim while policy is in force
• Determine if coverage is sufficient in light of:
  • Plan assets
  • Participant count
  • Type of assets held

Plan fiduciaries should make sure to review plan design and administration at least annually. Have a discussion with your Alerus representative to ensure the best design for your situation. In general, avoid changing the design to please a small percentage of participants and designs that you cannot support operationally.

Also, make sure to review your annual reports and notices, including Form 5500, plan audit, and summary annual report. You are responsible for reporting these to the government agencies and participants, and you should ensure they accurately represent your plan and that you understand what is being reported or disclosed.

Different types of plans operate differently. Additionally, some plans or plan sponsors are not subject to ERISA and as such may operate under a different set of rules. If you are a governmental or tax-exempt entity please contact your retirement business advisor/retirement specialist to ensure your plan is operating under the correct regulations. Some additional issues to be aware of:

Employee Deferrals/Loan Deposits

• Review deposit arrangements with payroll and plan administrator
• Confirm timeliness of deposits
• Confirm performance standards for the investment of deposits

Compliance Testing

• Confirm that the plan administrator has completed tests
• Review and understand test results

Check Fidelity Bond

• Generally, it is at least 10% of plan assets, not to exceed $500,000
• Confirm with a carrier that it is a bond, not just liability insurance

Confirm Timely Filing

• Form 5500
• 1099-Rs

Legal Documents

• Confirm that the plan document has been updated for any required restatements and interim amendments
• Confirm that SPD is up to date (including SMMs)
  • Review delivery procedure to ensure participants are receiving

Review With Plan Administrator

• Definition of eligibility
• Excluded employees
• Allocation criteria
• Compensation definition
  • Confirm that the payroll department or provider understands as well
• Loan process vs. loan policy

Confirm Timely Delivery Of Required Notices

• SPD/SMM
• SAR
• Participant statements
• Fee/investment disclosures (404a-5)
• If applicable:
  • QDIA notice
  • Mapping notice
  • Blackout notice
  • Auto-enrollment notice
  • Auto-acceleration notice
  • Safe harbor notice
  • ESOP diversification notice

As a fiduciary, you must also look to the education of participants. Alerus offers a variety of educational opportunities and your Alerus representative can help you establish an education plan that will best enhance the knowledge and participation of your participants.

General Education Topics

• Participation in the plan
• Saving for retirement
• Diversification/asset allocation
• Dollar-cost averaging
• Tax advantages
• Risk/return concepts
• Inflation
• Compounding
• Market behaviors (recession, etc.)

It is also a good idea to require HR communications and participant education be reviewed prior to delivery:

• Determine the appropriate party to conduct a review
• Retain samples of all items provided to employees

Here are some areas that a plan fiduciary must address with regard to plan investments. Make sure you understand what is involved in each issue, along with your own responsibilities.

• Creation and maintenance of investment policy statement
• Review of investment options using objective standards
• Use of company stock or “alternative” investments
• Use of a QDIA (qualified default investment alternative)

Company Stock Or “Alternative” Investments

• Confirm proper valuation
• Review information available to participants
• Consider percentage limitations on amount of account which may be invested in alternative investments

QDIA

• Confirm that investment meets QDIA criteria
  • Target funds (age appropriate; review/understand glide path)
  • Balanced funds (appropriate for demographics)
• Confirm that participants are provided initial and annual notice of QDIA

Plan investments are a source of considerable consternation, stress, and fiduciary liability. You can reduce your exposure by following best practices and by partnering with a qualified investment advisor, such as Alerus.

As a fiduciary, you have a responsibility to ensure that all fees charged to the plan or paid by the company are reasonable. Fiduciary responsibilities also include ensuring fees paid out of the plan meet the appropriate requirements. While many fees can be paid out of the plan, in addition to ensuring the requirements to do so have been met, they also must be disclosed by the service provider to the participants and the plan administrator.

Alerus provides a service provider disclosure that meets the requirements of what we as a service provider must disclose to you as a plan administrator. Alerus also provides a participant fee disclosure notice to distribute to participants annually. This disclosure meets the requirements of what a plan administrator must disclose to participants for the fees covered in the Alerus relationship. Are your other service providers doing the same? For example, if legal fees or accounting fees are being paid out of the plan, are they being disclosed to participants?

Tips For Reviewing Fee Structure

• Look at both direct and indirect fees
• Understand total cost vs. services rendered
• Determine if inherent conflicts exist that affect the objectivity of the service provider

Reviewing Participant Fee Disclosure (404a-5)

• Assure that it covers all vendors and fees
• Confirm delivery arrangements