The Supreme Court’s ruling on Tibble vs. Edison gave us all a chance to pause and remember that, despite all of the focus of late on automatic plan features and the retirement readiness of plan participants, it is still very important for plan fiduciaries and fiduciary committees to focus on the fundamentals of their fiduciary responsibilities to the plan and its participants. As such we hope you enjoy this quick recap of those fundamental rules.
ERISA requires that fiduciaries make decisions in the best interest of plan participants and beneficiaries. Fiduciary guidelines can be summarized in four basic rules (from Minimizing Fiduciary Risk – A Retirement Plan Sponsor’s Guide by The Standard):
- The exclusive benefit rule
- The prudent person rule
- Investment diversification
- Consistency with plan documents
Let’s take a quick look at how each rule governs the conduct of a fiduciary.
- Act exclusively in the interest of the plan participants and beneficiaries.
- Perform duties with the care, skill and diligence that a prudent person acting in a similar capacity and familiar with the matters at hand would use under the circumstances then prevailing.
- Diversify plan investments to minimize losses, unless circumstances indicate it is not prudent to do so.
Also known as the “duty of loyalty,” the exclusive benefit rule first requires fiduciaries to act solely for the purpose of providing benefits to participants and their beneficiaries. Any decisions the fiduciary makes must take into account only the interests of the plan and its participants, not the employer. In addition, fiduciaries must not engage in activities that entail a conflict of interest with regard to the retirement plan. For example, a fiduciary may not receive marketing fees or commissions in exchange for endorsing a particular vendor.
Second, the rule permits plan assets to be used for reasonable administrative expenses, such as those incurred for amendments required by law, nondiscrimination testing, Form 5500 preparation, audits and benefits calculation. However, expenses incurred for plan design are not payable from plan assets because they primarily benefit the plan sponsor.
This “prudent person rule,” also called the “duty of care,” does not require you to act as an expert. Instead, it requires that you recognize when you are not an expert and that you seek the advice of experts when it is needed, including when circumstances change. For example, this rule requires you to be familiar with “the matters at hand,” which include requirements under the Pension Protection Act of 2006 and ongoing clarifications from the DOL.
Because investment diversification* is a fundamental principle of investing success, it’s also a fundamental feature of ERISA’s requirements. The plan’s investment options must also be monitored for performance, and their role in the investment option lineup must be reviewed periodically. Best practices recommend you document this process each time you review a fund and maintain the results in a due diligence file.
Although compliance with ERISA 404(c) is not required, it can protect plan fiduciaries from the consequences of participant investment directions. To comply with ERISA 404(c), participants must have the ability to choose from a broad range of investment options, as well as:
- The opportunity to exercise control over investments that materially affect the potential return on assets
- A choice of at least three investment options, each of which is diversified and has materially different risk and return characteristics
- The opportunity to diversify investments to help minimize the risk of large losses
Consistency must be applied on both levels. For example, the plan sponsor cannot grant a plan loan that doesn’t comply with the plan documents – and ERISA’s conditions – without first amending the plan document to make the new conditions available to all participants.
*Diversification does not ensure a profit or protect against a loss in a declining market.
Please note that these opinions are our own and do not necessarily reflect those of LPL Financial or Global Retirement Partners.